1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2004
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Commission file number 1-11059
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AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
(Exact name of registrant as specified in charter)
California 13-3257662
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
(301) 816-2300
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of March 31, 2004, 12,079,514 depositary units of limited partnership
interest were outstanding.
2
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004
Page
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets - March 31, 2004 (unaudited) and
December 31, 2003 3
Statements of Income and Comprehensive Income - for the
three months ended March 31, 2004 and 2003 (unaudited) 4
Statement of Changes in Partners' Equity - for the
three months ended March 31, 2004 (unaudited) 5
Statements of Cash Flows - for the three months ended
March 31, 2004 and 2003 (unaudited) 6
Notes to Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Qualitative and Quantitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
BALANCE SHEETS
March 31, December 31,
2004 2003
---------------- ---------------
(Unaudited)
ASSETS
Investment in FHA-Insured Certificates and GNMA
Mortgage-Backed Securities, at fair value $ 35,012,537 $ 35,147,430
Investment in FHA-Insured Loans, at amortized cost,
net of unamortized discount and premium - 10,628,077
Investment in debentures, at fair value 1,741,873 10,335,670
Cash and cash equivalents 25,442,346 11,345,058
Receivables and other assets 294,315 1,592,192
------------- ------------
Total assets $ 62,491,071 $ 69,048,427
============= ============
LIABILITIES AND PARTNERS' EQUITY
Distributions payable $ 25,265,165 $ 2,513,947
Accounts payable and accrued expenses 83,225 73,460
Due to affiliate - 5,319,243
------------- ------------
Total liabilities 25,348,390 7,906,650
------------- ------------
Partners' equity:
Limited partners' equity, 15,000,000 Units authorized,
12,079,514 Units issued and outstanding 44,902,350 67,926,439
General partner's deficit (8,009,089) (7,074,710)
Accumulated other comprehensive income 249,420 290,048
------------- ------------
Total partners' equity 37,142,681 61,141,777
------------- ------------
Total liabilities and partners' equity $ 62,491,071 $ 69,048,427
============= ============
The accompanying notes are an integral part
of these financial statements.
4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
For the three months ended
March 31,
2004 2003
------ -------
Income:
Mortgage investment income $ 804,511 $ 1,321,225
Interest and other income 64,782 24,024
----------- -----------
869,293 1,345,249
----------- -----------
Expenses:
Asset management fee to related parties 106,629 163,451
General and administrative 88,288 107,091
----------- -----------
194,917 270,542
----------- -----------
Net earnings before gains on
mortgage dispositions 674,376 1,074,707
Gains on mortgage dispositions 632,327 452,826
----------- -----------
Net earnings $ 1,306,703 $ 1,527,533
=========== ===========
Other comprehensive loss - adjustment to
unrealized gains on investments in insured mortgages (40,628) (309,312)
----------- -----------
Comprehensive income $ 1,266,075 $ 1,218,221
=========== ===========
Net earnings allocated to:
Limited partners - 96.1% $ 1,255,742 $ 1,467,959
General Partner - 3.9% 50,961 59,574
----------- -----------
$ 1,306,703 $ 1,527,533
=========== ===========
Net earnings per Unit of limited
partnership interest - basic $ 0.10 $ 0.12
=========== ===========
The accompanying notes are an integral part
of these financial statements.
5
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
STATEMENT OF CHANGES IN PARTNERS' EQUITY
For the three months ended March 31, 2004
(Unaudited)
Accumulated
Other
General Limited Comprehensive
Partner Partners Income Total
------------ ------------ -------------- ------------
Balance, December 31, 2003 $ (7,074,710) $ 67,926,439 $ 290,048 $ 61,141,777
Net earnings 50,961 1,255,742 - 1,306,703
Adjustment to unrealized gains on
investments in insured mortgages - - (40,628) (40,628)
Distributions paid or accrued of $2.01 per Unit,
including return of capital of $1.91 per Unit (985,340) (24,279,831) - (25,265,171)
------------ ------------ --------- ------------
Balance, March 31, 2004 $ (8,009,089) $ 44,902,350 $ 249,420 $ 37,142,681
============ ============ ========= ============
Limited Partnership Units outstanding - basic, as
of and for the three months ended March 31, 2004 and 2003 12,079,514
==========
The accompanying notes are an integral part
of these financial statements.
6
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended
March 31,
2004 2003
-------- --------
Cash flows from operating activities:
Net earnings $ 1,306,703 $ 1,527,533
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Gains on mortgage dispositions (632,327) (452,826)
Changes in assets and liabilities:
Decrease in receivables and other assets 487,217 91,375
Increase in accounts payable and accrued expenses 9,765 169,234
(Decrease) increase in due to affiliate (151,408) 14,447
------------ -----------
Net cash provided by operating activities 1,019,950 1,349,763
------------ -----------
Cash flows from investing activities:
Proceeds from redemption of debentures 11,146,330 744,159
Debenture proceeds paid to affiliate (5,167,835) -
Receipt of mortgage principal from scheduled payments 78,153 167,199
Proceeds from mortgage prepayments and sales 9,534,643 949,721
Proceeds from mortgage assignments - 1,469,078
------------ -----------
Net cash provided by investing activities 15,591,291 3,330,157
------------ -----------
Cash flows used in financing activities:
Distributions paid to partners (2,513,953) (10,181,484)
------------ -----------
Net increase (decrease) in cash and cash equivalents 14,097,288 (5,501,564)
Cash and cash equivalents, beginning of period 11,345,058 10,448,516
------------ -----------
Cash and cash equivalents, end of period $ 25,442,346 $4,946,952
============ ===========
Non-cash investing activity:
Debentures received from HUD in exchange for assigned mortgages $1,741,873 $1,812,914
Portion of debentures due to an affiliate - (906,456)
9% of proceeds due from HUD for the mortgage on Westbrook Apartments - 149,566
The accompanying notes are an integral part
of these financial statements.
7
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION
American Insured Mortgage Investors - Series 85, L.P. (the "Partnership")
was formed pursuant to a limited partnership agreement, as amended,
("Partnership Agreement") under the Uniform Limited Partnership Act of the state
of California on June 26, 1984. During the period from March 8, 1985 (the
initial closing date of the Partnership's public offering) through January 27,
1986 (the termination date of the offering), the Partnership, pursuant to its
public offering of 12,079,389 Depository Units of limited partnership interest
("Units") raised a total of $241,587,780 in gross proceeds. In addition, the
initial limited partner contributed $2,500 to the capital of the Partnership in
exchange for 125 units of limited partnership interest.
CRIIMI, Inc., a wholly-owned subsidiary of CRIIMI MAE Inc. ("CRIIMI MAE"),
acts as the General Partner (the "General Partner") for the Partnership and
holds a partnership interest of 3.9%. The General Partner provides management
and administrative services on behalf of the Partnership. AIM Acquisition
Partners L.P. serves as the advisor (the "Advisor") to the Partnership. The
general partner of the Advisor is AIM Acquisition Corporation ("AIM
Acquisition") and the limited partners include, but are not limited to, The
Goldman Sachs Group, L.P., Sun America Investments, Inc. (successor to Broad,
Inc.) and CRI/AIM Investment, L.P., a subsidiary of CRIIMI MAE, over which
CRIIMI MAE exercises 100% voting control. AIM Acquisition is a Delaware
corporation that is primarily owned by Sun America Investments, Inc. and The
Goldman Sachs Group, L.P.
Pursuant to the terms of certain origination and acquisition services,
management services and disposition services agreements between the Advisor and
the Partnership (collectively the "Advisory Agreements"), the Advisor renders
services to the Partnership, including but not limited to, the management of the
Partnership's portfolio of mortgages and the disposition of the Partnership's
mortgages. Such services are subject to the review and ultimate authority of the
General Partner. However, the General Partner is required to receive the consent
of the Advisor prior to taking certain significant actions, including but not
limited to the disposition of mortgages, any transaction or agreement with the
General Partner or its affiliates, or any material change as to policies
regarding distributions or reserves of the Partnership (collectively the
"Consent Rights"). The Advisor is permitted and has delegated the performance of
services to CRIIMI MAE Services Limited Partnership ("CMSLP"), a subsidiary of
CRIIMI MAE, pursuant to a sub-management agreement (the "Sub-Advisory
Agreement"). The general partner and limited partner of CMSLP are wholly-owned
subsidiaries of CRIIMI MAE. The delegation of such services by the Advisor to
CMSLP does not relieve the Advisor of its obligation to perform such services.
Furthermore the Advisor has retained its Consent Rights.
Prior to December 1993, the Partnership was engaged in the business of
originating and acquiring government insured mortgage loans ("Insured
Mortgages"). In accordance with the terms of the Partnership Agreement, the
Partnership is no longer authorized to originate or acquire Insured Mortgages
and, consequently, its primary objective is to manage its portfolio of mortgage
investments, all of which are insured under Section 221(d)(4) or Section 231 of
the National Housing Act of 1937, as amended (the "National Housing Act"). The
Partnership Agreement states that the Partnership will terminate on December 31,
2009, unless terminated earlier under the provisions thereof. The Partnership is
required, pursuant to the Partnership Agreement, to dispose of its assets prior
to this date.
As the Partnership continues to liquidate its mortgage investments and
Unitholders receive distributions of return of capital and taxable gains,
Unitholders should expect a reduction in earnings and distributions due to the
decreasing mortgage base. Upon the termination and liquidation of the
Partnership, on or before December 31, 2009, distributions to Unitholders will
be made in accordance with the terms of the Partnership Agreement. A final
distribution to Unitholders will be based on the Partnership's remaining net
assets, and such distribution to Unitholders is likely to be substantially less
than the amount referenced in limited partners' equity in the Partnership's
financial statements.
2. BASIS OF PRESENTATION
The Partnership's financial statements are prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States ("GAAP"). The preparation of financial
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AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
In the opinion of the General Partner, the accompanying unaudited financial
statements contain all adjustments of a normal recurring nature necessary to
present fairly the financial position of the Partnership as of March 31, 2004,
and the results of its operations and its cash flows for the three months ended
March 31, 2004 and 2003.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with GAAP have been condensed or omitted.
While the General Partner believes that the disclosures presented are adequate
to make the information not misleading, these financial statements should be
read in conjunction with the financial statements and the notes to the financial
statements included in the Partnership's Annual Report on Form 10-K for the year
ended December 31, 2003.
3. INVESTMENT IN GNMA MORTGAGE-BACKED SECURITIES AND FHA-INSURED CERTIFICATES
Listed below is the Partnership's aggregate investment in GNMA
Mortgage-Backed Securities and FHA-Insured Certificates:
March 31, December 31,
2004 2003
------------ ------------
Number of:
GNMA Mortgage-Backed Securities 2 2
FHA-Insured Certificates 10 10
Amortized Cost $34,763,117 $34,857,381
Face Value 34,829,625 34,926,078
Fair Value 35,012,537 35,147,430
As of May 1, 2004, all of the GNMA Mortgage-Backed Securities and
FHA-Insured Certificates are current with respect to the payment of principal
and interest.
9
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. INVESTMENT IN FHA-INSURED LOANS
Listed below is the Partnership's aggregate investment in FHA-Insured
Loans:
March 31, December 31,
2004 2003
------------ -------------
Number of Loans (1) (2) - 3
Amortized Cost $ - $ 10,628,077
Face Value - 10,652,222
Fair Value - 11,278,741
(1) In January 2004, HUD transferred assignment proceeds to the Partnership
in the form of a 5.75% debenture, with a face value of approximately $3.5
million, in exchange for the mortgage on Kaynorth Apartments. Since the
mortgage on Kaynorth Apartments was beneficially owned 50% by the
Partnership and 50% by American Insured Mortgage Investors ("AIM 84"),
approximately $1.7 million of the debenture face value was due to AIM 84.
See further discussion in Note 5.
(2) In February 2004, the mortgages on Cobblestone Apartments and The
Plantation were sold, with the consent of the Advisor. The Partnership
received aggregate net proceeds of approximately $9.6 million and
recognized aggregate gains of approximately $386,000 for the three months
ended March 31, 2004. The aggregate distribution of approximately $0.76
per Unit related to the sale of these two mortgages was declared in
February 2004 and paid to Unitholders in May 2004.
5. INVESTMENTS IN DEBENTURES, DUE TO AFFILIATE AND OTHER
The Partnership, as the mortgagee, had the right to assign mortgages to the
United States Department of Housing and Urban Development ("HUD") under the
Section 221(g)(4) program of the National Housing Act (the "Section 221
Program.") at the expiration of 20 years from the date of final endorsement
("Anniversary Date"). The Partnership, as the mortgagee, could exercise its
option to put a mortgage to HUD during the one year period subsequent to the
Anniversary Date. This assignment procedure was applicable to an Insured
Mortgage which had a firm or conditional commitment for HUD insurance benefits
on or before November 30, 1983. A mortgagee electing to assign an Insured
Mortgage to HUD received, in exchange therefore, a debenture. As of March 31,
2004, the Partnership no longer holds mortgage investments eligible for
assignment to HUD under the Section 221 program. The following is a discussion
of debentures received in exchange for mortgages assigned to HUD under the
Section 221 Program:
Debenture and due to affiliate
- ------------------------------
Listed below are debentures redeemed by HUD in January 2004. The
Partnership received aggregate proceeds of approximately $10.6 million, which
included the face value of the debentures, plus accrued interest. The debentures
paid interest semi-annually on January 1 and July 1. Since the mortgages listed
were beneficially owned 50% by the Partnership and 50% by AIM 84, an affiliate
of the Partnership which shared the same General Partner, approximately $5.3
million of the proceeds were transferred to AIM 84. A distribution of
approximately $0.42 per Unit was declared in January 2004 and paid to
Unitholders in May 2004.
10
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per unit amounts)
Face Value Face Value Date
Redemption Interest Face Due to Due to the Debenture
Debenture for mortgage on: Date Rate Value Affiliate Partnership Received
------------------------- ----------- -------- ------ --------- ----------- --------
Baypoint Shoreline
Apartments 01/01/2004 6.375% $ 1,813 $ 906 $ 906 Feb-03
College Green Apartments 01/01/2004 5.750% 2,571 1,286 1,286 Jul-03
Brougham Estates II 01/01/2004 5.750% 4,774 2,387 2,387 Aug-03
Town Park Apartments 01/01/2004 5.750% 1,178 589 589 Aug-03
-------- ------ ------
Total debentures $10,336 $5,168 $5,168
======== ======= ======
In January 2004, HUD issued a 5.75% debenture to the Partnership in
exchange for the mortgage on Kaynorth Apartments. The face value of the
debenture was approximately $3.5 million and pays interest semi-annually on
January 1 and July 1. The Partnership recognized a gain of approximately
$246,000 in the first quarter of 2004 related to this assignment. This mortgage
was beneficially owned 50% by the Partnership and 50% by AIM 84. In February
2004, the Partnership, with the consent of the Advisor, sold AIM 84's 50%
interest in this debenture and subsequently transferred the cash proceeds, which
included the face value of the debenture, plus accrued interest, of
approximately $1.8 million to AIM 84. The fair value of this debenture, of
approximately $1.7 million, was included in Investment in Debentures on the
Partnership's balance sheet as of March 31, 2004.
Other
- -----
In January 2004, HUD also redeemed a 6.375% debenture held by a third party
beneficiary. The debenture was issued by HUD in May 2003, in exchange for the
assignment of the mortgage on The Executive House. The Partnership received
proceeds of approximately $836,000 which included the Partnership's portion of
the face value of the debenture, plus accrued interest. A distribution of
approximately $0.065 per Unit was declared in February 2004 and paid to
Unitholders in May 2004. Since the Partnership only owned 70.39% of the FHA
insured certificate secured by the mortgage on The Executive House and the
remainder was held by unrelated third parties, the debenture was held by an
unrelated third party and the face amount of approximately $811,000, plus
accrued interest, due to the Partnership was included in Receivables and Other
Assets on the Partnership's balance sheet as of December 31, 2003.
11
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. DISTRIBUTIONS TO UNITHOLDERS
The distributions paid or accrued to Unitholders on a per Unit basis for
the three months ended March 31, 2004 and 2003 are as follows:
2004 2003
----- ----
Quarter ended March 31 $2.01 (1) $0.31 (2)
----- -----
$2.01 $0.31
===== =====
The following disposition proceeds are included in the distributions listed
above:
Date Net
Proceeds Type of Proceeds
Name of property to which mortgage was held Received Disposition Per Unit
------------------------------------------- -------- ----------- --------
(1) Quarter ended March 31, 2004:
Pleasant View Nursing Home Dec 2003 Prepayment $0.570
Stone Hedge Village Apartments Dec 2003 Prepayment 0.135
Baypoint Shoreline Apts., College Green Apts., Brougham
Estates II and Town Park Apts. (redemption of debentures) Jan 2004 Assignments 0.420
The Executive House (redemption of debenture) Jan 2004 Assignment 0.065
Cobblestone Apts. and The Plantation Feb 2004 Sale 0.760
(2) Quarter ended March 31, 2003:
Walnut Hills Dec 2002 Prepayment 0.040
Westbrook Apartments Jan 2003 Assignment 0.120
Fairlawn II (redemption of 7.5% debenture) Jan 2003 Assignment 0.060
The basis for paying distributions to Unitholders is net proceeds from
mortgage and/or debenture dispositions, if any, and cash flow from operations,
which includes regular interest income and principal from Insured Mortgages and
interest on debentures. Although the Insured Mortgages pay a fixed monthly
mortgage payment and the debentures have a fixed semi-annual interest payment,
the cash distributions paid to the Unitholders will vary during each quarter due
to (1) the fluctuating yields in the short-term money market where the monthly
mortgage payments and debenture interest are temporarily invested prior to the
payment of quarterly distributions, (2) the reduction in the asset base and
monthly mortgage payments resulting from monthly mortgage payments received or
mortgage and debenture dispositions, (3) variations in the cash flow
attributable to the delinquency or default of Insured Mortgages and professional
fees and foreclosure costs incurred in connection with those Insured Mortgages
and (4) variations in the Partnership's operating expenses. As the Partnership
continues to liquidate its mortgage investments and Unitholders receive
distributions of return of capital and taxable gains, Unitholders should expect
a reduction in earnings and distributions due to the decreasing mortgage base.
Upon the termination and liquidation of the Partnership, on or before December
31, 2009, distributions to Unitholders will be made in accordance with the terms
of the Partnership Agreement. A final distribution to Unitholders will be based
on the Partnership's remaining net assets, and such distribution to Unitholders
is likely to be substantially less than the amount referenced in limited
partners' equity in the Partnership's financial statements.
12
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. TRANSACTIONS WITH RELATED PARTIES
The General Partner and certain affiliated entities earned or received
compensation or payments for services from the Partnership as follows:
COMPENSATION PAID OR ACCRUED TO RELATED PARTIES
-----------------------------------------------
For the
three months ended
March 31,
Name of Recipient Capacity in Which Served/Item 2004 2003
----------------- ----------------------------- ----- ----
CRIIMI, Inc. (1) General Partner/Distribution $ 985,340 $ 151,968
AIM Acquisition Partners, L.P.(2) Advisor/Asset Management Fee 106,629 163,451
Affiliate of General Partner/Expense
CRIIMI MAE Management, Inc.(3) Reimbursement 16,519 18,235
(1) The General Partner, pursuant to the Partnership Agreement, is entitled to
receive 3.9% of the Partnership's income, loss, capital and distributions,
including, without limitation, the Partnership's adjusted cash from
operations and proceeds of mortgage prepayments, sales or insurance (as
defined in the Partnership Agreement).
(2) The Advisor is entitled to an asset management fee equal to 0.95% of total
invested assets (as defined in the Partnership Agreement). CMSLP is
entitled to a fee of 0.28% of total invested assets from the Advisor's
asset management fee. Of the amounts paid to the Advisor, CMSLP earned a
fee equal to $31,424 and $48,172 for the three months ended March 31, 2004
and 2003, respectively. The general partner and limited partner of CMSLP
are wholly owned subsidiaries of CRIIMI MAE.
(3) CRIIMI MAE Management, Inc., an affiliate of the General Partner, is
reimbursed for personnel and administrative services on an actual cost
basis.
13
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS. When used in this Quarterly Report on Form 10-Q, the
words "believe," "anticipate," "expect," "contemplate," "may," "will," and
similar expressions are intended to identify forward-looking statements.
Statements looking forward in time are included in this Quarterly Report on Form
10-Q pursuant to the "safe harbor" provision of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially.
Accordingly, the following information contains or may contain forward-looking
statements: (1) information included in this Quarterly Report on Form 10-Q,
including, without limitation, statements made under Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations, (2)
information included or incorporated by reference in prior and future filings by
the Partnership (defined below) with the Securities and Exchange Commission
("SEC") including, without limitation, statements with respect to growth,
projected revenues, earnings, returns and yields on its portfolio of mortgage
assets, the impact of interest rates, costs and business strategies and plans
and (3) information contained in written material, releases and oral statements
issued by or on behalf of, the Partnership, including, without limitation,
statements with respect to growth, projected revenues, earnings, returns and
yields on its portfolio of mortgage assets, the impact of interest rates, costs
and business strategies and plans. Factors which may cause actual results to
differ materially from those contained in the forward-looking statements
identified above include, but are not limited to (i) regulatory and litigation
matters, (ii) interest rates, (iii) trends in the economy, (iv) prepayment of
mortgages, (v) defaulted mortgages, (vi) errors in servicing defaulted mortgages
and (vii) sales of mortgage investments below fair market value. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only of the date hereof. The Partnership undertakes no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
General
- -------
The Partnership's business consists of holding government insured mortgage
investments ("Insured Mortgages") primarily on multifamily housing properties,
and distributing the payments of principal and interest on such mortgage
investments, including debentures issued by the United States Department of
Housing and Urban Development ("HUD") in exchange for such mortgages, to the
holders of its depository units of limited partnership interests
("Unitholders"). CRIIMI, Inc., a wholly-owned subsidiary of CRIIMI MAE Inc.
("CRIIMI MAE"), acts as the General Partner (the "General Partner") for the
Partnership and holds a partnership interest of 3.9%. The Partnership's primary
source of revenue and cash is mortgage interest income from its Insured
Mortgages.
The General Partner is required to receive the consent of AIM Acquisition
Partners L.P., the advisor (the "Advisor") to the Partnership, prior to taking
certain significant actions, including but not limited to the disposition of
mortgages, any transaction or agreement with the General Partner or its
affiliates, or any material change as to policies regarding distributions or
reserves of the Partnership (collectively the "Consent Rights").
As the Partnership continues to liquidate its mortgage investments and
Unitholders receive distributions of return of capital and taxable gains,
Unitholders should expect a reduction in earnings and distributions due to the
decreasing mortgage base. The magnitude of the decrease will depend upon the
size of the Insured Mortgages which are prepaid, sold or assigned for insurance
proceeds.
Mortgage Investments
- --------------------
As of March 31, 2004, the Partnership had invested in 12 Insured Mortgages
and one debenture with an aggregate amortized cost of approximately $36.5
million, an aggregate face value of approximately $36.6 million and an aggregate
fair value of approximately $36.8 million.
14
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Four debentures held by the Partnership as of December 31, 2003, with an
aggregate face value of approximately $10.3 million were redeemed by HUD on
January 1, 2004. The debentures were issued in exchange for mortgages that were
held jointly by American Insured Mortgage Investors ("AIM 84"), an affiliate of
the Partnership which shared the same General Partner, and the Partnership,
therefore 50% of the debenture proceeds were paid to AIM 84 in January 2004. The
distribution of approximately $0.42 per Unit related to these debenture
redemptions was declared in January 2004 and paid to Unitholders in May 2004.
In January 2004, HUD also redeemed a 6.375% debenture held by a third party
beneficiary. The debenture was issued by HUD in May 2003, in exchange for the
assignment of the mortgage on The Executive House. The Partnership received
proceeds of approximately $836,000, which included the Partnership's portion of
the face value of the debenture, plus accrued interest. A distribution of
approximately $0.065 per Unit was declared in February 2004 and paid to
Unitholders in May 2004.
In January 2004, HUD transferred assignment proceeds to the Partnership in
the form of a 5.75% debenture, with a face value of approximately $3.5 million,
in exchange for the mortgage on Kaynorth Apartments, which was beneficially
owned 50% by the Partnership and 50% by AIM 84. In February 2004, approximately
$1.7 million of the debenture face value was sold, with the consent of the
Advisor, and paid to AIM 84. The Partnership recognized a gain of approximately
$246,000 in the first quarter of 2004 related to this assignment.
In February 2004, the mortgages on Cobblestone Apartments and The
Plantation were sold, with the consent of the Advisor. The Partnership received
aggregate net proceeds of approximately $9.6 million and recognized aggregate
gains of approximately $386,000 for the three months ended March 31, 2004. The
aggregate distribution of approximately $0.76 per Unit related to the sale of
these two mortgages was declared in February 2004 and paid to Unitholders in May
2004.
As of May 1, 2004, all of the Insured Mortgages are current with respect to
the payment of principal and interest.
Results of Operations
- ---------------------
Net earnings decreased by approximately $221,000 for the three months ended
March 31, 2004, as compared to the corresponding period in 2003, primarily due
to a decrease in mortgage investment income partially offset by an increase in
gains on mortgage dispositions.
Mortgage investment income decreased by approximately $517,000 for the
three months ended March 31, 2004, as compared to the corresponding period in
2003, primarily due to a reduction in the mortgage base. The mortgage base
decreased as a result of 14 mortgage dispositions with an aggregate principal
balance of approximately $27.7 million, representing an approximate 44% decrease
in the aggregate principal balance of the total mortgage portfolio since March
2003.
Interest and other income increased by approximately $41,000 for the three
months ended March 31, 2004, as compared to the corresponding period in 2003,
primarily due to an increase in debenture interest and due to variations in the
amounts and the timing of the temporary investment of mortgage disposition
proceeds prior to distribution.
Asset management fees decreased by approximately $57,000 for the three
months ended March 31, 2004, as compared to the corresponding period in 2003,
primarily due to the reduction in the mortgage base, as previously discussed.
15
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General and administrative expenses decreased by approximately $19,000 for
the three months ended March 31, 2004, as compared to the corresponding period
in 2003, primarily due to the reduction in the mortgage base, as previously
discussed.
Gains on mortgage dispositions increased by approximately $180,000 for the
three months ended March 31, 2004, as compared to the corresponding period in
2003. During the three months ended March 31, 2004, the Partnership recognized a
gain of approximately $246,000 from the assignment of one mortgage and gains of
approximately $386,000 from the sale of two mortgages. During the first three
months of 2003, the Partnership recognized a gain of approximately $93,000 from
the prepayment of one mortgage and gains of approximately $359,000 from the
assignment of two mortgages.
Liquidity and Capital Resources
- -------------------------------
The Partnership's operating cash receipts, derived from payments of
principal and interest on Insured Mortgages, interest on debentures and cash
receipts from interest on short-term investments, were sufficient during the
three months ended March 31, 2004 to meet operating requirements. The basis for
paying distributions to Unitholders is net proceeds from mortgage and/or
debenture dispositions, if any, and cash flow from operations, which includes
regular interest income and principal from Insured Mortgages and interest on
debentures. Although the Insured Mortgages pay a fixed monthly mortgage payment
and the debentures have a fixed semi-annual interest payment, the cash
distributions paid to the Unitholders will vary during each quarter due to (1)
the fluctuating yields in the short-term money market where the monthly mortgage
payments and debenture interest are temporarily invested prior to the payment of
quarterly distributions, (2) the reduction in the asset base and monthly
mortgage payments resulting from monthly mortgage payments received or mortgage
and debenture dispositions, (3) variations in the cash flow attributable to the
delinquency or default of Insured Mortgages and professional fees and
foreclosure costs incurred in connection with those Insured Mortgages and (4)
variations in the Partnership's operating expenses. As the Partnership continues
to liquidate its mortgage investments and Unitholders receive distributions of
return of capital and taxable gains, Unitholders should expect a reduction in
earnings and distributions due to the decreasing mortgage base. Upon the
termination and liquidation of the Partnership, on or before December 31, 2009,
distributions to Unitholders will be made in accordance with the terms of the
Partnership Agreement. A final distribution to Unitholders will be based on the
Partnership's remaining net assets, and such distribution to Unitholders is
likely to be substantially less than the amount referenced in limited partners'
equity in the Partnership's financial statements.
Net cash provided by operating activities decreased by approximately
$330,000 for the three months ended March 31, 2004, as compared to the
corresponding period in 2003, primarily due to a decrease in mortgage investment
income, partially offset by decreases in asset management fee and general and
administrative expenses.
Net cash provided by investing activities increased by approximately $12.3
million for the three months ended March 31, 2004, as compared to the
corresponding period in 2003, primarily due to increases in proceeds received
from mortgage prepayments and sales and net debenture redemptions, partially
offset by a decrease in mortgage assignments.
Net cash used in financing activities decreased by approximately $7.7
million for the three months ended March 31, 2004, as compared to the
corresponding period in 2003, due to a decrease in the amount of distributions
paid to partners in the first three months of 2004 compared to the same period
in 2003.
16
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Critical Accounting Policies
- ----------------------------
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting periods. The Partnership continually evaluates the
estimates used to prepare the financial statements, and updates those estimates
as necessary. In general, management's estimates are based on historical
experience, on information from third parties, and other various assumptions
that are believed to be reasonable under the facts and circumstances. Actual
results could differ materially from those estimates.
Management considers an accounting estimate to be critical if:
o it requires assumptions to be made that were uncertain at the time the
estimate was made; and
o changes in the estimate or different estimates that could have been
selected and could have a material impact on the Partnership's
results of operations or financial condition.
The Partnership's primary critical accounting estimate relates to the
determination of fair values for Insured Mortgages. The Partnership estimates
the fair value of its Insured Mortgages internally. The Partnership uses a
discounted cash flow methodology to estimate the fair value. This requires the
Partnership to make certain estimates regarding discount rates and expected
prepayments. The cash flows were discounted using a discount rate that, in the
Partnership's view, was commensurate with the market's perception of risk and
value. The Partnership used a variety of sources to determine its discount rate
including: (i) institutionally-available research reports, (ii) communications
with dealers and active insured mortgage security investors regarding the
valuation of comparable securities and (iii) recent transactions. Increases in
the discount rate used by the Partnership would generally result in a
corresponding decrease in the fair value of the Partnership's insured mortgages.
Decreases in the discount rate used by the Partnership would generally result in
a corresponding increase in the fair value of the Partnership's insured
mortgages. The Partnership also makes certain assumptions regarding the
prepayment speeds of its Insured Mortgages. In a low interest rate environment,
mortgages are more likely to prepay even if the mortgage contains prepayment
penalties. In general, if the Partnership increases its assumed prepayment
speed, the fair value of the Insured Mortgages will decrease. If the Partnership
decreases its assumed prepayment speed, the fair value of the Insured Mortgages
will increase.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Management has determined that there has not been a material change as of
March 31, 2004, in market risk from the information provided as of December 31,
2003 in the Partnership's Annual Report on Form 10-K as of December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
The General Partner carried out an evaluation, under the supervision and
with the participation of the General Partner's management, including the
General Partner's Chairman of the Board and Chief Executive Officer (CEO) and
the Chief Financial Officer (CFO), of the effectiveness of its disclosure
controls and procedures as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended. Based on that evaluation, the General
Partner's CEO and CFO concluded that its disclosure controls and procedures were
effective as of the end of the period covered by this report. There have been no
significant changes in the General Partner's internal controls over financial
reporting that occurred during the most recent fiscal quarter that have
materially affected, or are likely to materially affect, internal controls over
financial reporting.
17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Purpose
----------- -------
10.1 Loan Sale Agreement dated and effective as of
February 10, 2004, by and between American
Insured Mortgage Investors - Series 85, L.P.
and Greystone Servicing Corporation, Inc.
(Filed herewith).
31.1 Certification pursuant to the Exchange Act
Rule 13a-14(a) from Barry S. Blattman,
Chairman of the Board and Chief Executive
Officer of the General Partner (Filed
herewith).
31.2 Certification pursuant to the Exchange Act
Rule 13a-14(a) from Cynthia O. Azzara,
Executive Vice President, Chief Financial
Officer and Treasurer of the General Partner
(Filed herewith).
32.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 from Barry S.
Blattman, Chairman of the Board and Chief
Executive Officer of the General Partner
(Furnished herewith).
32.2 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 from Cynthia O.
Azzara, Executive Vice President, Chief
Financial Officer and Treasurer of the General
Partner (Furnished herewith).
Date
----
(b) Reports on Form 8-K
January 22, 2004 To report a press release issued on
January 21, 2004 announcing the January
2004 distribution to the Partnership's
Unitholders.
February 20, 2004 To report a press release issued on
February 18, 2004 announcing the February
2004 distribution to the Partnership's
Unitholders.
March 23, 2004 To report a press release issued on
March 19, 2003 announcing the
Partnership's fourth quarter financial results.
March 25, 2004 To report a press release issued on
March 22, 2004 announcing the March 2004
distribution to the Partnership's
Unitholders.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMERICAN INSURED MORTGAGE
INVESTORS L.P. - SERIES 85
(Registrant)
By: CRIIMI, Inc.
General Partner
May 7, 2004 /s/Cynthia O. Azzara
- ----------- ----------------------------------------
DATE Cynthia O. Azzara
Executive Vice President,
Chief Financial Officer and
Treasurer (Principal Accounting Officer)