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 September 30, 2004
------------------
Commission file number 1-11059
--------------------
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 September 30, 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 SEPTEMBER 30, 2004
Page
----
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets-September 30, 2004 (unaudited) and
December 31, 2003 3
Statements of Income and Comprehensive Income - for
the three and nine months ended September 30, 2004
and 2003 (unaudited) 4
Statement of Changes in Partners' Equity - for the
nine months ended September 30, 2004 (unaudited) 5
Statements of Cash Flows - for the nine months ended
September 30, 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 17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
BALANCE SHEETS
September 30, December 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS
Investment in FHA-Insured Certificates and GNMA
Mortgage-Backed Securities, at fair value $ 14,344,015 $ 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 11,496,726 11,345,058
Receivables and other assets 146,122 1,592,192
------------ ------------
Total assets $ 27,728,736 $ 69,048,427
============ ============
LIABILITIES AND PARTNERS' EQUITY
Distributions payable $ 11,187,063 $ 2,513,947
Accounts payable and accrued expenses 80,249 73,460
Due to affiliate - 5,319,243
------------ ------------
Total liabilities 11,267,312 7,906,650
------------ ------------
Partners' equity:
Limited partners' equity, 15,000,000 Units authorized,
12,079,514 Units issued and outstanding 25,125,410 67,926,439
General partner's deficit (8,811,691) (7,074,710)
Accumulated other comprehensive income 147,705 290,048
------------ ------------
Total partners' equity 16,461,424 61,141,777
------------ ------------
Total liabilities and partners' equity $ 27,728,736 $ 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 For the nine months ended
September 30, September 30,
2004 2003 2004 2003
--------- ----------- ----------- -----------
Income:
Insured mortgage investment income $ 353,160 $ 1,161,982 $ 1,768,017 $ 3,745,842
Interest and other income 63,274 77,349 182,777 141,231
--------- ----------- ----------- -----------
416,434 1,239,331 1,950,794 3,887,073
--------- ----------- ----------- -----------
Expenses:
Asset management fee to related parties 45,038 148,703 232,480 469,277
General and administrative 75,984 106,163 232,135 329,205
--------- ----------- ----------- -----------
121,022 254,866 464,615 798,482
--------- ----------- ----------- -----------
Net earnings before gains on insured
mortgage dispositions 295,412 984,465 1,486,179 3,088,591
Net gains on insured mortgage dispositions 571,671 627,469 2,055,067 1,373,339
--------- ----------- ----------- -----------
Net earnings $ 867,083 $ 1,611,934 $ 3,541,246 $ 4,461,930
========= =========== =========== ===========
Other comprehensive (loss) income - adjustment to
unrealized (loss) gain on investments in insured mortgages (530,096) 244,552 (142,343) (223,853)
--------- ----------- ----------- -----------
Comprehensive income $ 336,987 $ 1,856,486 $ 3,398,903 $ 4,238,077
========= =========== =========== ===========
Net earnings allocated to:
Limited partners - 96.1% $ 833,267 $ 1,549,069 $ 3,403,137 $ 4,287,915
General Partner - 3.9% 33,816 62,865 138,109 174,015
--------- ----------- ----------- -----------
$ 867,083 $ 1,611,934 $ 3,541,246 $ 4,461,930
========= =========== =========== ===========
Net earnings per Unit of limited
partnership interest - basic $ 0.07 $ 0.13 $ 0.28 $ 0.35
========= =========== =========== ===========
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 nine months ended September 30, 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 138,109 3,403,137 - 3,541,246
Adjustment to unrealized gains on
investments in insured mortgages - - (142,343) (142,343)
Distributions paid or accrued of $3.825 per Unit,
including return of capital of $3.545 per Unit (1,875,090) (46,204,166) - (48,079,256)
------------ ------------ --------- ------------
Balance, September 30, 2004 $ (8,811,691) $ 25,125,410 $ 147,705 $ 16,461,424
============ ============ ========= ============
Limited Partnership Units outstanding - basic, as of
and for the three and nine months ended September 30, 2004 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 nine months ended
September 30,
2004 2003
----------- -----------
Cash flows from operating activities:
Net earnings $ 3,541,246 $ 4,461,930
Adjustments to reconcile net earnings to net cash provided by operating activities:
Net gains on mortgage dispositions (2,055,067) (1,373,339)
Changes in assets and liabilities:
Decrease in receivables and other assets 635,410 37,306
Increase in accounts payable and accrued expenses 6,789 11,864
(Decrease) increase in due to affiliate (151,408) 91,704
----------- -----------
Net cash provided by operating activities 1,976,970 3,229,465
----------- -----------
Cash flows from investing activities:
Proceeds from redemption of debentures 11,146,330 2,674,487
Debenture proceeds paid to affiliate (5,167,835) 1,528,983
Receipt of mortgage principal from scheduled payments 188,577 744,159
Proceeds from mortgage prepayments and sales 31,413,766 -
Proceeds from mortgage assignments - 465,339
----------- -----------
Net cash provided by investing activities 37,580,838 5,412,968
----------- -----------
Cash flows used in financing activities:
Distributions paid to partners (39,406,140) (17,283,389)
----------- -----------
Net increase (decrease) in cash and cash equivalents 151,668 (8,640,956)
Cash and cash equivalents, beginning of period 11,345,058 10,448,516
----------- -----------
Cash and cash equivalents, end of period $11,496,726 $ 1,807,560
=========== ===========
Portion of debenture due from a third party in exchange for an assigned mortgage $ - $ 810,660
Debentures received from HUD in exchange for assigned mortgages 1,741,873 10,335,670
Portion of debentures due to affiliate - (5,167,835)
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"). The Partnership's Investment in Insured Mortgages is comprised of
participation certificates evidencing a 100 % undivided beneficial interest in
government insured multifamily mortgages issued or sold pursuant to Federal
Housing Administration ("FHA") programs ("FHA-Insured Certificates") and
mortgage-backed securities guaranteed by the Government National Mortgage
Association ("GNMA") ("GNMA Mortgage-Backed Securities"). 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
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AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
of return of capital and taxable gains, Unitholders should expect a
reduction in earnings and distributions due to the decreasing mortgage base.
Based upon the current level of interest rates, the trend in mortgage
prepayments over the past year is likely to continue. Such mortgage prepayments,
if continued at the trend over the past year, will likely result in a
termination and liquidation of the Partnership significantly earlier than the
December 2009 stated termination date. Upon the termination and liquidation of
the Partnership 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 after deducting and setting
aside amounts required to satisfy and discharge any existing Partnership
obligations and expenses, and such distribution to Unitholders will 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 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 September 30,
2004, and the results of its operations for the three and nine months ended
September 30, 2004 and 2003 and its cash flows for the nine months ended
September 30, 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:
September 30, December 31,
2004 2003
------------ ------------
Number of:
GNMA Mortgage-Backed Securities (4) 1 2
FHA-Insured Certificates (1) (2) (3) 7 10
Amortized Cost $14,196,310 $34,857,381
Face Value 14,304,777 34,926,078
Fair Value 14,344,015 35,147,430
(1) In May 2004, the mortgage on Waterford Green Apartments was prepaid. The
Partnership received net proceeds of approximately $6.6 million and
recognized a gain of approximately $19,000 and $923,000 for the three and
nine months
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AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
ended September 30, 2004. A distribution of approximately $0.455 per Unit
related to the prepayment of this mortgage was declared in May and a
distribution of approximately $0.07 per Unit for additional proceeds
received related to the Partnership's participation interest in this
mortgage was declared in June. Both distributions were paid to Unitholders
in August 2004.
(2) In May 2004, the mortgage on Northwood Place was prepaid. The Partnership
received net proceeds of approximately $4.3 million and recognized a loss
of approximately $51,000 for the nine months ended September 30, 2004. A
distribution of approximately $0.345 per Unit related to the prepayment of
this mortgage was declared in June and paid to Unitholders in August 2004.
(3) In June 2004, the mortgage on Stafford Towers was prepaid. The Partnership
received net proceeds of approximately $303,000 and recognized a loss of
approximately $21,000 for the nine months ended September 30, 2004. A
distribution of approximately $0.02 per Unit related to the prepayment of
this mortgage was declared in July and paid to Unitholders in November
2004.
(4) In July 2004, the GNMA security secured by the mortgage on Oak Forest
Apartments II was sold, with the consent of the Advisor. The Partnership
received net proceeds of approximately $10.6 million and recognized a gain
of approximately $553,000 for the three and nine months ended September
30, 2004. A distribution of approximately $0.84 per Unit related to the
sale of this GNMA security was declared in July and paid to Unitholders in
November 2004.
As of November 1, 2004, all of the GNMA Mortgage-Backed Securities and
FHA-Insured Certificates are current with respect to the payment of principal
and interest.
4. INVESTMENT IN FHA-INSURED LOANS
Listed below is the Partnership's aggregate investment in FHA-Insured
Loans:
September 30, 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 nine months
ended September 30, 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 September
30, 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
10
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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, approximately $5.3 million of the proceeds were transferred
to AIM 84. A distribution of the remaining $5.3 million or approximately $0.42
per Unit was declared in January 2004 and paid to Unitholders in May 2004.
(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 September 30, 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. 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 nine months ended September 30, 2004 and 2003 are as follows:
2004 2003
---- ----
Quarter ended March 31 $2.010 (1) $0.310 (4)
Quarter ended June 30 0.925 (2) 0.255 (5)
Quarter ended September 30 0.890 (3) 0.130 (6)
------ ------
$3.825 $0.695
====== ======
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 June 30, 2004:
Northwood Place May 2004 Prepayment 0.345
Waterford Green Apartments May 2004 Prepayment 0.455
Waterford Green Apartments - participation interest May 2004 Prepayment 0.070
(3) Quarter ended September 30, 2004:
Oak Forest Apartments II July 2004 Sale 0.84
Stafford Towers June 2004 Prepayment 0.02
(4) 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
(5) Quarter ended June 30, 2003:
Stonebridge Apartments Mar 2003 Prepayment 0.075
Magnolia Place Apartments May 2003 Prepayment 0.020
Willow Dayton May 2003 Prepayment 0.070
(6) Quarter ended September 30, 2003:
Ashley Oaks Apartments June 2003 Prepayment 0.040
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
12
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
receive distributions of return of capital and taxable gains, Unitholders
should expect a reduction in earnings and distributions due to the decreasing
mortgage base. Based upon the current level of interest rates, the trend in
mortgage prepayments over the past year is likely to continue. Such mortgage
prepayments, if continued at the trend over the past year, will likely result in
a termination and liquidation of the Partnership significantly earlier than the
December 2009 stated termination date. Upon the termination and liquidation of
the Partnership, 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 after deducting and setting
aside amounts required to satisfy and discharge any existing Partnership
obligations and expenses, and such distribution to Unitholders will be
substantially less than the amount referenced in limited partners' equity in the
Partnership's financial statements.
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 For the
three months ended nine months ended
September 30, September 30,
Name of Recipient Capacity in Which Served/Item 2004 2003 2004 2003
----------------- ----------------------------- ----- ----- ----- ----
CRIIMI, Inc. (1) General Partner/Distribution $ 436,295 $ 63,729 $1,875,090 $ 340,703
AIM Acquisition Partners, L.P.(2) Advisor/Asset Management Fee 45,038 148,703 232,480 469,277
Affiliate of General Partner/Expense
CRIIMI MAE Management, Inc.(3) Reimbursement 15,950 14,831 45,058 45,801
(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 $13,272 and $68,511 for the three and nine months ended
September 30, 2004, respectively and $43,823 and $138,300 for the three and
nine months ended September 30, 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. Based upon the current level of interest rates, the
trend in mortgage prepayments over the past year is likely to continue. Such
mortgage prepayments, if continued at the trend over the past year, will likely
result in a termination and liquidation of the Partnership significantly earlier
than the December 2009 stated termination date.
14
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Mortgage Investments
- --------------------
As of September 30, 2004, the Partnership had invested in 8 Insured
Mortgages and one debenture with an aggregate amortized cost of approximately
$15.9 million, an aggregate face value of approximately $16.0 million and an
aggregate fair value of approximately $16.1 million, as compared to December 31,
2003, when the Partnership had invested in 15 Insured Mortgages and five
debentures with an aggregate amortized cost of approximately $51.5 million, an
aggregate face value of approximately $51.6 million and an aggregate fair value
of approximately $52.4 million.
During the first quarter of 2004, two Insured Mortgages were sold, five
debentures were redeemed and one debenture was issued as assignment proceeds for
one mortgage. The net aggregate amortized cost and aggregate face value of these
assets was approximately $14.9 million as of December 31, 2003.
During the second quarter of 2004, three Insured Mortgages prepaid. These
mortgages had an aggregate amortized cost and an aggregate face value of
approximately $10.4 million as of December 31, 2003.
During the third quarter of 2004, the GNMA security secured by the mortgage
on Oak Forest Apartments II was sold, with the consent of the Advisor. This GNMA
security had an amortized cost and face value of approximately $10.1 million as
of December 31, 2003. The Partnership received net proceeds of approximately
$10.6 million and recognized a gain of approximately $553,000 for the three and
nine months ended September 30, 2004. A distribution of approximately $0.84 per
Unit related to the sale of this GNMA security was declared in July and paid to
Unitholders in November 2004.
As of November 1, 2004, all of the Insured Mortgages were current with
respect to the payment of principal and interest.
Results of Operations
- ---------------------
Net earnings decreased by approximately $745,000 and $921,000 for the three
and nine months ended September 30, 2004, respectively, as compared to the
corresponding periods in 2003. For the three month period, the decrease is
primarily due to a decrease in mortgage investment income and net gains on
mortgage dispositions partially offset by a decrease in expenses. For the nine
month period, the decrease is primarily due to a decrease in mortgage investment
income partially offset by an increase in net gains on mortgage dispositions and
a decrease in expenses.
Mortgage investment income decreased by approximately $809,000 and $2.0
million for the three and nine months ended September 30, 2004, respectively, as
compared to the corresponding periods in 2003, primarily due to a reduction in
the mortgage base. The mortgage base decreased as a result of 11 mortgage
dispositions with an aggregate principal balance of approximately $41.4 million,
representing an approximate 74% decrease in the aggregate principal balance of
the total mortgage portfolio since September 30, 2003.
Interest and other income decreased by approximately $14,000 for the three
months ended September 30, 2004 and increased by approximately $42,000 for the
nine months ended September 30, 2004, as compared to the corresponding periods
in 2003. These fluctuations were primarily 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 $104,000 and $237,000 for
the three and nine months ended September 30, 2004, respectively, as compared to
the corresponding periods 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 $30,000 and
$97,000 for the three and nine months ended September 30, 2004, respectively, as
compared to the corresponding periods in 2003, primarily due to the reduction in
the mortgage base.
Net gains on mortgage dispositions decreased by approximately $56,000 for
the three months ended September 30, 2004 and increased by approximately
$682,000 for the nine months ended September 30, 2004, respectively, as compared
to the corresponding periods in 2003. During the six months ended June 30, 2004,
the Partnership recognized a gain of approximately $246,000 from the assignment
of one mortgage, gains of approximately $386,000 from the sale of two mortgages
and net gains of approximately $851,000 from the prepayment of three mortgages.
During the three months ended September 30, 2004, the Partnership recognized a
gain of approximately $553,000 from the sale of one mortgage and additional gain
of approximately $19,000 from a mortgage that prepaid in the second quarter.
During the first six months of 2003, the Partnership recognized gains of
approximately $289,000 from the prepayment of four mortgages and gains of
approximately $457,000 from the assignment of three mortgages. During the three
months ended September 30, 2003, the Partnership recognized gains of
approximately $627,000 from the assignment of three 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
nine months ended September 30, 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. Based upon the
current level of interest rates, the trend in mortgage prepayments over the past
year is likely to continue. Such mortgage prepayments, if continued at the trend
over the past year, will likely result in a termination and liquidation of the
Partnership significantly earlier than the December 2009 stated termination
date. Upon the termination and liquidation of the Partnership 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 after deducting and setting aside amounts
required to satisfy and discharge any existing Partnership obligations and
expenses, and such distribution to Unitholders will 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 $1.3
million for the nine months ended September 30, 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.
16
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net cash provided by investing activities increased by approximately $32.2
million for the nine months ended September 30, 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 proceeds received from mortgage assignments and mortgage
principal from scheduled payments.
Net cash used in financing activities increased by approximately $22.1
million for the nine months ended September 30, 2004, as compared to the
corresponding period in 2003, due to an increase in the amount of distributions
paid to partners in the first nine months of 2004 compared to the same period in
2003.
Critical Accounting Policies
- ----------------------------
The preparation of financial statements in conformity with GAAP requires
the General Partner 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, the General Partner'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.
The General Partner 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 estimated 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
The General Partner has determined that there has not been a material
change as of September 30, 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.
17
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Purpose
---------- -------
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).
(b) Reports on Form 8-K
Date
----
July 26, 2004 To report a press release issued on July 21,
2004 announcing the July 2004 distribution to
the Partnership's Unitholders.
August 12, 2004 To report a press release issued on August 11,
2004 announcing the Partnership's second
quarter financial results.
August 26, 2004 To report a press release issued on August 20,
2004 announcing the August 2004 distribution to
the Partnership's Unitholders.
September 24, 2004 To report a press release issued on
September 21, 2004 announcing the September
2004 distribution to the Partnership's
Unitholders.
19
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
November 9, 2004 /s/Cynthia O. Azzara
- ---------------- ---------------------------------------
DATE Cynthia O. Azzara
Executive Vice President,
Chief Financial Officer and
Treasurer (Principal Accounting Officer)