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, 2002
---------------
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
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(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 [ ]
As of March 31, 2002, 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, 2002
Page
----
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets - March 31, 2002 (unaudited) and December 31, 2001 3
Statements of Income and Comprehensive Income - for the three
months ended March 31, 2002 and 2001 (unaudited) 4
Statement of Changes in Partners' Equity - for the three months ended
March 31, 2002 (unaudited) 5
Statements of Cash Flows - for the three months ended March 31, 2002
and 2001 (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 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
March 31, December 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS
Investment in FHA-Insured Certificates and GNMA
Mortgage-Backed Securities, at fair value
Acquired insured mortgages $ 41,844,999 $ 45,845,197
Originated insured mortgages 15,594,550 15,734,485
------------ ------------
57,439,549 61,579,682
Investment in FHA-Insured Loans, at amortized cost,
net of unamortized discount and premium:
Acquired insured mortgages 8,881,718 8,914,573
Originated insured mortgages 9,396,153 12,430,002
------------ ------------
18,277,871 21,344,575
Cash and cash equivalents 16,392,855 4,366,085
Receivables and other assets 4,358,126 8,394,392
Investment in FHA debenture - 2,385,233
------------ ------------
Total assets $ 96,468,401 $ 98,069,967
============ ============
LIABILITIES AND PARTNERS' EQUITY
Distributions payable $ 16,654,897 $ 1,885,460
Accounts payable and accrued expenses 137,709 121,659
Due to affiliate - 1,235,104
------------ ------------
Total liabilities 16,792,606 3,242,223
------------ ------------
Partners' equity:
Limited partners' equity, 15,000,000 Units authorized,
12,079,514 Units issued and outstanding 86,301,852 99,801,805
General partners' deficit (6,328,986) (5,781,121)
Accumulated other comprehensive (loss) income (297,071) 807,060
------------ ------------
Total partners' equity 79,675,795 94,827,744
------------ ------------
Total liabilities and partners' equity $ 96,468,401 $ 98,069,967
============ ============
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,
2002 2001
------------ ------------
Income:
Mortgage investment income $ 1,620,471 $ 2,147,699
Interest and other income 106,204 147,362
------------ ------------
1,726,675 2,295,061
------------ ------------
Expenses:
Asset management fee to related parties 189,781 260,415
General and administrative 98,974 101,101
------------ ------------
288,755 361,516
------------ ------------
Net earnings before gains on
mortgage dispositions 1,437,920 1,933,545
Gains on mortgage dispositions 1,169,159 262,286
------------ ------------
Net earnings $ 2,607,079 $ 2,195,831
============ ============
Other comprehensive (loss) income - adjustment to
unrealized (losses) gains on investments in insured mortgages (1,104,131) 575,549
------------ ------------
Comprehensive income $ 1,502,948 $ 2,771,380
============ ============
Net earnings allocated to:
Limited partners - 96.1% $ 2,505,403 $ 2,110,194
General Partner - 3.9% 101,676 85,637
------------ ------------
$ 2,607,079 $ 2,195,831
============ ============
Net earnings per Unit of limited
partnership interest - basic $ 0.21 $ 0.17
============ ============
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, 2002
(Unaudited)
Accumulated
Other
General Limited Comprehensive
Partner Partner Income (Loss) Total
------------ ------------ ------------ ------------
Balance, December 31, 2001 $ (5,781,121) $ 99,801,805 $ 807,060 $ 94,827,744
Net Earnings 101,676 2,505,403 - 2,607,079
Adjustment to unrealized gains (losses) on
investments in insured mortgages - - (1,104,131) (1,104,131)
Distributions paid or accrued of $1.325 per Unit,
including return of capital of $1.115 per Unit (649,541) (16,005,356) - (16,654,897)
------------ ------------ ------------ ------------
Balance, March 31, 2002 $ (6,328,986) $ 86,301,852 $ (297,071) $ 79,675,795
============ ============ ============ ============
Limited Partnership Units outstanding - basic, as
of March 31, 2002 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,
2002 2001
------------ ------------
Cash flows from operating activities:
Net earnings $ 2,607,079 $ 2,195,831
Adjustments to reconcile net earnings to net cash provided by operating activities:
Net gain on mortgage dispositions (1,169,159) (262,286)
Changes in assets and liabilities:
Decrease (increase) in receivables and other assets 708,321 (53,781)
Increase (decrease) in accounts payable and accrued expenses 16,050 (9,541)
Decrease in due to affiliate (42,487) (28,247)
------------ ------------
Net cash provided by operating activities 2,119,804 1,841,976
------------ ------------
Cash flows from investing activities:
Proceeds from disposition of mortgages 3,682,282 9,479,999
Proceeds received from Midland 6,759,242 -
Proceeds from redemption of debenture 2,385,233 -
Debenture proceeds paid to affiliate (1,192,617) -
Receipt of mortgage principal from scheduled payments 158,286 285,379
------------ ------------
Net cash provided by investing activities 11,792,426 9,765,378
------------ ------------
Cash flows used in financing activities:
Distributions paid to partners (1,885,460) (6,284,867)
------------ ------------
Net increase in cash and cash equivalents 12,026,770 5,322,487
Cash and cash equivalents, beginning of period 4,366,085 5,631,117
------------ ------------
Cash and cash equivalents, end of period $ 16,392,855 $ 10,953,604
============ ============
Non-cash investing activity:
Portion of HUD debentures due from Midland in exchange
for the mortgages on Country Club Terrace Apartments,
Nevada Hills Apartments and Dunhaven Apartments $ 3,431,297 -
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 under the Uniform Limited Partnership Act of the state of California
on June 26, 1984. The Partnership Agreement ("Partnership Agreement") states
that the Partnership will terminate on December 31, 2009, unless terminated
earlier under the provisions of the Partnership Agreement.
CRIIMI, Inc. (the "General Partner"), a wholly owned subsidiary of CRIIMI
MAE Inc. ("CRIIMI MAE"), holds a partnership interest of 3.9%. AIM Acquisition
Partners L.P. (the "Advisor") serves as the advisor to the Partnership pursuant
to an advisory agreement between the Advisor and the Partnership. The general
partner of the Advisor is AIM Acquisition Corporation ("AIM Acquisition") and
the limited partners include, but are not limited to, AIM Acquisition, The
Goldman Sachs Group, L.P., Sun America Investments, Inc. (successor to Broad,
Inc.) and CRI/AIM Investment, L.P., an affiliate of CRIIMI MAE. AIM Acquisition
is a Delaware corporation that is primarily owned by Sun America Investments,
Inc. and The Goldman Sachs Group, L.P.
Under the Advisory Agreement, the Advisor renders services to the
Partnership, including but not limited to, the management and disposition of the
Partnership's portfolio of 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. The Advisor is permitted to delegate the performance of services
pursuant to a sub-advisory agreement (the "Sub-Advisory Agreement"). The
delegation of such services does not relieve the Advisor of its obligation to
perform such services. CRIIMI MAE Services Limited Partnership ("CMSLP"), an
affiliate of CRIIMI MAE, manages the Partnership's portfolio pursuant to the
Sub-Advisory Agreement. The general partner of CMSLP is CMSLP Management
Company, Inc., a wholly owned subsidiary of CRIIMI MAE.
The Partnership's investment in mortgages consists 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"), mortgage-backed
securities guaranteed by the Government National Mortgage Association ("GNMA")
("GNMA Mortgage-Backed Securities") and FHA-insured mortgage loans ("FHA-Insured
Loans" and together with FHA-Insured Certificates and GNMA Mortgage-Backed
Securities referred to herein as "Insured Mortgages"). The mortgages underlying
the FHA-Insured Certificates, GNMA Mortgage-Backed Securities and FHA-Insured
Loans are non-recourse first liens on multifamily residential developments or
retirement homes.
2. BASIS OF PRESENTATION
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, 2002
and December 31, 2001 and the results of its operations and its cash flows for
the three months ended March 31, 2002 and 2001.
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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 generally accepted accounting principles
("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, 2001.
3. INVESTMENT IN FHA-INSURED CERTIFICATES AND GNMA MORTGAGE-BACKED SECURITIES
Fully Insured Mortgage Investments
----------------------------------
Listed below is the Partnership's aggregate investment in Fully Insured
Mortgages:
March 31, December 31,
2002 2001
----------- -----------
Fully Insured Acquired Mortgages:
Number of:
GNMA Mortgage-Backed Securities 2 2
FHA-Insured Certificates (1) through (4) 23 26
Amortized Cost $41,642,529 $44,640,062
Face Value 42,701,741 46,215,896
Fair Value 41,844,999 45,845,197
Fully Insured Originated Mortgages:
Number of:
GNMA Mortgage-Backed Securities 1 1
FHA-Insured Certificates 1 1
Amortized Cost $16,094,091 $16,132,560
Face Value 16,094,090 16,132,560
Fair Value 15,594,550 15,734,485
(1) In April 2002, the mortgage on Garden Court Apartments was prepaid. The
Partnership received net proceeds of approximately $1.2 million and expects
to recognize a gain of approximately $9,000. A distribution of
approximately $0.09 per Unit related to the prepayment of this mortgage was
declared in April and is expected to be paid to Unitholders in August 2002.
In addition to footnote (1) above, footnotes (2) through (4) referred to in
the table above correspond to the numbers of the items listed in the table that
follows.
The list below summarizes debentures issued by the United States Department
of Housing and Urban Development ("HUD") in January 2002 for mortgages assigned
to HUD under Section 221 of the National Housing Act (the "Section 221
program"). Interest is payable on the debentures semi-annually on January 1 and
July 1. The debentures were issued to Firstar Trust Company, the initial
mortgagee, and transferred to Midland Loan Services, Inc. ("Midland"), the
servicer. The Partnership anticipates the debentures will be redeemed prior to
the maturity date. The net proceed amounts listed below are included in
receivables and other assets in the Partnership's balance sheet as of March 31,
2002.
9
(Dollars in thousands, except per unit amounts)
Debenture Date of Debenture
Interest Net Application Response Gain Maturity
Complex Name Rate Proceeds Date from HUD 2002 Date
------------ ---- -------- ---- -------- ---- ----
(2) Country Club Terrace Apts. 7.500% $ 1,425 Sep 2000 Jan 2002 $ 178 Sep 2010
(3) Nevada Hills Apartments 7.500% 1,134 Dec 2000 Jan 2002 154 Dec 2010
(4) Dunhaven Apartments 7.125% 872 Jan 2001 Jan 2002 165 Feb 2011
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Total included in receivables
and other assets as of March 31, 2002 $ 3,431
=======
As of May 1, 2002, all of the fully insured FHA-Insured Certificates and
GNMA Mortgage-Backed Securities are current with respect to the payment of
principal and interest except for the mortgage on The Executive House, which is
delinquent with respect to the April 2002 payment of principal and interest. The
Partnership no longer receives monthly principal and interest from mortgages
that are in the HUD assignment process under the Section 221 program. The
servicer of the mortgage on Fairlawn II filed an application for insurance
benefits under section 221 in September 2000. The face value of this mortgage
was approximately $755,000 as of the insurance application date. The Partnership
has not received approval for the assignment of this mortgage as of May 1, 2002.
Under the Section 221 program, a mortgagee has the right to assign a
mortgage ("put") to FHA at the expiration of 20 years from the date of final
endorsement if the mortgage is not in default at such time. Any mortgagee
electing to assign an Insured Mortgage to FHA receives, in exchange therefor,
HUD debentures having a total face value equal to the then outstanding principal
balance of the Insured Mortgage plus accrued interest to the date of assignment.
These HUD debentures generally mature 10 years from the date of assignment and
bear interest at a rate announced semi-annually by HUD in the Federal Register
("going Federal rate") at such date. This assignment procedure is applicable to
an Insured Mortgage, which had a firm or conditional FHA commitment for
insurance on or before November 30, 1983. Once the servicer of a mortgage has
filed an application for insurance benefits under Section 221, the Partnership
will no longer receive the monthly principal and interest on the applicable
mortgage. The Partnership expects to receive HUD debentures, as discussed above,
plus accrued interest at the going Federal rate, from date of assignment of the
mortgage to the date of issuance of the debenture. The Partnership will
recognize a gain on these assignments upon receipt of HUD debentures or a loss
when it becomes probable that a loss will be incurred.
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4. INVESTMENT IN FHA-INSURED LOANS
Fully Insured FHA-Insured Loans
-------------------------------
Listed below is the Partnership's aggregate investment in FHA-Insured
Loans:
March 31, December 31,
2002 2001
----------- -----------
Fully Insured Acquired Loans:
Number of Loans 7 7
Amortized Cost $ 8,881,718 $ 8,914,573
Face Value 10,578,264 10,632,937
Fair Value 10,462,428 10,451,178
Fully Insured Originated Loans:
Number of Loans (1) 2 3
Amortized Cost $ 9,396,153 $12,430,002
Face Value 9,136,039 12,132,653
Fair Value 8,976,421 12,122,221
(1) In January 2002, the mortgage on Longleaf Lodge was prepaid. The
Partnership received net proceeds of approximately $3.7 million and
recognized a gain of approximately $672,000 for the three months ended
March 31, 2002. A distribution of approximately $0.29 per Unit related to
the prepayment of this mortgage was declared in January and paid to
Unitholders in May 2002.
As of May 1, 2002, all of the Partnership's FHA-Insured Loans were current
with respect to the payment of principal and interest, except for the mortgage
on Westbrook Apartments, which is delinquent with respect to the April 2002
payment of principal and interest.
In addition to base interest payments under Originated Insured Mortgages,
the Partnership is entitled to additional interest based on a percentage of the
net cash flow from the underlying development (referred to as "Participations").
During the three months ended March 31, 2002 and 2001, the Partnership received
additional interest of $3,228 and $0, respectively, from the Participations.
These amounts, if any, are included in mortgage investment income on the
accompanying Statements of Income and Comprehensive Income.
5. INVESTMENT IN DEBENTURE AND DUE TO AFFILIATE
In December 2000, HUD issued assignment proceeds in the form of a 7.125%
FHA debenture for the mortgage on Fox Run Apartments. The debenture, with a face
value as of December 31, 2001, of $2,385,233, was issued to the Partnership,
with interest payable semi-annually on January 1 and July 1. The mortgage on Fox
Run Apartments was beneficially owned 50% by the Partnership and 50% by an
affiliate, American Insured Mortgage Investors ("AIM 84"). In January 2002, net
proceeds of approximately $2.4 million were received upon redemption of this
debenture. Since the Partnership was the record owner and AIM 84 was the 50 %
beneficial owner of the mortgage on Fox Run Apartments, approximately $1.2
million of the debenture proceeds was paid to AIM 84. A distribution of
approximately $0.09 per Unit related to the redemption of this debenture was
declared in January 2002 and paid in May 2002.
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6. DISTRIBUTIONS TO UNITHOLDERS
The distributions paid or accrued to Unitholders on a per Unit basis for
the three months ended March 31, 2002 and 2001 are as follows:
2002 2001
------ ------
Quarter ended March 31, $1.325(1) $0.680(2)
------ ------
$1.325 $0.680
====== ======
The following disposition proceeds are included in the distributions listed
above:
Date Net
Proceeds Type of Proceeds
Complex Name(s) Received Disposition Per Unit
--------------- -------- ----------- --------
(1) Quarter ended March 31, 2002:
The Gate House Apartments Dec 2001 Prepayment $0.220
Longleaf Lodge Jan 2002 Prepayment 0.290
Fox Run Apartments Jan 2002 Assignment 0.090
Interest on debentures related to mortgages on Summit
Square Manor, Park Place, Park Hill Apts, Fairfax
House, Woodland Villas, Country Club Terrace Apts, Jan - Feb
Dunhaven Apts and Nevada Hills Apts 2002 Assignment 0.060
Summit Square Manor Jan 2002 Assignment 0.150
Park Place Jan 2002 Assignment 0.060
Park Hill Apartments Jan 2002 Assignment 0.140
Fairfax House Jan 2002 Assignment 0.170
Woodland Villas Jan 2002 Assignment 0.025
(2) Quarter ended March 31, 2001:
The Meadows of Livonia Jan 2001 Prepayment $0.530
The basis for paying distributions to Unitholders is net proceeds from
mortgage dispositions, if any, and cash flow from operations, which includes
regular interest income and principal from Insured Mortgages. Although the
Insured Mortgages pay a fixed monthly mortgage 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 payment
receipts 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 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.
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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 2002 2001
----------------- ----------------------------- ---- ----
CRIIMI, Inc. (1) General Partner/Distribution $ 649,541 $ 333,350
AIM Acquisition Partners,L.P.(2) Advisor/Asset Management Fee 189,781 260,415
Affiliate of General Partner/Expense
CRIIMI MAE Management, Inc. Reimbursement 15,342 11,969
(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, pursuant to the Partnership Agreement, is entitled to an Asset
Management Fee equal to 0.95% of Total Invested Assets (as defined in the
Partnership Agreement). CMSLP, the sub-advisor to the Partnership, 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 $55,945 and $76,759 for the three months ended March 31, 2002
and 2001, respectively. The general partner and limited partner of CMSLP
are wholly owned subsidiaries of CRIIMI MAE.
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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 "believes," "anticipates," "expects," "contemplates," 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 or incorporated by reference 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 with the Securities and Exchange
Commission 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 and (v) defaulted mortgages. 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
-------
As of March 31, 2002, the Partnership had invested in 36 Insured Mortgages
with an aggregate amortized cost of approximately $76.0 million, an aggregate
face value of approximately $78.5 million and an aggregate fair value of
approximately $76.9 million, as discussed below.
In April 2002, the mortgage on Garden Court Apartments was prepaid. The
Partnership received net proceeds of approximately $1.2 million and expects to
recognize a gain of approximately $9,000. A distribution of approximately $0.09
per Unit related to the prepayment of this mortgage was declared in April and is
expected to be paid to Unitholders in August 2002.
As of May 1, 2002, all of the fully insured FHA-Insured Certificates and
GNMA Mortgage-Backed Securities are current with respect to the payment of
principal and interest except for the mortgages on Westbrook Apartments and The
Executive House, which are delinquent with respect to the April 2002 payment of
principal and interest. The Partnership no longer receives monthly principal and
interest from mortgages that are in the HUD assignment process under the Section
221 program. The servicer of the mortgage on Fairlawn II filed an application
for insurance benefits under section 221 in September 2000. The face value of
this mortgage was approximately $755,000 as of the insurance application date.
The Partnership has not received approval for the assignment of this mortgage as
of May 1, 2002.
Under the Section 221 program, a mortgagee has the right to put a mortgage
to FHA at the expiration of 20 years from the date of final endorsement if the
mortgage is not in default at such time. Any mortgagee electing to assign an
Insured Mortgage to FHA receives, in exchange therefor, HUD debentures having a
total face value equal to the then outstanding principal balance of the Insured
Mortgage plus accrued interest to the date of assignment. These HUD debentures
generally mature 10 years from the date of assignment and bear interest at the
going Federal rate at such date. This assignment procedure is applicable to an
Insured Mortgage, which had a firm or conditional FHA commitment for insurance
on or before November 30, 1983. Once the servicer of a mortgage has filed an
application for insurance benefits under the Section 221 program, the
14
Partnership will no longer receive the monthly principal and interest on the
applicable mortgage. The Partnership expects to receive HUD debentures, as
discussed above, plus accrued interest at the going Federal rate, from date of
assignment of the mortgage to the date of issuance of the debenture. The
Partnership will recognize a gain on these assignments upon receipt of HUD
debentures or a loss when it becomes probable that a loss will be incurred.
The list below summarizes debentures issued in January 2002 for mortgages
assigned to HUD under the Section 221 program. Interest is payable on the
debentures semi-annually on January 1 and July 1. The debentures were issued to
Firstar Trust Company, the initial mortgagee, and transferred to Midland Loan
Services, Inc. ("Midland"), the servicer. The Partnership anticipates the
debentures will be redeemed prior to the maturity date. The net proceed amounts
listed below are included in receivables and other assets in the Partnership's
balance sheet as of March 31, 2002.
(Dollars in thousands, except per unit amounts)
Debenture Date of Debenture
Interest Net Application Response Gain Maturity
Complex Name Rate Proceeds Date from HUD 2002 Date
------------ ---- -------- ---- -------- ---- ----
(2) Country Club Terrace Apts. 7.500% $ 1,425 Sep 2000 Jan 2002 $ 178 Sep 2010
(3) Nevada Hills Apartments 7.500% 1,134 Dec 2000 Jan 2002 154 Dec 2010
(4) Dunhaven Apartments 7.125% 872 Jan 2001 Jan 2002 165 Feb 2011
-------
Total included in receivables
and other assets as of March 31, 2002 $ 3,431
=======
Results of Operations
---------------------
Net earnings increased by approximately $411,000 for the three months ended
March 31, 2002, as compared to the corresponding period in 2001, primarily due
to an increase in gains on mortgage dispositions, partially offset by a decrease
in mortgage investment income, as discussed below.
Mortgage investment income decreased by approximately $527,000 for the
three months ended March 31, 2002, as compared to the corresponding period in
2001, primarily due to a reduction in the mortgage base. The mortgage base
decreased as a result of fifteen mortgage dispositions with an aggregate
principal balance of approximately $26 million, representing an approximate 24%
decrease in the aggregate principal balance of the total mortgage portfolio
since March 2001 as compared to March 2002.
Interest and other income decreased by approximately $41,000 for the three
months ended March 31, 2002, as compared to the corresponding period in 2001,
primarily due to the timing of temporary investment of mortgage disposition
proceeds prior to distribution.
Asset management fees decreased by approximately $71,000 for the three
months ended March 31, 2002, as compared to the corresponding period in 2001,
primarily due to the reduction in the mortgage asset base.
General and administrative expenses decreased slightly by approximately
$2,000 for the three months ended March 31, 2002, as compared to the
corresponding period in 2001.
Gains on mortgage dispositions increased by approximately $907,000 for the
three months ended March 31, 2002, as compared to the corresponding period in
2001. During the first three months of 2002, the Partnership recognized a gain
of approximately $672,000 from the prepayment of the mortgage on Longleaf Lodge
and gains of approximately $497,000 from the assignment of the mortgages on
Country Club Terrace Apartments, Dunhaven Apartments and Nevada Hills
15
Apartments. During the first three months of 2001, the Partnership recognized
gains of approximately $262,000 from the prepayment of the mortgages on The
Meadows of Livonia and Gold Key Village Apartments.
Liquidity and Capital Resources
-------------------------------
The Partnership's operating cash receipts, derived from payments of
principal and interest on Insured Mortgages, plus cash receipts from interest on
short-term investments, were sufficient during the first three months of 2002 to
meet operating requirements. The basis for paying distributions to Unitholders
is net proceeds from mortgage dispositions, if any, and cash flow from
operations, which includes regular interest income and principal received from
Insured Mortgages. Although the Insured Mortgages pay a fixed monthly mortgage
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 received are temporarily invested prior to the
payment of quarterly distributions, (2) the reduction in the asset base and
monthly mortgage payments due to monthly mortgage payments received or mortgage
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.
Net cash provided by operating activities increased by approximately
$278,000 for the three months ended March 31, 2002, as compared to the
corresponding period in 2001, primarily due to a decrease in receivables and
other assets, partially offset by lower mortgage investment income due to a
reduction in the mortgage base. The decrease in receivables and other assets is
primarily due to the receipt of principal and interest previously accrued on the
mortgages awaiting assignment from HUD under the Section 221 program, as
previously discussed.
Net cash provided by investing activities increased by approximately $2.0
million for the three months ended March 31, 2002, as compared to the
corresponding period in 2001. This increase is primarily due to proceeds
received from Midland, as discussed below, and proceeds received from the
redemption of a debenture, as discussed below. These increases were partially
offset by a decrease in proceeds received from the prepayment of mortgages and
debenture proceeds paid to an affiliate, as discussed below.
During 2001, HUD issued assignment proceeds in the form of FHA debentures
in exchange for mortgages put to HUD under the Section 221 program. The
debentures were issued to Firstar Trust Company, the initial mortgagee, and were
subsequently transferred to Midland for each of the mortgages on Summit Square
Manor, Park Place, Park Hill Apartments, Fairfax House and Woodland Villas. In
January 2002, the Partnership received aggregate net proceeds of approximately
$6.8 million from Midland for the redemption of the FHA debentures that were
previously issued by HUD. A distribution of approximately $0.545 per Unit
related to the redemption of these debentures was declared in Februuary and paid
in May 2002.
In December 2000, HUD issued assignment proceeds in the form of a 7.125%
FHA debenture for the mortgage on Fox Run Apartments. The debenture, with a face
value of approximately $2.4 million as of December 31, 2001, was issued to the
Partnership, with interest payable semi-annually on January 1 and July 1. The
mortgage on Fox Run Apartments was owned 50% by the Partnership and 50% by an
affiliate of the Partnership, American Insured Mortgage Investors ("AIM 84"). In
January 2002, net proceeds of approximately $2.4 million were received upon
redemption of this debenture. Since the mortgage on Fox Run Apartments was
beneficially owned 50% by the Partnership and 50% by AIM 84, approximately $1.2
million of the debenture proceeds was paid to AIM 84. A distribution of
approximately $0.09 per Unit related to the redemption of this debenture was
declared in January 2002 and paid in May 2002.
16
Net cash used in financing activities decreased by approximately $4.4
million for the three months ended March 31, 2002, as compared to the
corresponding period in 2001, due to a decrease in the amount of distributions
paid to partners in the first three months of 2002 compared to the same period
in 2001.
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PART I. FINANCIAL INFORMATION
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's principal market risk is exposure to changes in interest
rates in the U.S. Treasury securities market. The Partnership will experience
fluctuations in the market value of its assets related to changes in the
interest rates of U.S. Treasury bonds as well as increases in the spread between
U.S. Treasury bonds and the Partnership's Insured Mortgages. As of March 31,
2002, the average U.S. Treasury rate used to price the Partnership's Insured
Mortgages had increased by approximately 35 to 54 basis points compared to
December 31, 2001.
Management has determined that there has not been a material change as of
March 31, 2002, in market risk from December 31, 2001 as reported in the
Partnership's Annual Report on Form 10-K as of December 31, 2001.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
19
PART II. OTHER INFORMATION
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 10, 2002 /s/ Cynthia O. Azzara
------------ ---------------------------
DATE Cynthia O. Azzara
Senior Vice President,
Chief Financial Officer and
Treasurer