1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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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 its 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) 255-4700
--------------
(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, 2005, 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, 2005
CAPTION>
Page
----
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets - March 31, 2005 (unaudited) and December 31, 2004 3
Statements of Income and Comprehensive Income - for the
three months ended March 31, 2005 and 2004 (unaudited) 4
Statement of Changes in Partners' Equity - for the three months ended
March 31, 2005 (unaudited) 5
Statements of Cash Flows - for the three months ended March 31, 2005
and 2004 (unaudited) 6
Notes to Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
PART II. Other Information
Item 6. Exhibits 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,
2005 2004
-------------- ---------------
(Unaudited)
ASSETS
Investment in FHA-Insured Certificates and GNMA
Mortgage-Backed Securities, at fair value $ 14,235,448 $ 14,299,980
Investment in debenture, at fair value 1,741,873 1,741,873
Cash and cash equivalents 518,635 619,856
Receivables and other assets 146,124 140,559
------------ ------------
Total assets $ 16,642,080 $ 16,802,268
============ ============
LIABILITIES AND PARTNERS' EQUITY
Distributions payable $ 251,395 $ 377,092
Accounts payable and accrued expenses 107,371 83,241
------------ ------------
Total liabilities 358,766 460,333
------------ ------------
Partners' equity:
Limited partners' equity, 15,000,000 Units authorized,
12,079,514 Units issued and outstanding 24,976,727 25,012,435
General partner's deficit (8,817,725) (8,816,275)
Accumulated other comprehensive income 124,312 145,775
------------ ------------
Total partners' equity 16,283,314 16,341,935
------------ ------------
Total liabilities and partners' equity $ 16,642,080 $ 16,802,268
============ ============
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,
2005 2004
------- ----------
Income:
Mortgage investment income $ 320,181 $ 804,511
Interest and other income 27,408 64,782
--------- -----------
347,589 869,293
--------- -----------
Expenses:
Asset management fee to related parties 36,405 106,629
General and administrative 96,947 88,288
--------- -----------
133,352 194,917
--------- -----------
Net earnings before gains on
mortgage dispositions 214,237 674,376
Gains on mortgage dispositions - 632,327
--------- -----------
Net earnings $ 214,237 $ 1,306,703
========= ===========
Other comprehensive loss - adjustment to
unrealized gains on investments in insured mortgages (21,463) (40,628)
--------- -----------
Comprehensive income $ 192,774 $ 1,266,075
========= ===========
Net earnings allocated to:
Limited partners - 96.1% $ 205,882 $ 1,255,742
General Partner - 3.9% 8,355 50,961
--------- -----------
$ 214,237 $ 1,306,703
========= ===========
Net earnings per Unit of limited
partnership interest - basic and diluted $ 0.02 $ 0.10
========= ===========
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, 2005
(Unaudited)
Accumulated
Other
General Limited Comprehensive
Partner Partners Income Total
------------- ------------ ----------------- -------------
Balance, December 31, 2004 $ (8,816,275) $ 25,012,435 $ 145,775 $ 16,341,935
Net earnings 8,355 205,882 - 214,237
Adjustment to unrealized gains on
investments in insured mortgages - - (21,463) (21,463)
Distributions paid or accrued of $0.02 per Unit (9,805) (241,590) - (251,395)
------------ ------------ --------- ------------
Balance, March 31, 2005 $ (8,817,725) $ 24,976,727 $ 124,312 $ 16,283,314
============ ============ ========= ============
Limited Partnership Units outstanding - basic and diluted,
as of and for the three months ended March 31, 2005 and 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 three months ended
March 31,
2005 2004
--------- ----------
Cash flows from operating activities:
Net earnings $ 214,237 $ 1,306,703
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gains on mortgage dispositions - (632,327)
Changes in assets and liabilities:
(Increase) decrease in receivables and other assets (5,565) 487,217
Increase in accounts payable and accrued expenses 24,130 9,765
Decrease in due to affiliate - (151,408)
--------- -----------
Net cash provided by operating activities 232,802 1,019,950
--------- -----------
Cash flows from investing activities:
Proceeds from mortgage prepayments and sales - 9,534,643
Receipt of mortgage principal from scheduled payments 43,069 78,153
Proceeds from redemption of debentures - 11,146,330
Debenture proceeds paid to affiliate - (5,167,835)
--------- -----------
Net cash provided by investing activities 43,069 15,591,291
--------- -----------
Cash flows used in financing activities:
Distributions paid to partners (377,092) (2,513,953)
--------- -----------
Net (decrease) increase in cash and cash equivalents (101,221) 14,097,288
Cash and cash equivalents, beginning of period 619,856 11,345,058
--------- -----------
Cash and cash equivalents, end of period $ 518,635 $25,442,346
========= ===========
Non-cash investing activity:
Debentures received from HUD in exchange for assigned mortgages $ - $ 1,741,873
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.
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. Based upon the current level of interest rates, the
trend in mortgage prepayments and other dispositions over the past year is
likely to continue. Such mortgage prepayments and other dispositions, 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
8
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 will be based on the Unitholders' and the
General Partner's pro-rata share of the Partnership's remaining net assets after
deducting and setting aside amounts required to satisfy and discharge any
existing Partnership obligations and expenses, as stated in the Partnership
Agreement. Such distribution to Unitholders will be substantially less than the
amount of limited partners' equity shown on the Partnership's financial
statements, because that amount is calculated in accordance with GAAP but does
not reflect the actual amount distributable to limited partners. The terms of
the Partnership Agreement do not require the General Partner to contribute an
amount equal to the General Partner's deficit to the Partnership as shown on the
Partnership's financial statements prior to the time the Partnership makes a
final distribution. Therefore, the amount of that deficit is excluded from the
amount distributable to limited partners.
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 March 31, 2005,
and the results of its operations and its cash flows for the three months ended
March 31, 2005 and 2004.
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, 2004.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of the Partnership's financial
instruments are presented in accordance with GAAP which define fair value as the
amount at which a financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
These estimated fair values, however, do not represent the liquidation value or
the market value of the Partnership.
As of March 31, 2005 As of December 31, 2004
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------- ------------- ------------ -------------
Investment in FHA-Insured Certificates
and GNMA Mortgage-Backed
Security (1) $ 14,111,137 $ 14,235,448 $ 14,154,205 $ 14,299,980
============= ============== ============= ==============
Cash and cash equivalents $ 518,635 $ 518,635 $ 619,856 $ 619,856
============= ============== ============= ==============
Investment in Debentures $ 1,741,873 $ 1,741,873 $ 1,741,873 $ 1,741,873
============= ============== ============= ==============
9
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) Carried at fair value on the Partnership's balance sheet.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Investment in FHA-Insured Certificates, GNMA Mortgage-Backed Securities and
----------------------------------------------------------------------------
Debenture
---------
There is an active market for new issuances of FHA-Insured Certificates and
GNMA Mortgage-Backed Securities. However, the Partnership's Insured Mortgages
are not comparable to such new issuances due to their age and characteristics of
their prepayment penalties. Accordingly, the Partnership internally develops
fair value estimates for these securities, as described below.
The Partnership's fair value estimates for its Insured Mortgages are based
on available market information, certain third party information and
management's estimates. The Partnership compares the interest rates on each of
its Insured Mortgages to the applicable U.S. Treasury rate for a security with a
comparable maturity plus a spread to determine an approximate market level
interest rate relative to each of its Insured Mortgages and considers prepayment
lockouts and penalties in determining the fair value of its Insured Mortgages.
In general, the Partnership's Insured Mortgages have relatively high coupon
rates compared to current U.S. Treasury rates and low, if any, prepayment
penalties. Accordingly, most of the Partnership's Insured Mortgages are valued
close to par. Insured Mortgages that have some remaining prepayment penalties
are valued to include the prepayment penalty likely to be paid in the event of
prepayment. These assumptions are similar to information provided by a third
party and provide prices that are consistent with prices received in sales of
certain of the Partnership's Insured Mortgages. The Partnership believes that
its valuation methodology is reasonable for determining estimated fair values of
the Partnership's Insured Mortgages and, due to the nature of these Insured
Mortgages, another valuation methodology would not result in values materially
different from the values utilized by the Partnership which generally
approximate their par values.
Since the Partnership's debenture may be redeemed by HUD, at any time, the
face value of the debenture is equivalent to the fair value of the debenture.
Cash and cash equivalents
-------------------------
The carrying amount approximates fair value because of the short maturity
of these instruments.
4. 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,
2005 2004
------------ ------------
Number of:
GNMA Mortgage-Backed Securities 1 1
FHA-Insured Certificates (1) (2) (3) 7 7
Amortized Cost $14,111,137 $14,154,205
Face Value 14,215,881 14,260,814
Fair Value 14,235,448 14,299,980
10
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) In April 2005, the mortgage on Bradley Road Nursing was prepaid. The
Partnership received net proceeds of approximately $2.5 million and
expects to recognize a gain of approximately $64,000 during the second
quarter of 2005. The Partnership expects to distribute approximately
$0.195 per Unit related to the prepayment of this mortgage and expects to
include such amount in the second quarter distribution expected to be paid
to Unitholders in August 2005.
(2) In April 2005, the mortgage on Sangnok Villa was prepaid. The Partnership
received net proceeds of approximately $876,000 and expects to recognize a
gain of approximately $4,700 during the second quarter of 2005. The
Partnership expects to distribute approximately $0.07 per Unit related to
the prepayment of this mortgage and expects to include such amount in the
second quarter distribution expected to be paid to Unitholders in August
2005.
(3) In May 2005, the FHA-Insured Certificate backed by the mortgage on
Eaglewood Villa Apartments was sold, in the ordinary course of business,
with the consent of the Advisor. The Partnership received net proceeds of
approximately $2.6 million and expects to recognize a gain of
approximately $92,000 during the second quarter of 2005. The Partnership
expects to distribute approximately $0.21 per Unit related to the sale of
this FHA-Insured Certificate and expects to include such amount in the
second quarter distribution expected to be paid to Unitholders in
August 2005.
As of May 3, 2005, all of the GNMA Mortgage-Backed Securities and
FHA-Insured Certificates are current with respect to the payment of principal
and interest.
5. INVESTMENT IN DEBENTURE
Listed below is the Partnership's investment in a debenture issued by HUD:
March 31, December 31,
2005 2004
------------ ------------
Amortized Cost $1,741,873 $1,741,873
Face Value 1,741,873 1,741,873
Fair Value 1,741,873 1,741,873
Interest on this 5.75% debenture is payable semi-annually on January 1 and
July 1. The maturity date of this debenture is June 10, 2013, however it may be
redeemed by HUD at any time.
6. DISTRIBUTIONS TO UNITHOLDERS
The distributions paid or accrued to Unitholders on a per Unit basis for
the three months ended March 31, 2005 and 2004 are as follows:
2005 2004
----- ----
Quarter ended March 31 $0.02 $2.01
----- -----
$0.02 $2.01
===== =====
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
Partnership's 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 in which the monthly
mortgage payment receipts are temporarily invested prior to the payment of
quarterly distributions, (2) the reduction in the asset base resulting from
monthly mortgage payments received or mortgage dispositions, (3) variations in
the cash flow attributable to the delinquency or default of Insured Mortgages,
the timing of receipt of debentures, the interest rate on debentures and
debenture redemptions, and (4) changes 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
11
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
mortgage base. Based upon the current level of interest rates, the trend in
mortgage prepayments and other dispositions over the past year is likely to
continue. Such mortgage prepayments and other dispositions, 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 will be based on the Unitholders' and the
General Partner's pro-rata share of the Partnership's remaining net assets after
deducting and setting aside amounts required to satisfy and discharge any
existing Partnership obligations and expenses, as stated in the Partnership
Agreement. Such distribution to Unitholders will be substantially less than the
amount of limited partners' equity shown on the Partnership's financial
statements, because that amount is calculated in accordance with GAAP but does
not reflect the actual amount distributable to limited partners. The terms of
the Partnership Agreement do not require the General Partner to contribute an
amount equal to the General Partner's deficit to the Partnership as shown on the
Partnership's financial statements prior to the time the Partnership makes a
final distribution. Therefore, the amount of that deficit is excluded from the
amount distributable to limited partners.
Commencing in the first quarter of 2005, the General Partner declares
distributions of regular cash flow and mortgage proceeds, if any, once each
quarter. The General Partner made the decision to declare distributions
quarterly instead of monthly to reduce expenses associated with monthly
declarations. The distributions are to be declared in March, June, September and
December and are to be paid approximately 30 days after the end of each calendar
quarter.
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 2005 2004
----------------- ----------------------------- ----- ----
CRIIMI, Inc. (1) General Partner/Distribution $ 9,805 $ 985,340
AIM Acquisition Partners, L.P. (2) Advisor/Asset Management Fee 36,405 106,629
CRIIMI MAE Management, Inc.(3) Affiliate of General Partner/Expense Reimbursement 14,827 16,519
(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 $10,728 and $31,424 for the three months ended March 31, 2005
and 2004, 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.
12
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, distributions 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 disposition of investments, 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 matters, (ii) interest rates, (iii) prepayment of mortgages, (iv)
defaulted mortgages, (v) errors in servicing defaulted mortgages and (vi) sales
of mortgage investments at other than 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 and other dispositions over the past year is
likely to continue. Such mortgage prepayments and other dispositions, 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.
Mortgage Investments
--------------------
As of March 31, 2005, the Partnership had investments in 8 Insured
Mortgages and one debenture with
13
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 $16.0 million, as compared to March 31, 2004, when the Partnership
had investments 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.
In April 2005, the mortgages on Bradley Road Nursing and Sangnok Villa
prepaid. The Partnership received aggregate net proceeds of approximately $3.3
million and expects to recognize gains of approximately $68,000 during the
second quarter of 2005. The Partnership expects to distribute approximately
$0.265 per Unit related to the prepayment of these mortgages and expects to
include such amount in the second quarter distribution expected to be paid to
Unitholders in August 2005.
In May 2005, the FHA-Insured Certificate backed by the mortgage on
Eaglewood Villa Apartments was sold, in the ordinary course of business, with
the consent of the Advisor. The Partnership received net proceeds of
approximately $2.6 million and expects to recognize a gain of approximately
$92,000 during the second quarter of 2005. The Partnership expects to distribute
approximately $0.21 per Unit related to the sale of this FHA-Insured Certificate
and expects to include such amount in the second quarter distribution expected
to be paid to Unitholders in August 2005.
After the prepayment of the two insured mortgages in April 2005 and the
sale of the one FHA-Insured Certificate in May 2005, the Partnership had
investments in 5 Insured Mortgages and one debenture with an aggregate face
value of approximately $10.1 million. As of May 3, 2005, all of the GNMA
Mortgage-Backed Securities and FHA-Insured Certificates are current with respect
to the payment of principal and interest.
Results of Operations
---------------------
Net earnings decreased by approximately $1.1 million for the three months
ended March 31, 2005, as compared to the corresponding period in 2004, primarily
due to a decrease in mortgage investment income and a decrease in gains on
mortgage dispositions.
Mortgage investment income decreased by approximately $484,000 for the
three months ended March 31, 2005, as compared to the corresponding period in
2004, primarily due to a reduction in the mortgage base. The mortgage base
decreased as a result of 4 mortgage dispositions with an aggregate principal
balance of approximately $20.4 million, representing an approximate 59% decrease
in the aggregate principal balance of the total mortgage portfolio since March
2004.
Interest and other income decreased by approximately $37,000 for the three
months ended March 31, 2005, as compared to the corresponding period in 2004,
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 $70,000 for the three
months ended March 31, 2005, as compared to the corresponding period in 2004,
primarily due to the reduction in the mortgage base, as previously discussed.
General and administrative expenses increased by approximately $9,000 for
the three months ended March 31, 2005, as compared to the corresponding period
in 2004, primarily related to the Partnership's listing fees on the American
Stock Exchange.
Gains on mortgage dispositions decreased by approximately $632,000 for the
three months ended
14
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
March 31, 2005, as compared to the corresponding period in 2004. During the
three months ended March 31, 2005, the Partnership recognized no gains or
losses. During the first three months 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.
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, 2005 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 from Insured Mortgages. Although the Partnership's 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 in which the monthly mortgage payment receipts
are temporarily invested prior to the payment of quarterly distributions, (2)
the reduction in the asset base resulting from monthly mortgage payments
received or mortgage dispositions, (3) variations in the cash flow attributable
to the delinquency or default of Insured Mortgages, the timing of receipt of
debentures, the interest rate on debentures and debenture redemptions, and (4)
changes 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 and other
dispositions over the past year is likely to continue. Such mortgage prepayments
and other dispositions, 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
will be based on the Unitholders' and the General Partner's pro-rata share of
the Partnership's remaining net assets after deducting and setting aside amounts
required to satisfy and discharge any existing Partnership obligations and
expenses, as stated in the Partnership Agreement. Such distribution to
Unitholders will be substantially less than the amount of limited partners'
equity shown on the Partnership's financial statements, because that amount is
calculated in accordance with GAAP but does not reflect the actual amount
distributable to limited partners. The terms of the Partnership Agreement do not
require the General Partner to contribute an amount equal to the General
Partner's deficit to the Partnership as shown on the Partnership's financial
statements prior to the time the Partnership makes a final distribution.
Therefore, the amount of that deficit is excluded from the amount distributable
to limited partners.
Net cash provided by operating activities decreased by approximately
$787,000 for the three months ended March 31, 2005, as compared to the
corresponding period in 2004, primarily due to a decrease in mortgage investment
income and a decrease in cash received from interest on debentures.
Net cash provided by investing activities decreased by approximately $15.5
million for the three months ended March 31, 2005, as compared to the
corresponding period in 2004, primarily due a decrease in proceeds received from
mortgage prepayments, mortgage sales and redemption of debentures, partially
offset by debenture proceeds due to affiliate.
Net cash used in financing activities decreased by approximately $2.1
million for the three months ended March 31, 2005, as compared to the
corresponding period in 2004, due to a decrease in the amount of distributions
paid to partners in the first three months of 2005 compared to the same period
in 2004.
15
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 critical accounting estimates include the determination
of the fair values for Insured Mortgages:
Fair Value of Insured Mortgages - The Partnership's fair value estimates
for its Insured Mortgages are based on available market information,
certain third party information and management's estimates. The Partnership
compares the interest rates on each of its Insured Mortgages to the
applicable U.S. Treasury rate for a security with a comparable maturity
plus a spread to determine an approximate market level interest rate
relative to each of its Insured Mortgages and considers prepayment lockouts
and penalties in determining the fair value of its Insured Mortgages. In
general, the Partnership's Insured Mortgages have relatively high coupon
rates compared to current U.S. Treasury rates and low, if any, prepayment
penalties. Accordingly, most of the Partnership's Insured Mortgages are
valued close to par. Insured Mortgages that have some remaining prepayment
penalties are valued to include the prepayment penalty likely to be paid in
the event of prepayment. These assumptions are similar to information
provided by a third party and provide prices that are consistent with
prices received in sales of certain of the Partnership's Insured Mortgages.
The Partnership believes that its valuation methodology is reasonable for
determining estimated fair values of the Partnership's Insured Mortgages
and, due to the nature of these Insured Mortgages, another valuation
methodology would not result in values materially different from the values
utilized by the Partnership which generally approximate their par values.
The Partnership assesses each Insured Mortgage for other-than-temporary
impairment when the fair value of an Insured Mortgage declines below
amortized cost. Any such decline is considered other-than-temporary unless
the Partnership has the ability and intent to hold the Insured Mortgage for
a reasonable period of time sufficient for a forecasted recovery of fair
value up to (or beyond) the cost of the investment, and evidence indicating
that the cost of the Insured Mortgage is recoverable within a reasonable
period of time outweighs evidence to the contrary. If an
other-than-temporary impairment is determined to exist, such impairment is
measured by comparing the estimated fair value of the related Insured
Mortgage to its current amortized cost basis, with the difference
recognized as a loss in the income statement. The Partnership did not
recognize an impairment loss on its Insured Mortgages during the years
ended December 31, 2004, 2003 and 2002.
16
PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management has determined that there has not been a material change as of
March 31, 2005 in market risk from the information provided as of December 31,
2004 in the Partnership's Annual Report on Form 10-K as of December 31, 2004.
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
its 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 (the "Exchange Act"). 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.
There have been no changes in the General Partner's internal controls over
financial reporting in the fiscal quarter ended March 31, 2005 that have
materially affected, or is reasonably likely to materially affect, internal
controls over financial reporting.
17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
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 18 U.S.C.
Section 1350 from Barry S. Blattman,
Chairman of the Board and Chief Executive
Officer of the General Partner
(Furnished herewith).
32.2 Certification pursuant to 18 U.S.C.
Section 1350 from Cynthia O. Azzara,
Executive Vice President, Chief Financial
Officer and Treasurer of the General
Partner (Furnished herewith).
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
/s/Cynthia O. Azzara
May 6, 2005 ---------------------------------------
----------- Cynthia O. Azzara
DATE Executive Vice President,
Chief Financial Officer and
Treasurer (Principal Accounting Officer)