-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TPKZ7FMo6R3lS0+dfM9rqqGpJzDdCBDQNjZvvb/roPdnyZf9sj/8Ak/KQtmDrmgk lYWI+sz6bpy32LfI98ymEQ== 0000784014-02-000001.txt : 20020415 0000784014-02-000001.hdr.sgml : 20020415 ACCESSION NUMBER: 0000784014-02-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INSURED MORTGAGE INVESTORS L P SERIES 86 CENTRAL INDEX KEY: 0000784014 STANDARD INDUSTRIAL CLASSIFICATION: INVESTORS, NEC [6799] IRS NUMBER: 132943272 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15615 FILM NUMBER: 02581453 BUSINESS ADDRESS: STREET 1: 11200 ROCKVILLE PIKE CITY: ROCKVILLE STATE: MD ZIP: 20852 BUSINESS PHONE: 3014689200 MAIL ADDRESS: STREET 1: 11200 ROCKVILLE PIKE CITY: ROCKVILLE STATE: MD ZIP: 20852 10-K 1 aim86_10k-2001.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------------------ For the fiscal year ended December 31, 2001 Commission file number 1-12704 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86 ---------------------------------------------------- (Exact name of registrant as specified in it's charter) Delaware 13-2943272 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 11200 Rockville Pike Rockville, Maryland 20852 (301) 816-2300 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------------ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - --------------------------- ------------------------ Depositary Units of Limited American Stock Exchange Partnership Interest Securities registered pursuant to Section 12(g) of the Act: None ------------------------------------ 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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of February 19, 2002, 9,576,290 depositary units of limited partnership interest were outstanding and the aggregate market value of such units held by non-affiliates of the Registrant on such date was $33,227,991. Documents incorporated by Reference None 2 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86 2001 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
Page PART I Item 1. Business....................................................................... 3 Item 2. Properties..................................................................... 4 Item 3. Legal Proceedings.............................................................. 4 Item 4. Submission of Matters to a Vote of Security Holders............................ 4 PART II Item 5. Market for Registrant's Securities and Related Security Holder Matters......... 5 Item 6. Selected Financial Data........................................................ 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 7 Item 7A. Qualitative and Quantitative Disclosures About Market Risk..................... 13 Item 8. Financial Statements and Supplementary Data.................................... 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................................ 14 PART III Item 10. Directors and Executive Officers of the Registrant............................. 15 Item 11. Executive Compensation......................................................... 17 Item 12. Security Ownership of Certain Beneficial Owners and Management................. 17 Item 13. Certain Relationships and Related Transactions................................. 18 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 19 Signatures ............................................................................... 22
3 PART I ITEM 1. BUSINESS FORWARD-LOOKING STATEMENTS. When used in this Annual Report on Form 10-K, 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K, including, without limitation, statements made under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, (2) information included or incorporated by reference in 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. Development and Description of Business - --------------------------------------- Information concerning the business of American Insured Mortgage Investors L.P.-Series 86 (the "Partnership") is contained in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and in Notes 1, 5 and 7 of the Notes to Financial Statements of the Partnership (filed in response to Item 8 hereof), all of which are incorporated by reference herein. See also Schedule IV-Mortgage Loans on Real Estate, for the table of the Partnership's investments in Insured Mortgages (as defined below), as of December 31, 2001, which is hereby incorporated by reference herein. Employees - --------- The Partnership has no employees. The business of the Partnership is managed by CRIIMI, Inc. (the "General Partner"), while its portfolio of mortgages is managed by AIM Acquisition Partners, L.P. (the "Advisor") pursuant to an advisory agreement (the "Advisory Agreement"). The General Partner is a wholly owned subsidiary of CRIIMI MAE Inc. ("CRIIMI MAE"). 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. 4 Under the Advisory Agreement, the Advisor will render 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 will be 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 will 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. Competition - ----------- In disposing of mortgage investments, the Partnership competes with private investors, mortgage banking companies, mortgage brokers, state and local government agencies, lending institutions, trust funds, pension funds, and other entities, some with similar objectives to those of the Partnership and some of which are or may be affiliates of the Partnership, its General Partner, the Advisor, CMSLP or their respective affiliates. Some of these entities may have substantially greater capital resources and experience in disposing of Federal Housing Administration ("FHA") insured mortgages than the Partnership. CRIIMI MAE and its affiliates also may serve as general partners, sponsors or managers of real estate limited partnerships, Real Estate Investments Trusts ("REITs") or other entities in the future. The Partnership may attempt to dispose of mortgages at or about the same time that CRIIMI MAE, one or more of the "AIM Funds" (defined as the Partnership, American Insured Mortgage Investors ("AIM 84"), American Insured Mortgage Investors - Series 85, L.P. ("AIM 85"), and American Insured Mortgage Investors L.P. - Series 88 ("AIM 88")), and/or other entities sponsored or managed by CRIIMI MAE or its affiliates, are attempting to dispose of mortgages. As a result of market conditions that could limit dispositions, CMSLP and its affiliates could be faced with conflicts of interest in determining which mortgages would be disposed of. Both CMSLP and the General Partner, however, are subject to their fiduciary duties in evaluating the appropriate action to be taken when faced with such conflicts. ITEM 2. PROPERTIES Although the Partnership does not own the underlying real estate, the mortgages underlying the Partnership's mortgage investments are non-recourse first liens on the respective multifamily residential developments or retirement homes. ITEM 3. LEGAL PROCEEDINGS Reference is made to Notes 5 and 8 of the Notes to Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to the security holders to be voted on during the fourth quarter of 2001. 5 ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED SECURITY HOLDER MATTERS Principal Market and Market Price for Units - ------------------------------------------- The General Partner listed the Partnership's Units for trading on the American Stock Exchange ("AMEX") on January 18, 1994 in order to provide investment liquidity as contemplated in the Partnership's original prospectus. The Units are traded under the symbol "AIJ." The high and low trade prices for the Units as reported on AMEX and the distributions, as applicable, for each quarterly period in 2001 and 2000 were as follows:
Amount of 2001 Distribution Quarter Ended High Low Per Unit ------------- ---- --- -------- March 31 $ 3.8750 $ 3.2500 $ 0.800(1) June 30 3.5600 3.2000 0.105(2) September 30 3.6100 3.3100 0.075 December 31 4.0000 3.3600 0.065 ------- $ 1.045 =======
Amount of 2000 Distribution Quarter Ended High Low Per Unit ------------- ---- --- -------- March 31 $ 5.2500 $ 3.6250 $ 0.070 June 30 4.0000 3.5625 0.095(3) September 30 4.2500 3.2500 0.075 December 31 4.3750 3.2500 1.105(4) ------- $ 1.345 =======
(1) This amount includes approximately $0.725 per Unit representing return of capital and gain from the following: (a) approximately $0.44 per Unit related to the sale of Spring Lake Village; (b) approximately $0.09 per Unit received from United States Department of Housing and Urban Development ("HUD") for the Spring Lake Village coinsurance claim; (c) approximately $0.18 per Unit received from the coinsurer of the mortgage on St. Charles Place-Phase II, as result of its coinsurance claim filed with HUD; and (d) approximately $0.015 per Unit of cash held in reserve for anticipated legal costs related to the mortgages on St. Charles Place-Phase II and The Villas. (2) This amount includes approximately $0.03 per Unit related to the receipt of an escrow balance from the servicer of Spring Lake Village. (3) This amount includes approximately $0.02 per Unit of interest from receipt of HUD debenture in exchange for the Spring Lake Village HUD coinsurance claim. (4) This amount includes approximately $1.02 per Unit return of capital received from the coinsurer of the mortgage on The Villas, as a result of its coinsurance claim filed with HUD. Approximate Number of Unitholders Title of Class as of December 31, 2001 -------------- ----------------------- Depositary Units of Limited Partnership Interest 7,900 6 ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per Unit amounts)
For the Years Ended December 31, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Income $ 3,034 $ 3,134 $ 3,911 $ 6,058 $ 10,629 Net gain on mortgage dispositions 518 4,753 597 437 550 Loan loss -- -- -- -- (387) Net earnings 2,993 7,245 3,631 5,373 9,436 Net earnings per Limited Partnership Unit - Basic (1) $ 0.300 $ 0.720 $ 0.360 $ 0.530 $ 0.940 Distributions per Limited Partnership Unit (1)(2) $ 1.045 $ 1.345 $ 4.730 $ 2.170 $ 3.590
As of December 31, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Total assets $ 37,520 $ 55,785 $ 70,796 $ 97,126 $ 136,668 Partners' equity 36,733 44,529 49,981 94,878 111,571
(1) Calculated based upon the weighted average number of Units outstanding. (2) Includes distributions due the Unitholders for the Partnership's fiscal years ended December 31, 2001, 2000, 1999, 1998 and 1997, which were paid subsequent to year end. See Notes 7 and 9 of the Notes to Financial Statements of the Partnership. The selected income statement data presented above for the years ended December 31, 2001, 2000 and 1999, and the selected balance sheet data as of December 31, 2001 and 2000, are derived from, and are qualified by, reference to the Partnership's financial statements, which are included elsewhere in this Form 10-K. The selected income statement data for the years ended December 31, 1998 and 1997, and the selected balance sheet data as of December 31, 1999, 1998 and 1997 are derived from audited financial statements not included as part of this Annual Report on Form 10-K. This data should be read in conjunction with the financial statements and the notes thereto. 7 PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General - ------- The following discussion and analysis contains statements that may be considered forward looking. These statements contain a number of risks and uncertainties as discussed herein and in Item 1 of this Form 10-K that could cause actual results to differ materially. American Insured Mortgage Investors L.P. - Series 86 (the "Partnership") was formed under the Uniform Limited Partnership Act of the State of Delaware on October 31, 1985. During the period from May 2, 1986 (the initial closing date of the Partnership's public offering) through June 6, 1987 (the termination date of the offering), the Partnership, pursuant to its public offering of 9,576,165 Depository Units of limited partnership interest ("Units"), raised a total of $191,523,300 in gross proceeds. In addition, the initial limited partner contributed $2,500 to the capital of the Partnership and received 125 units of limited partnership interest in exchange therefor. CRIIMI, Inc. (the "General Partner") holds a partnership interest of 4.9% and is a wholly owned subsidiary of CRIIMI MAE Inc. ("CRIIMI MAE"). AIM Acquisition Partners, L.P. (the "Advisor") serves as the advisor to the Partnership pursuant to an advisory agreement (the "Advisory Agreement"). 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 will render 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 will be 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 will 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. Mortgage Investments - -------------------- Prior to the expiration of the Partnership's reinvestment period in December 1994, the Partnership was engaged in the business of originating mortgage loans ("Originated Insured Mortgages") and acquiring mortgage loans ("Acquired Insured Mortgages" and, together with Originated Insured Mortgages, referred to herein as "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 (as discussed below) under Section 221(d)(4) or Section 231 of the National Housing Act of 1937, as amended (the "National Housing Act"). The Partnership is a liquidating partnership and as it continues to liquidate its mortgage investments and investors receive distributions of return of capital and taxable gains, investors should expect a reduction in earnings and distributions due to the decreasing mortgage base. The partnership agreement states that the Partnership will terminate on December 31, 2020, unless previously terminated under the provisions of the partnership agreement. 8 As of December 31, 2001, the Partnership had invested in 13 Insured Mortgages, with an aggregate amortized cost of approximately $37 million, a face value of approximately $37 million and a fair value of approximately $36 million, as discussed below. Investment in 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 programs of the Federal Housing Administration ("FHA") ("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"). 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. The following is a discussion of the Partnership's insured mortgage investments, along with the risks related to each type of investment: A. Fully Insured Originated Insured Mortgages and Acquired Insured Mortgages Listed below is the Partnership's aggregate investment in fully Insured Mortgages as of December 31, 2001 and 2000:
December 31, 2001 2000 ---- ---- Fully Insured Originated Mortgage: Number of Mortgages 1 1 Amortized Cost $ 4,158,218 $ 4,202,201 Face Value 4,012,925 4,052,423 Fair Value 4,031,098 4,049,248 Fully Insured Acquired Mortgages: Number of GNMA Mortgage-Backed Securities 9 9 FHA-Insured Certificates (1) 2 2 FHA-Insured Loan 1 1 Amortized Cost $ 32,954,653 $ 33,391,521 Face Value 32,891,701 33,325,178 Fair Value 32,165,487 32,863,745
(1) In January 2002, the mortgage on Southampton Apartments was prepaid. The Partnership received net proceeds of approximately $1.9 million and expects to recognize a gain of approximately $30,000 in 2002. A distribution of approximately $0.19 per Unit related to the prepayment of this mortgage was declared in January 2002 and is expected to be paid in May 2002. 9 As of March 1, 2002, all of the Partnership's fully insured mortgage investments are current with respect to the payment of principal and interest. In addition to base interest payments from fully insured Originated Insured Mortgages, the Partnership is entitled to additional interest based on a percentage of the net cash flow from the underlying development and of the net proceeds from the refinancing, sale or other disposition of the underlying development (referred to as "Participations"). During the years ended December 31, 2001, 2000 and 1999, the Partnership received additional interest of $29,162, $16,844, and $12,503, respectively, from the fully insured Participations. These amounts are included in mortgage investment income on the accompanying statements of income and comprehensive income. B. Coinsured Mortgages ------------------- Under the United States Department of Housing and Urban Development ("HUD") coinsurance program, both HUD and the coinsurance lender are responsible for paying a portion of the insurance benefits if a mortgagor defaults and the sale of the development collateralizing the mortgage produces insufficient net proceeds to repay the mortgage obligation. In such case, the coinsurance lender will be liable to the Partnership for the first part of such loss in an amount up to 5% of the outstanding principal balance of the mortgage as of the date foreclosure proceedings are instituted or the deed is acquired in lieu of foreclosure. For any loss greater than 5% of the outstanding principal balance, the responsibility for paying the insurance benefits will be borne on a pro-rata basis, 85% by HUD and 15% by the coinsurance lender. While the Partnership is due payment of all amounts owed under the mortgage, the coinsurance lender is responsible for the timely payment of principal and interest to the Partnership. The coinsurance lender is prohibited from entering into any workout arrangement with the borrower without the Partnership's consent and must file a claim for coinsurance benefits with HUD, upon default, if the Partnership so directs. As an ongoing HUD-approved coinsurance lender, and under the terms of the participation documents, the coinsurance lender is required to satisfy certain minimum net worth requirements as set forth by HUD. However, it is possible that the coinsurance lender's potential liability for loss on these developments and others, could exceed its HUD-required minimum net worth. In such case, the Partnership would bear the risk of loss if the coinsurance lenders were unable to meet their coinsurance obligations. In addition, HUD's obligation for the payment of its share of the loss could be diminished under certain conditions, such as the lender not adequately pursuing regulatory violations of the borrower or the failure to comply with other terms of the mortgage. However, the General Partner is not aware of any conditions or actions that would result in HUD diminishing its insurance coverage. 1. Asset Held for Sale under Coinsurance Program --------------------------------------------- The Partnership had previously invested in one Asset Held for Sale under Coinsurance Program ("AHFS"), Spring Lake Village. Spring Lake Village is a 141-unit garden apartment complex located in St. Petersburg, Florida. In July 1997, the General Partner instructed the servicer to file a Notice of Default with HUD. In January 1998, the Partnership discontinued the accrual of interest income. In March 1998, Integrated Funding, Inc. ("IFI"), an affiliate of the Partnership and coinsurance lender, completed foreclosure proceedings and obtained title to this property. A claim was filed with HUD on April 1, 1999. The Partnership recognized a gain of approximately $1.3 million for the year ended December 31, 2000. All proceeds related to the disposition of this property have been received, as listed below: 10
Date Amount of Distribution Date Date of received Type of proceeds proceeds per Unit declared distribution - -------- ---------------- -------- -------- -------- ------------ Apr 2000 Claim proceeds, interest earned on $784,000, 9.125% debenture from date of default of mortgage until Jan 2000 $ 178,000 $0.02 Apr 2000 Aug 2000 Dec 2000 Net proceeds from sale of property 4,479,000 0.44 Jan 2001 May 2001 Jan 2001 Claim proceeds, redemption of $784,000, 9.125% debenture 784,000 0.08 Jan 2001 May 2001 Jan 2001 Claim proceeds, interest earned on $231,000, 9.125% debenture from date of default of mortgage until Jan 2001 74,000 0.01 Feb 2001 May 2001 Apr 2001 Escrow balance received from servicer 303,000 0.03 May 2001 Aug 2001 Jan 2002 Claim proceeds, redemption of $231,000, 9.125% debenture 231,000 0.02 Jan 2002 May 2002 ---------- ----- Total $6,049,000 $0.60 ========== =====
2. Coinsured by third party ------------------------ The following is a discussion of the two Originated Insured Mortgages coinsured by an unaffiliated third party coinsurance lender, the Patrician Mortgage Company ("Patrician"), under the HUD coinsurance program. On October 14, 1993, Patrician filed a foreclosure action on the property underlying the coinsured mortgage on The Villas. On November 2, 1993, the mortgagor filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The property was acquired and vested with Patrician in November 1998 and subsequently sold on September 30, 1999. In October 1999, the Partnership received sales proceeds of approximately $11.7 million. A distribution of approximately $1.16 per Unit related to the sale was declared in October 1999 and was paid to Unitholders in February 2000. Patrician filed a coinsurance claim for insurance benefits with HUD in October 1999, for remaining amounts due, including past due interest. In October 2000, the Partnership received proceeds from Patrician of approximately $10.3 million and recognized a gain of approximately $3.4 million for the year ended December 31, 2000. A distribution of approximately $1.02 per Unit related to the disposition of this mortgage was declared in October 2000 and was paid to Unitholders in February 2001. The remaining balance due, including accrued interest, is approximately $144,000 as of December 31, 2001. This amount is not included on the Partnership's balance sheet, however, the servicer of this mortgage is actively pursuing payment for the remaining balance. On October 14, 1993, Patrician filed a foreclosure action on the property underlying the coinsured mortgage on St. Charles Place-Phase II. On November 2, 1993, the mortgagor filed for protection under Chapter 11 of the U. S. Bankruptcy Code. The property was acquired and vested with Patrician in November 1998 and subsequently sold on October 12, 1999. Patrician filed a coinsurance claim for insurance benefits with HUD in October 1999, for remaining amounts due, including past due interest. In November 1999, the Partnership received sales proceeds of approximately $2.5 million. A distribution of approximately $0.24 per Unit related to the sale was declared in November 1999 and was paid to Unitholders in February 2000. In February 2001, the Partnership received claim proceeds from Patrician of approximately $1.8 million and recognized a gain of approximately $679,000 for the year ended December 31, 2001. The claim proceeds represent the remaining balance due on the mortgage, including interest from November 1, 1995 through the date of receipt. A distribution of approximately $0.18 per Unit related to the disposition of this mortgage was declared in March 2001 and was paid in May 2001. The amount of the Partnership's investment in this mortgage represented the Partnership's approximate 45% ownership interest in the mortgage. The remaining 55% ownership interest was held by American Insured Mortgages Investors L.P. - Series 88 ("AIM 88"), an affiliate of the Partnership. 11 Results of Operations - --------------------- 2001 versus 2000 - ---------------- Net earnings decreased for 2001 as compared to 2000, primarily due to a decrease in gain on mortgage dispositions, as discussed below. Interest and other income decreased for 2001 as compared to 2000, primarily due to the timing of temporary investment of mortgage disposition proceeds prior to distribution to Unitholders. Asset management fees to related parties decreased for 2001 as compared to 2000, due to the disposition of the coinsured mortgages in the fourth quarter of 2000 and the first quarter of 2001. General and administrative expense increased for 2001 as compared to 2000, primarily due to a decrease in the expense reimbursement from IFI, partially offset by a decrease in other general and administrative expenses. The decrease in the expense reimbursement from IFI is a result of the amendment to the IFI reimbursement agreement, which was revised to exclude the Partnership, as of December 31, 2000. Interest expense to affiliate decreased for 2001 as compared to 2000. This decrease was due to the cancellation of the note payable to affiliate as of December 31, 2000. Gain on mortgage dispositions decreased for 2001 as compared to 2000. During 2001, the Partnership recognized a gain of approximately $679,000 from the disposition of St. Charles Place-Phase II, a delinquent mortgage coinsured by a third party, as previously discussed. During 2000, the Partnership recognized a gain of approximately $3.4 million on the disposition of The Villas, a delinquent mortgage co-insured by a third party, as previously discussed. In addition, the Partnership recognized a gain of approximately $1.3 million on the sale of the AHFS, Spring Lake Village, as discussed previously. Loss on mortgage dispositions increased for 2001 as compared to 2000. During 2001, the Partnership recognized a loss due to the settlement of the litigation on the mortgage on Argyle Place, as discussed below. There were no losses recognized in 2000. In March 2001, Argyle Place Limited Partnership (the "Plaintiff") filed a complaint against the Partnership in the General Court of Justice, Civil Superior Court Division, Iredell County, North Carolina (the "Action"). In April 2001, the Partnership filed a notice of removal effectively removing the Action to the United States District Court for the Western District of North Carolina. Between 1992 and 1999, the Partnership held a mortgage on Argyle Place, which is owned and operated by the Plaintiff. In September 1999, the Plaintiff prepaid the Argyle Place mortgage (the "September Closing"). Count I of the complaint alleged that the actions of the Partnership in calculating proceeds due upon the September Closing were in breach of a Mortgagor-Mortgagee Agreement between the Plaintiff and the Partnership. Count II of the complaint alleged that the actions of the Partnership were unfair and deceptive in violation of Chapter 75 of the North Carolina General Statutes entitling the Plaintiff to treble damages and attorneys' fees. Through its complaint, the Plaintiff sought damages of approximately $202,000, plus accrued interest, costs and attorneys' fees. The Partnership filed a counterclaim asserting its right to be reimbursed for all expenses, including attorneys' fees and disbursements, incurred as a result of enforcing its rights under the Mortgagor-Mortgagee Agreement. In December 2001, the Partnership and the Plaintiff agreed on a settlement of approximately $100,000 to the Plaintiff. The Partnership recognized a loss of approximately $161,000 as of December 31, 2001. The loss includes the payment to the Plaintiff plus legal fees. The Partnership recognized a gain of approximately $369,000 on the mortgage on Argyle Place for the year ended December 31, 1999. The aggregate net gain for the mortgage on Argyle Place is approximately $208,000. 12 2000 versus 1999 - ---------------- Net earnings increased for 2000 as compared to 1999, primarily due to an increase in gains on mortgage dispositions, as discussed below. This increase was offset by a decrease in mortgage investment income. Mortgage investment income decreased for 2000 as compared to 1999, primarily due to a reduction in the mortgage base. The mortgage base decreased as a result of three mortgage dispositions since February 1999 with an aggregate principal balance of approximately $29 million, representing an approximate 43% decrease in the aggregate principal balance of the fully insured mortgages. Interest and other income decreased for 2000 as compared to 1999, primarily due to the timing of temporary investment of mortgage disposition proceeds prior to distribution to Unitholders. Asset management fees to related parties decreased for 2000 as compared to 1999, due to the reduction in the mortgage base. General and administrative expense decreased for 2000 as compared to 1999. The decrease is primarily due to the decrease in the mortgage base, a decrease in temporary employment costs and a decrease in coinsurance expense related to the disposition of Spring Lake Village. Net gains on mortgage dispositions increased for 2000 as compared to 1999. During 2000, the Partnership recognized a gain of approximately $3.4 million on the disposition of The Villas, a delinquent mortgage co-insured by a third party, as previously discussed. In addition, the Partnership recognized a gain of approximately $1.3 million on the sale of the AHFS, Spring Lake Village, as discussed previously. During 1999, the Partnership recognized gains of approximately $698,000 from the prepayment of the mortgages on Iroquois Club Apartments and Argyle Place and a loss of approximately $101,000 on the prepayment of the mortgage on Greenbriar Place. Liquidity and Capital Resources - ------------------------------- On October 5, 1998, CRIIMI MAE, the parent of the General Partner, and CRIIMI MAE Management, Inc., an affiliate of CRIIMI MAE and provider of personnel and administrative services to the Partnership, filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). On November 22, 2000, the United States Bankruptcy Court for the District of Maryland, in Greenbelt, Maryland (the "Bankruptcy Court") confirmed CRIIMI MAE's and CRIIMI MAE Management, Inc.'s reorganization plan. On April 17, 2001, CRIIMI MAE and CRIIMI MAE Management, Inc. emerged from bankruptcy. 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, are the Partnership's principal source of cash flow, and were sufficient for the years ended December 31, 2001, 2000 and 1999. The Partnership anticipates its cash flows to be sufficient to meet operating expense requirements for 2002. 13 The basis for paying distributions to Unitholders is net proceeds from mortgage dispositions and cash flow from operations, which includes regular interest income and principal from Insured Mortgages after paying all expenses of the Partnership. Although Insured Mortgages yield a fixed monthly mortgage payment once purchased, 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, resulting from monthly mortgage payments 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. Cash flow - 2001 versus 2000 - ---------------------------- Net cash provided by operating activities did not change significantly for 2001 as compared to 2000. Net cash provided by investing activities decreased for 2001 as compared to 2000, primarily due to a decrease in proceeds received from the disposition of previously delinquent coinsured mortgages, as previously discussed. Net cash used in financing activities decreased for 2001 as compared to 2000, due to a reduction in the amount of distributions paid to partners in 2001. Cash flow - 2000 versus 1999 - ---------------------------- Net cash provided by operating activities decreased for 2000 as compared to 1999, primarily due to the decrease in mortgage investment income, as discussed previously. Net cash provided by investing activities decreased for 2000 as compared to 1999, primarily due to a decrease in proceeds received from the disposition of mortgages. This decrease was partially offset by (1) an increase in proceeds received from Patrician for the disposition of the delinquent mortgage on The Villas, as previously discussed and (2) an increase in proceeds received from the disposition of the AHFS, Spring Lake Village, as previously discussed. Net cash used in financing activities decreased for 2000 as compared to 1999 due to a reduction in the amount of distributions paid to partners in 2000. ITEM 7A. 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 market, which coupled with the related spread to treasury investors required for the Partnership's Insured Mortgages, will cause fluctuations in the market value of the Partnership's assets. The table below provides information about the Partnership's Insured Mortgages, all of which were entered into for purposes other than trading. The table presents anticipated principal and interest cash flows based upon the assumptions used in determining the fair value of these securities and the related weighted average interest rates by expected maturity.
2002 2003 2004 2005 2006 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- Insured Mortgages (in millions) $5.5 $5.1 $6.7 $6.1 $5.1 $24.9 $53.4 $36.2 Average Interest Rate 7.52% 7.50% 7.41% 7.38% 7.38% 7.44% 7.44% --
14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is set forth in this Annual Report on Form 10-K commencing on page 23. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a), (b), (c), (e) The Partnership has no officers or directors. CRIIMI, Inc. holds a general partnership interest of 4.9%. The affairs of the Partnership are managed by the General Partner, which is wholly owned by CRIIMI MAE, a corporation whose shares are listed on the New York Stock Exchange. The general partner of the Advisor is 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. Pursuant to the terms of certain amendments to the partnership agreement, 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. 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 General Partner is also the general partner of AIM 84, AIM 85 and AIM 88, limited partnerships with investment objectives similar to those of the Partnership. The following table sets forth information concerning the executive officers and directors of CRIIMI MAE, the sole shareholder of the General Partner, as of February 19, 2002:
Name Age Position - ---- --- -------- William B. Dockser 64 Chairman of the Board H. William Willoughby 55 President, Secretary and Director David B. Iannarone 41 Executive Vice President Cynthia O. Azzara 42 Senior Vice President, Chief Financial Officer and Treasurer Brian L. Hanson 40 Senior Vice President John R. Cooper 54 Director Alan M. Jacobs 53 Director Robert J. Merrick 56 Director Robert E. Woods 54 Director
16 William B. Dockser has served as Chairman of the Board of the General Partner since 1991. Mr. Dockser has been Chairman of the Board of CRIIMI MAE since 1989. Mr. Dockser is also the founder of C.R.I., Inc. ("CRI"), serving as its Chairman of the Board since 1974. H. William Willoughby has served as President and Secretary of the General Partner since 1991. Mr. Willoughby has been President of CRIIMI MAE since 1990 and a Director and Secretary of CRIIMI MAE since 1989. Mr. Willoughby has been a director of CRI since 1974, Secretary of CRI from 1974 to 1990 and President of CRI since 1990. David B. Iannarone has served as Executive Vice President of the General Partner since December 2000. Mr. Iannarone has served as Executive Vice President CRIIMI MAE since December 2000; as Senior Vice President and General Counsel of CRIIMI MAE from March 1998 to December 2000; and as Vice President and General Counsel of CRIIMI MAE from July 1996 to March 1998. Cynthia O. Azzara has served as Chief Financial Officer of the General Partner since 1994. Ms. Azzara has served as Chief Financial Officer of CRIIMI MAE since 1994. She has also served as Senior Vice President of CRIIMI MAE since 1995 and Treasurer of CRIIMI MAE since 1997. Brian L. Hanson has served as Senior Vice President of the General Partner since March 1998. Mr. Hanson has served as Senior Vice President of CRIIMI MAE since March 1998; and as Group Vice President of CRIIMI MAE from March 1996 to March 1998. John R. Cooper has served as Director of the General Partner since April 2001. Mr. Cooper has served as Director of CRIIMI MAE since April 2001. Mr. Cooper is Senior Vice President, Finance, of PG&E National Energy Group, Inc. He has been with PG&E National Energy Group, Inc. and its predecessor, U.S. Generating Company, since its inception in 1989. Alan M. Jacobs has served as Director of the General Partner since April 2001. Mr. Jacobs has served as Director of CRIIMI MAE since April 2001; President of AMJ Advisors LLC, since September 1999; and founding member and Senior Partner of Ernst and Young LLP's restructuring and reorganization practice through September 1999. Mr. Jacobs is the Plan Administrator and Litigation Trust Trustee for T&W Financial Corporation, the Chapter 11 Trustee for Apponline.com, Inc., the Chapter 11 Trustee for Sharp International Corp., the Chapter 7 Trustee for Edison Brothers Stores, Inc. and was formerly the co-chairman and co-chief executive officer of West Coast Entertainment Corporation. Mr. Jacobs serves as a director of The Singer Sewing Company. Mr. Jacobs was an executive officer of West Coast Entertainment Corporation at the time such corporation filed a petition under the federal bankruptcy laws in March 2000. Robert J. Merrick has served as Director of the General Partner since 1997. Mr. Merrick has served as Director of CRIIMI MAE since 1997; Chief Credit Officer and Director of MCG Capital Corporation since February 1998; Executive Vice President from 1985 and Chief Credit Officer of Signet Banking Corporation through 1997, also served as Chairman of the Credit Policy Committee and member of the Asset and Liability Committee and Management Committee. Robert E. Woods has served as Director of the General Partner since 1998. Mr. Woods has served as Director of CRIIMI MAE since 1998; Managing Director and Head of Loan Syndications for the Americas at Societe Generale, New York since 1997; Managing Director, Head of Real Estate Capital Markets and Mortgage-Backed Securities division, Citicorp from 1991 to 1997. 17 (d) There is no family relationship between any of the officers and directors of the General Partner. (f) Involvement in certain legal proceedings. None. (g) Promoters and control persons. Not applicable. (h) Section 16(a) Beneficial Interest Ownership Compliance Reporting - Based solely on its review of Forms 3, 4, and 5 and amendments thereto furnished to the Partnership, and written representations from certain reporting persons that no Form 5s were required for those persons, the Partnership believes that all reporting persons have filed on a timely basis Forms 3, 4 and 5 as required in the fiscal year ended December 31, 2001. ITEM 11. EXECUTIVE COMPENSATION The Partnership does not have any directors or officers. None of the directors or officers of the General Partner receive compensation from the Partnership, and the General Partner does not receive reimbursement from the Partnership for any portion of their salaries. Other information required by Item 11 is hereby incorporated by reference herein to Note 7 of the Notes to Financial Statements of the Partnership. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) The following table sets forth certain information regarding the beneficial ownership of Units as of February 19, 2002, by holders of more than five percent (5%) of the Partnership's Units.
Number of Percent of Name Address Units Class - ---- ------- --------- ---------- Private Management 20 Corporate Park 613,680 6.41% Group, Inc. * Suite 400 Irvine, CA 92606 Financial and Investment 417 St. Joseph Street Management Group, Ltd. * P.O. Box 40 630,956 6.59% Suttins Bay, MI 49682 * An Investment Adviser.
18 (b) The following table sets forth certain information regarding the beneficial ownership of the Partnership's Units as of February 19, 2002 by each director of the General Partner, each named executive officer of the General Partner, and by affiliates of the Partnership. Unless otherwise indicated, each Unitholder has sole voting and investment power with respect to the Units beneficially owned. Amount and Nature of Units Percentage of Units Name Beneficially Owned Outstanding - ---- ------------------ ------------------- William B. Dockser 11,000 (1) * CRIIMI MAE 500 * (1) Includes 4,000 Units held by Mr. Dockser's wife * Less than 1% (c) There are no arrangements known to the Partnership, the operation of which may at any subsequent date result in a change in control of the Partnership. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a) Transactions with management and others. Note 7 of the Notes to Financial Statements of the Partnership's report which contains a discussion of the amounts, fees and other compensation paid or accrued by the Partnership to the directors and executive officers of the General Partner and their affiliates, is hereby incorporated by reference herein. (b) Certain business relationships. Other than as set forth in Item 11 of this Annual Report on Form 10-K which is hereby incorporated by reference herein, the Partnership has no business relationship with entities of which the current General Partner of the Partnership are officers, directors or equity owners. (c) Indebtedness of management. None. (d) Transactions with promoters. Not applicable. 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements:
Page Description Number - ----------- ------ Balance Sheets as of December 31, 2001 and 2000........................................................ 25 Statements of Income and Comprehensive Income for the years ended December 31, 2001, 2000 and 1999............................................................................................ 26 Statements of Changes in Partners' Equity for the years ended December 31, 2001, 2000 and 1999......... 27 Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999.......................... 28 Notes to Financial Statements.......................................................................... 29 (a)(2) Financial Statement Schedules: IV - Mortgage Loans on Real Estate..................................................................... 40
All other schedules have been omitted because they are not applicable, not required, or the information is included in the Financial Statements or Notes thereto. (a)(3) Exhibits: 4.0 Amended and Restated Certificate of Limited Partnership is incorporated by reference to Exhibit 4(a) to Amendment No. 1 to the Partnership's Registration Statement on Form S-11 (No. 33-1735) dated March 6, 1986 (such Registration Statement, as amended, is referred to herein as the "Amended Registration Statement"). 4.1 Second Amended and Restated Agreement of Limited Partnership is incorporated by reference in Exhibit 3 to the Amended Registration Statement. 4.2 Material Amendments to the Second Amended and Restated Agreement of Limited Partnership are incorporated by reference to Exhibit 4(a) to the Annual Report on Form 10-K for the year ended December 31, 1987. 4.3 Amendment to the Second Amended and Restated Agreement of Limited Partnership of the Partnership dated February 12, 1990, incorporated by reference to Exhibit 4(b) to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1989. 4.4 Amendment to Partnership Agreement dated September 4, 1991, incorporated by reference to Exhibit 28(c), to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1991. 20 10.0 Escrow Agreement is incorporated by reference to Exhibit 10(a) to the Amended Registration Statement. 10.1 Origination and Acquisition Services Agreement is incorporated by reference to Exhibit 10(b) to the Amended Registration Statement. 10.2 Management Services Agreement is incorporated by reference to Exhibit 10(c) to the Amended Registration Statement. 10.3 Disposition Services Agreement is incorporated by reference to Exhibit 10(d) to the Amended Registration Statement. 10.4 Agreement among the former managing general partner, the former associate general partner and Integrated Resources, Inc. is incorporated by reference to Exhibit 10(e) to the Amended Registration Statement. 10.5 Reinvestment Plan is incorporated by reference to the Prospectus contained in the Amended Registration Statement. 10.6 Pages A-1 - A-5 of the Partnership Agreement of Registrant, incorporated by reference to Exhibit 28 to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1990. 10.7 Purchase Agreement among AIM Acquisition, the former managing general partner, the former corporate general partner, IFI and Integrated dated as of December 13, 1990, as amended January 9, 1991, incorporated by reference to Exhibit 28(a) to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1990. 10.8 Purchase Agreement among CRIIMI, Inc., AIM Acquisition, the former managing general partner, the former corporate general partner, IFI and Integrated dated as of December 13, 1990 and executed as of March 1, 1991, incorporated by reference to Exhibit 28(b) to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1990. 10.9 Sub-Management Agreement by and between AIM Acquisition and CRI/AIM Management, Inc., dated as of March 1, 1991, incorporated by reference to Exhibit 28(e) to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1992. 10.10 Expense Reimbursement Agreement by Integrated Funding Inc. and the AIM Funds, effective December 31, 1992, incorporated by reference to Exhibit 28(f) to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993. 10.11 Non-negotiable promissory note to American Insured Mortgage Investors L.P. - Series 88 in the amount of $478,612 dated April 1, 1994, incorporated by reference to Exhibit 10(p) to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1994. 21 10.12 Amendment No. 1 to Reimbursement Agreement by Integrated Funding, Inc. and the AIM Funds, effective April 1, 1994, incorporated by reference to Exhibit 10(q) to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1994. 10.13 Non-negotiable promissory note to American Insured Mortgage Investors L.P. -Series 88 in the amount of $658,486 dated April 1, 1997, incorporated by reference to Exhibit 10.13 to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1998. 10.14 Amendment No. 2 to Reimbursement Agreement by Integrated Funding, Inc. and the AIM Funds, effective April 1, 1997, incorporated by reference to Exhibit 10.14 to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1998. 10.15 Amendment No. 3 to Reimbursement Agreement by Integrated Funding, Inc. and the AIM Funds, effective January 1, 2000, incorporated by reference to exhibit 10.15 to the Partnership's Annual Report on Form 10-K for the year ended December 31, 2000. 10.16 Amendment No. 4 to Reimbursement Agreement by Integrated Funding, Inc. and the AIM Funds, effective January 1, 2001 (filed herewith). 99.0 Letter to Securities and Exchange Commission from the Partnership dated March 21, 2002 regarding the representations received from Arthur Andersen LLP in performing the audit of the December 31, 2001 financial statements (filed herewith). (b) Reports on Form 8-K filed during the last quarter of the fiscal year: None. All other items are not applicable. 22 PART IV SIGNATURES KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William B. Dockser and H. William Willoughby, jointly and severally, his attorney-in-fact, each with the power of substitution for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, 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 86 (Registrant) By: CRIIMI, Inc. General Partner March 12, 2002 /s/ William B. Dockser - -------------- --------------------------------- DATE William B. Dockser Chairman of the Board March 12, 2002 /s/ H. William Willoughby - -------------- --------------------------------- DATE H. William Willoughby President, Secretary and Director March 19, 2002 /s/ Cynthia O. Azzara - -------------- --------------------------------- DATE Cynthia O. Azzara Senior Vice President, Chief Financial Officer and Treasurer March 12, 2002 /s/ John R. Cooper - -------------- --------------------------------- DATE John R. Cooper Director March 12, 2002 /s/ Alan M. Jacobs - -------------- --------------------------------- DATE Alan M. Jacobs Director March 14, 2002 /s/ Robert J. Merrick - -------------- --------------------------------- DATE Robert J. Merrick Director March 11, 2002 /s/ Robert E. Woods - -------------- --------------------------------- DATE Robert E. Woods Director 23 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86 Financial Statements as of December 31, 2001 and 2000 and for the Years Ended December 31, 2001, 2000 and 1999 24 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of American Insured Mortgage Investors L.P. - Series 86: We have audited the accompanying balance sheets of American Insured Mortgage Investors L.P. - Series 86 (the "Partnership") as of December 31, 2001 and 2000, and the related statements of income and comprehensive income, changes in partners' equity and cash flows for the years ended December 31, 2001, 2000 and 1999. These financial statements and the schedule referred to below are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Partnership as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years ended December 31, 2001, 2000 and 1999, in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule IV-Mortgage Loans on Real Estate as of December 31, 2001 is presented for purposes of complying with the Securities and Exchange Commission's rules and regulations and is not a required part of the basic financial statements. The information in this schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/Arthur Andersen LLP Vienna, Virginia March 4, 2002 25 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86 BALANCE SHEETS
December 31, December 31, 2001 2000 ------------ ------------ ASSETS Investment in FHA-Insured Certificates and GNMA Mortgage-Backed Securities, at fair value: Acquired insured mortgages $ 31,209,550 $ 31,903,173 ------------ ------------ Investment in FHA-Insured Loans, at amortized cost, net of unamortized discount and premium: Originated insured mortgages 4,158,218 4,202,201 Acquired insured mortgages 948,661 958,273 ------------ ------------ 5,106,879 5,160,474 Cash and cash equivalents 691,264 15,872,119 Investment in FHA debenture 230,670 783,981 Receivables and other assets 281,468 2,065,477 ------------ ------------ Total assets $ 37,519,831 $ 55,785,224 ============ ============ LIABILITIES AND PARTNERS' EQUITY Distributions payable $ 654,531 $ 11,127,025 Due to affiliate - 24,948 Accounts payable and accrued expenses 132,157 103,905 ------------ ------------ Total liabilities 786,688 11,255,878 ------------ ------------ Partners' equity: Limited partners' equity, 15,000,000 Units authorized, 9,576,290 Units issued and outstanding 45,091,570 52,252,446 General partners' deficit (7,561,985) (7,193,025) Accumulated other comprehensive loss (796,442) (530,075) ------------ ------------ Total partners' equity 36,733,143 44,529,346 ------------ ------------ Total liabilities and partners' equity $ 37,519,831 $ 55,785,224 ============ ============
The accompanying notes are an integral part of these financial statements. 26 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86 STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the years ended December 31, 2001 2000 1999 ----------- ----------- ----------- Income: Mortgage investment income $ 2,799,005 $ 2,820,566 $ 3,448,550 Interest and other income 234,950 313,713 462,058 ----------- ----------- ----------- 3,033,955 3,134,279 3,910,608 ----------- ----------- ----------- Expenses: Asset management fee to related parties 300,282 374,943 540,758 General and administrative 258,301 221,394 287,840 Interest expense to affiliate - 45,994 47,740 ----------- ----------- ----------- 558,583 642,331 876,338 ----------- ----------- ----------- Earnings before gain (loss) on mortgage dispositions 2,475,372 2,491,948 3,034,270 Gain on mortgage dispositions 678,802 4,752,954 698,402 Loss on mortgage dispositions (161,132) - (101,219) ----------- ----------- ----------- Net earnings $ 2,993,042 $ 7,244,902 $ 3,631,453 =========== =========== =========== Other comprehensive (loss) income (266,367) 847,335 (898,749) ----------- ----------- ----------- Comprehensive income $ 2,726,675 $ 8,092,237 $ 2,732,704 =========== =========== =========== Net earnings allocated to: Limited partners - 95.1% $ 2,846,383 $ 6,889,902 $ 3,453,512 General partner - 4.9% 146,659 355,000 177,941 ----------- ----------- ----------- $ 2,993,042 $ 7,244,902 $ 3,631,453 =========== =========== =========== Net earnings per Limited Partnership Unit - Basic $ 0.30 $ 0.72 $ 0.36 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 27 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86 STATEMENTS OF CHANGES IN PARTNERS' EQUITY For the years ended December 31, 2001, 2000, and 1999
Accumulated Other Total General Limited Comprehensive Partners' Partner Partner Loss Equity ------------- ------------- ------------- -------------- Balance, January 1, 1999 $ (4,728,466) $ 100,084,995 $ (478,661) $ 94,877,868 Net Earnings 177,941 3,453,512 - 3,631,453 Adjustment to unrealized gains (losses) on investments in insured mortgages - - (898,749) (898,749) Distributions paid or accrued of $4.73 per Unit, including return of capital of $4.37 per Unit (2,333,856) (45,295,853) - (47,629,709) ------------- ------------- ------------- ------------- Balance, December 31, 1999 (6,884,381) 58,242,654 (1,377,410) 49,980,863 Net Earnings 355,000 6,889,902 - 7,244,902 Adjustment to unrealized gains (losses) on investments in insured mortgages - - 847,335 847,335 Distributions paid or accrued of $1.345 per Unit, including return of capital of $0.625 per Unit (663,644) (12,880,110) - (13,543,754) ------------- ------------- ------------- ------------- Balance, December 31, 2000 (7,193,025) 52,252,446 (530,075) 44,529,346 Net Earnings 146,659 2,846,383 - 2,993,042 Adjustment to unrealized gains (losses) on investments in insured mortgages - - (266,367) (266,367) Distributions paid or accrued of $1.045 per Unit, including return of capital of $0.745 per Unit (515,619) (10,007,259) - (10,522,878) ------------- ------------- ------------- ------------- Balance, December 31, 2001 $ (7,561,985) $ 45,091,570 $ (796,442) $ 36,733,143 ============= ============= ============= ============= Limited Partnership Units outstanding - Basic, as of December 31, 2001, 2000 and 1999 9,576,290 =========
The accompanying notes are an integral part of these financial statements. 28 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86 STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001 2000 1999 ------------ ------------ ------------ Cash flows from operating activities: Net earnings $ 2,993,042 $ 7,244,902 $ 3,631,453 Adjustments to reconcile net earnings to net cash provided by operating activities: Gain on mortgage dispositions (678,802) (4,752,954) (698,402) Loss on mortgage dispositions 161,132 - 101,219 Changes in assets and liabilities: Decrease in investment in affiliate - 8,966 8,291 Increase (decrease) in accounts payable and accrued expenses and note payable and due to affiliate 3,304 (13,615) (62,121) Decrease in receivables and other assets 237,670 316,271 413,228 ------------ ------------ ------------ Net cash provided by operating activities 2,716,346 2,803,570 3,393,668 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from disposition of mortgages - - 44,301,514 Proceeds received from Patrician 1,833,339 10,307,216 - Proceeds received from redemption of debenture 783,981 - - Proceeds from disposition of Asset held for sale under coinsurance program - 4,571,322 - Receipt of principal from scheduled payments 480,851 445,663 441,069 ------------ ------------ ------------ Net cash provided by investing activities 3,098,171 15,324,201 44,742,583 ------------ ------------ ------------ Cash flows from financing activities: Distributions paid to partners (20,995,372) (22,455,443) (29,000,754) ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents (15,180,855) (4,327,672) 19,135,497 Cash and cash equivalents, beginning of year 15,872,119 20,199,791 1,064,294 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 691,264 $ 15,872,119 $ 20,199,791 ============ ============ ============ Non cash investing activity: Receivables due from Patrician as a result of the foreclosure and sale of the properties underlying the mortgages on St. Charles Place-Phase-II and The Villas $ - $ - $ 4,251,324 9.125% debentures received from HUD as a result of the disposition of Asset held for sale under coinsurance program 230,670 783,981 - Receivables resulting from the the disposition of Asset held for sale under coinsurance program - 640,109 -
The accompanying notes are an integral part of these financial statements. 29 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86 NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION American Insured Mortgage Investors L.P. - Series 86 (the "Partnership") was formed under the Uniform Limited Partnership Act of the state of Delaware on October 31, 1985. CRIIMI, Inc. (the "General Partner") holds a partnership interest of 4.9% and is a wholly owned subsidiary of CRIIMI MAE Inc. ("CRIIMI MAE"). AIM Acquisition Partners L.P. (the "Advisor") serves as the advisor to the Partnership, pursuant to an advisory agreement (the "Advisory Agreement"). 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 will render 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 will be 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 will 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. Prior to the expiration of the Partnership's reinvestment period in December 1994, the Partnership was engaged in the business of originating mortgage loans ("Originated Insured Mortgages") and acquiring mortgage loans ("Acquired Insured Mortgages" and, together with Originated Insured Mortgages, referred to herein as "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. The partnership agreement states that the Partnership will terminate on December 31, 2020, unless previously terminated under the provisions of the partnership agreement. On October 5, 1998, CRIIMI MAE, the parent of the General Partner, and CRIIMI MAE Management, Inc., an affiliate of CRIIMI MAE and provider of personnel and administrative services to the Partnership, filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). On November 22, 2000, the United States Bankruptcy Court for the District of Maryland, in Greenbelt, Maryland (the "Bankruptcy Court") confirmed CRIIMI MAE's and CRIIMI MAE Management, Inc.'s reorganization plan. On April 17, 2001, CRIIMI MAE and CRIIMI MAE Management, Inc. emerged from bankruptcy. 30 2. SIGNIFICANT ACCOUNTING POLICIES Method of Accounting - -------------------- The Partnership's financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles 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. Investment in 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"), mortgage-backed securities guaranteed by Government National Mortgage Association ("GNMA") ("GNMA Mortgage-Backed Securities") and FHA-insured mortgage loans ("FHA-Insured Loans"). 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. Payments of principal and interest on FHA-Insured Certificates and FHA-Insured Loans are insured by the United States Department of Housing and Urban Development ("HUD") pursuant to Title 2 of the National Housing Act. Payments of principal and interest on GNMA Mortgage-Backed Securities are guaranteed by GNMA pursuant to Title 3 of the National Housing Act. As of December 31, 2001, the weighted average remaining term of the Partnership's investments in GNMA Mortgage-Backed Securities and FHA-Insured Certificates is approximately 25 years. However, the partnership agreement states that the Partnership will terminate in approximately 19 years, on December 31, 2020, unless previously terminated under the provisions of the partnership agreement. As the Partnership is anticipated to terminate prior to the weighted average remaining term of its investments in GNMA Mortgage-Backed Securities and FHA-Insured Certificates, the Partnership does not have the ability or intent, at this time, to hold these investments to maturity. Consequently, the General Partner believes that the Partnership's investments in GNMA Mortgage-Backed Securities and FHA-Insured Certificates should be included in the available for sale category. Although the Partnership's investments in GNMA Mortgage-Backed Securities and FHA-Insured Certificates are classified as available for sale for financial statement purposes, the General Partner does not intend to voluntarily sell these assets other than those which may be sold as a result of a default. In connection with this classification, as of December 31, 2001 and 2000, the Partnership's investments in GNMA Mortgage-Backed Securities and FHA-Insured Certificates are recorded at fair value, with the unrealized losses on these assets reported as other comprehensive income and as a separate component of partners' equity. Subsequent increases or decreases in the fair value of GNMA Mortgage-Backed Securities and FHA-Insured Certificates, classified as available for sale, will be included as a separate component of partners' equity. Realized gains and losses on GNMA Mortgage-Backed Securities and FHA-Insured Certificates, classified as available for sale, will continue to be reported in earnings. As of December 31, 2001 and 2000, Investment in FHA-Insured Loans is recorded at amortized cost. 31 The amortized cost of the GNMA Mortgage-Backed Securities, FHA-Insured Certificates and FHA-Insured Loans is adjusted for amortization of discounts and premiums to maturity. Such amortization is included in mortgage investment income. Gains from dispositions of mortgage investments are recognized upon the receipt of cash or HUD debentures. Losses on dispositions of mortgage investments are recognized when it becomes probable that a mortgage will be disposed of and that the disposition will result in a loss. In the case of Insured Mortgages fully insured by HUD, the Partnership's maximum exposure for purposes of determining the loan losses would generally be an assignment fee charged by HUD representing approximately 1% of the unpaid principal balance of the Insured Mortgage at the date of default, plus the unamortized balance of acquisition fees and closing costs paid in connection with the acquisition of the Insured Mortgage and the loss of approximately 30 days accrued interest. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents consist of money market funds, time and demand deposits, commercial paper and repurchase agreements with original maturities of three months or less. Income Taxes - ------------ No provision has been made for Federal, state or local income taxes in the accompanying statements of income and comprehensive income since they are the responsibility of the Unitholders. Statements of Cash Flows - ------------------------ No cash payments were made for interest expense during the years ended December 31, 2001, 2000 and 1999. Since the statements of cash flows are intended to reflect only cash receipt and cash payment activity, the statements of cash flows do not reflect operating activities that affect recognized assets and liabilities while not resulting in cash receipts or cash payments. 32 3. FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair values of the Partnership's financial instruments are presented in accordance with generally accepted accounting principles 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 December 31, 2001 As of December 31, 2000 Amortized Fair Amortized Fair Cost Value Cost Value ----------- ----------- ----------- ----------- Investment in FHA-Insured Certificates and GNMA Mortgage-Backed Securities: Acquired Insured Mortgages $32,005,992 $31,209,550 $32,433,248 $31,903,173 =========== =========== =========== =========== Investment in FHA-Insured Loans: Originated Insured Mortgages $ 4,158,218 $ 4,031,098 $ 4,202,201 $ 4,049,248 Acquired Insured Mortgage 948,661 955,937 958,273 960,572 ----------- ----------- ----------- ----------- $ 5,106,879 $ 4,987,035 $ 5,160,474 $ 5,009,820 =========== =========== =========== =========== Cash and cash equivalents $ 691,264 $ 691,264 $15,872,119 $15,872,119 Investment in FHA debenture $ 230,670 $ 230,670 $ 783,981 $ 783,981
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, FHA-Insured Loans and FHA debenture - -------------------------------------------------------------------- The fair value of the FHA-Insured Certificates, GNMA Mortgage-Backed Securities and FHA-Insured Loans is priced internally. The Partnership used a discounted cash flow methodology to estimate the fair value; the cash flows were discounted using a discount rate that, in the Partnership's view, was commensurate with the market's perception of risk and value. The Partnership used a variety of sources to determine its discount rate including: (i) institutionally-available research reports, and (ii) communications with dealers and active insured mortgage security investors regarding the valuation of comparable securities. The fair value of the FHA Debenture is based upon the prices of other comparable securities that trade in the market. The fair value is equal to its face value upon redemption of the debenture. Cash and cash equivalents - ------------------------- The carrying amount approximates fair value because of the short maturity of these instruments. 33 4. COMPREHENSIVE INCOME Comprehensive Income includes net earnings as currently reported by the Partnership adjusted for other comprehensive income. Other comprehensive income for the Partnership consists of changes in unrealized gains and losses related to the Partnership's mortgages accounted for as available for sale. The table below breaks out other comprehensive income for the periods presented into the following two categories: (1) the change to unrealized gains and losses that relate to mortgages which were disposed of during the period with the resulting realized gain or loss reflected in net earnings (reclassification adjustments) and (2) the change in the unrealized gain or loss related to those investments that were not disposed of during the period.
2001 2000 1999 ---- ---- ---- Reclassification adjustment for losses (gains) included in net income $ -- $ -- $ 618,688 Unrealized holding gains (losses) arising during the period (266,367) 847,335 (1,517,437) ---------- ---------- ---------- Net adjustment to unrealized gains (losses) on mortgages $ (266,367) $ 847,335 $ (898,749) ========== ========== ==========
5. INVESTMENT IN INSURED MORTGAGES The following is a discussion of the Partnership's insured mortgage investments, along with the risks related to each type of investment: A. Fully Insured Originated Insured Mortgages and Acquired Insured Mortgages ------------------------------------------------------------------------- Listed below is the Partnership's aggregate investment in fully Insured Mortgages as of December 31, 2001 and 2000:
December 31, 2001 2000 ---- ---- Fully Insured Originated Mortgage: Number of Mortgages 1 1 Amortized Cost $ 4,158,218 $ 4,202,201 Face Value 4,012,925 4,052,423 Fair Value 4,031,098 4,049,248 Fully Insured Acquired Mortgages: Number of GNMA Mortgage-Backed Securities 9 9 FHA-Insured Certificates (1) 2 2 FHA-Insured Loan 1 1 Amortized Cost $ 32,954,653 $ 33,391,521 Face Value 32,891,701 33,325,178 Fair Value 32,165,487 32,863,745
(1) In January 2002, the mortgage on Southampton Apartments was prepaid. The Partnership received net proceeds of approximately $1.9 million and expects to recognize a gain of approximately $30,000 in 2002. A distribution of approximately $0.19 per Unit related to the prepayment of this mortgage was declared in January 2002 and is expected to be paid in May 2002. 34 As of March 1, 2002, all of the Partnership's fully insured mortgage investments are current with respect to the payment of principal and interest. In addition to base interest payments from fully insured Originated Insured Mortgages, the Partnership is entitled to additional interest based on a percentage of the net cash flow from the underlying development and of the net proceeds from the refinancing, sale or other disposition of the underlying development (referred to as "Participations"). During the years ended December 31, 2001, 2000 and 1999, the Partnership received additional interest of $29,162, $16,844, and $12,503, respectively, from the fully insured Participations. These amounts are included in mortgage investment income on the accompanying statements of income and comprehensive income. B. Coinsured Mortgages ------------------- Under the HUD coinsurance program, both HUD and the coinsurance lender are responsible for paying a portion of the insurance benefits if a mortgagor defaults and the sale of the development collateralizing the mortgage produces insufficient net proceeds to repay the mortgage obligation. In such case, the coinsurance lender will be liable to the Partnership for the first part of such loss in an amount up to 5% of the outstanding principal balance of the mortgage as of the date foreclosure proceedings are instituted or the deed is acquired in lieu of foreclosure. For any loss greater than 5% of the outstanding principal balance, the responsibility for paying the insurance benefits will be borne on a pro-rata basis, 85% by HUD and 15% by the coinsurance lender. While the Partnership is due payment of all amounts owed under the mortgage, the coinsurance lender is responsible for the timely payment of principal and interest to the Partnership. The coinsurance lender is prohibited from entering into any workout arrangement with the borrower without the Partnership's consent and must file a claim for coinsurance benefits with HUD, upon default, if the Partnership so directs. As an ongoing HUD-approved coinsurance lender, and under the terms of the participation documents, the coinsurance lender is required to satisfy certain minimum net worth requirements as set forth by HUD. However, it is possible that the coinsurance lender's potential liability for loss on these developments and others, could exceed its HUD-required minimum net worth. In such case, the Partnership would bear the risk of loss if the coinsurance lenders were unable to meet their coinsurance obligations. In addition, HUD's obligation for the payment of its share of the loss could be diminished under certain conditions, such as the lender not adequately pursuing regulatory violations of the borrower or the failure to comply with other terms of the mortgage. However, the General Partner is not aware of any conditions or actions that would result in HUD diminishing its insurance coverage. The Partnership had previously invested in one Asset Held for Sale under Coinsurance Program ("AHFS"), Spring Lake Village. Spring Lake Village is a 141-unit garden apartment complex located in St. Petersburg, Florida. In July 1997, the General Partner instructed the servicer to file a Notice of Default with HUD. In January 1998, the Partnership discontinued the accrual of interest income. In March 1998, Integrated Funding, Inc. ("IFI"), an affiliate of the Partnership and coinsurance lender, completed foreclosure proceedings and obtained title to this property. A claim was filed with HUD on April 1, 1999. The Partnership recognized a gain of approximately $1.3 million for the year ended December 31, 2000. All proceeds related to the disposition of this property have been received, as listed below: 35 1. Asset Held for Sale under Coinsurance Program ---------------------------------------------
Date Amount of Distribution Date Date of received Type of proceeds proceeds per Unit declared distribution - -------- ---------------- -------- -------- -------- ------------ Apr 2000 Claim proceeds, interest earned on $784,000, 9.125% debenture from date of default of mortgage until Jan 2000 $ 178,000 $0.02 Apr 2000 Aug 2000 Dec 2000 Net proceeds from sale of property 4,479,000 0.44 Jan 2001 May 2001 Jan 2001 Claim proceeds, redemption of $784,000, 9.125% debenture 784,000 0.08 Jan 2001 May 2001 Jan 2001 Claim proceeds, interest earned on $231,000, 9.125% debenture from date of default of mortgage until Jan 2001 74,000 0.01 Feb 2001 May 2001 Apr 2001 Escrow balance received from servicer 303,000 0.03 May 2001 Aug 2001 Jan 2002 Claim proceeds, redemption of $231,000, 9.125% debenture 231,000 0.02 Jan 2002 May 2002 ---------- ----- Total $6,049,000 $0.60 ========== =====
2. Coinsured by third party ------------------------ The following is a discussion of the two Originated Insured Mortgages coinsured by an unaffiliated third party coinsurance lender, The Patrician Mortgage Company ("Patrician"), under the HUD coinsurance program. On October 14, 1993, Patrician filed a foreclosure action on the property underlying the coinsured mortgage on The Villas. On November 2, 1993, the mortgagor filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The property was acquired and vested with Patrician in November 1998 and subsequently sold on September 30, 1999. In October 1999, the Partnership received sales proceeds of approximately $11.7 million. A distribution of approximately $1.16 per Unit related to the sale was declared in October 1999 and was paid to Unitholders in February 2000. Patrician filed a coinsurance claim for insurance benefits with HUD in October 1999, for remaining amounts due, including past due interest. In October 2000, the Partnership received proceeds from Patrician of approximately $10.3 million and recognized a gain of approximately $3.4 million for the year ended December 31, 2000. A distribution of approximately $1.02 per Unit related to the disposition of this mortgage was declared in October 2000 and was paid to Unitholders in February 2001. The remaining balance due, including accrued interest, is approximately $144,000 as of December 31, 2001. This amount is not included on the Partnership's balance sheet, however, the servicer of this mortgage is actively pursuing payment for the remaining balance. On October 14, 1993, Patrician filed a foreclosure action on the property underlying the coinsured mortgage on St. Charles Place-Phase II. On November 2, 1993, the mortgagor filed for protection under Chapter 11 of the U. S. Bankruptcy Code. The property was acquired and vested with Patrician in November 1998 and subsequently sold on October 12, 1999. Patrician filed a coinsurance claim for insurance benefits with HUD in October 1999, for remaining amounts due, including past due interest. In November 1999, the Partnership received sales proceeds of approximately $2.5 million. A distribution of approximately $0.24 per Unit related to the sale was declared in November 1999 and was paid to Unitholders in February 2000. In February 2001, the Partnership received claim proceeds from Patrician of approximately $1.8 million and recognized a gain of approximately $679,000 for the year ended December 31, 2001. The claim proceeds represent the remaining balance due on the mortgage, including interest from November 1, 1995 through the date of receipt. A distribution of approximately $0.18 per Unit related to the disposition of this mortgage was declared in March 2001 and was paid in May 2001. The amount of the Partnership's investment in this mortgage represented the Partnership's approximate 45% ownership interest in the mortgage. The remaining 55% ownership interest was held by American Insured Mortgages Investors L.P. - Series 88 ("AIM 88"), an affiliate of the Partnership. 36 6. INVESTMENT IN AFFILIATE AND NOTE PAYABLE TO AFFILIATE As of December 31, 2001, the Partnership, along with AIM 88 and American Insured Mortgages Investors L.P. - Series 85 ("AIM 85"), affiliates of the General Partner, equally own AIM Mortgage, Inc. In turn, AIM Mortgage, Inc. owns all of the outstanding preferred stock and common stock of IFI. In order to capitalize IFI with sufficient net worth under HUD regulations, in April 1994, AIM 88, an affiliate of the Partnership, transferred a GNMA mortgage-backed security in the amount of approximately $2.0 million to IFI. As part of AIM 88's transfer of the GNMA to IFI, the Partnership and AIM 85 each issued a demand note payable to AIM 88 and recorded an investment in IFI through AIM Mortgage, Inc. in proportion to each entity's coinsured mortgages for which IFI was mortgagee of record as of April 1, 1994. Interest expense on the note payable was based on an interest rate of 7.25% per annum. In April 1997, the GNMA mortgage-backed security, with a balance of $1.9 million, was reallocated between the Partnership and AIM 88, since AIM 85 no longer held coinsured mortgages. As of December 31, 2000, the Investment in affiliate and related demand note payable from the Partnership were cancelled as it no longer holds mortgages coinsured by IFI (see Note 5). In connection with these transfers, IFI had entered into an expense reimbursement agreement with the Partnership, AIM 85 and AIM 88 (collectively the "AIM Funds") whereby IFI reimbursed the AIM Funds for general and administrative expenses incurred on behalf of IFI. The expense reimbursement was allocated to the AIM Funds based on an amount proportionate to each entity's IFI coinsured mortgages. The expense reimbursement and the Partnership's equity interest in IFI's net income or loss, substantially equalled the interest the Partnership paid on the note. In April 1997, this agreement was amended to exclude AIM 85 which no longer held coinsured mortgages. In December 2000, this agreement was amended to exclude the Partnership, which no longer holds coinsured mortgages. 37 7. TRANSACTIONS WITH RELATED PARTIES The principal officers of the General Partner for the years ended December 31, 2001, 2000 and 1999 did not receive fees for serving as officers of the General Partner, nor are any fees expected to be paid to the officers in the future. The General Partner, CMSLP and certain affiliated entities have, during the years ended December 31, 2001, 2000 and 1999, earned or received compensation or payments for services from the Partnership as follows: COMPENSATION PAID OR ACCRUED TO RELATED PARTIES
For the years ended December 31, Capacity in Which -------------------------------- Name of Recipient Served/Item 2001 2000 1999 - ----------------- ----------- ---- ---- ---- CRIIMI, Inc. (1) General Partner/Distribution $515,619 $663,644 $2,333,856 AIM Acquisition Partners, L.P. (2) Advisor/Asset Management Fee 300,282 374,943 540,758 CRIIMI MAE Affiliate of General Partner/ Management, Inc. Expense Reimbursement 42,584 41,959 45,744
(1) The General Partner, pursuant to amendments to the partnership agreement, effective September 6, 1991, is entitled to receive 4.9% 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 (both as defined in the partnership agreement). (2) The Advisor, pursuant to the partnership agreement, effective October 1, 1991, is entitled to an Asset Management Fee equal to 0.75% of Total Invested Assets. 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 $112,092, $140,800 and $201,856 for the years ended December 31, 2001, 2000 and 1999, respectively. The limited partner and general partner of CMSLP are wholly-owned subsidiaries of CRIIMI MAE. 8. LITIGATION In March 2001, Argyle Place Limited Partnership (the "Plaintiff") filed a complaint against the Partnership in the General Court of Justice, Civil Superior Court Division, Iredell County, North Carolina (the "Action"). In April 2001, the Partnership filed a notice of removal effectively removing the Action to the United States District Court for the Western District of North Carolina. Between 1992 and 1999, the Partnership held a mortgage on Argyle Place, which is owned and operated by the Plaintiff. In September 1999, the Plaintiff prepaid the Argyle Place mortgage (the "September Closing"). Count I of the complaint alleged that the actions of the Partnership in calculating proceeds due upon the September Closing were in breach of a Mortgagor-Mortgagee Agreement between the Plaintiff and the Partnership. Count II of the complaint alleged that the actions of the Partnership were unfair and deceptive in violation of Chapter 75 of the North Carolina General Statutes entitling the Plaintiff to treble damages and attorneys' fees. Through its complaint, the Plaintiff sought damages of approximately $202,000, plus accrued interest, costs and attorneys' fees. The Partnership filed a counterclaim asserting its right to be reimbursed for all expenses, including attorneys' fees and disbursements, incurred as a result of enforcing its rights under the Mortgagor-Mortgagee Agreement. In December 2001, the Partnership and the Plaintiff agreed on a settlement of approximately $100,000 to the Plaintiff. The Partnership recognized a loss of approximately $161,000 as of December 31, 2001. The loss includes the payment to the Plaintiff plus legal fees. The Partnership recognized a gain of approximately $369,000 on the mortgage on Argyle Place for the year ended December 31, 1999. The aggregate net gain for the mortgage on Argyle Place is approximately $208,000. 38 9. DISTRIBUTIONS TO UNITHOLDERS The distributions paid or accrued to Unitholders on a per Unit basis for the years ended December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999 ---- ---- ---- Quarter ended March 31, $ 0.800(1) $ 0.070 $ 2.56(5) Quarter ended June 30, 0.105(2) 0.095(3) 0.10(6) Quarter ended September 30, 0.075 0.075 0.08 Quarter ended December 31, 0.065 1.105(4) 1.99(7) --------- --------- -------- $ 1.045 $ 1.345 $ 4.73 ========= ========= ========
(1) This amount includes approximately $0.725 per Unit representing return of capital and gain from the following: (a) approximately $0.44 per Unit related to the sale of Spring Lake Village; (b) approximately $0.09 per Unit received from HUD for the Spring Lake Village coinsurance claim; (c) approximately $0.18 per Unit received from the coinsurer of the mortgage on St. Charles Place-Phase II, as result of its coinsurance claim filed with HUD; and (d) approximately $0.015 per Unit of cash held in reserve for anticipated legal costs related to the mortgages on St. Charles Place-Phase II and The Villas. (2) This amount includes approximately $0.03 per Unit related to the receipt of an escrow balance from the servicer of Spring Lake Village. (3) This amount includes approximately $0.02 per Unit of interest from receipt of HUD debenture in exchange for the Spring Lake Village HUD coinsurance claim. (4) This amount includes approximately $1.02 per Unit return of capital received from the coinsurer of the mortgage on The Villas, as a result of its coinsurance claim filed with HUD. (5) This amount includes approximately $2.46 per Unit representing return of capital and gain from the prepayment of the following mortgages: Iroquois Club Apartments of $1.89 per Unit and Greenbriar Place of $0.57 per Unit. (6) This amount includes approximately $0.01 per Unit representing previously undistributed accrued interest receivable from Spring Lake Village. (7) This amount includes approximately $0.53 per Unit representing return of capital and gain from the prepayment of the mortgage on Argyle Place. In addition, this amount includes approximately $1.40 per Unit representing partial return of capital received as a result of the sale of St. Charles Place-Phase II and The Villas. The basis for paying distributions to Unitholders is net proceeds from mortgage dispositions and cash flow from operations, which includes regular interest income and principal from Insured Mortgages. Although Insured Mortgages yield a fixed monthly mortgage payment once purchased, 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 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. 10. PARTNERS' EQUITY Depositary Units representing economic rights in limited partnership interests ("Units") were issued at a stated value of $20. A total of 9,576,165 Units were issued for an aggregate capital contribution of $191,523,300. In addition, the initial limited partner contributed $2,500 to the capital of the Partnership and received 125 Units in exchange therefor. 39 11. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2001, 2000 and 1999: (In Thousands, Except Per Unit Data)
2001 Quarter ended March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- Income $ 848 $ 785 $ 703 $ 698 Net gain (loss) on mortgage dispositions 679 -- -- (161) Net earnings 1,386 644 565 398 Net earnings per Limited Partnership Unit - Basic $ 0.14 $ 0.06 $ 0.06 $ 0.04
2000 Quarter ended March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- Income $ 835 $ 721 $ 717 $ 861 Net gain on mortgage dispositions -- -- -- 4,753 Net earnings 676 543 553 5,473 Net earnings per Limited Partnership Unit - Basic $ 0.07 $ 0.05 $ 0.05 $ 0.55
1999 Quarter ended March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- Income $ 1,198 $ 880 $ 917 $ 916 Net gain on mortgage dispositions 228 -- 369 -- Net earnings 1,166 680 1,071 714 Net earnings per Limited Partnership Unit - Basic $ 0.12 $ 0.07 $ 0.11 $ 0.06
40 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86 SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 2001
Annual Payment Interest Net (Principal Rate on Face Carrying and Maturity Mortgage Amount of Value Interest) Development Name/Location Date (4)(5) Mortgage (3) (3)(6)(7)(9) (4)(8) - ------------------------- ---- ------ ------------ ------------ ------ ACQUIRED INSURED MORTGAGES: Investment in FHA-Insured Certificates (carried at fair value) Southampton Apts., Grove City, OH 4/27 8.50% $ 1,899,694 $ 1,901,479 $ 183,038 Pleasantview Nursing Home, Union, NJ 6/29 7.75% 3,297,911 3,205,388 290,532 ----------- ----------- Total investment in FHA-Insured Certificates - Acquired Insured Mortgages 5,197,605 5,106,867 ----------- ----------- ACQUIRED INSURED MORTGAGES: Investment in GNMA Mortgage-Backed Securities (carried at fair value) Brighton Manor, Petersburg, VA 3/29 7.50% 975,885 951,896 80,561 Cyress Cove, Jacksonville, FL 2/28 7.30% 6,575,287 6,414,472 548,032 Hickory Tree Apts., Indianapolis, IN 4/27 7.375% 3,292,422 3,212,106 279,481 Main Street Square, Roundrock, TX 9/29 8.75% 1,312,653 1,291,043 122,869 Maple Manor, Syracuse, NY 4/29 7.375% 1,180,097 1,151,105 97,631 Mountain Village Apts., Tucson, AZ 5/29 7.50% 1,281,765 1,250,239 105,606 Oakwood Garden Apts., San Jose, CA 10/23 7.75% 9,038,642 8,821,136 815,299 Regency Park Apts., North St. Paul, MN 4/24 7.00% 1,348,747 1,316,406 116,349 Sunflower Apts., Tucson, AZ 5/29 7.50% 1,737,002 1,694,280 143,113 ----------- ----------- Total investment in GNMA Mortgage-Backed Securities-Acquired Insured Mortgages 26,742,500 26,102,683 ----------- ----------- Total investment in FHA-Insured Certificates and GNMA Mortgage-Backed Securities 31,940,105 31,209,550 ----------- ----------- ORIGINATED INSURED MORTGAGE: Investment in FHA-Insured Loans (carried at amortized cost)(2) Colony Square Apts, Rocky Mount, NC (1) 10/28 8.25% 4,012,925 4,158,218 372,352 ACQUIRED INSURED MORTGAGE: Investment in FHA-Insured Loan (carried at amortized cost)(2) Winburn Square, Lexington, KY 1/27 9.00% 951,596 948,661 95,829 ----------- ----------- Total investment in FHA-Insured Loans 4,964,521 5,106,879 ----------- ----------- TOTAL INVESTMENT IN INSURED MORTGAGES $36,904,626 $36,316,429 =========== ===========
41 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86 NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 2001 (1) The mortgage on Colony Square Apartments possesses a special assignment option, in its mortgage document, which allows the Partnership, anytime after April 2002, to require payment of the unpaid principal balance of the mortgage. At such time, the borrower must make payment to the Partnership or the Partnership may cancel the FHA insurance and institute foreclosure proceedings. (2) Inclusive of closing costs and acquisition fees. (3) Prepayment of these insured mortgages would be based upon the unpaid principal balance at the time of prepayment. (4) This represents the base interest rate during the permanent phase of this insured mortgage loan. Additional interest (referred to as Participations) measured as a percentage of the net cash flow from the development and of the net proceeds from sale, refinancing or other disposition of the underlying development (as defined in the participation agreements), will also be due. During the years ended December 31, 2001, 2000 and 1999, the Partnership received additional interest of $29,162, $16,844 and $12,503, respectively, from the Participations. (5) In addition, the servicer or the sub-servicer of the Insured Mortgage, primarily unaffiliated third parties, is entitled to receive compensation for certain services rendered. (6) A reconciliation of the carrying value of the Insured Mortgages for the years ended December 31, 2001 and 2000, is as follows:
2001 2000 ---- ---- Beginning balance $ 37,063,647 $ 41,318,088 Principal receipts on Insured Mortgages (480,851) (445,663) Gain on mortgage dispositions -- 1,339,299 (a) Disposition of AHFS -- (5,995,412)(b) Adjustment to unrealized gains (losses) on investments in Insured Mortgages (266,367) 847,335 ------------ ------------ Ending balance $ 36,316,429 $ 37,063,647 ============ ============
(a) This amount represents the gain recognized on the sale of the AHFS, Spring Lake Village. (b) This amount represents cash proceeds of $4,571,322 and non-cash proceeds of $1,424,090 as reflected on the Statement of Cash Flows. (7) The mortgages underlying the Partnership's investment in FHA-Insured Certificates, GNMA Mortgage-Backed Securities, and FHA-Insured Loans are non-recourse first liens on multifamily residential developments or retirement homes. (8) Principal and interest are payable at level amounts over the life of the Insured Mortgages. (9) As of December 31, 2001 and 2000, the tax basis of the Insured Mortgages, was approximately $36.8 million and $37.1 million, respectively. EX-10 3 ext_10-16.txt EXHIBIT 10.16 EXHIBIT 10.16 FOURTH AMENDMENT TO REIMBURSEMENT AGREEMENT ------------------------------------------- THIS FOURTH AMENDMENT TO REIMBURSEMENT AGREEMENT is made effective as of January 1, 2001 by and among Integrated Funding, Inc., a New York corporation ("IFI"), and American Insured Mortgage Investors L.P. - Series 88 ("AIM 88"). RECITALS -------- A. The parties hereto entered into the Expense Reimbursement Agreement effective as of December 31, 1992 (the "Agreement") in order to allocate to IFI a portion of the expenses incurred by American Insured Mortgage Investors - Series 85, L.P. , American Insured Mortgage Investors L.P. - Series 86 and AIM 88 (collectively referred to as the "AIM Funds") in connection with the Subadvisor's management of the funds. B. The parties hereto entered into the amendment to Reimbursement Agreement effective as of April 1, 1994 (the "First Amendment") in order to change the allocation of expenses to each fund based on the outstanding principal balance of coinsured loans for which IFI acts as the mortgagee of record as of April 1, 1994. C. The parties hereto entered into the amendment to Reimbursement Agreement effective as of April 1, 1997 (the "Second Amendment") in order to change the allocation of expenses to each fund based on the outstanding principal balance of coinsured loans for which IFI acts as the mortgagee of record as of April 1, 1997. D. The parties hereto entered into the amendment to Reimbursement Agreement effective as of January 1, 2000 (the "Third Amendment") in order to change the allocation of expenses to each fund based on the outstanding principal balance of coinsured loans for which IFI acts as the mortgagee of record as of January 1, 2000. E. The parties seek to change the allocation of expenses to each fund based on the outstanding principal balance of coinsured loans for which IFI acts as the mortgagee of record as of January 1, 2001. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Section 1 of the Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: "1. Reimbursement. IFI will reimburse AIM 88 a total expense amount calculated as 1.44582% annually of the outstanding principal balance of the coinsured loan for which IFI acts the mortgagee of record (approximately $9 million as of January 1, 2001, which is owned 100% by AIM 88). The total expense reimbursement shall be allocated 100% to AIM 88. 2. Except as modified above, all other provisions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first above written. [Signatures on following page] 2 INTEGRATED FUNDING, INC. By: /s/ William B. Dockser ---------------------- William B. Dockser Chairman of the Board AMERICAN INSURED MORTGAGE INVESTORS L.P. - Series 88 By: CRIIMI, Inc., General Partner By: /s/ Cynthia O. Azzara --------------------- Cynthia O. Azzara Senior Vice President, Chief Financial Officer and Treasurer EX-99 4 letter-re_aa.txt LETTER RE ARTHUR ANDERSEN EXHIBIT 99.0 March 21, 2002 Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549 Re: Annual Report on Form 10-K for the year ended December 31, 2001 for American Insured Mortgage Investors L.P. - Series 86 Ladies and Gentlemen: Consistent with the Commission's release of March 18, 2002, please be advised that the Partnership has obtained a letter from Arthur Andersen LLP, the Partnership's independent public accountants, dated March 21, 2002, containing the following representations regarding the audits performed on the Partnership's balance sheets as of December 31, 2001 and 2000 and the related statements of income and comprehensive income, changes in partners' equity and cash flows for the years ended December 31, 2001, 2000 and 1999: o the audits were subject to Arthur Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards; o there was appropriate continuity of Arthur Andersen personnel working on the audits; and o there was appropriate availability of national office consultation. Representation relating to the availability of personnel at foreign affiliates of Arthur Andersen was not relevant to these audits. AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86 (Registrant) By: CRIIMI, Inc. General Partner /s/ William B. Dockser --------------------------- William B. Dockser Chairman of the Board -----END PRIVACY-ENHANCED MESSAGE-----