<PAGE>1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1999
------------------
Commission file number 1-12704
-----------------
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
- -----------------------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 13-2943272
- ------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
(301) 816-2300
- -----------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
As of June 30, 1999, 9,576,290 Depositary Units of Limited Partnership
Interest were outstanding.
<PAGE>2
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
Page
----
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets - June 30, 1999 (unaudited)
and December 31, 1998........................... 3
Statements of Income and Comprehensive Income -
for the three and six months ended June 30,
1999 and 1998 (unaudited)....................... 4
Statement of Changes in Partners' Equity -
for the six months ended June 30, 1999
(unaudited)..................................... 5
Statements of Cash Flows - for the six
months ended June 30, 1999
and 1998 (unaudited)............................ 6
Notes to Financial Statements
(unaudited)..................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations...................................... 14
Item 2A. Qualitative and Quantitative Disclosures about
Market Risk..................................... 17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K.................. 18
Signature .................................................. 19
<PAGE>3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
BALANCE SHEETS
<TABLE><CAPTION>
June 30, December 31,
1999 1998
----------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
Investment in FHA-Insured Certificates
and GNMA Mortgage-Backed Securities,
at fair value:
Originated insured mortgages $ 21,401,256 $ 22,479,721
Acquired insured mortgages 32,365,205 33,305,292
----------------- -----------------
53,766,461 55,785,013
----------------- -----------------
Investment in FHA-Insured Loans, at
amortized cost, net of unamortized
premium and discount:
Originated insured mortgages 9,230,990 33,853,462
Acquired insured mortgage 971,162 975,086
----------------- -----------------
10,202,152 34,828,548
Cash and cash equivalents 1,118,262 1,064,294
Investment in affiliate 642,504 650,803
Receivables and other assets 4,165,480 4,797,104
----------------- -----------------
Total assets $ 69,894,859 $ 97,125,762
================ =================
LIABILITIES AND PARTNERS' EQUITY
Distributions payable $ 1,006,971 $ 1,409,759
Note payable and due to affiliate 658,486 658,494
Accounts payable and accrued expenses 167,074 179,641
----------------- -----------------
Total liabilities 1,832,531 2,247,894
----------------- -----------------
Partners' equity:
Limited partners' equity, 15,000,000 Units authorized,
9,576,290 Units issued and outstanding 76,367,556 100,084,995
General partner's deficit (5,950,500) (4,728,466)
Accumulated other comprehensive income (2,354,728) (478,661)
----------------- -----------------
Total partners' equity 68,062,328 94,877,868
----------------- -----------------
Total liabilities and
partners' equity $ 69,894,859 $ 97,125,762
================ =================
</TABLE>
The accompanying notes are an integral part
of these financial statements.
<PAGE>4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Income:
Mortgage investment income $ 824,754 $ 1,337,817 $ 1,963,417 $ 3,019,784
Interest and other income 54,991 86,207 114,643 223,673
------------- ------------ ------------- -----------
879,745 1,424,024 2,078,060 3,243,457
------------- ------------ ------------- -----------
Expenses:
Asset management fee to
related parties 129,771 186,626 290,732 393,392
General and administrative 58,199 87,942 145,847 181,328
Interest expense to affiliate 11,937 11,935 23,870 23,870
------------- ------------ ------------- -----------
199,907 286,503 460,449 598,590
------------- ------------ ------------- -----------
Earnings before net gain on
mortgage dispositions 679,838 1,137,521 1,617,611 2,644,867
Gain on mortgage dispositions -- 437,120 329,552 437,120
Loss on mortgage dispositions -- -- (101,219) --
------------ ------------ ------------- -----------
Net earnings $ 679,838 $ 1,574,641 $ 1,845,944 $ 3,081,987
============ ============ ============= ===========
Other comprehensive income (1,051,223) (290,587) (1,876,067) (84,289)
------------ ------------ ------------- ------------
Comprehensive income $ (371,385) $ 1,284,054 $ (30,123) $ 2,997,698
------------ ------------ ------------- ------------
Net earnings allocated to:
Limited partners - 95.1% $ 646,526 1,497,484 $ 1,755,493 $ 2,930,970
General partner - 4.9% 33,312 77,157 90,451 151,017
------------ ------------ ------------- ------------
$ 679,838 $ 1,574,641 $ 1,845,944 $ 3,081,987
============ ============ ============= ============
Net earnings per Limited
Partnership Unit-basic $ 0.07 $ 0.16 $ 0.18 $ 0.31
============ ============ ============= ============
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>5
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
STATEMENT OF CHANGES IN PARTNERS' EQUITY
For the six months ended June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
General Limited Comprehensive
Partner Partners Income Total
------------ ------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 $ (4,728,466) $100,084,995 $ (478,661) $ 94,877,868
Net earnings 90,451 1,755,493 -- 1,845,944
Adjustment to unrealized
losses
on investments in
insured mortgages -- -- (1,876,067) (1,876,067)
Distributions paid or
accrued of $2.66 per
Unit, including $2.48 (1,312,485) (25,472,932) -- (26,785,417)
return of capital
-------------- --------------- -------------- --------------
$ (5,950,500) $ 76,367,556 $ (2,354,728) $ 68,062,328
Balance, June 30, 1999 ============== =============== ============== ==============
Limited Partnership Units
outstanding - basic, as of
June 30, 1999 9,576,290
===============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
<PAGE>6
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,845,944 $ 3,081,987
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Gain on mortgage dispositions (329,552) (437,120)
Loss on mortgage disposition 101,219 --
Changes in assets and liabilities:
(Decrease) increase in note payable and due to affiliate (8) 23,870
Decrease in accounts payable and accrued expenses (12,567) (3,186)
Decrease in receivables and other assets 560,037 135,728
Decrease in investment in affiliate 8,299 --
------------- --------------
Net cash provided by operating activities 2,173,372 2,801,279
------------- --------------
Cash flows from investing activities:
Proceeds from disposition of mortgages 24,845,325 16,163,377
Receipt of principal from scheduled payments 223,476 340,000
------------- --------------
Net cash provided by investing activities 25,068,801 16,503,377
------------- --------------
Cash flows from financing activities:
Distributions paid to partners (27,188,205) (25,778,446)
-------------- --------------
Net cash used in financing activities (27,188,205) (25,778,446)
-------------- --------------
Net increase (decrease) in cash and cash equivalents 53,968 (6,473,790)
Cash and cash equivalents, beginning of period 1,064,294 24,011,634
-------------- --------------
Cash and cash equivalents, end of period $ 1,118,262 $ 17,537,844
============== ==============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
<PAGE>7
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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. The Partnership Agreement states that the Partnership will
terminate on December 31, 2020, unless previously terminated under the
provisions of the Partnership Agreement.
Effective September 6, 1991, CRIIMI, Inc. (the General Partner)
succeeded the former general partners to become the sole general partner of the
Partnership. CRIIMI, Inc., 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. 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., Broad, Inc. and
CRIIMI MAE. 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 which affect the management and
policies of the Partnership.
The Partnership's investment in mortgages includes participation
certificates evidencing a 100% undivided beneficial interest in government
insured multifamily mortgages issued or sold pursuant to Federal Housing
Administration (FHA) programs (FHA-Insured Certificates), mortgage-backed
securities guaranteed by the Government National Mortgage Association (GNMA)
(GNMA Mortgage-Backed Securities) and FHA-insured mortgage loans (FHA-Insured
Loans and together with FHA-Insured Certificates and GNMA Mortgage-Backed
Securities referred to herein as Insured Mortgages). The mortgages underlying
the FHA-Insured Certificates, GNMA Mortgage-Backed Securities and FHA-Insured
Loans, insured in whole or in part by the federal government, are non-recourse
first liens on multifamily residential developments or retirement homes. As
discussed in Note 3, certain of the FHA-Insured Certificates are secured by
coinsured mortgages.
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 a voluntary
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a
debtor-in-possession, CRIIMI MAE will not be permitted to provide any available
capital to the General Partner without approval from the bankruptcy court. This
restriction or potential loss of the availability of a potential capital
resource could adversely affect the General Partner and the Partnership;
however, CRIIMI MAE has not historically represented a significant source of
capital for the General Partner or the Partnership. Such bankruptcy filings
could also result in the potential need to replace CRIIMI MAE Management, Inc.
as a provider of personnel and administrative services to the Partnership.
CRIIMI MAE and CRIIMI MAE Management, Inc. are working diligently
toward the preparation of a plan of reorganization. The Bankruptcy Court has
granted the motion to extend CRIIMI MAE's and CRIIMI MAE Management, Inc.'s
exclusive right to file a plan of reorganization through September 10, 1999 and
to solicit acceptances thereof through November 10, 1999. CRIIMI MAE and CRIIMI
MAE Management, Inc. expect to file a plan of reorganization during 1999, which
would contemplate CRIIMI MAE's and CRIIMI MAE Management, Inc.'s emergence from
bankruptcy later in 1999. There can be no assurance at this time, however, that
a plan of reorganization will be proposed by CRIIMI MAE and CRIIMI MAE
Management, Inc. during such time or that such plan will be confirmed and
consummated.
<PAGE>8
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. BASIS OF PRESENTATION
In the opinion of the General Partner, the accompanying unaudited
financial statements contain all adjustments of a normal recurring nature
necessary to present fairly the financial position of the Partnership as of June
30, 1999 and December 31, 1998 and the results of its operations for the three
and six months ended June 30, 1999 and 1998 and its cash flows for the six
months ended June 30, 1999 and 1998.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. While the General Partner believes that the disclosures
presented are adequate to make the information not misleading, these financial
statements should be read in conjunction with the financial statements and the
notes to the financial statements included in the Partnership's Annual Report
filed on Form 10-K for the year ended December 31, 1998.
Comprehensive Income
--------------------
Comprehensive income is the change in Partners' equity during
a period from transactions from nonowner sources. This includes net
income as currently reported by the Partnership adjusted for unrealized
gains and losses related to the Partnership's mortgages accounted for
as "available for sale." Unrealized gains and losses are reported in
the equity section of the Balance Sheet as "Accumulated Other
Comprehensive Income."
<PAGE>9
3. INVESTMENT IN INSURED MORTGAGES
The following is a discussion of the Partnership's investment in
FHA-Insured Loans, FHA-Insured Certificates and GNMA Mortgage-Backed Securities
as of June 30, 1999 and December 31, 1998:
Fully Insured Originated Insured Mortgages and
Acquired Insured Mortgages
----------------------------------------------
Listed below is the Partnership's aggregate investment in
fully Insured Mortgages as of June 30, 1999 and December
31, 1998:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Fully Insured Originated Insured:
Number of Mortgages(1) 2 4
Amortized Cost $ 9,230,990 $ 33,853,462
Face Value 8,911,223 32,697,883
Fair Value 8,850,310 33,031,725
Fully Insured Acquired Insured:
Number of
GNMA Mortgage-Backed
Securities 9 9
FHA-Insured Certificates 2 2
FHA-Insured Loan 1 1
Amortized Cost $ 33,987,791 $ 34,171,962
Face Value 33,916,550 34,099,137
Fair Value 33,332,888 34,318,485
(1) In February 1999, the mortgages on Iroquois Club Apartments and
Greenbriar Place were prepaid. The Partnership received net proceeds of
approximately $19.1 million and $5.7 million and recognized a gain of
approximately $330,000 and a loss of approximately $101,000 for the mortgages on
Iroquois Club Apartments and Greenbriar Place, respectively, for the six months
ended June 30, 1999. An aggregate distribution of $2.46 per Unit related to
these prepayments was declared in March 1999 and was paid to Unitholders in
May 1999.
</TABLE>
As of August 2, 1999, 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 three and six months ended June 30, 1999,
the Partnership received additional interest of $12,503 and $12,503,
respectively, from the fully insured Participations. During the three
and six months ended June 30, 1998, the Partnership received additional
interest of $0 and $74,112, respectively, from the fully insured
participations. These amounts, if any, are included in mortgage
investment income on the accompanying Statements of Income and
Comprehensive Income.
Originated Coinsured FHA-Insured Certificates
---------------------------------------------
As of June 30, 1999 and December 31, 1998, the Partnership had
invested in three FHA-Insured Certificates secured by coinsured
mortgages. Two of the three FHA-Insured Certificates secured by
coinsured mortgages are coinsured by an unaffiliated third party
coinsurance lender, The Patrician Mortgage Company (Patrician), under
the HUD coinsurance
program.
1. Coinsured by third party
------------------------
As of June 30, 1999, the two originated coinsured mortgages
which are coinsured by Patrician, The Villas and St. Charles
Place - Phase II, were delinquent with respect to the payment
of principal and interest. The following is a discussion of
actual and potential performance problems with respect to the
mortgage investments.
Listed below are the originated Insured Mortgages co-insured
by Patrician:
<PAGE>10
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------------------------------------ --------------------------------------------
Amortized Face Fair Amortized Face Fair
Cost Value Value Cost Value Value
------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
The Villas(1) $ 15,412,759 $ 15,646,469 $ 14,186,368 $ 15,412,759 $ 15,646,469 $ 14,905,685
St. Charles Place -
Phase II(2) 3,035,688 3,035,688 2,760,808 3,035,688 3,035,688 2,898,074
------------ ------------ ------------ ------------ ----------- ------------
$ 18,448,447 $ 18,682,157 $ 16,947,176 $ 18,448,447 $ 18,682,157 $ 17,803,759
=========== =========== =========== =========== =========== ===========
(1) As of August 2, 1999, the mortgagor has made payments of
principal and interest due on the original mortgage on the Villas
through November 1995, and has made payments of principal and interest
due under a modification agreement with the Villas through August 1993.
As the result of bankruptcy proceedings that have been ongoing since
1992, the property was acquired and vested with Patrician in November
1998. Patrician is in the process of improving the property and
intends to file its initial claim with HUD by October 1999. A
coinsurance claim will be filed with HUD for remaining amounts not
collected as a result of the disposition. Due to deferred maintenance
and tax deficiencies, the Partnership does not expect cash flow to be
realized from this property until the property is sold and claims are
filed with HUD for Multifamily Coinsurance benefits.
(2) This amount represents the Partnership's approximate 45%
ownership interest in the mortgage. The remaining 55% ownership
interest is held by American Insured Mortgage Investors L.P. - Series
88 (AIM 88), an affiliate of the Partnership. As of August 2, 1999,
the mortgagor has made payments of principal and interest due on the
mortgage through November 1995. As the result of bankruptcy
proceedings that have been ongoing since 1992, the property was
acquired and vested with Patrician in November 1998. Patrician is in
the process of improving the property and intends to file its initial
claim with HUD by October 1999. A coinsurance claim will be filed with
HUD for remaining amounts not collected as a result of the disposition.
Due to deferred maintenance and tax deficiencies, the Partnership does
not expect cash flow to be realized from this property until the
property is sold and claims are filed with HUD for Multifamily
Coinsurance benefits.
</TABLE>
2. Coinsured by affiliate
----------------------
As of June 30, 1999 and December 31, 1998, the Partnership
held an investment in one FHA-Insured Certificate secured by a
coinsured mortgage, where the coinsurance lender is Integrated
Funding, Inc. (IFI), an affiliate of the Partnership.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
---------------------------------------------------------------------------------------- Cumulative
Amortized Face Fair Amortized Face Fair Loan Losses
Cost Value Value Cost Value Value Recognized
------------ ----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Spring Lake Village $4,656,113 $4,898,740 $4,454,080 $4,656,113 $4,898,740 $4,675,962 $ 502,626
</TABLE>
(1) In March 1998, IFI completed foreclosure proceedings and obtained
title to this property. A claim was filed with HUD on April 1, 1999.
Subsequent to sale and settlement, a second claim will be filed with HUD. The
Partnership expects that the loan loss reserve recognized in 1997 will cover
any amounts uncollectible.
In connection with the FHA-Insured Certificates secured by coinsured
mortgages, the Partnership has sought, in addition to base interest payments,
additional interest (commonly termed Participations) based on a percentage of
the net cash flow from the development and the net proceeds from the
refinancing, sale or other disposition of the underlying development. All of
the FHA-Insured Certificates secured by coinsured mortgages have contained such
Participations. During the three and six months ended June 30, 1999 and 1998,
the Partnership had not received additional interest from the Participations.
These amounts, if any, are included in mortgage investment income on the
accompanying Statements of Income and Comprehensive Income.
<PAGE>11
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. INVESTMENT IN AFFILIATE, NOTE PAYABLE AND DUE TO AFFILIATE
In order to capitalize IFI with sufficient net worth under HUD
regulations, in April 1994, American Insured Mortgage Investors L.P. - Series 88
(AIM 88), an affiliate of the Partnership, transferred a GNMA mortgage-backed
security in the amount of $2.0 million to IFI. The Partnership and American
Insured Mortgages Investors L.P. - Series 85 (AIM 85), an affiliate of the
Partnership, each issued a demand note payable to AIM 88 and recorded an
investment in IFI through an affiliate (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 is 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.
As a result, a new demand note payable to AIM 88 was issued and the investment
in IFI was updated.
IFI had entered into an expense reimbursement agreement with the
Partnership and AIM 88 (collectively the AIM Funds) whereby IFI reimburses the
AIM Funds for general and administrative expenses incurred on behalf of IFI.
The expense reimbursement is allocated to the AIM Funds based on an amount
proportionate to each entity's IFI coinsured mortgages. The expense
reimbursement, interest from the two notes and the Partnership's equity interest
in IFI's net income or loss, substantially equals the mortgage principal and
interest on the GNMA mortgage-backed security transferred to IFI.
<PAGE>12
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
5. DISTRIBUTIONS TO UNITHOLDERS
The distributions paid or accrued to Unitholders on a per Unit basis
for the six months ended June 30, 1999 and 1998 are as follows:
1999 1998
---------- ----------
Quarter ended March 31, $ 2.56(1) $ 0.15
Quarter ended June 30, 0.10(2) 1.75(3)
---------- ----------
$ 2.66 $ 1.90
========== ==========
(1) This amount includes approximately $2.46 per Unit 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.
(2) This amount includes approximately $0.01 per Unit representing
previously undistributed accrued interest receivable from Spring Lake Village.
(3) This amount includes approximately $1.60 from the prepayment of the
following mortgages: Arbor Station of $0.93 per Unit and Oak Grove Apartments
of $0.67 per Unit.
The basis for paying distributions to Unitholders is net proceeds from
mortgage dispositions, if any, and cash flow from operations, which includes
regular interest income and principal from Insured Mortgages. Although 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.
As the Partnership 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.
<PAGE>13
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. TRANSACTIONS WITH RELATED PARTIES
The General Partner and certain affiliated entities, during the three
and six months ended June 30, 1999 and 1998, earned or received compensation or
payments for services from the Partnership as follows:
<TABLE><CAPTION>
COMPENSATION PAID OR ACCRUED TO RELATED PARTIES
-----------------------------------------------
For the three months For the six months
Capacity in Which ended June 30, ended June 30,
Name of Recipient Served/Item 1999 1998 1999 1998
- ----------------- ---------------------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
CRIIMI, Inc. General Partner/Distribution $ 49,341 $ 863,477 $1,312,485 $ 937,489
AIM Acquisition Advisor/Asset Management Fee 129,771 186,626 290,732 393,392
Partners, L.P.(1)
CRIIMI MAE Affiliate of General Partner/ 14,408 15,978 21,666 30,038
Management, Inc. Expense Reimbursement
</TABLE>
(1) 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 (as defined in the Partnership Agreement). CRIIMI MAE Services
Limited Partnership (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 $48,441 and
$108,526, for the three and six months ended June 30, 1999, respectively and
earned a fee equal to $69,666 and $146,850, for the three and six months ended
June 30, 1998, respectively. The limited partner of CMSLP is a wholly-owned
subsidiary of CRIIMI MAE Inc., which filed for protection under Chapter 11 of
the U.S. Bankruptcy Code.
<PAGE>14
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
- ------------
The Partnership's Management's Discussion and Analysis of Financial
Condition and Results of Operations contains statements that may be considered
forward looking. These statements contain a number of risks and uncertainties
as discussed herein and in the Partnership's other reports filed with the
Securities and Exchange Commission that could cause actual results to differ
materially. See Item 1, "Forward-Looking Statements" in the Partnership's
Annual Report on Form 10-K for the year ended December 31, 1998, for a more
detailed discussion of such risks and uncertainties.
On October 5, 1998, CRIIMI MAE Inc., the parent of the General Partner,
and CRIIMI MAE Management, Inc., an affiliate of CRIIMI MAE Inc. and provider of
personnel and administrative services to the Partnership, filed voluntary
petitions for reorganization under Chapter 11 of the Bankruptcy Code. Such
bankruptcy filings could result in certain adverse effects to the Partnership
including without limitation, the potential loss of CRIIMI MAE Inc. as a
potential source of capital, as discussed under Liquidity and Capital Resources,
and the potential need to replace CRIIMI MAE Management, Inc. as a provider of
personnel and administrative services to the Partnership.
CRIIMI MAE and CRIIMI MAE Management, Inc. are working diligently
toward the preparation of a plan of reorganization. The Bankruptcy Court has
granted the motion to extend CRIIMI MAE's and CRIIMI MAE Management, Inc.'s
exclusive right to file a plan of reorganization through September 10, 1999 and
to solicit acceptances thereof through November 10, 1999. CRIIMI MAE and CRIIMI
MAE Management, Inc. expect to file a plan of reorganization during 1999, which
would contemplate CRIIMI MAE's and CRIIMI MAE Management, Inc.'s emergence from
bankruptcy later in 1999. There can be no assurance at this time, however, that
a plan of reorganization will be proposed by CRIIMI MAE and CRIIMI MAE
Management, Inc. during such time or that such plan will be confirmed and
consummated.
Year 2000
- ---------
The Year 2000 issue is a computer programming issue that may affect
many electronic processing systems. Until relatively recently, in order to
minimize the length of data fields, most date-sensitive programs eliminated the
first two digits of the year. This issue could affect information technology
("IT") systems and date sensitive embedded technology that controls certain
systems (such as telecommunications systems, security systems, etc.) leaving
them unable to properly recognize or distinguish dates in the twentieth and
twenty-first centuries. This treatment could result in significant
miscalculations when processing critical date-sensitive information relating to
dates after December 31, 1999.
The General Partner has substantially completed the Year 2000 testing
and remediation of its IT systems, which include software systems to
administer and manage mortgage assets and for internal accounting purposes. A
majority of the IT systems used by the Partnership is licensed from third
parties. These third parties have either provided upgrades to existing systems
or have indicated that their systems are Year 2000 compliant. The General
Partner has applied upgrades and has substantially completed compliance testing
and remediation as of August 11, 1999. There can be no assurance, however, that
all of the Partnership's IT systems will be Year 2000 compliant by December 31,
1999.
The Year 2000 issue may also affect the Partnership's date-sensitive
embedded technology, which controls systems such as the telecommunications
systems, security systems, etc. The General Partner does not believe that it
has significant exposure or that the cost to modify or replace such technology
to make it Year 2000 compliant will be material. The failure of any such
systems to be Year 2000 compliant could be material to the Partnership.
<PAGE>15
The potential impact of the Year 2000 issue depends not only on the
corrective measures the General Partner has undertaken and will undertake, but
also on the ways in which the Year 2000 issue is addressed by third parties with
whom the Partnership directly interfaces or whose financial condition or
operations are important to the Partnership. The Partnership has initiated
communications with third parties with which it directly interfaces to evaluate
the risk of their failure to be Year 2000 compliant and the extent to which the
Partnership may be vulnerable to such failure. There can be no assurance that
the systems of these third parties will be Year 2000 compliant by December 31,
1999. The failure of these third parties to be Year 2000 compliant could have a
material adverse effect on the operations of the Partnership.
The Partnership believes that its greatest risk with respect to the
Year 2000 issue relates to failures by third parties to be Year 2000 compliant.
In addition to risks posed by third parties with which the Partnership
interfaces directly, risks are created by third parties providing services to
large segments of society. The failure of third parties (i.e. tenants in
mortgage collateral, borrowers, building service providers to mortgage
collateral, banks and other financial institutions, etc.) to be Year 2000
compliant could, among other things, cause disruptions in the capital and real
estate markets and borrower defaults on real estate loans and mortgage-backed
securities as well as the pools of mortgage loans underlying such securities.
The Partnership believes that its greatest internal exposure to the
Year 2000 issue involves the loan servicing operations of an affiliate of the
Partnership that rely on computers to process and manage loans. An affiliate of
the Partnership, CMSLP, currently services approximately 26% of the total loans
in the AIM Funds. CMSLP has applied a vendor upgrade and has completed
compliance testing on the upgrade. The General Partner believes that the
results of such testing indicate that this risk has been substantially
mitigated.
Currently the General Partner estimates the cost of system upgrades
related to Year 2000 issues to be immaterial.
The General Partner has substantially completed its organizational
compliance testing and remediation, and it has also drafted contingency plans
for the risks of the failure of the Partnership or third parties to be Year 2000
compliant. The General Partner intends to complete contingency plans for the
Year 2000 issue in late 1999. Due to the inability to predict all of the
potential problems that may arise from the Year 2000 issue, there can be no
assurance that all contingencies will be adequately addressed by such plans.
General
- -------
As of June 30, 1999, the Partnership had invested in 17 insured
mortgages, with an aggregate amortized cost of approximately $66.3 million, an
aggregate face value of approximately $66.4 million and an aggregate fair value
of approximately $63.6 million, as discussed below.
As of August 2, 1999, all of the fully insured FHA-Insured
Certificates, GNMA Mortgage Backed Securities and FHA-Insured Loans were current
with respect to payment of principal and interest. As of August 2, 1999, the
three coinsured FHA-Insured Certificates were delinquent with respect to payment
of principal and interest.
Results of Operations
- ---------------------
Net earnings decreased for the three and six months ended June 30,
1999, as compared to the corresponding periods in 1998, primarily due to a
decrease in mortgage investment income, as discussed below and a decrease in net
gains on mortgage dispositions, as discussed below.
Mortgage investment income decreased for the three and six months ended
June 30, 1999, as compared to the corresponding periods in 1998, primarily due
to the prepayment of four mortgages since March 1998.
Interest and other income decreased for the three and six months ended
June 30, 1999, as compared to the corresponding periods in 1998, 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 the three and
six months ended June 30, 1999, as compared to the corresponding periods in
1998, due to the decrease in the mortgage base.
General and administrative expense decreased for the three and six
months ended June 30, 1999, as compared to the corresponding periods in 1998,
due to the decrease in the mortgage base and a decrease in coinsurance expense
related to the disposition of Spring Lake Village.
<PAGE>16
Net gains on mortgage dispositions decreased for the three six months
ended June 30, 1999, as compared to the corresponding periods in 1998. In
February 1999, the mortgages on Iroquois Club Apartments and Greenbriar Place
were prepaid. The Partnership recognized a gain of approximately $330,000 and a
loss of approximately $101,000 for the mortgages on Iroquois Club Apartments and
Greenbriar Place, respectively, for the six months ended June 30, 1999. During
the three and six months ended June 30, 1998, the Partnership recognized gains
from the prepayment of the mortgages on Arbor Station and Oak Grove Apartments
of approximately $414,000 and $23,000, respectively.
Liquidity and Capital Resources
- -------------------------------
The Partnership's operating cash receipts, derived from payments of
principal and interest on Insured Mortgages, plus cash receipts from interest on
short-term investments, were sufficient during the first six months of 1999 to
meet operating requirements.
The basis for paying distributions to Unitholders is net proceeds from
mortgage dispositions, if any, and cash flow from operations, which includes
regular interest income and principal from Insured Mortgages. Although 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.
As the Partnership 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.
Net cash provided by operating activities decreased for the six months
ended June 30, 1999, as compared to the corresponding period in 1998, primarily
due to the decrease in mortgage investment income, as discussed previously.
This decrease was partially offset by a decrease in receivables and other assets
due to the receipt of mortgage payments that had been delinquent as of
December 31, 1998.
Net cash provided by investing activities increased for the six months
ended June 30, 1999, as compared to the corresponding period in 1998, primarily
due to proceeds received from the disposition of mortgages, as previously
discussed. This increase was partially offset by a decrease in the receipt of
principal from scheduled payments, due to the reduction in mortgage base.
Net cash used in financing activities increased for the six months
ended June 30, 1999, as compared to the corresponding period in 1998 due to an
increase in the amount of distributions paid to partners in the first six months
of 1999 versus the same period in 1998.
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 a voluntary
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a
debtor-in-possession, CRIIMI MAE will not be permitted to provide any available
capital to the General Partner without approval from the bankruptcy court. This
restriction or potential loss of the availability of a potential capital
resource could adversely affect the General Partner and the Partnership;
however, CRIIMI MAE has not historically represented a significant source of
capital for the General Partner or the Partnership. Such bankruptcy filings
could also result in the potential need to replace CRIIMI MAE Management, Inc.
as a provider of personnel and administrative services to the Partnership.
CRIIMI MAE and CRIIMI MAE Management, Inc. are working diligently
toward the preparation of a plan of reorganization. The Bankruptcy Court has
granted the motion to extend CRIIMI MAE's and CRIIMI MAE Management, Inc.'s
exclusive right to file a plan of reorganization through September 10, 1999 and
to solicit acceptances thereof through November 10, 1999. CRIIMI MAE and CRIIMI
MAE Management, Inc. expect to file a plan of reorganization during 1999, which
would contemplate CRIIMI MAE's and CRIIMI MAE Management, Inc.'s emergence from
bankruptcy later in 1999. There can be no assurance at this time, however, that
a plan of reorganization will be proposed by CRIIMI MAE and CRIIMI MAE
Management, Inc. during such time or that such plan will be confirmed and
consummated.
<PAGE>17
ITEM 2A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's principal market risk is exposure to changes in
interest rates in the US 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.
Management has determined that there has not been a material change as
of June 30, 1999, in market risk from December 31, 1998 as reported in the
Partnership's Annual Report on Form 10-K as of December 31, 1998.
<PAGE>18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended June 30, 1999.
The exhibits filed as part of this report are listed below:
Exhibit No. Description
---------- -----------
27 Financial Data Schedule
<PAGE>19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN INSURED MORTGAGE
INVESTORS L.P. - SERIES 86
(Registrant)
By: CRIIMI, Inc.
General Partner
/s/August 12, 1999 /s/ Cynthia O. Azzara
- ------------------- -------------------------
DATE Cynthia O. Azzara
Principal Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM
THE QUARTERLY REPORT ON FORM 10-Q FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,118
<SECURITIES> 53,766
<RECEIVABLES> 15,011
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 69,895
<CURRENT-LIABILITIES> 1,833
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 68,062
<TOTAL-LIABILITY-AND-EQUITY> 69,895
<SALES> 0
<TOTAL-REVENUES> 2,407
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 460
<LOSS-PROVISION> 101
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,846
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,846
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,846
<EPS-BASIC> .18
<EPS-DILUTED> 0
</TABLE>
