1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 1997 ------------- Commission file number 1-11059 ----------------- AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P. ----------------------------------------------------------------- (Exact name of registrant as specified in charter) California 13-3257662 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer 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, 1997, 12,079,389 depositary units of limited partnership interest were outstanding. 2 AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P. INDEX TO FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 Page ---- PART I. Financial Information Item 1. Financial Statements Balance Sheets - June 30, 1997 (unaudited) and December 31, 1996 . . . . . . . . . . . 3 Statements of Operations - for the three and six months ended June 30, 1997 and 1996 (unaudited) . . . . . . . . . . . . . . . 4 Statement of Changes in Partners' Equity - for the six months ended June 30, 1997 (unaudited) . . . . . . . . . . . . . 5 Statements of Cash Flows - for the six months ended June 30, 1997 and 1996 (unaudited) . . . . . . . . . . . . . 6 Notes to Financial Statements (unaudited) . . 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . 14 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K . . . . . . 17 Signature . . . . . . . . . . . . . . . . . . . . . . . 18 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P. BALANCE SHEETS June 30, December 31, 1997 1996 ------------- ------------ (unaudited) ASSETS Investment in FHA-Insured Certificates and GNMA Mortgage- Backed Securities, at fair value: Acquired insured mortgages $157,970,619 $159,959,297 Originated insured mortgages 16,596,012 16,646,943 ------------ ------------ 174,566,631 176,606,240 ------------ ------------ Investment in FHA-Insured Loans, at amortized cost, net of unamortized discount and premium: Acquired insured mortgages 14,488,457 14,556,595 Originated insured mortgages 12,980,371 13,030,131 ------------ ------------ 27,468,828 27,586,726 Cash and cash equivalents 3,126,508 9,716,786 Receivables and other assets 1,738,041 1,727,662 Investment in affiliate -- 314,072 ------------ ------------ Total assets $206,900,008 $215,951,486 ============ ============ 4 LIABILITIES AND PARTNERS' EQUITY Distributions payable $ 3,770,920 $ 10,684,274 Accounts payable and accrued expenses 209,255 198,964 Note payable and due to affiliate 5,783 380,877 ------------ ------------ Total liabilities 3,985,958 11,264,115 ------------ ------------ Partners' equity: Limited partners' equity 197,730,810 198,836,652 General partner's deficit (1,806,896) (1,762,017) Unrealized gain on investment in FHA-Insured Certificates and GNMA Mortgage-Backed Securities 8,077,585 8,715,942 Unrealized loss on investment in FHA-Insured Certificates and GNMA Mortgage-Backed Securities (1,087,449) (1,103,206) ------------ ------------ Total partners' equity 202,914,050 204,687,371 ------------ ------------ Total liabilities and partners' equity $206,900,008 $215,951,486 ============ ============ The accompanying notes are an integral part of these financial statements. 5 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P. STATEMENTS OF OPERATIONS (Unaudited) For the three months ended For the six months ended June 30, June 30, ----------------------------- ----------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Income: Mortgage investment income $ 4,266,946 $ 4,469,099 $ 8,484,014 $ 9,037,254 Interest and other income 51,496 60,369 108,750 104,262 ------------ ------------ ------------ ------------ 4,318,442 4,529,468 8,592,764 9,141,516 ------------ ------------ ------------ ------------ Expenses: Asset management fee to related parties 476,952 502,066 954,845 1,010,056 General and administrative 166,969 160,865 314,959 329,656 Interest expense to affiliate -- 5,783 5,783 11,566 ------------ ------------ ------------ ------------ 643,921 668,714 1,275,587 1,351,278 ------------ ------------ ------------ ------------ Net earnings before net gains on mortgage dispositions/ modifications 3,674,521 3,860,754 7,317,177 7,790,238 Net gains on mortgage dispositions/modifications -- 556,121 205,217 554,932 ------------ ------------ ------------ ------------ Net earnings $ 3,674,521 $ 4,416,875 $ 7,522,394 $ 8,345,170 ============ ============ ============ ============ Net earnings allocated to: Limited partners - 96.1% $ 3,531,215 $ 4,244,616 $ 7,229,021 $ 8,019,708 General partner - 3.9% 143,306 172,259 293,373 325,462 ------------ ------------ ------------ ------------ $ 3,674,521 $ 4,416,875 $ 7,522,394 $ 8,345,170 ============ ============ ============ ============ Net earnings per Limited Partnership Unit $ 0.29 $ 0.35 $ 0.60 $ 0.66 ============ ============ ============ ============ The accompanying notes are an integral part of these financial statements. 6 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P. STATEMENT OF CHANGES IN PARTNERS' EQUITY For the six months ended June 30, 1997 (Unaudited) Adjustment Adjustment to to Unrealized Unrealized Gains on Losses on Investment Investment General Limited in Insured in Insured Partner Partners Mortgages Mortgages Total ------------- ------------- ------------- ------------ ------------- Balance, December 31, 1996 $ (1,762,017) $ 198,836,652 $ 8,715,942 $ (1,103,206) $ 204,687,371 Net earnings 293,373 7,229,021 -- -- 7,522,394 Distributions paid or accrued of $0.69 per Unit, including return of capital of $0.09 (338,252) (8,334,863) -- -- (8,673,115) Adjustments to unrealized gains (losses) on investments in FHA-Insured Certificates and GNMA Mortgage-Backed Securities -- -- (638,357) 15,757 (622,600) ------------- ------------- -------------- ------------ ------------- Balance, June 30, 1997 $ (1,806,896) $ 197,730,810 $ 8,077,585 $ (1,087,449) $ 202,914,050 ============= ============= ============== ============ ============= Limited Partnership Units outstanding - June 30, 1997 12,079,514 ============= The accompanying notes are an integral part of these financial statements. 7 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P. STATEMENTS OF CASH FLOWS (Unaudited) For the six months ended June 30, 1997 1996 ------------ ------------ Cash flows from operating activities: Net earnings $ 7,522,394 $ 8,345,170 Adjustments to reconcile net earnings to net cash provided by operating activities: Gain on mortgage dispositions/modifications (205,217) (658,974) Loss on mortgage dispositions/modifications -- 104,042 Changes in assets and liabilities: Increase in accounts payable and accrued expenses 10,291 42,391 Decrease (increase) in receivables and other assets 50,727 (60,771) Decrease in investment in affiliate 314,072 -- ------------ ------------ Net cash provided by operating activities 7,692,267 7,771,858 ------------ ------------ Cash flows from investing activities: Receipt of mortgage principal from scheduled payments 774,127 669,306 Proceeds from mortgage dispositions 904,891 3,824,757 ------------ ------------ Net cash provided by investing activities 1,679,018 4,494,063 ------------ ------------ Cash flows from financing activities: Distributions paid to partners (15,586,469) (8,673,116) Increase (decrease) in note payable and due to affiliate (375,094) 14,811 ------------ ------------ Net cash used in financing activities (15,961,563) (8,658,305) ------------ ------------ Net (decrease) increase in cash and cash equivalents (6,590,278) 3,607,616 Cash and cash equivalents, beginning of period 9,716,786 3,368,700 ------------ ------------ Cash and cash equivalents, end of period $ 3,126,508 $ 6,976,316 ============ ============ The accompanying notes are an integral part of these financial statements. 8 AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. ORGANIZATION American Insured Mortgage Investors - Series 85, L.P. (the Partnership) was formed under the Uniform Limited Partnership Act of the state of California on June 26, 1984. The Partnership will terminate on December 31, 2009, 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). The Partnership's investment in mortgages consists of participation certificates evidencing a 100% undivided beneficial interest in government insured multifamily mortgages issued or sold pursuant to Federal Housing Administration (FHA) programs (FHA-Insured Certificates), mortgage-backed securities guaranteed by the Government National Mortgage Association (GNMA) (GNMA Mortgage-Backed Securities) and FHA-insured mortgage loans (FHA-Insured Loans and together with FHA-Insured Certificates and GNMA Mortgage-Backed Securities referred to herein as Insured Mortgages). The mortgages underlying the FHA-Insured Certificates, GNMA Mortgage-Backed Securities and FHA-Insured Loans are non-recourse first liens on multifamily residential developments or retirement homes. 2. BASIS OF PRESENTATION In the opinion of the General Partner, the accompanying unaudited financial statements contain all adjustments of a normal recurring nature necessary to present fairly the financial position of the Partnership as of June 30, 1997 and December 31, 1996 and the results of its operations for the three and six months ended June 30, 1997 and 1996 and its cash flows for the six months ended June 30, 1997 and 1996. 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, 1996. New Accounting Standards ------------------------ In February 1997, FASB issued SFAS No. 128 "Earnings per Share" ("FAS 128"). FAS 128 changes the requirements for calculation and disclosure of earnings per share. This statement eliminates the calculation of primary earnings per share and requires the disclosure of basic earnings per share and diluted earnings per share. There will be no impact to the earnings per Unit of limited partnership interest. During 1997, FASB issued SFAS No. 129 "Disclosure of Information about Capital Structure" ("FAS 129"). FAS 129 continues the existing requirements to disclose the pertinent rights and privileges of all securities other than ordinary common stock but expands the number of companies subject to portions of its requirements. The Partnership does 9 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85 NOTES TO FINANCIAL STATEMENTS (Unaudited) 2. BASIS OF PRESENTATION - Continued not anticipate an impact to its current disclosures. During 1997, FASB issued SFAS No. 130 "Reporting Comprehensive Income" ("FAS 130"). FAS 130 states that all items that are required to be recognized under accounting standards as components of comprehensive income are to be reported in either the statement of income or another statement of comprehensive income. This would include 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". FAS 130 is effective beginning January 1, 1998. 3. INVESTMENT IN FHA-INSURED CERTIFICATES AND GNMA MORTGAGE- BACKED SECURITIES Fully Insured Mortgage Investments ---------------------------------- Listed below is the Partnership's aggregate investment in Fully Insured Mortgages: June 30, December 31, 1997 1996 ------------ ------------ Fully Insured Acquired: Number of GNMA Mortgage-Backed Securities 9 9 FHA-Insured Certificates (1)(2) 60 62 Amortized Cost $150,503,507 $151,866,819 Face Value 156,194,471 157,889,594 Fair Value 157,970,619 159,959,297 Fully Insured Originated: Number of GNMA Mortgage-Backed Securities 1 1 FHA-Insured Certificates 1 1 Amortized Cost $ 17,072,988 $ 17,126,685 Face Value 16,716,372 16,770,069 Fair Value 16,596,012 16,646,943 10 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85 NOTES TO FINANCIAL STATEMENTS (Unaudited) 3. INVESTMENT IN FHA-INSURED CERTIFICATES AND GNMA MORTGAGE- BACKED SECURITIES - Continued (1) On October 11, 1996, the servicer of the mortgage on Meadow Park Apartments I filed a Notice of Default and Election to Assign the mortgage with HUD. On January 24, 1997, the Partnership received approximately $628,000 representing approximately 90% of the assignment proceeds. The Partnership recognized a gain of approximately $139,000 for the six months ended June 30, 1997. A distribution of $0.05 per Unit related to this assignment, was declared in February 1997 and was paid to Unitholders in May 1997. The remaining 9% of proceeds due from HUD were received in May 1997, since the distribution was less than $0.01 per Unit, these proceeds were distributed with regular cash flow in August 1997. (2) In late February 1997, the mortgage on Security Apartments was prepaid. The Partnership received net proceeds of approximately $304,000, and recognized a gain of approximately $66,000 for the six months ended June 30, 1997. A distribution of approximately $0.02 per Unit related to this prepayment was declared in March 1997 and was paid to Unitholders in May 1997. The remaining 9% due on assignment is expected to be received. As of August 6, 1997, all of the fully insured FHA-Insured Certificates and GNMA Mortgage-Backed Securities are current with respect to the payment of principal and interest except for the mortgages on Portervillage I Apartments, which has been delinquent since January 1997, as discussed below, and Country Club Terrace Apartments and Isle of Pines Village Apartments, which are delinquent with respect to the June 1997 payment of principal and interest. The Partnership expects to receive the payments from the latter two mortgages. In May 1997, the servicer of the mortgage on Portervillage I Apartments filed a Notice of Default and an Election to Assign the mortgage with HUD. The face value of this mortgage was approximately $1.2 million at December 31, 1996. The Partnership expects to receive 99% of this amount plus accrued interest. 4. INVESTMENT IN FHA-INSURED LOANS Fully Insured FHA-Insured Loans ------------------------------- Listed below is the Partnership's aggregate investment in FHA-Insured Loans: 11 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85 NOTES TO FINANCIAL STATEMENTS (Unaudited) 4. INVESTMENT IN FHA-INSURED LOANS - Continued June 30, December 31, 1997 1996 ------------ ------------ Fully Insured Acquired: Number of Loans 12 12 Amortized Cost $ 14,488,457 $ 14,556,595 Face Value 17,287,508 17,405,640 Fair Value 17,330,771 17,706,486 Fully Insured Originated: Number of Loans 3 3 Amortized Cost $ 12,980,371 $ 13,030,131 Face Value 12,636,333 12,681,532 Fair Value 12,896,879 12,969,589 As of August 6, 1997, all of the Partnership's FHA-Insured Loans, recorded at amortized cost, were current with respect to the payment of principal and interest. In addition to base interest payments under Originated Insured Mortgages, the Partnership is entitled to additional interest based on a percentage of the net cash flow from the underlying development (referred to as Participations). During the three and six months ended June 30, 1997, the Partnership received additional interest of $89,222 from the Participations, as compared to $42,417 for the corresponding periods in 1996. These amounts, if any, are included in mortgage investment income on the accompanying statements of operations. 5. DISTRIBUTIONS TO UNITHOLDERS The distributions paid or accrued to Unitholders on a per Unit basis for the six months ended June 30, 1997 and 1996 are as follows: 1997 1996 ------ ------ Quarter ended March 31, $ 0.39(1) $ 0.33 Quarter ended June 30, 0.30 0.64(2) ------ ------ $ 0.69 $ 0.97 ====== ====== (1) This amount includes approximately $0.07 per Unit return of capital and gain from the disposition of the following mortgages: Meadow Park Apartments I $0.05 and Security Apartments $0.02. (2) This amount includes approximately $0.31 per Unit representing proceeds from the prepayment of the mortgages on Harbor View Estates, Bear Creek Apartments II and Cambridge Arms Apartments. The basis for paying distributions to Unitholders is net proceeds from mortgage dispositions, if any, and cash flow from operations, which includes regular interest income and principal from Insured Mortgages. Although the Insured Mortgages yield a fixed monthly mortgage payment once purchased, the 12 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85 NOTES TO FINANCIAL STATEMENTS (Unaudited) 5. DISTRIBUTIONS TO UNITHOLDERS - Continued cash distributions paid to the Unitholders will vary during each quarter due to (1) the fluctuating yields in the short-term money market where the monthly mortgage payment receipts are temporarily invested prior to the payment of quarterly distributions, (2) the reduction in the asset base and monthly mortgage payments resulting from monthly mortgage payments received or mortgage dispositions, (3) variations in the cash flow attributable to the delinquency or default of Insured Mortgages and professional fees and foreclosure costs incurred in connection with those Insured Mortgages and (4) variations in the Partnership's operating expenses. 6. TRANSACTIONS WITH RELATED PARTIES The General Partner and certain affiliated entities, during the three and six months ended June 30, 1997 and 1996, earned or received compensation or payments for services from the Partnership as follows: 13 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85 NOTES TO FINANCIAL STATEMENTS (Unaudited) 6. TRANSACTIONS WITH RELATED PARTIES - Continued COMPENSATION PAID OR ACCRUED TO RELATED PARTIES ----------------------------------------------- For the For the three months ended six monthes ended Capacity in Which June 30, June 30, Name of Recipient Served/Item 1997 1996 1997 1996 - ----------------- ---------------------------- ---------- ---------- ---------- ---------- CRIIMI, Inc. General Partner/Distribution $ 147,066 $ 313,741 $ 338,252 $ 475,513 AIM Acquisition Advisor/Asset Management Fee 476,952 502,066 954,845 1,010,056 Partners, L.P.(1) CRIIMI MAE Affiliate of General Partner/ 18,081 50,431 35,024 65,673 Management, Inc. Expense Reimbursement <FN> (1) The Advisor, pursuant to the Partnership Agreement, effective June 26, 1984, is entitled to an Asset Management Fee equal to 0.95% of Total Invested Assets (as defined in the Partnership Agreement). CRIIMI MAE Services Limited Partnership, the sub- advisor to the Partnership (the Sub-advisor) is entitled to a fee of 0.28% of Total Invested Assets. Of the amounts paid to the Advisor, the Sub-advisor earned a fee equal to $140,349 and $281,205 for the three and six months ended June 30, 1997, respectively, and $147,977 and $297,707 for the three and six months ended June 30, 1996, respectively. The Sub-advisor is an affiliate of CRIIMI MAE. </FN> 7. INVESTMENT IN AFFILIATE, NOTE PAYABLE AND DUE TO AFFILIATE Integrated Funding, Inc. (IFI), an affiliate of the Partnership, was the coinsurance lender for coinsured mortgages previously held by the Partnership. 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 Mortgage Investors L.P. - Series 86 (AIM 86), an afffiliate 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 15, 1994. Interest expense on the note payable was based on an interest rate of 7.25% per annum. IFI had entered into an expense reimbursement agreement with the Partnership, AIM 86 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. The final coinsured mortgages held by the Partnership were prepaid in late 1996. As a result, the aforementioned demand note payable to AIM 88 and the expense reimbursement agreement from IFI were cancelled as of April 1, 1997. 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. General - ------- As of June 30, 1997, the Partnership had invested in 86 Insured Mortgages with an aggregate amortized cost of approximately $195 million, an aggregate face value of approximately $203 million and an aggregate fair value of approximately $205 million, as discussed below. As of August 6, 1997, all of the fully insured FHA-Insured Certificates and GNMA Mortgage-Backed Securities are current with respect to the payment of principal and interest except for the mortgages on Portervillage I Apartments, which has been delinquent since January 1997, as discussed below, and Country Club Terrace Apartments and Isle of Pines Village Apartments, which are delinquent with respect to the June 1997 payment of principal and interest. The Partnership expects to receive the payments from the latter two mortgages. In May 1997, the servicer of the mortgage on Portervillage I Apartments filed a Notice of Default and an Election to Assign the mortgage with HUD. The face value of this mortgage was approximately $1.2 million at December 31, 1996. The Partnership expects to receive 99% of this amount plus accrued interest. Results of Operations - --------------------- Net earnings for the three and six months ended June 30, 1997 decreased as compared to the corresponding periods in 1996. This decrease was primarily the result of a reduction in mortgage investment income due to the disposition of six mortgages since May 1996. In addition, net gains on mortgage dispositions/modifications decreased, as discussed below. Interest and other income increased for the six months ended June 30, 1997, as compared to the corresponding period in 1996 primarily due to the investment of proceeds received in December 1996 from the prepayment of the mortgage on Westlake Village Apartments which was distributed in February 1997. This increase was offset by a decrease for the three months ended June 30, 1997, as compared to the corresponding period in 1996, primarily due to proceeds received in May 1996 from the prepayment of two mortgages which were distributed in August 1996. Asset management fees decreased for the three and six months ended June 30, 1997, as compared to the corresponding periods in 1996, resulting from the reduction in the asset base. General and administrative expenses did not change significantly for the three and six months ended June 30, 1997, as compared to the corresponding periods in 1996. Interest expense to affiliate decreased for the three and six months ended June 30, 1997, as compared to the corresponding periods in 1996. This decrease was due to the cancellation of the note payable to affiliate, as discussed in Note 7 of the financial statements. Net gains on mortgage dispositions decreased for the three and six months ended June 30, 1997, as compared to the corresponding periods in 1996. During the first six months of 1997, the Partnership recognized gains of approximately 15 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued $66,000 from the prepayment of the mortgage on Security Apartments in February 1997, and approximately $139,000 from the assignment of the mortgage on Meadow Park Apartments I in January 1997. During the first six months of 1996, the Partnership recognized gains on the prepayment of the mortgages on Cambridge Arms Apartments and Bear Creek Apartments II and the modification of the Oak Forest loan. 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 1997 to meet operating requirements. The basis for paying distributions to Unitholders is net proceeds from mortgage dispositions, if any, and cash flow from operations, which includes regular interest income and principal from Insured Mortgages. Although the 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 payments received are temporarily invested prior to the payment of quarterly distributions, (2) the reduction in the asset base and monthly mortgage payments due to monthly mortgage payments received or mortgage dispositions, (3) variations in the cash flow attributable to the delinquency or default of Insured Mortgages and professional fees and foreclosure costs incurred in connection with those Insured Mortgages and (4) variations in the Partnership's operating expenses. Net cash provided by operating activities decreased for the six months ended June 30, 1997, as compared to the corresponding period in 1996, primarily due to the decrease in net earnings, as discussed above. Net cash provided by investing activities decreased for the six months ended June 30, 1997, as compared to the corresponding period in 1996. This decrease is primarily due to proceeds received from the disposition of three mortgages in 1996 as compared to proceeds received from the disposition of two mortgages in 1997, as discussed above. In addition, the receipt of mortgage principal from scheduled payments increased due to the normal amortization of mortgages. Net cash used in financing activities increased for the six months ended June 30, 1997, as compared to the corresponding period in 1996. This increase was due to the distribution of net proceeds received from the mortgage on Westlake Village in December 1996 which was distributed in February 1997. 16 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, 1997. The exhibits filed as part of this report are listed below: Exhibit No. Description ----------- ----------------------- 27 Financial Data Schedule 17 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 85 (Registrant) By: CRIIMI, Inc. General Partner August 11, 1997 /s/ Cynthia O. Azzara - --------------- ------------------------- DATE Cynthia O. Azzara Principal Financial and Accounting Officer