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, 1999 -------------- 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, 1999, 12,079,514 depositary units of limited partnership interest were outstanding. 2 AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P. INDEX TO FORM 10-Q FOR THE QUARTER ENDED 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................................. 19 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K.............. 20 Signature .............................................. 21 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P. BALANCE SHEETS June 30, December 31, 1999 1998 --------------- -------------- (unaudited) ASSETS Investment in FHA-Insured Certificates and GNMA Mortgage- Backed Securities, at fair value: Acquired insured mortgages $ 102,165,617 $ 110,253,225 Originated insured mortgages 16,318,808 16,738,030 -------------- ------------- 118,484,425 126,991,255 -------------- ------------- Investment in FHA-Insured Loans, at amortized cost, net of unamortized discount and premium: Acquired insured mortgages 11,551,772 11,617,321 Originated insured mortgages 12,760,088 12,818,519 -------------- -------------- 24,311,860 24,435,840 Cash and cash equivalents 7,234,174 15,793,919 Investment in FHA debentures -- 2,296,098 Receivables and other assets 1,137,651 1,453,292 -------------- -------------- Total assets $ 151,168,110 $ 170,970,404 ============== ============== LIABILITIES AND PARTNERS' EQUITY Distributions payable $ 8,170,327 $ 15,963,562 Accounts payable and accrued expenses 176,095 184,236 Due to affiliate -- 1,279,178 -------------- -------------- Total liabilities 8,346,422 17,426,976 --------------- -------------- Partners' equity: Limited partners' equity, 15,000,000 units authorized, 12,079,514 units issued and outstanding 144,762,510 151,721,136 General partner's deficit (3,956,493) (3,674,093) Accumulated other comprehensive income 2,015,671 5,496,385 --------------- -------------- Total partners' equity 142,821,688 153,543,428 --------------- -------------- Total liabilities and partners' equity $ 151,168,110 $ 170,970,404 =============== ============== The accompanying notes are an integral part of these financial statements. 4 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P. STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited) For the three months ended For the six months ended June 30, June 30, --------------------------- ------------------------- 1999 1998 1999 1998 ------------ ------------- ----------- ------------ Income: Mortgage investment income $ 3,084,695 $ 3,533,125 $ 6,202,234 $ 7,239,023 Interest and other income 37,689 218,085 86,083 371,291 ------------ ------------ ------------- ------------ 3,122,384 3,751,210 6,288,317 7,610,314 Expenses: Asset management fee to related parties 353,668 405,959 715,575 824,061 General and administrative 127,101 147,924 266,327 292,377 ------------ ------------ ------------- ------------ 480,769 553,883 981,902 1,116,438 ------------ ------------ ------------- ------------ Net earnings before gains on mortgage dispositions 2,641,615 3,197,327 5,306,415 6,493,876 Net gains on mortgage dispositions 650,781 857,977 650,781 961,789 ------------ ------------ ------------- ------------ Net earnings $ 3,292,396 $ 4,055,304 $ 5,957,196 $ 7,455,665 ============ ============ ============ ============ Other comprehensive income (2,356,502) (1,858,183) (3,480,714) (1,231,508) ------------ ------------ ------------- ------------ Comprehensive income $ 935,894 $ 2,197,121 $ 2,476,482 $ 6,224,157 ------------ ------------ ------------- ------------ Net earnings allocated to: Limited partners - 96.1% $ 3,163,993 $ 3,897,147 $ 5,724,865 $ 7,164,894 General partner - 3.9% 128,403 158,157 232,331 290,771 ------------ ------------ ------------- ------------ $ 3,292,396 $ 4,055,304 $ 5,957,196 $ 7,455,665 ============ ============ ============= ============ Net earnings per Unit of limited Partnership interest - Basic $ 0.26 $ 0.32 $ 0.47 $ 0.59 ============ ============ ============= ============ 5 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P. STATEMENT OF CHANGES IN PARTNERS' EQUITY For the six months ended June 30, 1999 (Unaudited) Accumulated Other General Limited Comprehensive Partner Partner Income Total ________________ _______________ _______________ ______________ Balance, December 31, 1998 $ (3,674,093) $ 151,721,136 $ 5,496,385 $ 153,543,428 Net Earnings 232,331 5,724,865 -- 5,957,196 Adjustment to unrealized losses on investments in in insured mortgages -- -- (3,480,714) (3,480,714) Distributions paid or accrued of $1.05 per Unit, including return of capital of $0.58 (514,731) (12,683,491) -- (13,198,222) ----------------- ---------------- ---------------- ---------------- Balance, June 30, 1999 $ (3,956,493) $ 144,762,510 $ 2,015,671 142,821,688 ================= ================ ================ ================ Limited Partnership Units outstanding - 12,079,514 basic, as of June 30, 1999 ================ 6 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, 1999 1998 ----------------- ---------------- Cash flows from operating activities: Net earnings $ 5,957,196 $ 7,455,665 Adjustments to reconcile net earnings to net cash provided by operating activities: Net gain on mortgage dispositions (650,781) (961,789) Changes in assets and liabilities: Decrease in accounts payable and accrued expenses and due to affiliate (139,270) (120,237) Decrease in receivables and other assets 315,641 280,061 ---------------- ---------------- Net cash provided by operating activities 5,482,786 6,653,700 ---------------- ---------------- Cash flows from investing activities: Receipt of mortgage principal from scheduled payments 671,065 680,474 Proceeds from mortgage dispositions 5,129,812 13,504,073 Proceeds from redemption of debenture 2,296,098 -- Debenture proceeds due to affiliate (1,148,049) -- ---------------- ---------------- Net cash provided by investing activities 6,948,926 14,184,547 ---------------- ---------------- Cash flows from financing activities: Distributions paid to partners (20,991,457) (28,910,387) ---------------- ---------------- Net cash used in financing activities (20,991,457) (28,910,387) ---------------- ---------------- Net decrease in cash and cash equivalents (8,559,745) (8,072,140) Cash and cash equivalents, beginning of period 15,793,919 14,718,103 ---------------- ---------------- Cash and cash equivalents, end of period $ 7,234,174 $ 6,645,963 ================ ================ Non cash investing activity: 9.5% debenture received from HUD in exchange for the mortgage on Porter Village I Apartments $ -- $ 2,296,098 Portion of debenture due to affiliate, AIM 84 -- (1,148,049) The accompanying notes are an integral part of these financial statements 7 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85 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). 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 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. 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. 8 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85 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." 9 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85 NOTES TO FINANCIAL STATEMENTS (Unaudited) 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, 1999 1998 ----------------- ----------------- Fully Insured Acquired: Number of GNMA Mortgage-Backed Securities 8 8 FHA-Insured Certificates (1) (2) (3) 42 46 Amortized Cost $ 99,631,509 $104,595,386 Face Value 102,976,965 108,690,257 Fair Value 102,165,617 110,253,225 Fully Insured Originated: Number of GNMA Mortgage-Backed Securities 1 1 FHA-Insured Certificates 1 1 Amortized Cost $ 16,837,249 $ 16,899,484 Face Value 16,480,632 16,542,867 Fair Value 16,318,808 16,738,030 (1) In April 1999, the mortgage on Nassau Apartments was prepaid. The Partnership received net proceeds of approximately $866,000 and recognized a loss of approximately $3,500 for the six months ended June 30, 1999. A distribution of approximately $0.07 per Unit related to the prepayment of this mortgage was declared in May 1999 and was paid to Unitholders in August 1999. (2) In April 1999, the mortgages on Walnut Apartments and Kings Villa/Discovery Commons were prepaid. The Partnership received net proceeds, from the two mortgages, of approximately $3.7 million resulting in an aggregate gain of approximately $593,000 for the six months ended June 30, 1999. A distribution of approximately $0.30 per Unit related to the prepayment of these mortgages was declared in May 1999 and was paid to Unitholders in August 1999. (3) In May 1999, the mortgage on Quail Creek Apartments was prepaid. The Partnership received net proceeds of approximately $553,000 and recognized a gain of approximately $62,000 for the six months ended June 30, 1999. A distribution of approximately $0.04 per Unit related to the prepayment of this mortgage was declared in June 1999 and was paid to Unitholders in August 1999. As of August 4, 1999, 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 Lincoln Green, which has been delinquent since May 1999, as discussed below, and Franklin Plaza and Bradley Road Nursing which are delinquent with respect to the payment of principal and interest due to the Partnership in July 1999. The Partnership expects to receive the payments on Franklin Plaza and Bradley Road Nursing. In July 1999, the General Partner instructed the servicer of the mortgage on Lincoln Green to file an Election to Assign the mortgage with HUD. The face value of this mortgage was approximately $3.1 million at April 30, 1999. The Partnership expects to receive 99% of this amount plus accrued interest. 11 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85 NOTES TO FINANCIAL STATEMENTS (Unaudited) 4. INVESTMENT IN FHA-INSURED LOANS Fully Insured FHA-Insured Loans ------------------------------- Listed below is the Partnership's aggregate investment in FHA-Insured Loans: June 30, December 31, 1999 1998 ----------------- ----------------- Fully Insured Acquired: Number of Loans 10 10 Amortized Cost $ 11,551,772 $ 11,617,321 Face Value 13,952,930 14,068,282 Fair Value 13,780,334 14,087,092 Fully Insured Originated: Number of Loans 3 3 Amortized Cost $ 12,760,088 $ 12,818,519 Face Value 12,435,513 12,488,890 Fair Value 12,351,230 12,747,524 As of August 4, 1999, all of the Partnership's FHA-Insured Loans, recorded at amortized cost, were current with respect to the payment of principal and interest, except for the mortgage on Longleaf Lodge which is delinquent with respect to the payment of principal and interest due to the Partnership in July 1999. 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, 1999, the Partnership received additional interest of $45,164 and $45,164, respectively, from the Participations. During the three and six months ended June 30, 1998, the Partnership received additional interest of $0 and $34,553, respectively, from the Participations. These amounts, if any, are included in mortgage investment income on the accompanying Statements of Income and Comprehensive Income. 12 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85 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, $0.40(1)(2) $1.07(4) Quarter ended June 30, $0.65(3) $0.58(5) ------- ------- $1.05 $1.65 ======= ======= (1) This amount includes approximately $0.06 per Unit representing net proceeds from the prepayment of the mortgage on Gamel & Gamel Apartments (Brown Gable Apartments). (2) This amount includes approximately $0.10 per Unit representing net proceeds received from the redemption of the FHA debenture. During the first quarter of 1998, the assignment proceeds of the mortgage on Portervillage I Apartments were received in the form of a 9.5% debenture. The debenture, with a face value of $2,296,098, was issued to the Partnership, with interest payable semi-annually on January 1 and July 1. In January 1999, net proceeds of approximately $2.3 million were received upon redemption of these debentures. Since the mortgage on Portervillage I Apartments was owned 50% by the Partnership and 50% by an affiliate of the Partnership, American Insured Mortgage Investors (AIM 84), approximately $1.1 million of the debenture proceeds was paid to AIM 84. (3) This amount includes approximately $0.41 per Unit representing net proceeds from the prepayment of the mortgages on Nassau Apartments, Walnut Apartments, Kings Villa/Discovery Commons, and Quail Creek Apartments. (4) This amount includes approximately $0.77 per Unit representing net proceeds from the prepayment of the mortgage on Spanish Trace Apartments. (5) This amount includes approximately $0.31 per Unit representing net proceeds from the prepayment of the mortgages on Isle of Pines Village Apartments, Emerald Green Apartments, and Stoney Brook 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 cash distributions paid to the Unitholders will vary during each quarter due to (1) the fluctuating yields in the short-term money market where the monthly mortgage payment receipts are temporarily invested prior to the payment of quarterly distributions, (2) the reduction in the asset base and monthly mortgage payments resulting from monthly mortgage payments received or mortgage dispositions, (3) variations in the cash flow attributable to the delinquency or default of Insured Mortgages and professional fees and foreclosure costs incurred in connection with those Insured Mortgages and (4) variations in the Partnership's operating expenses. As the Partnership continues to liquidate its mortgage investments and 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. 13 AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85 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: 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 - ----------------- --------------------- ---------- ---------- ----------- --------- CRIIMI, Inc. General Partner/Distribution $318,643 $284,327 $514,731 $808,862 AIM Acquisition Advisor/Asset Management Fee 353,668 405,959 715,575 824,061 Partners, L.P.(1) CRIIMI MAE Affiliate of General Partner/ 15,046 16,361 22,488 32,544 Management, Inc. Expense Reimbursement (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 (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 $104,247 and $210,921 for the three and six months ended June 30, 1999, respectively, and $119,657 and $242,893 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. 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. 15 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued 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 General Partner'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. 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 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. CRIIMI MAE Services Limited Partnership (CMSLP) currently services approximately 26% of the total mortgage investments 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 Partnership 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. 16 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued General - ------- As of June 30, 1999, the Partnership had invested in 65 Insured Mortgages with an aggregate amortized cost of approximately $141 million, an aggregate face value of approximately $146 million and an aggregate fair value of approximately $145 million, as discussed below. As of August 4, 1999, all of the fully insured FHA-Insured Certificates, GNMA Mortgage-Backed Securities and FHA-Insured Loans are current with respect to the payment of principal and interest except for the mortgages on Lincoln Green, which has been delinquent since May 1999, as discussed below, and Longleaf Lodge, Franklin Plaza and Bradley Road Nursing, which are delinquent with respect to the payment of principal and interest due to the Partnership in July 1999. The Partnership expects to receive payment on the latter three mortgages. In July 1999, the General Partner instructed the servicer of the mortgage on Lincoln Green to file an Election to Assign the mortgage with HUD. The face value of this mortgage was approximately $3.1 million at April 30, 1999. 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, 1999 decreased as compared to the corresponding periods in 1998, primarily due to a decrease in mortgage investment income as a result of the disposition of fourteen mortgages since April 1998. Also contributing to the decrease was a decrease in net gains from mortgage dispositions as discussed below. 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. Asset management fees decreased for the three and six months ended June 30, 1999, as compared to the corresponding periods in 1998, primarily from the reduction in the mortgage asset base. General and administrative expenses decreased for the three and six months ended June 30, 1999, as compared to the corresponding periods in 1998, primarily due to a reduction in mortgage base. 17 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Net gains on mortgage dispositions decreased for the three and six months ended June 30, 1999, as compared to the corresponding periods in 1998. During the first six months of 1999, the Partnership recognized net gains of approximately $651,000 from the prepayment of the mortgages on Nassau Apartments, Walnut Apartments, Kings Villa/Discovery Commons and Quail Creek Apartments. During the first six months of 1998, the Partnership recognized gains of approximately $200,000 from the assignment of the mortgage on Portervillage I Apartments in March 1998 and approximately $858,000 from the prepayment of the mortgages on Stoney Brook Apartments, Emerald Green Apartments and Isle of Pines Village Apartments in April 1998. In addition, the Partnership recognized a loss of approximately $96,000 from the prepayment of the mortgage on Spanish Trace Apartments in February 1998. During the first quarter of 1998, the assignment proceeds of the mortgage on Portervillage I Apartments were received in the form of a 9.5% debenture. The debenture, with a face value of $2,296,098, was issued to the Partnership, with interest payable semi-annually on January 1 and July 1. In January 1999, net proceeds of approximately $2.3 million were received upon redemption of these debentures. Since the mortgage on Portervillage I Apartments was owned 50% by the Partnership and 50% by an affiliate of the Partnership, American Insured Mortgage Investors (AIM 84), approximately $1.1 million of the debenture proceeds was paid to AIM 84. 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 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. 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. 18 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued 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 earnings before mortgage dispositions as it relates to the reduction in mortgage base. Net cash provided by investing activities decreased for the six months ended June 30, 1999, as compared to the corresponding period in 1998. This decrease is primarily due to a decrease in proceeds received from the disposition of mortgages and a decrease in debenture proceeds due to affiliate, as discussed previously. This decrease was offset by an increase in proceeds from redemption of debenture, as discussed previously. Net cash used in financing activities decreased for the six months ended June 30, 1999, as compared to the corresponding period in 1998, due to a decrease 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., and 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 filing 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. 19 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 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. 20 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 21 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 /s/ August 12, 1999 /s/ - ------------------- ------------------------- DATE Cynthia O. Azzara Principal Financial and Accounting Officer