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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission file number 0-15753
HIGH EQUITY PARTNERS L.P. - SERIES 86
(Exact name of registrant as specified in its charter)
DELAWARE 13-3314609
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 West Putnam Avenue, Greenwich, CT 06830
(Address of principal executive offices)
(203) 862-7000
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
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<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
INDEX
Part I. Financial Information:
Balance Sheets--September 30, 1996 and December 31, 1995
Statements of Operations--Three Months Ended September 30,
1996 and 1995 and Nine Months Ended September 30, 1996 and 1995
Statement of Partners' Equity--Nine Months Ended
September 30, 1996
Statements of Cash Flows--Nine Months Ended
September 30, 1996 and 1995
Notes to Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information:
Legal Proceedings, Other Events and Exhibits
and Reports on Form 8-K
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
BALANCE SHEETS
ASSETS
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Real estate ................................ $ 50,518,646 $ 51,326,327
Cash and cash equivalents .................. 6,678,258 4,752,024
Other assets ............................... 4,130,760 3,590,638
Receivables ................................ 403,868 597,944
------------ ------------
$ 61,731,532 $ 60,266,933
============ ============
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued expenses ...... $ 2,671,330 $ 1,963,371
Due to affiliates .......................... 424,018 490,095
Distributions payable ...................... 383,754 383,754
------------ ------------
3,479,102 2,837,220
------------ ------------
Commitments and contingencies
PARTNERS' EQUITY:
Limited partners' equity (588,010
units issued and outstanding) ............ 62,688,985 61,907,403
General partners' deficit .................. (4,436,555) (4,477,690)
------------ ------------
58,252,430 57,429,713
------------ ------------
$ 61,731,532 $ 60,266,933
============ ============
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
STATEMENTS OF OPERATIONS
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Rental Revenue ........................................ $ 3,078,250 $ 2,770,329 $ 8,935,277 $ 7,771,305
------------ ------------ ------------ ------------
Costs and Expenses:
Operating expenses ............................... 1,339,716 1,361,438 3,967,598 3,789,181
Depreciation and amortization .................... 511,061 376,500 1,531,912 1,250,250
Partnership management fee ....................... 351,551 351,551 1,054,653 1,054,653
Administrative expenses .......................... 141,631 140,801 406,119 427,697
Property management fee .......................... 89,988 77,958 262,213 232,510
Write-down for impairment ........................ -- -- -- 23,769,050
------------ ------------ ------------ ------------
2,433,947 2,308,248 7,222,495 30,523,341
------------ ------------ ------------ ------------
Income (loss) before interest
and other income ................................. 644,303 462,081 1,712,782 (22,752,036)
Interest income .................................. 64,254 65,239 167,303 236,962
Other income ..................................... 47,374 14,050 93,894 45,210
------------ ------------ ------------ ------------
Net income (loss) ..................................... $ 755,931 $ 541,370 $ 1,973,979 $(22,469,864)
============ ============ ============ ============
Net income (loss) attributable to:
Limited partners ................................. $ 718,134 $ 514,302 $ 1,875,280 $(21,346,371)
General partners ................................. 37,797 27,068 98,699 (1,123,493)
------------ ------------ ------------ ------------
Net income (loss) ..................................... $ 755,931 $ 541,370 $ 1,973,979 $(22,469,864)
============ ============ ============ ============
Net income (loss) per unit of limited
partnership interest (588,010 units
outstanding) ..................................... $ 1.22 $ .87 $ 3.19 $ (36.30)
============ ============ ============ ============
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
STATEMENT OF PARTNERS' EQUITY
General Limited
Partners' Partners'
(Deficit) Equity Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance, January 1, 1996 ........ $ (4,477,690) $ 61,907,403 $ 57,429,713
Net income for the nine
months ended September 30, 1996 . 98,699 1,875,280 1,973,979
Distributions as return of
capital for the nine months ended
September 30, 1996 ($ 1.86 per
limited partnership unit) ....... (57,564) (1,093,698) (1,151,262)
------------ ------------ ------------
Balance, September 30, 1996 ..... $ (4,436,555) $ 62,688,985 $ 58,252,430
============ ============ ============
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
STATEMENTS OF CASH FLOWS
For The Nine Months Ended
September 30,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) ........................... $ 1,973,979 $(22,469,864)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Write-down for impairment ........... -- 23,769,050
Depreciation and amortization ....... 1,531,912 1,250,250
Straight line adjustment for stepped
lease rentals ...................... (281,829) (184,500)
Changes in asset and liabilities:
Accounts payable and accrued expenses 707,959 1,219,858
Due to affiliates ................... (66,077) (57,992)
Receivables ......................... 194,076 (295,059)
Other assets ........................ (436,497) (501,532)
------------ ------------
Net cash provided by operating
activities .......................... 3,623,523 2,730,211
------------ ------------
Cash Flows From Investing Activities:
Improvements to real estate ................. (546,027) (1,607,704)
------------ ------------
Cash Flows From Financing Activities:
Distributions to partners ................... (1,151,262) (1,151,262)
------------ ------------
Increase (Decrease) in Cash and Cash Equivalents 1,926,234 (28,755)
Cash and Cash Equivalents,
Beginning of Year ........................... 4,752,024 5,750,089
------------ ------------
Cash and Cash Equivalents,
End of Quarter .............................. $ 6,678,258 $ 5,721,334
============ ============
See notes to financial statements
</TABLE>
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
NOTES TO FINANCIAL STATEMENTS
l. GENERAL
The accompanying financial statements, notes and discussions should be
read in conjunction with the financial statements, related notes and
discussions contained in the Partnership's annual report on Form l0-K
for the year ended December 3l, 1995. The December 31, 1995 year-end
balance sheet data presented herein was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
The financial information contained herein is unaudited; however, in
the opinion of management, all adjustments necessary for a fair
presentation of such financial information have been included. Other
than the write-down for impairment, all of the aforementioned
adjustments are of normal recurring nature and there have not been any
non-recurring adjustments included in the results reported for the
current period.
2. SIGNIFICANT ACCOUNTING POLICIES
Impairment of Assets
In March 1995, the Financial Accounting Standards Board issued
Statement # 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of" ("SFAS # 121"). Although
the adoption of the statement was not required until fiscal years
beginning after December 15, 1995, the Partnership implemented SFAS
#121 for the year ended December 31, 1995.
Under SFAS #121 the initial test to determine if an impairment exists
is to compute the recoverability of the asset based on anticipated cash
flows (net realizable value) compared to the net carrying value of the
asset. If anticipated cash flows on an undiscounted basis are
insufficient to recover the net carrying value of the asset, an
impairment loss should be recognized, and the asset written down to its
estimated fair value. The fair value of the asset is the amount by
which the asset could be bought or sold in a current transaction
between willing parties, that is, other than in a forced or liquidation
sale. The net realizable value of an asset will generally be greater
than its fair value because net realizable value does not discount cash
flows to present value and discounting is usually one of the
assumptions used in determining fair value.
Upon implementation of SFAS #121, certain of the Partnership's assets
have been written down to their estimated fair values, while others
remain at depreciated cost. Thus, the net carrying value of the
Partnership's asset portfolio may differ materially from its fair
value. However, the write-downs for impairment do not affect the tax
basis of the assets and the write-downs are not included in the
determination of taxable income or loss.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
NOTES TO FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Because the determination of both net realizable value and fair value
is based upon projections of future economic events such as property
occupancy rates, rental rates, operating cost inflation and market
capitalization rates which are inherently subjective, the amounts
ultimately realized at disposition may differ materially from the net
carrying value as of the balance sheet date. The cash flows used to
determine fair value and net realizable value are based on good faith
estimates and assumptions developed by management. Inevitably,
unanticipated events and circumstances may occur and some assumptions
may not materialize; therefore actual results may vary from the
estimates and the variances may be material. The Partnership may
provide additional losses in subsequent periods if the real estate
market or local economic conditions change and such write-downs could
be material.
Certain reclassifications were made to the prior year financial
statements in order to conform them to the current period presentation.
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
The Investment General Partner of the Partnership, Resources High
Equity, Inc. and the Administrative General Partner of the Partnership,
Resources Capital Corp., were, until November 3, 1994, wholly-owned
subsidiaries of Integrated Resources, Inc. ("Integrated") at which
time, pursuant to the consummation of the plan of reorganization,
substantially all of the assets of Integrated were sold to Presidio
Capital Corp., a British Virgin Islands corporation ("Presidio") and
the Investment General Partner and the Administrative General Partner
(the "General Partners") became wholly owned subsidiaries of Presidio.
Presidio AGP Corp., which is a wholly-owned subsidiary of Presidio,
became the Associate General Partner on February 28, 1995, replacing
Second Group Partners which withdrew as of that date. The General
Partners and affiliates of the General Partners are also engaged in
businesses related to the acquisition and operation of real estate.
Presidio is also the parent of other corporations that are or may in
the future be engaged in businesses that may be in competition with the
Partnership. Accordingly, conflicts of interest may arise between the
Partnership and such other businesses. Wexford Management LLC
("Wexford"), has been engaged to perform administrative services to
Presidio and its direct and indirect subsidiaries as well as the
Partnership. During the three months ended September 30, 1996,
reimbursable expenses to Wexford amounted to $25,500. Wexford is
engaged to perform similar services for other similar entities that may
be in competition with the Partnership.
The Partnership has entered into a property management services
agreement with Resources Supervisory Management Corp. ("Resources
Supervisory"), an affiliate of the General Partners, to perform certain
functions relating to the management of the properties of the
Partnership. A portion of the property management fees were paid to
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
NOTES TO FINANCIAL STATEMENTS
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
unaffiliated management companies which are engaged for the purpose of
performing certain of the management functions for certain properties.
For the quarters ended September 30, 1996 and 1995, Resources
Supervisory was entitled to receive $89,988 and $77,958, respectively,
of which $67,521 and $43,084 was paid to unaffiliated management
companies. These fees have been paid in the subsequent quarters.
For the administration of the Partnership, the Administrative General
Partner is entitled to receive reimbursement of expenses of a maximum
of $200,000 per year (exclusive of the administrative expenses paid to
Wexford). The Administrative General Partner was entitled to receive
$50,000 for each of the quarters ended September 30, 1996 and 1995
which was paid in the subsequent quarters.
For managing the affairs of the Partnership, the Administrative General
Partner is entitled to receive an annual partnership asset management
fee equal to 1.05% of the amount of original gross proceeds paid or
allocable to the acquisition of property by the Partnership. For each
of the quarters ended September 30, 1996 and 1995, the Administrative
General Partner earned $351,551 which was paid in the subsequent
quarters.
The general partners are allocated 5% of the net income of the
Partnership which amounted to $37,797 and $27,068 for the quarters
ended September 30, 1996 and 1995, respectively. They are also entitled
to receive 5% of distributions which amounted to $19,188 for each of
the quarters ended September 30, 1996 and 1995.
During the liquidation stage of the Partnership, the Investment General
Partner or an affiliate may be entitled to receive certain fees which
are subordinated to the limited partners receiving their original
invested capital and certain specified minimum returns on their
investment.
During July 1996 through October 1996, Millenium Funding III Corp., a
wholly owned indirect subsidiary of Presidio, purchased 2,285 units of
the Partnership from various limited partners. These purchases
represent less than .4% of the outstanding limited partnership units of
the Partnership.
4. REAL ESTATE
Management recorded write-downs for impairment totaling $23,769,050 in
the first quarter of 1995 pursuant to adoption of SFAS #121 as
discussed in Note 2. No write-downs were recorded for the nine months
ended September 30, 1996.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
NOTES TO FINANCIAL STATEMENTS
4. REAL ESTATE (CONTINUED)
The following table represents the write-downs for impairment recorded
on the Partnership's properties:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
Property 1996 1995
-------- ---- ----
<S> <C> <C>
Century Park I ....................... $ -- $ 1,250,000
568 Broadway ......................... -- 2,569,050
Seattle Tower ........................ -- 3,550,000
Commonwealth ......................... -- 1,700,000
Melrose Crossing ..................... -- 7,200,000
Matthews Festival .................... -- 5,300,000
230 East Ohio ........................ -- 2,200,000
----------- -----------
$ -- $23,769,050
=========== ===========
</TABLE>
The following table is a summary of the Partnership's real estate as
of:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ -------------
<S> <C> <C>
Land ..................................... $ 12,305,557 $ 12,305,557
Buildings and improvements ............... 58,031,772 57,485,744
------------ ------------
70,337,329 69,791,301
Less: Accumulated depreciation .......... (19,818,683) (18,464,974)
------------ ------------
$ 50,518,646 $ 51,326,327
============ ============
</TABLE>
5. DISTRIBUTIONS PAYABLE
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Limited partners ($.62 per unit) ............... $364,566 $364,566
General partners ............................... 19,188 19,188
-------- --------
$383,754 $383,754
======== ========
</TABLE>
Such distributions were paid in the quarters subsequent to September
30, 1996 and December 31, 1995, respectively.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
NOTES TO FINANCIAL STATEMENTS
6. DUE TO AFFILIATES
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Partnership asset management fee ................. $351,551 $351,551
Property management fee .......................... 22,467 88,544
Non-accountable expense reimbursement ............ 50,000 50,000
-------- --------
$424,018 $490,095
======== ========
</TABLE>
Such amounts were paid in the quarters subsequent to September 30, 1996
and December 31, 1995, respectively.
7. COMMITMENTS AND CONTINGENCIES
a) 568 Broadway Joint Venture is currently involved in litigation with a
number of present or former tenants who are in default on their lease
obligations. Several of these tenants have asserted claims or counter
claims seeking monetary damages. The plaintiffs' allegations include
but are not limited to claims for breach of contract, failure to
provide certain services, overcharging of expenses and loss of profits
and income. These suits seek total damages of in excess of $20 million
plus additional damages of an indeterminate amount. The 568 Broadway
Joint Venture's action for rent against Solo Press was tried in 1992
and resulted in a judgement in favor of the 568 Broadway Joint Venture
for rent owed. The Partnership believes this will result in dismissal
of the action brought by Solo Press against the 568 Broadway Joint
Venture. Since the facts of the other actions which involve material
claims or counterclaims are substantially similar, the Partnership
believes that the 568 Broadway Joint Venture will prevail in those
actions as well.
b) A former retail tenant of 568 Broadway (Galix Shops, Inc.) and a
related corporation which is a retail tenant of a building adjacent to
568 Broadway filed a lawsuit in the Supreme Court of the State of New
York, County of New York, against the Broadway Joint Venture which owns
568 Broadway. The action was filed on April 13, 1994. The plaintiffs
allege that by erecting a sidewalk shed in 1991, 568 Broadway deprived
plaintiffs of light, air and visibility to their customers. The
sidewalk shed was erected, as required by local law, in connection with
the inspection and restoration of the 568 Broadway building facade,
which is also required by local law. Plaintiffs further allege that the
erection of the sidewalk shed for a continuous period of over two years
is unreasonable and unjustified and that such conduct by defendants has
deprived plaintiffs of the use and enjoyment of their property. The
suit seeks a judgment requiring removal of the sidewalk shed,
compensatory damages of $20 million, and punitive damages of $10
million. The Partnership believes that this suit is meritless and
intends to vigorously defend it.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
c) On or about May 11, 1993 the Partnership was advised of the existence
of an action (the "B&S Litigation") in which a complaint (the "HEP
Complaint") was filed in the Superior Court for the State of California
for the County of Los Angeles (the "Court") on behalf of a purported
class consisting of all of the purchasers of limited partnership
interests in the Partnership.
On April 7, 1994 the plaintiffs were granted leave to file an amended
complaint (the "Amended Complaint"). The Amended Complaint asserted
claims against the General Partners of the Partnership, the general
partners of HEP-85, the managing general partner of HEP-88 and certain
officers of the Administrative and Investment General Partner, among
others. The Investment General Partner of the Partnership is also a
general partner of HEP-85 and HEP-88.
On July 19, 1995, the Court preliminarily approved a settlement of the
B&S Litigation and approved the form of a notice (the "Notice")
concerning such proposed settlement. In response to the Notice,
approximately 1.1% of the limited partners of the three HEP
partnerships (representing approximately 4% of outstanding units)
requested exclusion and 15 limited partners filed written objections to
the settlement. The California Department of Corporations also sent a
letter to the Court opposing the settlement. Five objecting limited
partners, represented by two law firms, also made motions to intervene
so they could participate more directly in the action. The motions to
intervene were granted by the Court on September 14, 1995. In October
and November 1995, the attorneys for the plaintiffs-intervenors
conducted extensive discovery. At the same time, there were continuing
negotiations concerning possible revisions to the proposed settlement.
On November 30, 1995, the original plaintiffs and the intervening
plaintiffs filed a Consolidated Class and Derivative Action Complaint
("Consolidated Complaint") against the Administrative and Investment
General Partners, the managing general partner of HEP-85, the managing
general partner of HEP-88 and the indirect corporate parent of the
General Partners, alleging various state law class and derivative
claims, including claims for breach of fiduciary duties; breach of
contract; unfair and fraudulent business practices under California
Bus. & Prof. Code Sec. 17200; negligence; dissolution, accounting,
receivership, and removal of general partner; fraud; and negligent
misrepresentation. The Consolidated Complaint alleges, among other
things, that the general partners caused a waste of HEP Partnership
assets by collecting fees in lieu of pursuing a strategy to maximize
the value of the investments owned by the limited partners; that the
general partners breached their duty of loyalty and due care to the
limited partners by expropriating management fees from the partnerships
without trying to run the HEP Partnerships for the purposes for which
they are intended; that the general partners are acting improperly to
enrich themselves in their position of control over the HEP
Partnerships and that their actions prevent non-affiliated entities
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
from making and completing tender offers to purchase HEP Partnership
Units; that by refusing to seek the sale of the HEP Partnerships'
properties, the general partners have diminished the value of the
limited partners' equity in the HEP Partnerships; that the general
partners have taken a heavily overvalued partnership asset management
fee; and that limited partnership units were sold and marketed through
the use of false and misleading statements.
On or about January, 1996, the parties to the B & S Litigation agreed
upon a revised settlement, which would be significantly more favorable
to limited partners than the previously proposed settlement. The
revised settlement proposal, like the previous proposal, involves the
reorganization of (i) HEP-85, (ii) the Partnership and, (iii) HEP-88
(collectively, the "HEP Partnerships"), through an exchange (the
"Exchange") in which limited partners (the "Participating Investors")
of the partnerships participating in the Exchange (the "Participating
Partnerships") would receive, in exchange for the partnership units,
shares of common stock ("Shares") of a newly-formed corporation,
Millennium Properties Inc. ("Millennium") which intends to qualify as a
real estate investment trust. Such reorganization would only be
effected with respect to a particular Partnership if holders of a
majority of the outstanding units of that Partnership consent to such
reorganization pursuant to a Consent Solicitation Statement (the
"Consent Solicitation Statement") which would be sent to all limited
partners after the settlement is approved by the Court. In connection
with the Exchange, Participating Investors would receive Shares of
Millennium in exchange for their limited partnership units. 84.65% of
the Shares would be allocated to Participating Investors in the
aggregate (assuming each of the partnerships participate in the
Exchange) and 15.35% of the Shares would be allocated to the general
partners in consideration of the general partners' existing interests
in the Participating Partnerships, their relinquishment of entitlement
to receive fees and expense reimbursements, and the payment by the
general partners of an affiliate of certain amounts for legal fees.
As part of the Exchange, Shares issued to Participating Investors would
be accompanied by options granting such Investors the right to require
an affiliate of the general partners to purchase Shares at a price of
$11.50 per Share, exercisable during the three month period commencing
nine months after the effective date of the Exchange. A maximum of 1.5
million Shares (representing approximately 17.7% of the total Shares
issued to investors if all partnerships participate) would be required
to be purchased if all partnerships participate in the Exchange. Also
as part of the Exchange, the indirect parent of the General Partners
would agree that in the event that dividends paid with respect to the
Shares do not aggregate at least $1.10 per Share for the first four
complete fiscal quarters following the Effective Date, it would make a
supplemental payment to holders of such Shares in the amount of such
difference. The general partners or an affiliate would also provide an
amount, not to exceed $2,232,500 in the aggregate, for the payment of
attorneys' fees and reimbursable expenses of class counsel, as approved
by the Court, and the costs of providing notice to the class (assuming
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
that all three Partnerships participate in the Exchange). In the event
that fewer than all of the Partnerships participate in the Exchange,
such amount would be reduced. The general partners would advance to the
Partnerships the amounts necessary to cover such fees and expenses of
the Exchange (but not their litigation costs and expenses, which the
general partners would bear). Upon the effectuation of the Exchange,
the B & S Litigation would be dismissed with prejudice.
On February 8, 1996, at a hearing on preliminary approval of the
revised settlement, the Court determined that in light of renewed
objections to the settlement by the California Department of
Corporations, the Court would appoint a securities litigation expert to
evaluate the settlement.. The Court stated that it would rule on the
issue of preliminary approval of the settlement after receiving the
expert's report. On May 6, 1996, the expert submitted a report stating
that he was unable to conclude that the revised settlement as proposed
is fair, reasonable and adequate, and recommending that the revised
settlement be restructured so as to allocate Shares to the general
partners based solely on the value of their 5% equity interests in the
Partnerships, that the allocation of Shares be based on independent
appraisals of all of the Partnerships' properties, and that
Participating Investors be provided with dissenters' rights. On May 28,
1996, at a hearing in connection with the expert's report, the Court
ordered the parties to brief certain valuation issues, the requisite
consents required from limited partners to approve the Exchange and the
applicability of exemptions from the California securities law.
Thereafter, in response to the expert's report, the proposed settlement
was further revised to require independent appraisals of all the
Partnerships' properties and to provide Participating Investors with
dissenters' rights, which would entitle Participating Investors who
elected dissenters' rights to receive, as compensation for their Units,
unsecured notes issued by Millennium, the face amount of which would be
based on the independent appraisals.
A hearing on the issues the Court had ordered the parties to brief was
held on July 9, 1996. On July 18, 1996, the Court preliminarily
approved the proposed, revised settlement of the B & S Litigation, and
made a preliminary finding that the proposed, revised settlement is
fair, adequate and reasonable to the class, and that a settlement class
should be conditionally certified. After a hearing on August 19, 1996
the Court approved the form and method of notice to limited partners
regarding the proposed, revised settlement which has been sent to
limited partners.
At a hearing on October 23, 1996, the Court stated that it wished to
consider late-filed briefs from certain objectors which were filed up
to and including the date of the hearing. The Court also invited a
further response from the plaintiffs to such briefs. On November 4,
1996, the Court issued an order seeking comment on the final version of
the settlement from the California Department of Corporations and
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
additional information from the plaintiffs. The Court requested a
response within 17 days of its order. Upon final approval of the
settlement by the Court, the Consent Solicitation Statement concerning
the Exchange would be sent to all limited partners. There would be at
least a 60 day solicitation period and a reorganization of the
Partnership cannot be consummated unless a majority of the limited
partners in the Partnership affirmatively vote to approve it.
8. RESULTS OF OPERATIONS
Results of operations for the nine months ended September 30, 1996 are
not necessarily indicative of the results to be expected for the entire
year.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's real estate properties are commercial properties except for
the Melrose Out Parcel which is an undeveloped parcel of land for which the
Partnership has entered into a ground lease. All properties were acquired for
cash. The Partnership's public offering of Units commenced on April 28, 1986. As
of October 1, 1987, the date of the final admission of limited partners, the
Partnership had accepted subscriptions for 588,010 Units (including Units held
by the initial limited partner) for aggregate net proceeds of $142,592,500
(gross proceeds of $147,002,500 less organization and offering expenses
aggregating $4,410,000).
The Partnership uses working capital reserves remaining from the net proceeds of
its public offering and any undistributed cash from operations as its primary
source of liquidity. For the nine months ended September 30, 1996, 100% of
distributions and capital expenditures were funded from cash flow from
operations. As of September 30, 1996, total remaining working capital reserves
amounted to approximately $3,739,000. The Partnership intends to distribute less
than all of its future cash flow from operations to maintain adequate reserves
for capital improvements and capitalized lease procurement costs. In addition,
if the real estate market conditions deteriorate in any of the areas where the
Partnership's properties are located, there is substantial risk that this would
have an adverse effect on cash flow distributions. Working capital reserves are
temporarily invested in short-term money market instruments and are expected,
together with cash flow from operations, to be sufficient to fund future capital
improvements to the Partnership's properties.
During the nine months ended September 30, 1996, cash and cash equivalents
increased $1,926,234 as a result of cash provided by operations in excess of
capital expenditures and distributions to partners. The Partnership's primary
source of funds is cash flow from the operations of its properties, principally
rents received from tenants, which amounted to $3,623,523 for the nine months
ended September 30, 1996. The Partnership used $546,027 for capital expenditures
related to capital and tenant improvements to the properties and $1,151,262 for
distributions to partners during the nine months ended September 30, 1996.
The Partnership expects to continue to utilize a portion of its cash flow from
operations to pay for various capital and tenant improvements to the properties
and leasing commissions (the amount of which cannot be predicted with
certainty). Capital and tenant improvements and leasing commissions may in the
future exceed the Partnership's cash flow from operations which would otherwise
be available for distributions. In that event, the Partnership would utilize the
remaining working capital reserves or sell one or more properties, which would
have an adverse effect on future distributions. Except as discussed above,
management is not aware of any other trends, events, commitments or
uncertainties that will have a significant impact on liquidity.
REAL ESTATE MARKET
The real estate market continues to suffer from the effects of the recession
which included a substantial decline in the market value of existing properties.
Market values have been slow to recover, and while the pace of new construction
has slowed, high vacancy rates continue to exist in many areas.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Technological changes are also occurring which may reduce the office space needs
of many users. These factors may continue to reduce rental rates. As a result,
the Partnership's potential for realizing the full value of its investment in
its properties is at increased risk.
IMPAIRMENT OF ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement # 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of" ("SFAS # 121"). Although the adoption of the statement was not
required until fiscal years beginning after December 15, 1995, the Partnership
implemented SFAS #121 for the year ended December 31, 1995.
Under SFAS #121 the initial test to determine if an impairment exists is to
compute the recoverability of the asset based on anticipated cash flows (net
realizable value) compared to the net carrying value of the asset. If
anticipated cash flows on an undiscounted basis are insufficient to recover the
net carrying value of the asset, an impairment loss should be recognized, and
the asset written down to its estimated fair value. The fair value of the asset
is the amount by which the asset could be bought or sold in a current
transaction between willing parties, that is, other than in a forced or
liquidation sale. The net realizable value of an asset will generally be greater
than its fair value because net realizable value does not discount cash flows to
present value and discounting is usually one of the assumptions used in
determining fair value.
Upon implementation of SFAS #121, certain of the Partnership's assets have been
written down to their estimated fair values, while others remain at depreciated
cost. Thus, the net carrying value of the Partnership's asset portfolio may
differ materially from its fair value. However, the write-downs for impairment
do not affect the tax basis of the assets and the write-downs are not included
in the determination of taxable income or loss.
Because the determination of both net realizable value and fair value is based
upon projections of future economic events such as property occupancy rates,
rental rates, operating cost inflation and market capitalization rates which are
inherently subjective, the amounts ultimately realized at disposition may differ
materially from the net carrying values as of the balance sheet date. The cash
flows used to determine fair values and net realizable values are based on good
faith estimates and assumptions developed by management. Inevitably,
unanticipated events and circumstances may occur and some assumptions may not
materialize; therefore, actual results may vary from the estimate and the
variances may be material. The Partnership may provide additional losses in
subsequent periods if the real estate market or local economic conditions change
and such write-downs could be material.
Management recorded write-downs for impairment totaling $23,769,050 in the first
quarter of 1995 pursuant to the adoption of SFAS #121 as discussed above. No
write-downs were recorded for the nine months ended September 30, 1996.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table represents the write-downs for impairment recorded on
certain of the Partnership's properties.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
Property 1996 1995
-------- ---- ----
<S> <C> <C>
Century Park I ....................... $ -- $ 1,250,000
568 Broadway ......................... -- 2,569,050
Seattle Tower ........................ -- 3,550,000
Commonwealth ......................... -- 1,700,000
Melrose Crossing ..................... -- 7,200,000
Matthews Festival .................... -- 5,300,000
230 East Ohio ........................ -- 2,200,000
----------- -----------
$ -- $23,769,050
=========== ===========
</TABLE>
RESULTS OF OPERATIONS
The Partnership experienced net income for the nine months ended September 30,
1996 compared to a net loss for the same period in the prior year due primarily
to the significant write-down for impairment recorded in 1995. The Partnership
experienced an increase in net income for the three months ended September 30,
1996 compared to the same period in the prior year due primarily to higher
revenues at certain properties in 1996.
Rental revenue increased during both the nine and three month periods ended
September 30, 1996 as compared to the same periods in 1995. Revenues increased
at Century Park I, 568 Broadway, and Seattle Tower due to higher occupancy rates
during both periods in 1996 as new leases were executed in late 1995 and in
1996. Revenues increased at Sutton Square in the first three quarters of 1996
compared to 1995 due to higher real estate tax and other reimbursements and
higher percentage rent income recorded in 1996. These increases were offset by
decreases in revenues at Matthews during the nine and three months ended
September 30, 1996 as certain tenants vacated the premises and/or filed for
bankruptcy during 1995.
Costs and expenses decreased during the nine months ended September 30, 1996
compared to the same period in 1995 due primarily to the write-down for
impairment recorded in 1995 while costs and expenses increased during the three
months ended September 30, 1996 compared to 1995. Operating expenses increased
during the nine months ended September 30, 1996 due to increases in repairs and
maintenance expenses and higher utility costs at certain properties, partially
offset by decreases in real estate taxes. The cost of repairs and maintenance
and utilities increased most significantly at Century Park I, 568 Broadway and
Sutton Square due to the increased occupancy during the nine months ended
September 30, 1996 compared to the same period in 1995. Overall real estate tax
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
expense decreased during the nine months ended September 30, 1996 as tax appeals
resulted in lower assessed values and lower real estate taxes at 230 East Ohio
and 568 Broadway. For the three months ended September 30, 1996, operating
expenses remained consistent compared to the same period in the prior year.
Depreciation and amortization increased during the nine and three month period
in 1996 compared to 1995 due to the significant capital and tenant improvement
work in 1995. The partnership asset management fee in 1996 remained consistent
with the fee in 1995. Administrative expenses remained generally consistent
during the first three quarters of 1996 as lower allocated partnership payroll
costs were offset by higher partnership legal fees in 1996 as compared to the
same periods in the prior year. The property management fees increased during
the nine and three month periods ended September 30, 1996 compared to the same
periods in 1995 due to higher revenues at certain properties as previously
discussed.
Interest income decreased due to lower interest rates for the nine and three
months ended September 30, 1996 as compared to the same periods in 1995, but
higher cash balances during the third quarter of 1996 as compared to the prior
year partially offset the decrease in interest rates. Other income, which
consists of investor ownership transfer fees, increased during the nine and
three month periods ended September 30, 1996 compared to the same periods in the
prior year due to a greater number of investor transfers during the second and
third quarters of 1996.
Inflation is not expected to have a material impact on the Partnership's
operations or financial position.
Legal Proceedings
The Partnership is a party to certain litigation. See Note 7 to the financial
statements for a description thereof.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
PART II. - OTHER INFORMATION
Item 1 - Legal Proceedings
(a) See Management's Discussion and Analysis of Financial
Condition and Results of Operations and Notes to Financial
Statements - Note 7 which is herein incorporated by reference.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits: There were no exhibits filed
(b) Reports on Form 8-K: None
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1996
SIGNATURES
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.
High Equity Partners L.P. - Series 86
By: Resources Capital Corp.,
Administrative General Partner
Dated: November 14, 1996 By: /S/ Joseph M. Jacobs
---------------------
Joseph M. Jacobs
President
(Duly Authorized Officer)
Dated: November 14, 1996 By: /S/ Jay L. Maymudes
--------------------
Jay L. Maymudes
Vice President, Secretary
and Treasurer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary information extracted from the financial
statements of the September 30, 1996 Form 10-Q of High Equity Partners
L.P.-Series 86 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,678,258
<SECURITIES> 0
<RECEIVABLES> 403,868
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 61,731,532
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 58,252,430
<TOTAL-LIABILITY-AND-EQUITY> 61,731,532
<SALES> 0
<TOTAL-REVENUES> 8,935,277
<CGS> 0
<TOTAL-COSTS> 3,967,598
<OTHER-EXPENSES> 3,254,897
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,973,979
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,973,979
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,973,979
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
