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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, 1999
------------------
Commission file number 0-15753
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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.)
Cambridge Center, 9th Floor, Cambridge, MA 02142
(Address of principal executive offices)
(617) 234-3000
(Registrant's telephone number, including area code)
411 West Putnam Avenue, Greenwich, CT 06830
(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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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1999
INDEX
Page No.
--------
Part I. Financial Information:
Balance Sheets--September 30, 1999 and December 31, 1998 3
Statements of Operations--Three and Nine Months Ended September 30,
1999 and 1998 4
Statement of Partners' Equity-- Nine Months Ended September 30, 1999 5
Statements of Cash Flows-- Nine Months Ended September 30, 1999 and
1998 6
Notes to Financial Statements 7 - 13
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 16
Part II. Other Information:
Legal Proceedings, Other Events and Exhibits
and Reports on Form 8-K 17
2
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1999
BALANCE SHEETS
September 30, 1999 December 31, 1998
------------------ -----------------
ASSETS
Real estate - net $ 46,288,235 $ 47,232,184
Cash and cash equivalents 11,655,876 10,220,165
Other assets 4,189,150 4,141,622
Receivables 466,650 243,240
------------ ------------
$ 62,599,911 $ 61,837,211
============ ============
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued expenses $ 2,312,911 $ 1,902,806
Distributions payable - 711,801
Due to affiliates 232,472 479,206
------------ ------------
2,545,383 3,093,813
------------ ------------
Commitments and contingencies
PARTNERS' EQUITY:
Limited partners' equity (588,010
units issued and outstanding) 57,050,855 55,805,281
General partners' equity 3,003,673 2,938,117
------------ ------------
60,054,528 58,743,398
------------ ------------
$ 62,599,911 $ 61,837,211
============ ============
See notes to financial statements
3
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1999
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Rental Revenue $2,901,252 $2,869,077 $8,885,796 $8,444,641
---------- ---------- ---------- ----------
Costs and Expenses:
Operating expenses 863,672 1,026,690 2,838,183 3,124,004
Depreciation and amortization 514,576 487,806 1,543,728 1,463,418
Partnership management fee 165,289 321,358 808,005 964,074
Administrative expenses 218,731 195,542 1,134,062 787,173
Property management fee 91,824 83,884 294,200 249,398
---------- ---------- ---------- ----------
1,854,191 2,115,280 6,618,178 6,588,067
---------- ---------- ---------- ----------
Income before interest and other income 1,047,061 753,797 2,267,618 1,856,574
Interest income 116,323 103,129 364,804 334,150
Other income 14,280 1,540 102,310 19,705
---------- ---------- ---------- ----------
Net income $1,177,664 $ 858,466 $2,734,732 $2,210,429
========== ========== ========== ==========
Net income attributable to:
Limited partners $1,118,781 $ 815,543 $2,597,996 $2,099,908
General partners 58,883 42,923 136,736 110,521
---------- ---------- ---------- ----------
Net income $1,177,664 $ 858,466 $2,734,732 $2,210,429
========== ========== ========== ==========
Net income per unit of limited
partnership interest (588,010
units outstanding) $ 1.90 $ 1.39 $ 4.42 $ 3.57
========== ========== ========== ==========
</TABLE>
See notes to financial statements
4
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1999
STATEMENT OF PARTNERS' EQUITY
General Limited
Partners' Partners'
Equity Equity Total
---------- ----------- -----------
Balance, January 1, 1999 $2,938,117 $55,805,281 $58,743,398
Net income for the nine
months ended September 30, 1999 136,736 2,597,996 2,734,732
Distributions as return of
capital for the nine months ended
September 30, 1999 ($2.30 per
limited partnership unit) (71,180) (1,352,422) (1,423,602)
---------- ----------- -----------
Balance, September 30, 1999 $3,003,673 $57,050,855 $60,054,528
========== =========== ===========
See notes to financial statements
5
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1999
STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30,
-----------------------------
1999 1998
------------ ------------
Cash Flows From Operating Activities:
Net income $ 2,734,732 $ 2,210,429
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization 1,543,728 1,463,418
Straight line adjustment for stepped
lease rentals (75,123) (58,365)
Changes in asset and liabilities:
Accounts payable and accrued expenses 410,105 349,064
Due to affiliates (246,734) (313,338)
Receivables (223,410) (24,117)
Other assets (161,675) (200,322)
------------ ------------
Net cash provided by operating activities 3,981,623 3,426,769
------------ ------------
Cash Flows From Investing Activities:
Improvements to real estate (410,509) (668,722)
------------ ------------
Cash Flows From Financing Activities:
Distributions to partners (2,135,403) (2,135,403)
------------ ------------
Increase in Cash and Cash Equivalents 1,435,711 622,644
Cash and Cash Equivalents, Beginning of Year 10,220,165 9,828,701
------------ ------------
Cash and Cash Equivalents, End of Quarter $ 11,655,876 $ 10,451,345
============ ============
See notes to financial statements
6
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1999
NOTES TO FINANCIAL STATEMENTS
1. 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 10-K for
the year ended December 31, 1998.
The financial information contained herein is unaudited; however, in the
opinion of management, all adjustments necessary (consisting only of
normal recurring adjustments) for a fair presentation of such financial
information have been included. Results of operations for the nine months
ended September 30, 1999 are not necessarily indicative of the results to
be expected for the entire year.
2. SIGNIFICANT ACCOUNTING POLICIES
Impairment of Assets
The Partnership evaluates the recoverability of the net carrying value of
its real estate and related assets at least annually, and more often if
circumstances dictate. If this review indicates that the carrying value of
a property may not be recoverable, the Partnership estimates the future
cash flows expected to result from the use of the property and its
eventual disposition, generally over a five-year holding period. In
performing this review, management takes into account, among other things,
the existing occupancy, the expected leasing prospects of the property and
the economic situation in the region where the property is located.
If the sum of the expected future cash flows, undiscounted, is less than
the carrying amount of the property, the Partnership recognizes an
impairment loss, and reduces the carrying amount of the asset to its
estimated fair value. Fair value is the amount at 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. Management estimates fair
value using discounted cash flows or market comparables, as most
appropriate for each property. Independent certified appraisers are
utilized to assist management, when warranted.
Impairment write-downs recorded by the Partnership do not affect the tax
basis of the assets and are not included in the determination of taxable
income or loss.
Because the expected cash flows used to evaluate the recoverability of the
assets and their fair values are based upon projections of future economic
events, such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates, the amounts ultimately realized
at disposition may differ materially from the net carrying values at the
balance sheet dates. The cash flows and market comparables used in this
process are based on good faith estimates and assumptions developed by
management. Unanticipated events and circumstances may occur and some
assumptions may not materialize; therefore, actual results may vary
materially from the estimates. The Partnership may in the future provide
additional write-downs, which could be material, if real estate markets or
local economic conditions change
Investments in Joint Ventures
-----------------------------
Certain properties were purchased in joint venture ownership with
affiliated partnerships that have the same, or affiliated, general
partners as the Partnership. Thus, the joint ventures are, for practical
purposes, not subject to joint control by such partnerships, but instead
are controlled by the partnerships' general partners, all of which are
under common ownership and control. Therefore, the Partnership's financial
statements present the assets, liabilities, revenues and expenses of the
joint ventures on a pro rata basis in accordance with the Partnership's
percentage of ownership.
7
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1999
NOTES TO FINANCIAL STATEMENTS
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., are wholly-owned subsidiaries of Presidio Capital Corp.
("Presidio"). Presidio AGP Corp., which is a wholly-owned subsidiary of
Presidio, is the Associate General Partner (together with the Investment
and Administrative General Partners, the "General Partners"). 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 (and affiliated with
other entities) 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.
Subject to the right of the limited partners under the Limited Partnership
Agreement, Presidio controls the Partnership through its indirect
ownership of the General Partners. Effective July 31, 1998, Presidio is
indirectly controlled by NorthStar Capital Investment Corp., a Maryland
corporation. Presidio has a management agreement with NorthStar Presidio
Management Company LLC ("NorthStar Presidio"), an affiliate of NorthStar
Capital Investment Corp., pursuant to which NorthStar Presidio provides
the day-to-day management of Presidio and its direct and indirect
subsidiaries and affiliates, including the Partnership. For each of the
nine months ended September 30, 1999 and 1998, reimbursable expenses
incurred by NorthStar Presidio related to the Partnership amounted to
approximately $76,500.
On October 21, 1999, Presidio and certain of its affiliates entered into a
Services Agreement with AP-PCC III, L.P. (the "Agent") pursuant to which
the Agent was retained to provide asset management and investor relation
services to the Partnership and other entities affiliated with the
Partnership.
As a result of this agreement, the Agent has the duty to direct the day to
day affairs of the Partnership, including, without limitation, reviewing
and analyzing potential sale, financing or restructuring proposals
regarding the Partnership's assets, preparation of all Partnership
reports, maintaining Partnership records and maintaining bank accounts of
the Partnership. The Agent is not permitted, however, without the consent
of Presidio, or as otherwise required under the terms of the Partnership's
Agreement of Limited Partnership (the "Partnership Agreement") to, among
other things, cause the Partnership to sell or acquire an asset or file
for bankruptcy.
In order to facilitate the provision by the Agent of the asset management
services and the investor relation services, effective October 25,1999,
the officers and directors of the General Partner resigned and nominees of
the Agent were elected as the officers and directors of the General
Partner. The Agent is an affiliate of Winthrop Financial Associates, a
Boston based company that provides asset management services, investor
relation services and property management services to over 150 limited
partnerships which own commercial property and other assets. The General
Partner does not believe that this transaction will have a material effect
on the operations of the Partnership.
8
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1999
NOTES TO FINANCIAL STATEMENTS
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
(CONTINUED)
The Partnership has 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 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,
1999 and 1998, Resources Supervisory was entitled to receive $91,824 and
$83,884, respectively, of which $74,641 and $69,537 was paid to
unaffiliated management companies, respectively for property management
services and the balance was retained by Resources Supervisory. For the
nine months ended September 30, 1999 and 1998, Resources Supervisory was
entitled to receive $294,200 and $249,398, respectively, of which $243,439
and $208,324 was paid to unaffiliated management companies, respectively
for property management services and the balance was retained by Resources
Supervisory.
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. The Administrative General Partner received $50,000 for
each of the quarters ended September 30, 1999 and 1998. The Administrative
General Partner received $150,000 for each of the nine-month periods ended
September 30, 1999 and 1998.
During 1998, for managing the affairs of the Partnership, the
Administrative General Partner was 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 the three and nine months ended September 30, 1998, the
Administrative General Partner received $321,358 and $964,074,
respectively. Pursuant to the amendment to the Partnership Agreement which
became effective on August 20, 1999, the annual partnership management fee
for 1999 has been reduced to $973,293. For the three and nine months ended
September 30, 1999, the Managing General Partner received $165,289 and
$808,005, respectively. Further, the Partnership Agreement has been
amended (for the year 2000 and beyond) so that the partnership management
fee will be calculated equal to 1.25% of the Gross Asset Value of the
Partnership, defined as the appraised value of all the assets of the
Partnership based on the most recent appraisal.
9
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1999
NOTES TO FINANCIAL STATEMENTS
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
(CONTINUED)
The General Partners are allocated 5% of the net income of the
Partnership, which amounted to $58,883 and $42,923 for the quarters ended
September 30, 1999 and 1998, respectively. Net income allocated to the
General Partners amounted to $136,736 and $110,521 for the nine months
ended September 30, 1999 and 1998, respectively. They are also entitled to
receive 5% of distributions, which amounted to $0 and $35,590 for the
quarters ended September 30, 1999 and 1998, respectively. Distributions
allocated to the General Partners amounted to $71,180 and $106,770 for
the nine months ended September 30, 1999 and 1998, respectively.
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. All
fees received by the General Partners are subject to certain limitations
as set forth in the Partnership Agreement.
From July 1996 through March 12, 1998, Millennium Funding III Corp.
("MFIII"), a wholly owned indirect subsidiary of Presidio, purchased
45,320 units of the Partnership from various limited partners.
In connection with a tender offer for units of the Partnership made on
March 12, 1998 (the "Offer") by Olympia Investors, L.P. ("Olympia"),
Olympia and Presidio entered into an agreement dated March 6, 1998 (the
"Agreement"). Subsequent to the expiration of the offer, Olympia announced
that it had accepted for payment 32,750 units properly tendered pursuant
to the Offer. Pursuant to the Agreement, MFIII purchased 50% of those
units owned by Olympia as a result of the Offer, or 16,375 units, for
$91.73 per unit. Presidio may be deemed to beneficially own the remaining
units owned by Olympia as a consequence of the Agreement.
Subsequent to the expiration of the tender offer described above, MFIII
purchased an additional 18,769 limited partnership units from August 1998
through July 1999. The total number of units purchased by MFIII represents
approximately 13.7% of the outstanding limited partnership units of the
Partnership.
10
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1999
NOTES TO FINANCIAL STATEMENTS
4. REAL ESTATE
The following table is a summary of the Partnership's real estate as of:
September 30, 1999 December 31, 1998
------------------ -----------------
Land $ 11,669,652 $ 11,669,652
Buildings and improvements 58,201,544 57,791,035
------------ ------------
69,871,196 69,460,687
Less: Accumulated depreciation (23,582,961) (22,228,503)
------------ ------------
$ 46,288,235 $ 47,232,184
============ ============
5. DISTRIBUTIONS PAYABLE
September 30, 1999 December 31, 1998
------------------ -----------------
Limited partners $ - $676,211
General partners - 35,590
-------- --------
$ - $711,801
======== ========
Such distributions were paid in the subsequent quarters.
6. DUE TO AFFILIATES
September 30, 1999 December 31, 1998
------------------ -----------------
Partnership asset management fee $165,289 $321,358
Property management fee 17,183 107,848
Non-accountable expense
reimbursement 50,000 50,000
-------- --------
$232,472 $479,206
======== ========
Such amounts were paid in the subsequent quarters.
11
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1999
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES
In May 1993, limited partners in the Partnership commenced an action (the
"Action") 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 the purchasers of limited partnership interests in the Partnership. On
April 7, 1994 the plaintiffs were granted leave to file an amended
complaint on behalf of a class consisting of all the purchasers of limited
partnership interests in the Partnership, Integrated Resources High Equity
Partners, Series 85 and High Equity Partners L.P. - Series 88
(collectively, the "HEP Partnerships").
In November 1995, the original plaintiffs and intervening plaintiffs filed
a consolidated class and derivative action complaint (the "Consolidated
Complaint") alleging various state law class and derivative claims,
including claims for breach of fiduciary duty; breach of contract; unfair
and fraudulent business practices under California Bus. & Prof. Code
Section 17200; negligence; dissolution, accounting, receivership and
removal of general partner; fraud; and negligent misrepresentation.
In early 1996, the parties submitted a proposed settlement to the Court
(the "Proposed Settlement"), which contemplated a reorganization of the
three HEP Partnerships into a single real estate investment trust
("REIT"), pursuant to which approximately 85% of the shares of the REIT
would have been allocated to investors in the three HEP Partnerships
(assuming each of the HEP Partnerships participated in the
reorganization), and approximately 15% of the shares would have been
allocated to the HEP General Partners. In early 1997, the Court declined
to grant final approval of the Proposed Settlement because the Court was
not persuaded that the Proposed Settlement was fair, adequate or
reasonable as to the proposed class.
In July 1997, the plaintiffs filed an amended complaint, which generally
asserts the same claims as the earlier Consolidated Complaint but contains
more detailed factual assertions and eliminates some claims they had
previously asserted. The HEP General Partners challenged the amended
complaint on legal grounds and filed demurrers and a motion to strike. In
October 1997, the Court granted substantial portions of the HEP General
Partners' motions. Thereafter, the HEP General Partners served answers
denying the allegations and asserting numerous defenses.
12
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1999
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In February 1998, the Court certified three separate plaintiff classes
consisting of the current owners of record of HEP Units (but excluding all
defendants or entities related to such defendants), and appointed class
counsel and liaison counsel.
In mid-1998, the parties actively engaged in negotiations concerning a
possible settlement of the Action. In September 1998, the parties reached
an agreement in principle, and, during the following months, negotiated a
more formal settlement stipulation (the "Settlement Stipulation"), which
they executed in December 1998. The Settlement Stipulation was submitted
to the Court for preliminary approval in early January 1999. In February
1999, the Court gave preliminary approval to the Settlement Stipulation
and directed that notice of the proposed settlement be sent to the
previously certified class. The settlement contemplates (I) amendments to
the Partnership Agreement that would modify the existing fee structure;
(II) a tender offer whereby the General Partners would purchase up to 6.7%
of the units from limited partners; and (III) that the General Partners
would use their best efforts to effect a reorganization of the HEP
Partnerships into separate REIT's or other publicly traded entities. At a
hearing held on April 29, 1999, the Court approved the settlement in its
entirety and directed entry of judgement to that effect. In August 1999,
the settlement was consummated following approval of the amendments to the
Partnership Agreement.
At a hearing held on April 29, 1999, the Court also awarded a total of
$2.5 million in attorneys' fees and reimbursement of expenses to Class
and objectors' counsel. Of that total, $875,000 is to be paid by the
General Partners and the balance by the HEP Partnerships. In connection
with the Settlement Stipulation, the Partnership paid $602,667 during
the nine months ended September 30, 1999. The Limited Partnership
Agreement provides for indemnification of the General Partners and their
affiliates in certain circumstances. The Partnership has agreed to
reimburse the General Partners for their actual costs incurred in
defending this litigation and the costs of preparing settlement
materials. Through September 30, 1999, the Partnership paid the
General Partners a total of $1,034,510 for these costs.
13
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Working capital reserves are temporarily invested in short-term money market
instruments and together with cash flow from operations, are expected to be
sufficient to fund future capital improvements to the Partnership's properties.
As of September 30, 1999, total working capital reserves amounted to
approximately $5,631,000.
The Partnership intends to distribute to its partners less than all of its
future cash flow from operations in order to assure adequate reserves for
capital improvements and capitalized lease procurement costs.
During the nine months ended September 30, 1999, cash and cash equivalents
increased $1,435,711 as a result of net 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 operation of its properties (principally
rents received from tenants less property operating expenses) which amounted to
$3,981,623 for the nine months ended September 30, 1999. The Partnership used
$410,509 for capital expenditures related to capital and tenant improvements to
the properties and $2,135,403 for distributions to partners during the nine
months ended September 30, 1999.
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 vacancy at Tri-Columbus is currently being marketed
to a variety of potential tenants. If and when a replacement tenant is secured,
it is likely that capital expenditures will be required to fund tenant
improvements and leasing commissions. Capital and tenant improvements and
leasing commissions may in the future exceed the Partnership's cash flow from
operations. In that event, the Partnership would utilize its remaining working
capital reserves, reduce distributions, or sell one or more properties. Except
as discussed above, management is not aware of any other trends, events,
commitments or uncertainties that will have a significant impact on liquidity.
RESULTS OF OPERATIONS
The Partnership experienced an increase in net income of approximately $319,000
for the three months ended September 30, 1999 as compared to the 1998 period,
primarily due to slightly higher rental revenues and lower costs and expenses.
Rental revenues increased $32,175 during the three months ended September 30,
1999 due to increases in revenues of $146,948 and $35,875 at 568 Broadway and
Seattle Tower, respectively, as a result of increases in overall rental rates,
partially offset by decreases of $109,564 and $20,474 in revenues at Melrose and
Tri-Columbus, respectively, due to the loss of tenants during the latter part of
1998.
14
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Costs and expenses decreased $261,050 during the three months ended September
30, 1999 as compared to the 1998 period, primarily due to lower operating
expenses and partnership management fees, partially offset by higher
depreciation and administrative expenses. Operating expenses decreased $162,979
during the 1999 period due primarily to a $41,000 decrease in bad debt expense
at various properties and a $95,481 reduction in professional fees at 568
Broadway related to tenant collection issues. The $156,069 decrease in
partnership management fees was due to an amendment to the partnership agreement
(see Note 3) approved in August 1999 reducing the fee for 1999. Depreciation
expense increased $26,869 during the 1999 period due to the capital additions
during 1998. Administrative expenses increased $23,189 for the three months
ended September 30, 1999 due to higher legal fees incurred in 1999 pursuant to
the Settlement Agreement related to the ongoing litigation and possible
reorganization of the Partnership (see Note 7).
Interest income increased $13,194 during the three months ended September 30,
1999 as compared to the same period in 1998 due to higher invested balances.
Other income increased $12,740 during the three months ended September 30, 1999
as compared to the same periods in 1998 due to a greater number of investor
transfers on which the Partnership earns a transfer fee.
The Partnership experienced an increase in net income of approximately $524,000
for the nine months ended September 30, 1999 as compared to the 1998 period,
primarily due to higher rental revenues, interest and other income. Costs and
expenses increased during the nine-month period in 1999 as compared to the same
period in the prior year.
Rental revenues increased $441,155 during the nine months ended September 30,
1999 due to increases in revenues of $364,721 and $106,912 at 568 Broadway and
Seattle Tower, respectively, as a result of increases in overall rental rates,
partially offset by decreases of $124,242 and $45,192 in revenues at
Tri-Columbus and Melrose, respectively, due to the loss of tenants during the
latter part of 1998.
Costs and expenses increased $30,111during the nine months ended September 30,
1999 as compared to the 1998 period primarily due to higher depreciation,
administrative expenses and property management fees, partially offset by lower
operating expenses and partnership management fees. The $285,821 decrease in
operating expenses was primarily due to a $60,611 reduction in repair and
maintenance costs at Matthews, a $41,000 decrease in bad debt expense at various
properties, and a $95,481 decrease in professional fees at 568 Broadway related
to tenant collection issues. The partnership management fee decreased $156,069
due to an amendment to the partnership agreement (see Note 3) approved in August
1999 reducing the fee for 1999. Depreciation expense increased $80,310 during
the 1999 period due to the capital additions during 1998. Administrative
expenses increased $346,889 for the nine months ended September 30, 1999 due to
higher legal fees incurred pursuant to the Settlement Agreement related to the
ongoing litigation and possible reorganization of the Partnership (see Note 7).
The $44,802 increase in property management fees during the 1999 period was due
to higher revenues, as previously discussed.
Interest income increased $30,654 during the nine months ended September 30,
1999 as compared to the 1998 period due to higher cash balances. Other income
increased $82,605 during the nine months ended September 30, 1999 as compared to
the same period in 1998 due to a greater number of investor transfers on which
the Partnership earns a transfer fee.
15
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Forward-looking Statements
When used in this quarterly report on Form 10-Q, the words "believes,"
"anticipates," "expects" and similar expressions are intended to identify
forward-looking statements. Statements looking forward in time are included in
this quarterly report on Form 10-Q pursuant to the "safe harbor" provision of
the Private Securities Litigation Reform Act of 1995. Such statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially, including, but not limited to, those set forth in
"management's discussion and analysis of financial condition and results of
operations." Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The
Partnership undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances occurring after the date hereof or
to reflect the occurrence of unanticipated events.
Year 2000 Compliance
The Year 2000 compliance issue concerns the inability of computerized
information systems and programs to accurately calculate, store or use a date
after December 31, 1999, as a result of the year being stored as a two digit
number. The Partnership is dependent upon the General Partner and its affiliates
for management and administrative services. This could result in system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
During the third quarter of 1999, the General Partner and its affiliates
completed their assessment of computer systems used in connection with the
management of the Partnership. The General Partner and its affiliates have
completed upgrading those systems where required. The Partnership has to date
not borne, nor is it expected that the Partnership will bear, any significant
costs in connection with the upgrade of those systems requiring remediation.
To date, the General Partner is not aware of any external agent or service
provider with a Year 2000 issue that would materially impact the Partnership's
results of operations, liquidity or capital resources. However, the General
Partner has no means of ensuring that external agents and service providers will
be Year 2000 compliant. The General Partner does not believe that the inability
of external agents or service providers to complete their Year 2000 resolution
process in a timely manner will have a material impact on the financial position
or results of operations of the Partnership. However, the effect of
non-compliance by external agents is not readily determinable.
16
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1999
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:
(i) Amendment to the Amended and Restated Agreement of Limited
Partnership dated August 20, 1999.
(ii) Guarantee by Presidio Capital Corp. dated August 20, 1999.
(b) Reports on Form 8-K:
None
17
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 1999
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 15, 1999 By:/s/Allan Rothschild
---------------------------
Allan Rothschild
(Duly Authorized Officer)
Dated: November 15, 1999 By:/s/Lawrence Schachter
---------------------------
Lawrence Schachter
(Principal Financial and
Accounting Officer)
18
<PAGE>
Exhibit (i)
APPENDIX A
AMENDMENT TO
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
HIGH EQUITY PARTNERS L.P. - SERIES 86
The amended and restated agreement of limited partnership (the
"Agreement") of High Equity Partners L.P. - Series 86, a Delaware limited
partnership, is hereby amended as follows:
1. Paragraph 9.4 of the Agreement is amended in its entirety to read as
follows:
9.4 Partnership Asset Management Fee. As compensation
for services rendered in managing the affairs of the
Partnership, the Administrative General Partner shall be
entitled to receive the Partnership Asset Management Fee,
which shall be an amount per annum equal to 1.25% of the Gross
Asset Value of the Partnership as of the last day of the
period in respect of which the Partnership Asset Management
Fee is payable (which amount shall be prorated for any partial
year) (it being understood that, notwithstanding anything to
the contrary in this Paragraph 9.4, the Partnership Asset
Management Fee payable for calendar year 1999 shall be
$312,139 less than an amount equal to 1.05% of Invested
Assets). The Partnership Asset Management Fee shall be paid
quarterly. For purposes of this Paragraph 9.4, the term "Gross
Asset Value" on a particular date means the gross asset value
of all assets owned by the Partnership on that date, as
determined by an appraisal of such assets by an independent
appraiser of national reputation selected by the General
Partners.
2. Paragraph 9.1 of the Agreement is amended by adding a new Paragraph
9.1.4 to read as follows:
9.1.4 If the Partnership is liquidated prior to December
31, 2008, the General Partners shall, at the time of the
liquidation, and in lieu and satisfaction of all other
obligations the General Partners and their affiliates might
then or thereafter have under or by reason of Paragraph 9
hereof, pay the Partnership an amount (the "Fee Give Back
Amount") equal to $2,861,277 (the "Original Fee Give Back
Amount"), reduced by 10% of the Original Fee Give Back Amount
for each full calendar year after 1998, and prorated for any
calendar year in which such liquidation occurs other than on
December 31 of that year. If the Partnership is liquidated on
or after December 31, 2008, neither the General Partners nor
their affiliates shall have any liability or obligation to pay
any Fee Give Back Amount. For purposes of this Paragraph
9.1.4, the term "liquidation" means a sale of all or
substantially all the property owned by the Partnership for
cash or property that is distributed to the Partners, but does
not include any
<PAGE>
transaction in which the Partnership is reorganized into a
separate, publicly traded real estate investment trust or
other entity whose shares are listed on a national securities
exchange or on the NASDAQ National Market System (a
"Reorganization") and, in addition, does not include any
transaction following a Reorganization, whether by the
successor to the Partnership in the Reorganization or
otherwise. For the avoidance of doubt, it is hereby understood
and agreed that, following a Reorganization, the General
Partners and their affiliates shall have no liability or
obligation to pay any Fee Give Back Amount.
3. Except as otherwise provided above, the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
___________, 1999.
GENERAL PARTNERS:
RESOURCES HIGH EQUITY, INC.
By:___________________________________
RESOURCES CAPITAL CORP.
By:___________________________________
PRESIDIO AGP CORP.
By: _______________________________
<PAGE>
EXHIBIT (ii)
GUARANTEE
Dated ____________, 1999
The undersigned, for good and valuable consideration, receipt of which is
hereby acknowledged, agrees as follows:
1. The undersigned hereby unconditionally and irrevocably guarantees
payment when due of all Fee Give Back Liabilities (as defined below) of the
General Partners (as defined below). For purposes of this Guarantee, the Term
(a) "Fee Give Back Liabilities" means all liabilities and obligations of the
General Partners to pay the Fee Give Back Amount (as defined in paragraphs 9.2,
9.1.4 and 9.1.3 of the amended and restated agreement of limited partnership, as
amended (collectively, the "Partnership Agreements"), or as amended in the
future, of Integrated Resources High Equity Partners, Series 85, a California
Limited Partnership, High Equity Partners L.P. - Series 86 and High Equity
partners L.P. - Series 88, respectively, and (b) "General Partners" has the
meaning given it in the respective Partnership Agreements.
2. The undersigned hereby agrees that it will not permit its Net Worth (as
defined below) at any time to be less than the aggregate amount of the Fee Give
Back Liabilities at that time. Notwithstanding the foregoing, however, the
undersigned may, at its option from time to time, substitute one or more
Substitute Guarantors (as defined below) to fulfill the undersigned's
obligations under section 1 and the first sentence of this section 2, as long as
the Net Worth of each Substitute Guarantor at any time it is a Substitute
Guarantor is not less than the aggregate amount of the Fee Give Back Liabilities
that Substitute Guarantor is then guaranteeing as a Substitute Guarantor.
However, Presidio Capital Corp. shall remain fully liable on this Guarantee to
the extent any substitute Guarantor fails or refuses to fulfill its obligations
under this Guarantee. For purposes of this Guarantee, the term (a) "Net Worth"
of a person or entity means, at a particular date, all amounts that would, in
conformity with generally accepted accounting principles in the United States of
America in effect at that time, be included in that person's or entity's net
worth or equity on that person's or entity's balance sheet at that date (without
including as a liability in the calculation of net worth indebtedness that is
subordinate to the Fee Give Back Liabilities), and (b) "Substitute Guarantor"
means any person or entity that executes and delivers a guarantee in the form of
section 1.
3. This Guarantee shall be governed by and construed in accordance with
the law of the State of California applicable to agreements made and to be
performed wholly within the state of California.
PRESIDO CAPITAL CORP.
By:_________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary information extracted from the financial
statements of the September 30, 1999 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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,655,876
<SECURITIES> 0
<RECEIVABLES> 466,650
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 62,599,911
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 60,054,528
<TOTAL-LIABILITY-AND-EQUITY> 62,599,911
<SALES> 0
<TOTAL-REVENUES> 8,885,796
<CGS> 0
<TOTAL-COSTS> 2,838,183
<OTHER-EXPENSES> 3,779,995
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,734,732
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,734,732
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,734,732
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
