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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
Commission file number 0-15753
HIGH EQUITY PARTNERS L.P. - SERIES 86
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(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
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(Address of principal executive offices)
(617) 234-3000
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(Registrant's telephone number, including area code)
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, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Balance Sheets--September 30, 2000 and December 31, 1999 3
Statements of Operations--Three and Nine Months Ended September 30, 2000
and 1999 4
Statement of Partners' Equity-- Nine Months Ended September 30, 2000 5
Statements of Cash Flows-- Nine Months Ended September 30, 2000 and 1999 6
Notes to Financial Statements 7 - 13
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 17
Part II. Other Information:
Legal Proceedings, Other Events and Exhibits
and Reports on Form 8-K 18
</TABLE>
2
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 2000
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
ASSETS
Real estate - net $46,315,682 $47,277,773
Cash and cash equivalents 16,465,000 12,675,936
Other assets 3,416,845 3,381,222
Receivables 204,613 78,570
----------- -----------
$66,402,140 $63,413,501
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued expenses $ 1,387,909 $ 1,774,695
Due to affiliates 326,624 466,528
----------- -----------
1,714,533 2,241,223
----------- -----------
Commitments and contingencies (Note 6)
PARTNERS' EQUITY:
Limited partners' equity (588,010
units issued and outstanding) 61,452,281 58,112,718
General partners' equity 3,235,326 3,059,560
----------- -----------
64,687,607 61,172,278
----------- -----------
$66,402,140 $63,413,501
=========== ===========
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 2000
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Rental Revenue $3,175,716 $2,901,252 $8,936,786 $8,885,796
---------- ---------- ---------- ----------
Costs and Expenses:
Operating expenses 763,793 863,771 2,665,051 2,838,183
Depreciation and amortization 560,693 514,576 1,591,688 1,543,728
Partnership management fee 276,624 165,289 708,778 808,005
Administrative expenses 138,979 218,731 785,069 1,134,062
Property management fee 82,110 91,824 254,820 294,200
---------- ---------- ---------- ----------
1,822,199 1,854,191 6,005,406 6,618,178
---------- ---------- ---------- ----------
Income before interest and other income 1,353,517 1,047,061 2,931,380 2,267,618
Interest income 215,256 116,323 548,149 364,804
Other income 25,750 14,280 35,800 102,310
---------- ---------- ---------- ----------
Net income $1,594,523 $1,177,664 $3,515,329 $2,734,732
========== ========== ========== ==========
Net income attributable to:
Limited partners $1,514,797 $1,118,781 $3,339,563 $2,597,996
General partners 79,726 58,883 175,766 136,736
---------- ---------- ---------- ----------
Net income $1,594,523 $1,177,664 $3,515,329 $2,734,732
========== ========== ========== ==========
Net income per unit of limited
partnership interest (588,010 units
outstanding) $ 2.58 $ 1.90 $ 5.68 $ 4.42
========== ========== ========== ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 2000
STATEMENT OF PARTNERS' EQUITY
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS' PARTNERS'
EQUITY EQUITY TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
Balance, January 1, 2000 $3,059,560 $58,112,718 $61,172,278
Net income for the nine
months ended September 30, 2000 175,766 3,339,563 3,515,329
---------- ----------- -----------
Balance, September 30, 2000 $3,235,326 $61,452,281 $64,687,607
========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 2000
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2000 1999
------------ ------------
Cash Flows From Operating Activities:
Net income $ 3,515,329 $ 2,734,732
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization 1,591,688 1,543,728
Straight line adjustment for stepped
lease rentals (29,833) (75,123)
Changes in asset and liabilities:
Accounts payable and accrued expenses (386,786) 410,105
Due to affiliates (139,904) (246,734)
Receivables (126,043) (223,410)
Other assets (273,984) (161,675)
------------ ------------
Net cash provided by operating activities 4,150,467 3,981,623
------------ ------------
Cash Flows From Investing Activities:
Improvements to real estate (361,403) (410,509)
------------ ------------
Cash Flows From Financing Activities:
Distributions to partners -- (2,135,403)
------------ ------------
Increase in Cash and Cash Equivalents 3,789,064 1,435,711
Cash and Cash Equivalents, Beginning of Year 12,675,936 10,220,165
------------ ------------
Cash and Cash Equivalents, End of Quarter $ 16,465,000 $ 11,655,876
============ ============
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 2000
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 l0-K for the year
ended December 3l, 1999.
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 three and
nine months ended September 30, 2000 are not necessarily indicative of the
results to be expected for the entire year.
2. SIGNIFICANT ACCOUNTING POLICIES
Investment in Joint Ventures
Certain properties were purchased in joint ventures with affiliated
partnerships that have the same or affiliated general partners as the
Partnership. The Partnership owns an undivided interest and is severally
liable for indebtedness it incurs in connection with its ownership interest
in those properties. 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.
Real Estate
Real Estate is carried at cost, net of adjustments for impairment. Repairs
and maintenance are charged to expense as incurred. Replacement and
betterments are capitalized. 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.
7
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 2000
NOTES TO FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Real Estate (continued)
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.
Revenue Recognition
The Securities and Exchange Commission released staff accounting bulletin
No. 101, "Revenue Recognition in Financial Statements" on December 3, 1999.
The Partnership has reviewed its revenue recognition policies and as a
result there will be no material change in the revenue recognized by the
Partnership.
3. RELATED PARTY TRANSACTION
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.
From August 28, 1997 to October 21, 1999, Presidio was party to a
management agreement with NorthStar Presidio Management Company LLC
("NorthStar Presidio"), an affiliate of NorthStar Capital Investment Corp.,
pursuant to which NorthStar Presidio provided the day-to-day management of
Presidio and its direct and indirect subsidiaries and affiliates, including
the Partnership. Effective October 21,1999, Presidio entered into a service
agreement with AP-PCC III, L.P. (the "Agent") pursuant to
8
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 2000
NOTES TO FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS (CONTINUED)
which the Agent was retained to provide the asset management and investor
relation services to the Partnership and other entities affiliated with the
Partnership previously provided by NorthStar Presidio. The Partnership does
not pay any of these fees to the Agent.
The Partnership had 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. Resources Supervisory in turn
sub-contracted with management companies to provide property management
services for specific properties. For the quarter ended September 30, 2000
Resources Supervisory was entitled to receive $82,110 for property
management services, $81,526 of which was paid to Kestrel Management L.P.
("Kestrel"), an affiliate of the General Partners and the Agent, and $584
of which was paid to an unaffiliated management company. For the quarter
ended September 30, 1999 Resources Supervisory was entitled to receive
$91,824 for property management services, $74,641 of which was paid to
unaffiliated management companies with the balance being retained by
Resources Supervisory. For the nine months ended September 30, 2000
Resources Supervisory was entitled to receive $254,820 for property
management services, $152,415 of which was paid to Kestrel and $102,405 of
which was paid to unaffiliated management companies. For the nine months
ended September 30, 1999 Resources Supervisory was entitled to receive
$294,200 for property management services, $243,439 of which was paid to
unaffiliated management companies with the balance being retained by
Resources Supervisory. As of October 1, 2000 all property management
services for the Partnership were being performed directly by Kestrel and
Resources Supervisory was no longer performing any property management
services.
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, 2000 and 1999. The Administrative
General Partner received $150,000 for each of the nine-month periods ended
September 30, 2000 and 1999.
For managing the affairs of the Partnership, the Managing General Partner
is also entitled to receive an annual partnership management fee. Pursuant
to the amendment to the Partnership Agreement, which became effective on
August 20, 1999, the annual partnership management fee for 1999 was reduced
to $973,293. Further, the Partnership Agreement was amended (for the year
2000 and beyond) so that the partnership management fee will be 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. For
the quarters ended September 30, 2000 and 1999, the Managing General
Partner earned partnership management fees of $276,624 and $165,289,
respectively. For the nine-month periods ended September 30, 2000 and 1999,
the Managing General Partner earned partnership management fees of $708,778
and $808,005, respectively.
9
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 2000
NOTES TO FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS (CONTINUED)
The General Partners are allocated 5% of the net income of the Partnership
which amounted to $79,726 and $58,883 for the quarters ended September 30,
2000 and 1999, respectively. Net income allocated to the General Partners
amounted to $175,766 and $136,736 for the nine months ended September 30,
2000 and 1999 respectively. The General Partners are also entitled to
receive 5% of distributions, which amounted to $71,180 for the nine months
ended September 30, 1999.
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., 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, Presidio purchased 50% of those units owned by Olympia as a
result of the Offer, or 16,375 units, for $91.73 per unit. In addition,
Olympia had the right to cause Presidio to purchase its remaining units for
a price based on procedures set forth in the agreement. Olympia recently
exercised this right, and Millennium Funding III, LLC, an affiliate of the
General Partners, acquired an additional 16,375 units.
Subsequent to the expiration of the tender offer described above,
Millennium Funding III Corp. purchased an additional 17,471 limited
partnership units from August 1998 through May 1999.
Pursuant to the settlement of class action lawsuit (see Note 7), Millennium
Funding III LLC completed a tender offer in January 2000, in which it
purchased 39,596 limited partnership units (representing approximately 6.7%
of the outstanding units) for $103.05 per unit or $4,080,368 in total. As a
result of these purchases as well as the other purchases of units by the
affiliates of the General Partners, affiliates of the General Partners own
139,649 units representing approximately 23.75% of the total outstanding
units.
10
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 2000
NOTES TO FINANCIAL STATEMENTS
4. REAL ESTATE
The following table is a summary of the Partnership's real estate as of:
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
Land $ 11,669,652 $ 11,669,652
Buildings and improvements 59,906,687 59,545,284
----------- -------------
71,576,339 71,214,936
Less: Accumulated depreciation (25,260,657) (23,937,163)
----------- -------------
$ 46,315,682 $ 47,277,773
============ ============
5. DUE TO AFFILIATES
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
Partnership management fee $ 276,624 $ 330,577
Property management fee -- 35,951
Non-accountable expense reimbursement 50,000 100,000
--------- ---------
$ 326,624 $ 466,528
========= =========
Such amounts were paid in the subsequent quarters.
6. COMMITMENTS AND CONTINGENCIES
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.
a) The Broadway Joint Venture's action for rent against Solo Press was tried
in 1992 and resulted in a judgment in favor of the Broadway Joint Venture
for rent owed. The Partnership believes this will result in dismissal of
the action brought by Solo Press against the Broadway Joint Venture. Since
the facts of the other actions which involve material claims or
counterclaims are substantially similar, the Partnership believes that the
Broadway Joint Venture will prevail in those actions as well.
11
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 2000
NOTES TO FINANCIAL STATEMENTS
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 alleged that the erecting 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
the property. The suit seeks a judgment requiring removal of the sidewalk
shed (since removed), 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.
7. SETTLEMENT OF LAWSUIT
In April 1999, the California Superior Court approved the terms of the
settlement of a class action and derivative litigation involving the
Partnership. Under the terms of the settlement, the General Partners agreed
to take the actions described below subject to first obtaining the consent
of limited partners to amendments to the Agreement of Limited Partnership
of the Partnership summarized below. The settlement became effective in
August 1999 following approval of the amendments. As amended, the
Partnership Agreement (a) provides for a Partnership Asset Management Fee
equal to 1.25% of the Gross Asset Value of the Partnership for 2000 and
thereafter and a fixed 1999 Partnership Asset Management Fee of $973,293 or
$312,139 less than the amount that would have been paid for 1999 under the
prior formula and (b) fixes the amount that the General Partners will be
liable to pay to limited partners upon liquidation of the Partnership as
repayment of fees previously received (the "Fee Give-Back Amount").
As of December 31, 1999, the Fee Give-Back Amount was $4.38 per Unit which
amount will be reduced by approximately $.49 per Unit for each full
calendar year after 1999 in which liquidation does not occur. As amended,
the Partnership Agreement provides that, upon a reorganization of the
Partnership into a real estate investment trust or other public entity, the
General Partners will have no further liability to pay the Fee Give-Back
Amount. In accordance with the terms of the settlement, Presidio Capital
Corp., an affiliate of the General Partners, guaranteed payment of the Fee
Give-Back Amount.
As required by the settlement, an affiliate of the General Partners,
Millennium Funding III, LLC, made a tender offer to limited partners to
acquire up to 39,596 Units (representing approximately 6.7% of the
outstanding Units) at a price of $103.05 per Unit. The offer closed in
January 2000 and all 39,596 Units were acquired in the offer.
12
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 2000
NOTES TO FINANCIAL STATEMENTS
7. SETTLEMENT OF LAWSUIT (CONTINUED)
The final requirement of the settlement obligated the General Partners to
use their best efforts to reorganize the Partnership into a real estate
investment trust or other entity whose shares were listed on a national
securities exchange or on the NASDAQ National Market System. A Registration
Statement was filed with the Securities and Exchange Commission on February
11, 2000 with respect to the restructuring of the Partnership into a
publicly-traded real estate investment trust. The Registration Statement
has not yet become effective and the consent of a majority of limited
partners will be needed to effect the restructuring.
13
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The matters discussed in this form 10-Q contain certain forward-looking
statements and involve risks uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the
disclosures contained in this Form 10-Q and the other filings with the
Securities and Exchange Commission made by the Partnership from time to
time. The discussion of the Partnership's liquidity, capital resources and
results of operations, including forward looking statements pertaining to
such matters, does not take into account the effects of any changes to the
Partnership's operations. Accordingly, actual results could differ
materially from those projected in the forward-looking statements as a
result of a number of factors, including those identified herein.
This item should be read in conjunction with the financial statements and
other items contained elsewhere in the report.
Liquidity and Capital Resources
The Partnership is engaged in the business of operating and holding for
investment previously acquired income-producing properties, consisting of
office buildings, shopping centers and other commercial and industrial
properties such as industrial parks and warehouses. The Partnership holds
an interest in ten properties, one of which, Melrose Crossing, is currently
being marketed for sale. The Partnership generates rental revenues from the
commercial properties and is responsible for each property's operating
expenses as well as its administrative costs.
The Partnership had $16,465,000 in cash and cash equivalents at September
30, 2000. Cash and cash equivalents are temporarily invested in short term
instruments and together with cash flow from operations are expected to be
sufficient to fund future capital improvements to the Partnership's
properties.
The Partnership's level of liquidity based upon cash and cash equivalents
increased by $3,789,064 at September 30, 2000 as compared to December 31,
1999. The increase in cash and cash equivalents at September 30, 2000 is
due to $4,150,467 of cash provided by operating activities which was
partially offset by $361,403 of cash used for capital expenditures. 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.
The Partnership expects to continue to utilize a portion of its cash flow
from operations and its reserves to pay for various capital and tenant
improvements to its properties and for leasing commissions. Vacancies at
Mathew Festival and Commonwealth are currently being marketed to a variety
of potential tenants. The Partnership is currently funding operating
expenses at these locations from cash reserves. If and when replacement
tenants are 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.
14
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
Except as discussed above, management is not aware of any other trends,
events, commitments, or uncertainties that will have a significant impact
on liquidity.
As discussed in "Item 1. Financial Statements-Note 7", the Partnership
entered into a settlement agreement relating to a class action lawsuit. In
light of the current implementation of the settlement and the filing of the
Registration Statement pursuant to which the General Partners are using
their best efforts to reorganize the Partnership into a real estate
investment trust, the General Partners have suspended any distributions
until such reorganization is either approved or disapproved.
Results of Operations
For the nine months ended September 30, 2000, the Partnership experienced
an increase of $780,597 in net income to $3,515,329 from $2,734,732 for the
nine months ended September 30, 1999. The increase was due to an increase
in rental revenue of $50,990, a reduction in costs and expenses of $612,772
as well as an increase in interest income of $183,345 which was partially
offset by a decrease in other income of $66,510. The Partnership
experienced an increase of $416,859 in net income to $1,594,523 for the
three months ended September 30, 2000 from $1,177,644 for the three months
ended September 30, 1999. The increase in net income was due to an increase
in rental income of $274,464, decrease in costs and expenses of $31,992,
and an increase in interest income of $98,933.
Rental revenues for the nine months ended September 30, 2000 increased
$50,990 to $8,936,786 from $8,885,796 for the nine months ended September
30, 1999. The increase resulted from the rental of vacant spaces at
Commonwealth Industrial Park and overall rental rate increase on new
leasing activity.
Rental revenues for the three months ended September 30, 2000 increased
$274,464 to $3,175,716 from $2,901,252 for the same period in 1999. Rental
revenues increased primarily due to the leasing of vacant space at
Commonwealth Industrial Park along with higher rental rates at other
properties.
The decrease in costs and expenses for the nine months ended September 30,
2000 as compared to 1999, was primarily due to decreases in administrative
expenses of ($348,993), partnership management fees ($99,227), operating
expenses ($173,132) and property management fees ($39,380). These decreases
were partially offset by an increase in depreciation and amortization
($47,960).
Administrative expenses decreased due to legal expenses associated with the
conversion of the Partnership to a REIT were less than the legal fees
associated with the class action litigation.
Partnership asset management fees decreased for the first nine months of
2000 as compared to the first nine months of 1999 as a result of an
amendment to the Partnership Agreement which changed the calculation of
such fee to 1.25% of gross asset value of the partnership. (See Item 1
Financial Statements Note - 3.)
15
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Results of Operations (continued)
Operating expenses decreased primarily due to parking lot maintenance at
Melrose Crossing decreasing by approximately $40,000 and real estate taxes
reductions of approximately $75,000. Depreciation and amortization expense
increased due to capital and tenant improvements in 1999 and 2000.
The decrease in costs and expenses of $31,992 for the three months ended
September 30, 2000 as compared to 1999 was primarily due to a decrease in
operating expenses ($99,978), property management fees ($9,714), and
administrative expenses ($79,752). These decreases were partially offset by
an increase in depreciation and amortization ($46,117) due to major
improvements at Commonwealth Industrial Park, as well as an increase in
partnership management fee of ($111,335).
Interest income increased during the three and nine months ended September
30, 2000 as compared to the same period in 1999 due to higher cash
balances. Other income increased during the three months ended September
30, 2000 due to the receipt of more investor transfer fees. However, other
income decreased during the nine months ended September 30, 2000 due to the
receipt of fewer investor transfer fees.
Inflation is not expected to have a material impact on the Partnership's
operations or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership is not subject to market risk as its cash and cash
equivalents are invested in short term money market mutual funds. The
Partnership has no loans outstanding.
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 2000
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial schedule is filed as an exhibit to this report.
(b) Reports on Form 8-K:
No report of Form 8-K was filed during this period.
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HIGH EQUITY PARTNERS L.P. - SERIES 86 - FORM 10-Q - SEPTEMBER 30, 2000
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 ___, 2000 By: /S/ MICHAEL L. ASHNER
-------------------------------
Michael L. Ashner
President and Director
(Principal Executive Officer)
Dated: November ___, 2000 By: /S/ CAROLYN B. TIFFANY
-----------------------------------
Carolyn B. Tiffany
Vice President and Treasurer
(Principal Financial and Accounting
Officer)
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