UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d)
--- of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1998
or
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition period from ______ to ______
Commission File Number: 33-2294
PARTICIPATING DEVELOPMENT FUND 86
Exact Name of Registrant as Specified in its Charter
Connecticut 06-1153833
State or Other Jurisdiction of I.R.S. Employer Identification No.
Incorporation or Organization
3 World Financial Center, 29th Floor,
New York, NY Attn.: Andre Anderson 10285
Address of Principal Executive Offices Zip Code
(212) 526-3183
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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 ____
<PAGE>
2
<TABLE>
BALANCE SHEETS
<CAPTION>
At September 30, At December 31,
1998 1997
(unaudited) (audited)
--------------- --------------
<S> <C> <C>
Assets Real estate, at cost:
Land $ -- $ 8,387,590
Buildings and personal property -- 11,450,426
Tenant improvements -- 915,023
----------- -----------
-- 20,753,039
Less accumulated depreciation -- (4,372,698)
----------- -----------
-- 16,380,341
Real estate assets held for disposition 16,659,747 --
Cash and cash equivalents 595,902 739,170
Restricted cash 46,201 39,381
Accounts receivable 73,294 44,091
Deferred leasing costs, net of accumulated
amortization of $173,403 in 1997 -- 180,242
Incentives to lease, net of accumulated
amortization of $113,606 in 1997 -- 123,652
Deferred rent receivable -- 195,868
Prepaid expenses 10,122 5,816
----------- -----------
Total Assets $17,385,266 $17,708,561
=========== ===========
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 157,217 $ 93,906
Due to affiliates 17,382 6,953
Security deposits payable 42,009 39,381
Prepaid rent -- 71,594
----------- -----------
Total Liabilities 216,608 211,834
----------- -----------
Partners' Capital (Deficit):
General Partner (578,021) (568,179)
Limited Partners (1,124,000 units
outstanding) 17,746,679 18,064,906
----------- -----------
Total Partners' Capital 17,168,658 17,496,727
----------- -----------
Total Liabilities and
Partners' Capital $17,385,266 $17,708,561
=========== ===========
</TABLE>
<TABLE>
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
For the nine months ended September 30, 1998
<CAPTION>
General Limited
Partner Partners Total
--------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1997 $(568,179) $18,064,906 $17,496,727
Cash distributions (31,287) (1,011,600) (1,042,887)
Net income 21,445 693,373 714,818
--------- ----------- -----------
Balance at September 30, 1998 $(578,021) $17,746,679 $17,168,658
========= =========== ===========
</TABLE>
<PAGE>
3
<TABLE>
STATEMENTS OF OPERATIONS (UNAUDITED)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Income
Rental $492,670 $520,477 $1,570,218 $1,528,217
Interest 6,997 8,718 21,482 27,328
Other 3,220 20,660 10,680 24,480
-------- -------- ---------- ----------
Total income 502,887 549,855 1,602,380 1,580,025
-------- -------- ---------- ----------
Expenses
Property operating 126,133 138,725 397,163 382,632
Depreciation and
amortization -- 160,890 301,455 481,444
General and administrative 77,424 55,314 188,944 159,366
-------- -------- ---------- ----------
Total expenses 203,557 354,929 887,562 1,023,442
-------- -------- ---------- ----------
Net Income $299,330 $194,926 $ 714,818 $ 556,583
======== ======== ========== ==========
Net Income Allocated:
To the General Partner $ 8,980 $ 5,847 $ 21,445 $ 16,697
To the Limited Partners 290,350 189,079 693,373 539,886
-------- -------- ---------- ----------
$299,330 $194,926 $ 714,818 $ 556,583
======== ======== ========== ==========
Per limited partnership unit
(1,124,000 outstanding) $ .26 $ .17 $ .62 $ .48
----- ----- ----- -----
</TABLE>
<PAGE>
4
<TABLE>
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended September 30,
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 714,818 $ 556,583
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 301,455 481,444
Increase (decrease) in cash arising from
changes in operating assets and liabilities:
Restricted cash (6,820) (1,846)
Accounts receivable (29,203) 25,185
Prepaid expenses (4,306) (34,738)
Deferred rent receivable 8,411 2,170
Accounts payable and accrued expenses 63,311 (21,573)
Due to affiliates 10,429 3,297
Security deposits payable 2,628 (2,073)
Prepaid rent (71,594) --
----------- -----------
Net cash provided by operating activities 989,129 1,008,449
----------- -----------
Cash Flows From Investing Activities:
Additions to real estate assets (89,510) (13,873)
----------- -----------
Net cash used for investing activities (89,510) (13,873)
----------- -----------
Cash Flows From Financing Activities:
Cash distributions (1,042,887) (1,042,887)
----------- -----------
Net cash used for financing activities (1,042,887) (1,042,887)
----------- -----------
Net decrease in cash and cash equivalents (143,268) (48,311)
Cash and cash equivalents, beginning of period 739,170 736,429
----------- -----------
Cash and cash equivalents, end of period $ 595,902 $ 688,118
=========== ===========
Supplemental Disclosure of Non-Cash
Investing Activities:
Write-off of fully depreciated
tenant improvements $ 175,961 $ --
----------- -----------
Supplemental Disclosure of Non-Cash Operating Activities:
In connection with the General Partner's intent to sell the Partnership's
properties, deferred rent receivable, deferred leasing costs and incentives to
lease in the amounts of $187,457, $182,634 and $108,123, respectively, were
reclassified to "Real estate assets held for disposition."
</TABLE>
<PAGE>
5
NOTES TO THE FINANCIAL STATEMENTS
The unaudited financial statements should be read in conjunction with the
Partnership's annual 1997 audited financial statements within Form 10-K.
The unaudited financial statements include all normal and recurring accruals
which are, in the opinion of management, necessary to present a fair statement
of financial position as of September 30, 1998 and the results of operations for
the three and nine months ended September 30, 1998 and 1997, and cash flows for
the nine months ended September 30, 1998 and 1997, and the statement of changes
in partners' capital (deficit) for the nine months ended September 30, 1998.
Results of operations for the period are not necessarily indicative of the
results to be expected for the full year.
Certain prior year amounts have been reclassified in order to conform to the
current year's presentation.
On July 1, 1998, the Partnership's real estate assets were reclassified on the
balance sheet to "Real estate assets held for disposition." Accordingly, the
Partnership suspended depreciation and amortization in accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
No other significant events have occurred subsequent to fiscal year 1997, and no
material contingencies exist, which would require disclosure in this interim
report per Regulation S-X, Rule 10-01, Paragraph (a)(5).
<PAGE>
6
Part I, Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
The General Partner has begun marketing Sunnyvale R&D and 1899 Powers Ferry for
sale. While it is anticipated that the properties will be sold during the first
quarter of 1999, there can be no assurance that the sales will occur within this
time frame. On July 1, 1998, the Partnership's real estate assets were
reclassified on the balance sheet to "Real estate assets held for disposition."
Accordingly, the Partnership suspended depreciation and amortization in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of."
At September 30, 1998, the Partnership had cash and cash equivalents of
$595,902, compared with $739,170 at December 31, 1997. The decrease is primarily
due to cash distributions exceeding net cash provided by operating activities
for the period. The Partnership also maintains a restricted cash balance, which
is comprised of tenant security deposits. Restricted cash totaled $46,201 at
September 30, 1998, compared with $39,381 at December 31, 1997.
Accounts receivable totaled $73,294 at September 30, 1998, compared to $44,091
at December 31, 1997. The increase primarily reflects amounts due from former
1899 Powers Ferry tenants. Prepaid expenses totaled $10,122 at September 30,
1998, compared to $5,816 at December 31, 1997. The increase is primarily due to
the timing of payments for insurance fees.
Accounts payable and accrued expenses totaled $157,217 at September 30, 1998,
compared to $93,906 at December 31, 1997. The increase is primarily due to the
timing of payments for real estate taxes and administrative costs. Prepaid rent
totaled $-0- at September 30, 1998, compared to $71,594 at December 31, 1997.
The decrease is due to the timing of the collection of rental receipts.
Cobb County, Georgia notified the Partnership of its intent, under the powers of
eminent domain, to condemn a portion of the land at 1899 Powers Ferry for the
widening of Powers Ferry Road. On May 17, 1998, the Partnership received a
formal notice of condemnation from Cobb County, along with an offer from the
Department of Transportation, to reimburse the Partnership for damages to the
property not taken. On August 4, 1998, the Partnership submitted a proposed
counteroffer to the Department of Transportation and is currently awaiting a
response. After consultation with the real estate brokerage firm selected to
market the Partnership's properties, it appears that the condemnation will not
have as material an impact on the value of the property as originally
anticipated.
The Partnership will pay a cash distribution to the Limited Partners of $.30 per
Unit for the three months ended September 30, 1998 on or about November 23,
1998. Since inception, the Partnership has paid total cash distributions of
$43.06 per original $50 Unit, including $23.66 per Unit in return of capital
payments which have reduced the Unit size from $50 per Unit to $26.34 per Unit.
As of September 30, 1998, lease levels at each of the properties were as
follows: Sunnyvale R&D - 100%; 1899 Powers Ferry - 83%.
<PAGE>
7
Tandem Computers Inc. ("Tandem"), which leases 100% of the Sunnyvale property,
continues to sublease the entire space to a computer networking company through
the expiration of its lease on March 31, 1999. Tandem has elected not to
exercise its option to renew its lease for an additional five years, and will
vacate the property in March. The Partnership commenced the active marketing of
the property in October 1998 and anticipates completing a sale of the property
by the first quarter of 1999.
Results of Operations
The Partnership's operations resulted in net income of $299,330 and $714,818 for
the three and nine months ended September 30, 1998, respectively, compared to
$194,926 and $556,583 for the comparable periods in 1997. The increase is
primarily due to a decrease in depreciation and amortization expense from the
reclassification of properties as "Real estate assets held for disposition" on
July 1, 1998.
Rental income totaled $492,670 and $1,570,218 for the three and nine months
ended September 30, 1998, respectively, compared with $520,477 and $1,528,217
for the comparable periods a year earlier. The decrease for the three months
ended September 30, 1998 is primarily attributable to lower occupancy at 1899
Powers Ferry for the 1998 period. The increase for the nine months ended
September 30, 1998 is primarily attributable to higher income at 1899 Powers
Ferry, reflecting higher average lease rates. Interest income declined to $6,997
and $21,482 for the three and nine months ended September 30, 1998,
respectively, from $8,718 and $27,328 for the comparable periods in 1997,
largely due to the Partnership's lower average cash balances in 1998. Other
income totaled $3,220 and $10,680 for the three and nine months ended September
30, 1998, respectively, compared with $20,660 and $24,480 for the comparable
periods in 1997. The decreases are primarily due to decreases in transfer agent
receipts and the receipt of a real estate tax refund in 1997.
Property operating expenses totaled $126,133 and $397,163 for the three and nine
months ended September 30, 1998, respectively, compared with $138,725 and
$382,632 for the comparable periods a year earlier. The increase for the
nine-month period is primarily due to higher real estate taxes and
administrative expenses at 1899 Powers Ferry, which were partially offset by
lower repairs and maintenance expenses.
Depreciation and amortization expense totaled $-0- and $301,455 for the three
and nine months ended September 30, 1998, respectively, compared with $160,890
and $481,444 for the corresponding periods in 1997. The Partnership suspended
depreciation and amortization on July 1, 1998 in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
General and administrative expenses were $77,424 and $188,944 for the three and
nine months ended September 30, 1998, respectively, compared with $55,314 and
$159,366 for the comparable periods in 1997. The increases are primarily due to
higher legal, administrative and audit fees.
<PAGE>
8
Part II Other Information
Items 1-5 Not applicable.
Item 6 Exhibits and reports on Form 8-K.
(a) Exhibits -
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended September 30, 1998.
<PAGE>
9
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.
PARTICIPATING DEVELOPMENT FUND 86
BY: PDF 86 Real Estate Services Inc.
General Partner
Date: November 16, 1998 BY: /s/Michael T. Marron
--------------------------
Michael T. Marron
Director, President and
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Sep-30-1998
<CASH> 642,103
<SECURITIES> 000
<RECEIVABLES> 73,294
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> 725,519
<PP&E> 16,659,747
<DEPRECIATION> 000
<TOTAL-ASSETS> 17,385,266
<CURRENT-LIABILITIES> 216,608
<BONDS> 000
000
000
<COMMON> 000
<OTHER-SE> 17,168,658
<TOTAL-LIABILITY-AND-EQUITY> 17,385,266
<SALES> 1,570,218
<TOTAL-REVENUES> 1,602,380
<CGS> 000
<TOTAL-COSTS> 397,163
<OTHER-EXPENSES> 490,399
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 714,818
<INCOME-TAX> 000
<INCOME-CONTINUING> 714,818
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 714,818
<EPS-PRIMARY> .62
<EPS-DILUTED> .62
</TABLE>
