1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
- ----- THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1998
-----------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ----- THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 33-2294
-------
PARTICIPATING DEVELOPMENT FUND 86
A Real Estate Limited Partnership
---------------------------------
Exact name of registrant as specified in its charter
Connecticut 06-1153833
----------- ----------
State or other jurisdiction of IRS employer identification No.
incorporation or organization
3 World Financial Center, 29th Floor
New York, New York Attn.: Andre Anderson 10285
- ------------------------------------------- -----
Address of principal executive offices Zip code
Registrant's Telephone Number, Including Area Code: (212) 526-3183
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTERESTS
--------------------------------------
(Title of Class)
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-----
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: Not applicable.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Prospectus dated February 21, 1986 filed with the Securities and
Exchange Commission pursuant to Rule 424(b) on February 27, 1986 are
incorporated by reference into Parts I, II, III, and IV of this report.
Portions of Parts I, II, III and IV are incorporated by reference to the
Partnership's Annual Report to Unitholders for the year ended December 31, 1998
filed as an exhibit under Item 14.
<PAGE>
2
PART I
Item 1. Business
(a) General Development of Business
-------------------------------
Participating Development Fund 86, a Real Estate Limited Partnership (the
"Partnership"), was formed on December 9, 1985 under the Uniform Limited
Partnership Act of the State of Connecticut. The Partnership was originally
formed to make five participating investments by entering into land purchase
leaseback transactions and concurrently funding leasehold mortgage loans secured
by commercial and multi-family residential real estate (the "Participating
Investments"). The Partnership made its Participating Investments in the
following five properties (the "Properties"): Sunnyvale R&D, a one-story
research and development building located in Sunnyvale, California; Foothills
Tech Plaza, two research and development/service buildings in Phoenix, Arizona;
Harris Pond Apartments, a 170-unit luxury apartment complex in Charlotte, North
Carolina; Pebblebrook Apartments, a 267-unit luxury apartment complex in
Overland Park (Kansas City), Kansas; and 1899 Powers Ferry, a four-story office
building located in Atlanta, Georgia. The Participating Investment in Harris
Pond Apartments was sold on November 1, 1989. As a result of defaults under
ground leases on the Sunnyvale, Phoenix, Atlanta and Overland Park Properties,
the Partnership took title to these Properties in their entirety. The
Partnership does not plan to invest in any additional property.
On June 15, 1992, Phoenix Realty Management, Inc., ("Phoenix") sent a notice of
resignation as co-General Partner of the Partnership to PDF86 Real Estate
Services Inc. ("RE Services" or the "General Partner"), formerly Shearson Lehman
Brothers/PDF 86, Inc. (See Item 10. "Certain Matters Involving Affiliates of RE
Services"), the Partnership's other co-General Partner. The effective date of
the resignation was June 16, 1992. As a result of the resignation of Phoenix, RE
Services, as sole General Partner, manages the affairs of the Partnership.
Foothills Tech Plaza was sold on September 29, 1995 for $10,011,512, net of
$226,000 in contracted roof repairs, and Pebblebrook Apartments was sold on May
23, 1996 for a net sales price of $10,210,955. Additional information regarding
these sales is incorporated by reference to Note 3 "Real Estate Investments" of
the Notes to the Financial Statements contained in the Partnership's Annual
Report to Unitholders for the year ended December 31, 1998 filed as an exhibit
under Item 14.
The Partnership engaged real estate brokers in 1998 to assist in selling the
Partnership's two remaining Properties, Sunnyvale R&D and 1899 Powers Ferry. On
March 19, 1999, the Partnership closed on the sale of 1899 Powers Ferry pursuant
to a purchase offer executed in February 1999. See Item 7 for a discussion of
such sale. The Partnership has executed a letter of intent with a buyer to
purchase Sunnyvale R&D and is currently negotiating a purchase and sale
agreement. It is currently anticipated that Sunnyvale R&D will be sold and the
Partnership liquidated in 1999, however, there can be no assurance that
Sunnyvale R&D will be sold within this time frame, or that the sale will result
in a particular price.
Additional information regarding the historical development of business is
incorporated by reference to Note 1 "Organization," Note 2 "Significant
Accounting Policies" and Note 3 "Real Estate Investments" of the Notes to the
Financial Statements contained in the Partnership's Annual Report to Unitholders
for the year ended December 31, 1998 filed as an exhibit under Item 14.
(b) Financial Information About Industry Segment
--------------------------------------------
The Partnership's sole business is the ownership and operation of the
Properties. All of the Partnership's revenues, operating profit or losses and
assets relate solely to such industry segment.
(c) Narrative Description of Business
---------------------------------
Incorporated by reference to Note 1 "Organization" and Note 3 "Real Estate
Investments" of the Notes to the Financial Statements contained in the
Partnership's Annual Report to Unitholders for the year ended December 31, 1998
filed as an exhibit under Item 14.
<PAGE>
3
(d) Competition
-----------
Incorporated by reference to the section entitled "Property Profiles and Leasing
Update" contained in the Partnership's Annual Report to Unitholders for the year
ended December 31, 1998 filed as an exhibit under Item 14.
(e) Employees
---------
The Partnership has no employees.
Item 2. Properties
Description of Properties and material leases incorporated by reference to the
section entitled "Message to Investors" and Note 3 "Real Estate Investments" of
the Notes to the Financial Statements contained in the Partnership's Annual
Report to Unitholders for the year ended December 31, 1998, filed as an exhibit
under Item 14.
Item 3. Legal Proceedings
The Registrant is not subject to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Unit Holders during the fourth quarter of
1998.
PART II
Item 5. Market for the Partnership's Limited Partnership
Units and Related Security Holder Matters
(a) Market Information
------------------
There is no established trading market for the Units of the Partnership.
(b) Holders
-------
As of December 31, 1998, there were 7,376 holders of record, owning an aggregate
of 1,124,000 Units.
(c) Distributions
-------------
In consideration of the Partnership's marketing efforts, quarterly cash
distributions from operations were suspended commencing with the 1998 third
quarter distribution which would have been paid in November 1998. The General
Partner intends to pay a cash distribution shortly from the net proceeds of the
sale of 1899 Powers Ferry, which sale closed on March 19, 1999. Once the
remaining Property is sold, the General Partner will distribute the net
proceeds, together with the Partnership's remaining cash reserves (after payment
of, or provision for, the Partnership's liabilities and expenses), and dissolve
the Partnership.
The following distributions were paid to the Limited Partners for the two years
ended December 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
Cash Distributions Per Limited Partnership Unit
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
<S> <C> <C> <C> <C> <C>
1997 $0.30 $0.30 $0.30 $0.30 $ 1.20
1998 $0.30 $0.30 $0.00 $0.00 $ 0.60
</TABLE>
<PAGE>
4
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
For the Years Ended December 31, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
Dollars in thousands, except per Unit data
<S> <C> <C> <C> <C> <C>
Total revenues $ 2,095 $ 2,142 $ 2,964 $ 4,549 $ 4,589
Total expenses 1,218 1,427 2,035 2,975 3,139
Gain on sale of real estate -- -- 2,405 1,089 --
Net income 877 715 3,334 2,662 1,450
Total assets 17,660 17,709 18,301 27,446 36,106
Net income per Unit .76 .62 2.92 2.32 1.25
Cash distributions per
Limited Partnership Unit .90(3) 1.20 10.75(1) 9.79(2) 1.20
- ---------------------------------------------------------------------------------------------------------
<FN>
(1) Includes a special one time cash distribution of $0.55 per Unit paid on March 29, 1996, and $9.00 in
return of capital from the sale of Pebblebrook Apartments paid on August 30, 1996.
(2) Includes $8.59 in return of capital from the sale of Foothills Tech Plaza paid on November 24, 1995.
(3) Includes fourth quarter 1997 distribution and first and second quarter 1998 distributions which were
paid in 1998.
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
- -------------------------------
The Partnership engaged real estate brokers in 1998 to assist in selling the
Partnership's two remaining Properties, Sunnyvale R&D and 1899 Powers Ferry.
Accordingly, on July 1, 1998, the Partnership's real estate assets were
reclassified on the balance sheet to "Real estate assets held for disposition"
and 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."
On March 19, 1999, the Partnership closed on the sale of 1899 Powers Ferry
pursuant to a purchase offer executed in February 1999. The Property was sold to
Devon Realty (the "Buyer"), an unaffiliated entity, for a selling price of
approximately $7,674,000, net of closing adjustments. The selling price was
determined by arm's length negotiations between the Partnership and the Buyer.
The Partnership has executed a letter of intent with a buyer to purchase
Sunnyvale R&D and is currently negotiating a purchase and sale agreement. It is
currently anticipated that the Property will be sold and the Partnership
liquidated in 1999. However, there can be no assurance that Sunnyvale R&D will
be sold within this time frame, or that the sale will result in a particular
price.
In consideration of the Partnership's marketing efforts, quarterly cash
distributions from operations were suspended commencing with the 1998 third
quarter distribution which would have been paid in November 1998. The General
Partner intends to pay a cash distribution shortly from the net proceeds of the
sale of 1899 Powers Ferry, which sale closed on March 19, 1999. Once the
remaining Property is sold, the General Partner will distribute the net
proceeds.
At December 31, 1998, the Partnership had cash and cash equivalents of $756,758,
compared with $739,170 at December 31, 1997. The slight increase is primarily
due to net cash provided by operating activities for the period exceeding cash
distributions and additions to real estate.
Accounts receivable totaled $4,173 at December 31, 1998, compared to $44,091 at
December 31, 1997. The decrease is primarily due to the write-off of receivables
from two former tenants at 1899 Powers Ferry.
In connection with the General Partner's intent to sell the Partnership's
remaining properties, deferred rent receivable, deferred leasing costs and
incentives to lease were reclassified to "Real estate assets held for
disposition."
Accounts payable and accrued expenses totaled $191,616 at December 31, 1998,
compared to $93,906 at December 31, 1997. The increase is primarily due to the
timing of payments for Partnership servicing fees.
<PAGE>
5
A discussion of leasing activity and material leases at the Partnership's
Properties is incorporated by reference to the section entitled "Message to
Investors" and Note 3 "Real Estate Investments" of the Notes to the Financial
Statements, both contained in the Partnership's Annual Report to Unitholders for
the year ended December 31, 1998, filed as an exhibit under Item 14. As of
December 31, 1998, lease levels at each of the properties were as follows:
Sunnyvale R&D - 100%; 1899 Powers Ferry - 86%.
Market Risk
- -----------
Interest rate risk comprises the Partnership's principal exposure. The
Partnership has no long-term debt and its remaining Properties have no mortgage
debt. Accordingly, the Partnership's interest risk exposure is primarily limited
to interest earned on the Partnership's cash and cash equivalents, which are
invested at short-term rates. Such risk is not considered material to the
Partnership's operations.
Year 2000 Initiatives
- ---------------------
The Year 2000 compliance issue concerns the ability of computerized information
systems to accurately calculate, store or use a date after 1999. This could
result in computer system failures or miscalculations causing disruptions of
operations. The Year 2000 issue affects almost all companies and organizations.
The Partnership sold the Powers Ferry property on March 19, 1999 and executed a
letter of intent to sell the Sunnyvale property on March 12, 1999. It is
anticipated that a sale of Sunnyvale will be completed and the Partnership
dissolved prior to December 31, 1999. In the event that the Partnership is not
dissolved prior to December 31, 1999, potential Year 2000 issues relate to the
outside vendors which provide the Partnership's administrative services,
including accounting, tax preparation and transfer agent services. Such services
are reliant on computer systems, software products and equipment which are
expected to be Year 2000 compliant by December 31, 1999. The General Partner
continues to discuss Year 2000 compliance with these outside vendors. It is
anticipated that the cost of vendor compliance with Year 2000 issues will be
borne primarily by these vendors. Although it is not possible at the present
time to estimate the cost of this remediation work based on available
information, the General Partner does not expect such costs to have a material
adverse impact on the Partnership's business, results or operations or financial
condition.
The Partnership may also have potential Year 2000 issues related to vendors
which provide accounting and property management services to Sunnyvale as well
as Year 2000 issues related to property management systems at the property. Due
to the General Partner's intent to sell the Sunnyvale property and to liquidate
the Partnership before December 31, 1999, no assessment has been made by the
General Partner as to the potential adverse impact of Year 2000 related issues
at the property level.
Due to the General Partner's intent to sell Sunnyvale and dissolve the
Partnership before December 31, 1999, the General Partner currently does not
have Year 2000 contingency plans. In the event it appears that the Sunnyvale
property will not be sold during 1999, the General Partner intends to develop
and implement contingency plans in 1999. However, there is no certainty such
plans would fully mitigate any Year 2000 problems.
Results of Operations
- ---------------------
1998 Versus 1997
- ----------------
The Partnership's operations resulted in net income of $877,481 for the year
ended December 31, 1998, compared to $714,981 in fiscal 1997. The increase is
primarily due to the suspension of recording depreciation and amortization
expense in connection with reclassifying the Partnership's remaining real estate
assets as "Real estate assets held for disposition."
Rental income totaled $2,055,337 for the year ended December 31, 1998, unchanged
from $2,062,875 in fiscal 1997, reflecting stable leasing conditions at both
properties. Interest income decreased from $33,664 for the year ended December
31, 1997 to $28,123 for the year ended December 31, 1998, due to the
Partnership's lower average cash balances in 1998. Other income totaled $11,815
for the year ended December 31, 1998, compared with $45,631 in fiscal 1997. The
decrease is primarily due to the receipt of a real estate tax refund for 1899
Powers Ferry, recorded in 1997.
Property operating expenses totaled $542,683 for the year ended December 31,
1998, compared with $575,893 a year earlier. The slight decrease is primarily
due to lower repairs and maintenance expenses at 1899 Powers Ferry.
<PAGE>
6
General and administrative expenses totaled $373,656 for the year ended December
31, 1998, compared with $220,607 in fiscal 1997. The increases are primarily due
to higher Partnership administrative servicing costs and costs incurred to
market the properties for sale.
1997 Versus 1996
- ----------------
The Partnership's operations resulted in net income of $714,981 for the year
ended December 31, 1997, compared to $3,333,580 for the year ended December 31,
1996. Net income in 1996 included a gain from the sale of Pebblebrook Apartments
of $2,405,209. Excluding this gain, income before gain on sale of real estate
totaled $928,371 in 1996. The decrease from 1996 to 1997 is primarily a result
of the sale of Pebblebrook and the resulting reduction in rental income.
As a result of the sale of Pebblebrook Apartments, the following income and
expense categories decreased from 1996 to 1997: rental income, property
operating expense and depreciation and amortization. Rental income for the
Partnership's two remaining properties, Sunnyvale R&D and 1899 Powers Ferry (the
"Remaining Properties") totaled $2,062,875 for the year ended December 31, 1997,
largely unchanged from $2,065,537 in 1996.
Interest income totaled $33,664 for the year ended December 31, 1997, compared
to $201,466 for the year ended December 31, 1996. The decrease is largely due to
the Partnership's lower average cash balance in 1997.
Property operating expenses for the Remaining Properties totaled $571,035 for
the year ended December 31, 1997, compared with $817,102 in 1996. The decrease
is primarily a result of lower repairs and maintenance, real estate taxes and
administrative expenses at 1899 Powers Ferry. General and administrative
expenses totaled $220,607 for the year ended December 31, 1997, largely
unchanged from $225,804 in 1996, as decreases in legal, appraisal and other
professional fees were offset by increases in audit expense and printing costs.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders for
the year ended December 31, 1998 filed as an exhibit under Item 14.
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The General Partner of the Partnership is PDF86 Real Estate Services Inc. ("RE
Services"), formerly Shearson Lehman Brothers, Inc./PDF 86, Inc., an affiliate
of Lehman Brothers Inc. ("Lehman"). See section captioned "Certain Matters
Involving Affiliates of RE Services" for a description of the sale of certain of
Shearson Lehman Brothers, Inc. ("Shearson") domestic retail brokerage and asset
management business to Smith Barney, Harris Upham & Co. Incorporated, which
resulted in a change in the general partner's name. Brief descriptions of the
business experience of the directors and officers of the General Partner are
provided below. Each of the directors of the General Partner is elected
annually. There is no family relationship among any of the persons currently
serving as directors or officers of the General Partner.
Certain officers and directors of RE Services are now serving (or in the past
have served) as officers and directors of entities which act as general partners
of a number of real estate limited partnerships which have sought protection
under the provisions of the Federal Bankruptcy Code. The partnerships which have
filed bankruptcy petitions own real estate which has been adversely affected by
the economic conditions in the markets in which the real estate is located and,
consequently, the partnerships sought the protection of bankruptcy laws to
protect the partnership's assets from losses through foreclosure.
<PAGE>
7
The executive officers and directors of RE Services are listed below.
Name Office
---- ------
Rocco F. Andriola Director
Michael T. Marron Director, President and Chief Financial Officer
William T. McDermott Vice President
Rocco F. Andriola, 40, is a Managing Director of Lehman Brothers in its
Diversified Asset Group and has held such position since October 1996. Since
joining Lehman in 1986, Mr. Andriola has been involved in a wide range of
restructuring and asset management activities involving real estate and other
direct investment transactions. From June 1991 through September 1996, Mr.
Andriola held the position of Senior Vice President in Lehman's Diversified
Asset Group. From June 1989 through May 1991, Mr. Andriola held the position of
First Vice President in Lehman's Capital Preservation and Restructuring Group.
From 1986 to 1989, Mr. Andriola served as a Vice President in the Corporate
Transactions Group of Shearson Lehman Brothers' office of the general counsel.
Prior to joining Lehman, Mr. Andriola practiced corporate and securities law at
Donovan Leisure Newton & Irvine in New York. Mr. Andriola received a B.A. from
Fordham University, a J.D. from New York University School of Law, and an LL.M
in Corporate Law from New York University's Graduate School of Law.
Michael T. Marron, 35, is a Vice President of Lehman Brothers and has been a
member of the Diversified Asset Group since 1990 where he has actively managed
and restructured a diverse portfolio of syndicated limited partnerships. Prior
to joining Lehman Brothers, Mr. Marron was associated with Peat Marwick Mitchell
& Co. serving in both its audit and tax divisions from 1985 to 1989. Mr. Marron
received his B.S. degree from the State University of New York at Albany and an
M.B.A. from Columbia University.
William T. McDermott, 35, is a Vice President of Lehman Brothers and has been a
member of the Diversified Asset Group since 1998. Mr. McDermott joined Lehman
Brothers in 1993 and held various positions within the firm before joining the
Diversified Asset Group. Prior to joining Lehman Brothers, Mr. McDermott was a
financial analyst with Cantor Fitzgerald Inc. from 1991 - 1993 and was
associated with Arthur Andersen & Co. serving in both its audit and bankruptcy
consulting divisions from 1985 to 1991. Mr. McDermott received his B.B.A. degree
from the University of Notre Dame and is a Certified Public Accountant.
Certain Matters Involving Affiliates of RE Services
- ---------------------------------------------------
On July 31, 1993, Shearson Lehman Brothers, Inc. sold certain of its domestic
retail brokerage and asset management businesses to Smith Barney, Harris Upham &
Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson changed its
name to Lehman Brothers Inc. The transaction did not affect the ownership of the
Partnership's General Partner. However, the assets acquired by Smith Barney
included the name "Shearson." Consequently, the Shearson Lehman Brothers/PDF 86,
Inc. general partner changed its name to PDF86 Real Estate Services Inc. to
delete any reference to "Shearson."
Item 11. Executive Compensation
The General Partner and its Affiliates have received certain fees, commissions
and reimbursements for expenses incurred as provided for on pages 13 through 17
of the Prospectus which are contained under "Management Compensation" (See
Exhibit 3 incorporated herein by reference). The General Partner is entitled to
receive a share of cash distributed when and as cash distributions are made to
Unit Holders and a share of taxable income or taxable loss, and may be
reimbursed for certain out-of-pocket expenses. In addition, the General Partner
is entitled to receive various fees and distributions during the liquidation
stages of the Partnership. Descriptions of such fees, distribution allocations,
and reimbursements is incorporated by reference to Note 5 "Transactions with
Related Parties" and Note 6 "Partners' Capital (Deficit)" of the Notes to the
Financial Statements. Certain officers and directors of the General Partner are
employees of Lehman Brothers Inc. and are not compensated by the Partnership or
the General Partner for services rendered in connection with the Partnership.
<PAGE>
8
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security of Ownership of Certain Beneficial Owners
--------------------------------------------------
No person (including any "group" as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934) is known to the Registrant to be the beneficial
owner of more than five percent of the outstanding voting Interests as of
December 31, 1998.
(b) Security Ownership of Management
--------------------------------
No officer or director of the General Partner beneficially owned or owned of
record directly or indirectly any Interests as of December 31, 1998.
(c) Changes in Control
------------------
None.
Item 13. Certain Relationships and Related Transactions
(a) Transactions With Management and Others
---------------------------------------
Incorporated by reference to Note 5 "Transactions with Related Parties" and Note
6 "Partners' Capital (Deficit)" of the Notes to the Financial Statements
contained in the Partnership's Annual Report to Unitholders for the year ended
December 31, 1998 filed as an exhibit under Item 14.
(b) Certain Business Relationships
------------------------------
There have been no business transactions between any of the Directors and the
Partnership.
(c) Indebtedness of Management
--------------------------
No management person is indebted in any amount to the Partnership.
(d) Transactions With Promoters
---------------------------
There have been no transactions with promoters other than as described above in
(a).
<PAGE>
9
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(i) Index to Financial Statements
Balance Sheets at December 31, 1998 and 1997.......................(1)
Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996...................................(1)
Statements of Partners' Capital (Deficit)
for the Years Ended December 31, 1998, 1997 and 1996...............(1)
Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996...................................(1)
Notes to the Financial Statements..................................(1)
Independent Auditors' Report.......................................(1)
(a)(ii) Financial Statement Schedule
Independent Auditors' Report.......................................F-1
Schedule III - Real Estate and Accumulated Depreciation............F-2
(1) Incorporated by reference to the Partnership's Annual Report to
Unitholders for the year ended December 31, 1998.
(b) No reports on form 8-K were filed in the fourth quarter of the calendar year
1998.
(c) See Exhibit Index contained herein.
Exhibit
Number
- ------
3 Agreement of Limited Partnership of Participating Development Fund 86,
A Real Estate Limited Partnership. Reference is made to Exhibit A of
the Prospectus (the "Prospectus") contained in Amendment No. 2 to
Registrant's Form S-11 Registration Statement filed with the
Securities and Exchange Commission on December 20, 1985 (the
"Registration Statement").
13 Annual Report to Unitholders for the year ended December 31, 1998.
27 Financial Data Schedule
<PAGE>
10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: PDF86 Real Estate Services Inc.
General Partner
Date: March 29, 1999 BY: /s/Michael T. Marron
--------------------
Name: Michael T. Marron
Title: Director, President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
PDF86 REAL ESTATE SERVICES INC.
General Partner
Date: March 29, 1999 BY: /s/Rocco F. Andriola
--------------------
Name: Rocco F. Andriola
Title: Director
Date: March 29, 1999 BY: /s/Michael T. Marron
--------------------
Name: Michael T. Marron
Title: Director, President and Chief Financial Officer
Date: March 29, 1999 BY: /s/William T. McDermott
-----------------------
Name: William T. McDermott
Title: Vice President
Exhibit 13
Participating Development Fund 86
1998 Annual Report to Unitholders
<PAGE>
- --------------------------------------------------------------------------------
PARTICIPATING DEVELOPMENT FUND 86
- --------------------------------------------------------------------------------
Participating Development Fund 86 is a limited partnership formed in
1986 to fund participating investments secured by commercial and
multi-family residential real estate properties. The Partnership
subsequently took title to four of the five participating investments.
One of the participating investments and three of the Partnership's
properties have been sold. The Partnership's remaining property is a
combined office/research and development facility, containing 105,285
rentable square feet. Provided below is a comparison of lease levels
at the property as of December 31, 1998 and 1997.
Percentage
Leased
Property Location 1998 1997
-------- -------- ---- ----
Sunnyvale R&D Sunnyvale, CA 100% 100%
Contents
1 Message to Investors
3 Financial Statements
6 Notes to the Financial Statements
12 Independent Auditors' Report
13 Net Asset Valuation
<PAGE>
1
- --------------------------------------------------------------------------------
MESSAGE TO INVESTORS
- --------------------------------------------------------------------------------
We are pleased to present the 1998 Annual Report for Participating Development
Fund 86 (the "Partnership"). Included in this report is information on the
recent sale of 1899 Powers Ferry and an update on our marketing efforts relating
to the Partnership's remaining property, Sunnyvale R&D. Also included are
financial highlights and the Partnership's audited financial statements for the
year ended December 31, 1998.
Sales & Marketing Update
As discussed in previous correspondence, we have been actively marketing the
remaining properties for sale. We are pleased to report that as a result of a
successful marketing effort, the Partnership closed on the sale of 1899 Powers
Ferry on March 19, 1999 to an unaffiliated purchaser for approximately
$7,674,000, net of closing adjustments and selling costs (the "Sale"). We
anticipate that a special cash distribution, representing a majority of the net
proceeds from the Sale, will be made to Limited Partners in the near future. In
addition, the Partnership has executed a letter of intent with a buyer to
purchase Sunnyvale R&D and is currently negotiating a purchase and sale
agreement.
Leasing Update
Tandem Computers Inc. ("Tandem"), which leases 100% of Sunnyvale R&D, continues
to sublease the entire space to a computer networking company through the
expiration of its lease on March 31, 1999. We have been notified that Tandem has
elected not to exercise its option to renew its lease and will vacate the
property in April. We do not anticipate that this will significantly impact our
objective to sell the property during 1999.
Market Update
The Partnership's remaining property is located in the Sunnyvale submarket of
Silicon Valley, which is the area's largest submarket. While Silicon Valley
performed well in 1998, there were some signs of softening in the market.
Average rental rates increased, but the overall vacancy rate in the market also
increased to 8.9% at year-end 1998, compared to 4.5% at year-end 1997. As a
result, planned construction of new space has also declined. Trends in the
Sunnyvale area have mirrored those within Silicon Valley. Despite the slight
softening of the market, Sunnyvale provides a central location for many top
high-tech firms, and the outlook for 1999 looks favorable given a stable
economy.
Cash Distributions
In light of our current sales efforts, cash distributions were suspended in the
third quarter of 1998. However, as discussed above, a special cash distribution
relating to the 1899 Powers Ferry Sale will be made shortly. After the Sunnyvale
R&D property is sold, the net proceeds together with the Partnership's remaining
cash reserves (after payment of, or provision for, the Partnership's liabilities
and expenses) will be distributed, and the Partnership will be liquidated. 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 to $26.34.
Financial Highlights
Provided below is a review of Partnership operations for the year ended
December 31,
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------------------
<S> <C> <C>
Total Income $2,095,275 $2,142,170
Property Operating Expenses 542,683 575,893
Net Income 877,481 714,981
Net Cash provided by Operating Activities 1,338,250 1,415,035
----------------------------------------------------------------------
</TABLE>
<PAGE>
2
o Total income decreased primarily due to lower other income in 1998.
The decrease in other income is due to the receipt of a real estate
tax refund in 1997.
o The slight decrease in property operating expenses is primarily due
to lower repairs and maintenance expenses at 1899 Powers Ferry.
o The increase in net income is primarily attributable to a reduction
in depreciation and amortization expense as a result of the
reclassification of the properties as "Real estate assets held for
disposition."
o The decrease in net cash provided by operating activities is
primarily attributable to a decrease in total income.
General Information
We will keep you updated with respect to our marketing efforts relating to the
Partnership's remaining property in future reports. In the interim, questions
regarding the Partnership should be directed to your Financial Consultant or
Partnership Investor Services. All requests for a change of address or transfer
should be submitted in writing to the Partnership's administrative agent at P.O.
Box 7090, Troy, MI 48007-7090. Partnership Investor Services can be reached at
(617) 342-4225, and the Partnership's administrative agent can be reached at
(248) 637-7900.
Very truly yours,
PDF 86 Real Estate Services Inc.
General Partner
Michael T. Marron
President
March 29, 1999
<PAGE>
3
PARTICIPATING DEVELOPMENT FUND 86
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
BALANCE SHEETS
At December 31, At December 31,
1998 1997
- -------------------------------------------------------------------------------------
<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 16,848,012 --
Cash and cash equivalents 756,758 739,170
Restricted cash 44,980 39,381
Accounts receivable 4,173 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 6,445 5,816
- -------------------------------------------------------------------------------------
Total Assets $17,660,368 $17,708,561
=====================================================================================
Liabilities and Partners' Capital (Deficit)
Liabilities:
Accounts payable and accrued expenses $ 191,616 $ 93,906
Due to General Partner 20,858 6,953
Security deposits payable 44,979 39,381
Prepaid rent 71,594 71,594
-----------------------------
Total Liabilities 329,047 211,834
-----------------------------
Partners' Capital (Deficit):
General Partner (573,142) (568,179)
Limited Partners (1,124,000 units outstanding) 17,904,463 18,064,906
-----------------------------
Total Partners' Capital 17,331,321 17,496,727
- -------------------------------------------------------------------------------------
Total Liabilities and Partners' Capital $17,660,368 $17,708,561
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1998, 1997 and 1996
General Limited
Partner Partners Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 $(436,797) $ 27,521,646 $ 27,084,849
Distributions (163,018) (12,083,149) (12,246,167)
Net income 51,903 3,281,677 3,333,580
- -------------------------------------------------------------------------------------
Balance at December 31, 1996 (547,912) 18,720,174 18,172,262
Distributions (41,716) (1,348,800) (1,390,516)
Net income 21,449 693,532 714,981
- -------------------------------------------------------------------------------------
Balance at December 31, 1997 (568,179) 18,064,906 17,496,727
Distributions (31,287) (1,011,600) (1,042,887)
Net income 26,324 851,157 877,481
- -------------------------------------------------------------------------------------
Balance at December 31, 1998 $(573,142) $ 17,904,463 $ 17,331,321
=====================================================================================
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
4
PARTICIPATING DEVELOPMENT FUND 86
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the years ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Rental $2,055,337 $2,062,875 $2,706,140
Interest 28,123 33,664 201,466
Other 11,815 45,631 55,944
------------------------------------------
Total Income 2,095,275 2,142,170 2,963,550
- -------------------------------------------------------------------------------------
Expenses
Property operating 542,683 575,893 1,131,167
Depreciation and amortization 301,455 630,689 678,208
General and administrative 373,656 220,607 225,804
------------------------------------------
Total Expenses 1,217,794 1,427,189 2,035,179
- -------------------------------------------------------------------------------------
Income before gain on sale of real estate 877,481 714,981 928,371
Gain on sale of real estate -- -- 2,405,209
------------------------------------------
Net Income $ 877,481 $ 714,981 $3,333,580
=====================================================================================
Net Income Allocated:
To the General Partner $ 26,324 $ 21,449 $ 51,903
To the Limited Partners 851,157 693,532 3,281,677
- -------------------------------------------------------------------------------------
$ 877,481 $ 714,981 $3,333,580
=====================================================================================
Per limited partnership unit
(1,124,000 outstanding) $ .76 $ .62 $ 2.92
- -------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
5
PARTICIPATING DEVELOPMENT FUND 86
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
For the years ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net income $ 877,481 $ 714,981 $ 3,333,580
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 257,319 537,271 678,208
Amortization 44,136 93,418 --
Gain on sale of real estate -- -- (2,405,209)
Increase (decrease) in cash arising
from changes in operating assets and
liabilities:
Restricted cash (5,599) 4,948 55,957
Accounts receivable 39,918 (13,903) 1,116
Prepaid expenses (629) 453 (42,564)
Deferred leasing costs -- (8,627) --
Deferred rent receivable 8,411 3,468 (5,702)
Accounts payable and accrued expenses 97,710 8,826 (57,876)
Due to General Partner 13,905 3,295 (35,152)
Security deposits payable 5,598 (689) (60,216)
Prepaid rent -- 71,594 (79,555)
-------------------------------------------
Net cash provided by operating activities 1,338,250 1,415,035 1,382,587
- -------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of real estate -- -- 10,210,955
Additions to real estate (277,775) (21,778) (90,980)
-------------------------------------------
Net cash (used for) provided by
investing activities (277,775) (21,778) 10,119,975
- -------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Cash distributions (1,042,887) (1,390,516) (12,246,167)
-------------------------------------------
Net cash used for financing activities (1,042,887) (1,390,516) (12,246,167)
- -------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 17,588 2,741 (743,605)
Cash and cash equivalents, beginning
of year 739,170 736,429 1,480,034
-------------------------------------------
Cash and cash equivalents, end of year $ 756,758 $ 739,170 $ 736,429
=====================================================================================
Supplemental Schedule of Non-Cash
Investing Activities:
Write-off of fully depreciated
tenant improvements $ 175,961 $ 295,667 $ 120,653
- -------------------------------------------------------------------------------------
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>
See accompanying notes to the financial statements.
<PAGE>
6
PARTICIPATING DEVELOPMENT FUND 86
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
1. Organization
Participating Development Fund 86, a Real Estate Limited Partnership (the
"Partnership") was formed on December 9, 1985, under the Uniform Limited
Partnership Act of the State of Connecticut. The Partnership was originally
formed to invest in participating investments, secured by commercial and
multi-family residential real estate, by entering into land purchase leaseback
transactions and funding leasehold mortgage loans on improvements constructed on
such land (the "Participating Investments"). The Partnership ultimately took
title to four of the Participating Investments funded. One Participating
Investment was sold during 1989, two of the four properties directly owned by
the Partnership were sold during 1995 and 1996, and one was sold in March 1999.
The Partnership now leases and operates the remaining property, and is currently
marketing such property for sale. The General Partners were PDF86 Real Estate
Services, Inc. ("RE Services"), formerly Shearson Lehman Brothers/PDF 86, Inc.
(see below), and Phoenix Realty/PDF 86, Inc. ("Phoenix"), a Connecticut
corporation and an indirect wholly-owned subsidiary of Phoenix Home Life Mutual
Insurance Company ("Phoenix Mutual"). The Partnership commenced operations on
April 23, 1986.
On June 15, 1992, Phoenix sent a notice of resignation as co-general partner of
the Partnership to RE Services. The effective date of resignation was June 16,
1992. As a result of the resignation of Phoenix, RE Services as sole General
Partner manages the affairs of the Partnership. Since RE Services had been a
co-general partner and was actively involved in the management of the
Partnership since it was formed, the resignation of Phoenix has not had any
adverse impact on the continuing operations of the Partnership.
On July 31, 1993, Shearson Lehman Brothers Inc. sold certain of its domestic
retail brokerage and asset management businesses to Smith Barney, Harris Upham &
Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson Lehman
Brothers Inc. changed its name to Lehman Brothers Inc. The transaction did not
affect the ownership of the general partner. However, the assets acquired by
Smith Barney included the name "Shearson." Consequently, effective October 22,
1993, Shearson Lehman Brothers/PDF 86, Inc. changed its name to PDF86 Real
Estate Services Inc. to delete any reference to "Shearson." 2. Significant
Accounting Policies
Real Estate Investments Buildings and personal property are stated at cost,
less accumulated depreciation and amortization. Costs related to the selection
and acquisition of the Partnership's properties have been capitalized as part of
the costs of those Properties.
Prior to July 1, 1998, depreciation on buildings and personal property was
provided over the estimated economic lives of the Properties (5 - 35 years)
using the straight-line method. Additionally, tenant improvements, deferred
leasing costs and incentives to lease were amortized over the term of the
related lease agreements using the straight-line method.
Impairment of Long-Lived Assets Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("FAS 121"), requires the Partnership to assess its
real estate investments for impairment whenever events or changes in
circumstances indicate that the carrying amount of the real estate may not be
recoverable. Recoverability of real estate to be held and used is measured by a
comparison of the carrying amount of the real estate to future net cash flows
(undiscounted and without interest) expected to be generated by the real estate.
If the real estate is considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the real estate
exceeds the fair value of the real estate. The carrying amount of the real
estate investment is not considered impaired by management as of December 31,
1998.
<PAGE>
7
PARTICIPATING DEVELOPMENT FUND 86
On July 1, 1998, the Partnership's real estate assets were reclassified on the
balance sheet to "Real estate assets held for disposition," and are recorded at
the lower of net carrying cost or fair market value less selling expenses.
Accordingly, the Partnership suspended depreciation and amortization in
accordance with Statement of Financial Accounting Standards No. 121 after
July 1, 1998.
Rental Income and Deferred Rent Rental income is recognized as earned over the
terms of the lease agreements. Deferred rent receivable consists of rental
income which is recognized on a straight-line basis over the lease terms, but
will not be received until later periods as a result of scheduled rental
increases.
Cash and Cash Equivalents Cash and cash equivalents consist of short-term,
highly liquid debt instruments purchased with an original maturity of three
months or less. The carrying value approximates fair value because of the short
maturity of these instruments.
Restricted Cash Restricted cash represents cash held in connection with tenant
security deposits.
Income Taxes The Partnership files Federal and applicable state partnership
income tax returns which indicate each partner's and unit holder's share of
taxable income or loss to be reported on their respective individual income tax
returns. As a result, no provision for income taxes has been made in the
accompanying financial statements.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments The carrying amount of trade receivables
and payables approximates fair value.
3. Real Estate Investments
Foothills Tech Plaza On May 30, 1986, the Partnership acquired the land and
participating mortgage loan receivable on Foothills Tech Plaza from Phoenix
Mutual, which had funded the investment on behalf of the Partnership on November
12, 1985. Foothills Tech Plaza is an office/service center located in Phoenix,
Arizona, comprised of two single-story buildings containing an aggregate of
172,655 square feet of net leasable space. On June 25, 1986, the Partnership
acquired the property in its entirety, including the improvements located
thereon, in full satisfaction of the mortgagor/lessee's obligation under the
terms of the mortgage and ground lease. On September 29, 1995, Foothills Tech
Plaza was sold for $10,011,512 net of $226,000 in contracted roof repairs. The
gain on disposition totaled $1,088,860 in 1995.
1899 Powers Ferry On May 30, 1986, the Partnership acquired the land and
participating mortgage loan receivable on 1899 Powers Ferry ("Powers Ferry")
from Phoenix Mutual, which had funded the investment on behalf of the
Partnership on April 4, 1986. Powers Ferry is a four-story office building
located in Marietta, Georgia containing approximately 93,000 square feet of
space.
<PAGE>
8
PARTICIPATING DEVELOPMENT FUND 86
The mortgagor/lessee of Powers Ferry did not make the ground rent and mortgage
loan payments due May 1, 1987, and, as a result, the Partnership issued a notice
of default. On July 7, 1987, the Partnership became the owner of the property in
its entirety through a foreclosure sale transaction. On that date, the
Partnership's Participating Investment in Powers Ferry, net of escrowed funds
returned and debt service payments received totaled $8,916,094. For Federal
income tax purposes, the debt service payments paid from mortgage loan proceeds
in escrow ($904,593 including interest) were recorded as income and no
depreciation was recorded through July 7, 1987. As a result, the Partnership's
depreciable basis in the Powers Ferry property is greater for tax purposes than
for financial reporting purposes. In connection with the acquisitions of Powers
Ferry and Foothills Tech Plaza, the Partnership paid Phoenix Mutual $19,392,519,
representing the cost to Phoenix Mutual plus net interest of $102,482 on funds
disbursed by Phoenix Mutual.
On March 19, 1999, the Partnership sold Powers Ferry pursuant to a purchase
offer executed in February 1999. The Property was sold to an unaffiliated
entity, for a selling price of approximately $7,674,000, net of closing
adjustments.
Sunnyvale R&D On August 28, 1986, the Partnership acquired the land and funded
a participating mortgage loan on the improvements for the Sunnyvale R&D building
located in Sunnyvale, California. Sunnyvale R&D is a one-story research and
development building containing approximately 105,285 square feet of net
leasable space. The Partnership purchased the land from the lessee for
$6,050,000 and concurrently funded a mortgage loan of $4,531,190.
On October 30, 1986, the Partnership served notice of default on the
mortgagor/lessee for non-payment of amounts due under the ground lease and
mortgage. As a result of the default and pursuant to certain terms provided in
the Agreement of Ground Lease, the lessee transferred all of its right and title
under the ground lease to the Partnership on November 26, 1986 and the
Partnership became the owner of the Property in its entirety, including the
improvements located thereon in full satisfaction of the mortgagor/lessee's
obligation under the terms of the mortgage and ground lease.
As of December 31, 1998, Sunnyvale R&D was 100% leased to a single tenant,
Tandem Computers Inc. ("Tandem"). The tenant signed a six-year lease (the
"Master Lease") which commenced April 1, 1988 at an annual rental rate of $7.68
per square foot, triple net, and on April 1, 1994 negotiated a five year
extension at an average annual rental rate of $8.16 per square foot with an
option for an additional five years, by written notice, on or before six months
from the expiration of this extension period. During the fourth quarter of 1994
Tandem agreed to sublease its entire space, effective April 1, 1995. The
sublease is subject to the terms, conditions and termination date of the above
mentioned Master Lease. Tandem has notified the Partnership that it has elected
not to exercise its option to renew its lease, and will vacate the property upon
expiration of its lease in March 1999. The Partnership has executed a letter of
intent with a buyer to purchase Sunnyvale R&D and is currently negotiating a
purchase and sale agreement. It is currently anticipated that Sunnyvale R&D will
be sold and the Partnership liquidated in 1999, however, there can be no
assurance that Sunnyvale R&D will be sold within this time frame, or that the
sale will result in a particular price.
Pebblebrook Apartments On September 4, 1986, the Partnership acquired the land
for $2,000,000 and funded a mortgage loan of $7,750,000 on the improvements for
the Pebblebrook Apartments ("Pebblebrook") located in Overland Park, Kansas.
Pebblebrook is a 267-unit luxury garden apartment complex located in a suburb of
Kansas City. On April 16, 1991, the Partnership became the owner of the property
in its entirety through a special conveyance transaction. On May 23, 1996
Pebblebrook Apartments was sold by the Partnership for a net sales price of
$10,210,955. The transaction resulted in a gain on sale of $2,405,209 in 1996.
4. Leases and Rental Revenues
Tandem leases 100% of Sunnyvale R&D pursuant to a lease which expires in March
1999. As of December 31, 1998, the 1999 future rentable payments relating to
Sunnyvale R&D are $214,781.
<PAGE>
9
PARTICIPATING DEVELOPMENT FUND 86
Certain leases contain provisions whereby the rent can change annually based
upon changes in the Consumer Price Index. All the leases at Powers Ferry provide
that tenants pay their pro-rata share of any increases in operating expenses
over a base amount. The lease at Sunnyvale R&D is triple net with the tenant
paying all property operating expenses and real estate taxes.
The Sunnyvale R&D building generated rental revenue in excess of 10% of the
Partnership's rental revenues for the years ended December 31, 1998, 1997 and
1996. For the years ended December 31, 1998, 1997 and 1996, Sunnyvale R&D
contributed $859,126 (42%), $859,126 (42%), and $859,126 (32%), respectively, of
the Partnership's rental income.
5. Transactions With Related Parties
Pursuant to the Partnership Agreement, the General Partner(s) and their
affiliates were paid fees and expenses for services rendered in connection with
the formation of the Partnership and the acquisition of the Properties. In
addition, the General Partners and their affiliates were paid or are due the
following fees and expense reimbursements for ongoing services rendered to the
Partnership:
a) In connection with the acquisition of the Partnership's investments, the
General Partners were paid Investment Fees totaling $2,248,000, which had
been capitalized as part of the cost of the investments and allocated to
land, buildings, tenant improvements and participating mortgage loans
receivable based upon their relative valuations.
b) The Partnership has agreed to pay the remaining General Partner a fee for
managing and servicing the Partnership's investments. The Asset Management
Fee will be equal to the lesser of $50,000 per annum or 1% of all cash
revenues received by the Partnership, including any deferred interest after
deducting (i) operating expenses, (ii) amounts set aside for working
capital reserves, and (iii) payments on the Partnership's other current
obligations as defined in the Partnership Agreement. Such fees incurred and
expensed by the Partnership totaled $13,905, $13,905 and $17,382 in 1998,
1997 and 1996, respectively.
c) The Partnership has agreed to pay the remaining General Partner a
Subordinated Disposition Fee, in an amount not to exceed the lesser of (i)
one half of the competitive real estate commission applicable at the date
of sale, or (ii) 3% of the amount payable to the Partnership in connection
with the disposition of such investment. The fee is payable only after the
Unit Holders have been returned their original investment and any unpaid
Preferred Return.
At December 31, amounts due to General Partner are as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------
<S> <C> <C>
Asset management fee $20,858 $6,953
=======================
</TABLE>
6. Partners' Capital (Deficit)
The Unit Holders will be entitled to receive from distributions of cash from
operations ("Current Cash Receipts") or Net Proceeds from Sales, Investment
Repayment and Participation Proceeds (as defined in the Partnership Agreement) a
cumulative, non-compounded Preferred Return on their average adjusted unreturned
invested capital equal to 14% per annum calculated from January 1, 1987. To the
extent that Current Cash Receipts distributed to the Unit Holders is less than
the Preferred Return for that year, the unpaid amount may be paid from Current
Cash Receipts in subsequent years, or upon sale of a Property or repayment of
the Partnership's investments and any Participating Proceeds. At December 31,
1998 the Unit Holders have not yet received their cumulative preferred return.
The Partnership Agreement provides for the allocation of income, losses and the
distribution of cash generally as follows:
<PAGE>
10
PARTICIPATING DEVELOPMENT FUND 86
All items of income, loss, deduction and credit from Current Cash Receipts, as
defined, will be distributed 97% to Unit Holders and 3% to the General Partner.
Net proceeds from Sales, Investment Repayment and Participating Proceeds shall
be distributed as follows:
a) 99% to the Unit Holders and 1% to the General Partner until the Unit
Holders have received cumulative distributions of net proceeds from Sales,
Investment Repayment and Participating Proceeds plus Current Cash Receipts
equal to their original invested capital plus any unpaid Preferred Return.
b) To the General Partner in payment of any unpaid Subordinated Disposition
Fee.
c) 85% to the Unit Holders and 15% to the General Partner.
All items of income, gain, loss, deduction and credit attributable to net
proceeds from Sales, Investment Repayment and Participating Proceeds will be
allocated between the Unit Holders, as a group, and the General Partner, in the
same ratio that each such group received distributions of such net proceeds from
Sales, Investment Repayment and Participating Proceeds. The Partnership
distributed $1,011,600, $1,348,800 and $12,083,149 to the Unit Holders in 1998,
1997 and 1996, respectively. In addition, the Partnership distributed $31,287,
$41,716 and $163,018 to the General Partner in 1998, 1997 and 1996,
respectively.
7. Reconciliation of Financial Statement Basis Net Income and Partners'
Capital to Federal Income Tax Basis Net Income and Partners' Capital
Reconciliation of financial statement basis net income to federal income tax
basis net income:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial statement basis net income $ 877,481 $ 714,981 $ 3,333,580
Financial statement amortization under
tax basis amortization (64,087) (12,286) (12,285)
Financial statement depreciation (under)
tax basis depreciation (276,465) (20,870) (106,954)
Financial statement rental income
(over) under tax basis rental income 8,410 75,063 (85,257)
Financial statement gain on sale of
property (over) tax basis gain on
sale of property -- -- (2,213,064)
Other 66,088 291 305
-----------------------------------------
(266,054) 42,198 (2,417,255)
- -------------------------------------------------------------------------------------
Federal income tax basis net income $ 611,427 $ 757,179 $ 916,325
-----------------------------------------
</TABLE>
<PAGE>
11
PARTICIPATING DEVELOPMENT FUND 86
Reconciliation of financial statement partners' capital to federal income tax
basis partners' capital:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial statement basis
partners' capital $17,331,321 $17,496,727 $18,172,262
Current year financial statement
basis net income (over) under
federal income tax basis net
income (266,054) 42,198 (2,417,255)
Cumulative Federal income tax basis
net income over financial statement
net income 9,782,495 9,740,297 12,157,552
- -------------------------------------------------------------------------------------
Federal income tax basis
partners' capital $26,847,762 $27,279,222 $27,912,559
- -------------------------------------------------------------------------------------
</TABLE>
Because many types of transactions are susceptible to varying interpretations
under Federal and State income tax laws and regulations, the amounts reported
above may be subject to change at a later date upon final determination by the
respective taxing authorities.
<PAGE>
12
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
The Partners
Participating Development Fund 86:
We have audited the accompanying balance sheets of Participating Development
Fund 86 (a Connecticut limited partnership) as of December 31, 1998 and 1997,
and the related statements of operations, partners' capital (deficit), and cash
flows for each of the years in the three-year period ended December 31, 1998.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Participating Development Fund
86 as of December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 26, 1999, except as to Note 3,
which is as of March 19, 1999
<PAGE>
13
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
NET ASSET VALUATION
- -------------------------------------------------------------------------------------
Comparison of Acquisition Costs to Estimated Value and
Determination of Net Asset Value Per $26.34 Unit at December 31, 1998 (Unaudited)
Acquisition 1998 Estimated
Property Date of Acquisition Cost (1) Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sunnyvale R&D(2) 08-28-86 $11,185,961 $13,375,000
1899 Powers Ferry(3) 07-07-87 8,916,095 7,674,000
------------------------------
$20,102,056 21,049,000
Cash and cash equivalents 756,758
Accounts receivable 4,173
Prepaid expenses 6,445
-----------
21,816,376
Less:
Total liabilities (net of security deposits payable) (284,068)
-----------
Partnership Net Asset Value(4) $21,532,308
===========
Net Asset Value Allocated:
Limited Partners $21,316,985
General Partner 215,323
-----------
$21,532,308
===========
Net Asset Value Per Unit
(1,124,000 Units outstanding) $18.96
- -------------------------------------------------------------------------------------
<FN>
(1) Purchase price plus General Partners' acquisition fees.
(2) This represents the Partnership's share of the December 31, 1998 estimated
values which were determined by the General Partner, with the assistance of the
broker engaged to market the properties.
(3) Based on actual sale price.
(4) The Net Asset Value assumes a hypothetical sale on December 31, 1998 of the
Partnership's properties at their estimated values and the distribution of the
net proceeds to Limited Partners in the liquidation of the Partnership. Real
estate brokerage commissions and other costs associated with selling the
Partnership's properties are not determinable at this time and as such are not
included in the calculation. Since the Partnership would incur these expenses in
the sale of its properties cash available for the distribution to the Partners
would be less than the Net Asset Value. The current market value of the Units
may differ substantially from their Net Asset Value.
</FN>
</TABLE>
Limited Partners should note that properties' values are estimated and the
actual values realizable upon sale may be significantly different. The estimated
value does not reflect the actual costs which would be incurred in selling the
properties. As a result of these factors and the illiquid nature of an
investment in Units of the Partnership, the variation between the estimated
value of the Partnership's properties and the price at which Units of the
Partnership could be sold may be significant. Fiduciaries of Limited Partners
which are subject to ERISA or other provisions of law requiring valuations of
Units should consider all relevant factors, including, but not limited to Net
Asset Value per Unit, in determining the fair market value of the investment in
the Partnership for such purposes.
<PAGE>
F-1
PARTICIPATING DEVELOPMENT FUND 86
<TABLE>
<CAPTION>
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1998
Sunnyvale 1899
Office Buildings: R & D Powers Ferry Total
- -------------------------------------------------------------------------------------
Location Sunnyvale, CA Marietta, GA na
<S> <C> <C> <C>
Construction date 1986 1986 na
Acquisition date 08-28-86 07-07-87 na
Life on which depreciation in latest
income statements is computed (3) (3) na
Encumbrances -- -- --
Initial cost to Partnership(1):
Land $ 6,336,962 $2,050,628 $ 8,387,590
Buildings and improvements 4,848,999 6,774,215 11,623,214
Costs capitalized subsequent
to acquisition:
Land, buildings and improvements 3,146,034 2,398,849 5,544,883
Retirements (2,976,402) (1,875,144) (4,851,546)
Deferred rent receivable -- 187,457 187,457
Deferred leasing cost -- 302,347 302,347
Incentive to lease -- 108,123 108,123
Gross amount at which carried
at close of period:
Land $ 6,336,962 $2,050,628 $ 8,387,590
Buildings and improvements 5,018,631 7,297,920 12,316,551
Deferred rent receivable -- 187,457 187,457
Deferred leasing cost -- 302,347 302,347
Incentive to lease -- 108,123 108,123
-------------------------------------------
$11,355,593 $9,946,475 $21,302,068
-------------------------------------------
Accumulated depreciation(2) $ 1,826,720 $2,627,336 $ 4,454,056
- -------------------------------------------------------------------------------------
<FN>
(1) Represents aggregate cost for both financial reporting and Federal income
tax purposes.
(2) The amount of accumulated depreciation for Federal income tax purposes is
$6,225,906.
(3) Buildings and personal property: 5-35 years, tenant improvements: over the
terms of the respective leases.
</FN>
</TABLE>
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate investments:
Beginning of year $20,753,039 $21,026,928 $30,909,245
Additions 127,063 21,778 90,980
Retirements (175,961) (295,667) (120,653)
Deferred rent receivable 187,457 -- --
Deferred leasing cost 302,347 -- --
Incentives to lease 108,123 -- --
Dispositions -- -- (9,852,644)
-------------------------------------------
End of year $21,302,068 $20,753,039 $21,026,928
-------------------------------------------
Accumulated depreciation:
Beginning of year $ 4,372,698 $ 4,131,094 $ 5,730,421
Depreciation expense 257,319 537,271 568,224
Retirements (175,961) (295,667) (120,653)
Dispositions -- -- (2,046,898)
-------------------------------------------
End of year $ 4,454,056 $ 4,372,698 $ 4,131,094
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
F-2
INDEPENDENT AUDITORS' REPORT ON SCHEDULE III
The Partners
Participating Development Fund 86:
Under date of February 26, 1999, except as to Note 3, which is as of March 19,
1999, we reported on the balance sheets of Participating Development Fund 86 (a
Connecticut limited partnership) as of December 31, 1998 and 1997, and the
related statements of operations, partners' capital (deficit) and cash flows for
each of the years in the three-year period ended December 31, 1998, as contained
in the 1998 annual report to unitholders. These financial statements and our
report thereon are incorporated by reference in the annual report on Form 10-K
for the year 1998. In connection with our audits of the aforementioned financial
statements, we also have audited the related financial statement schedule as
listed in the accompanying index. This financial statement schedule is the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on the financial statement schedule based on our audits.
In our opinion, the financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 26, 1999, except as to Note 3,
which is as of March 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 756,758
<SECURITIES> 000
<RECEIVABLES> 4,173
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> 000
<PP&E> 16,848,012
<DEPRECIATION> 000
<TOTAL-ASSETS> 17,660,368
<CURRENT-LIABILITIES> 329,047
<BONDS> 000
000
000
<COMMON> 000
<OTHER-SE> 17,331,321
<TOTAL-LIABILITY-AND-EQUITY> 17,660,368
<SALES> 000
<TOTAL-REVENUES> 2,095,275
<CGS> 000
<TOTAL-COSTS> 542,683
<OTHER-EXPENSES> 675,111
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 877,481
<INCOME-TAX> 000
<INCOME-CONTINUING> 877,481
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 877,481
<EPS-PRIMARY> .76
<EPS-DILUTED> .76
</TABLE>
