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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
Commission file number 0-14438
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
A CALIFORNIA LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
CALIFORNIA 13-3239107
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 West Putnam Avenue, Greenwich, CT 06830
(Address of principal executive offices)
(203) 862-7000
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
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INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
INDEX
Part I. Financial Information:
Balance Sheets--June 30, 1996 and December 31, 1995
Statements of Operations--Three Months Ended June 30, 1996
and 1995 and Six Months Ended June 30, 1996 and 1995
Statement of Partners' Equity--Six Months Ended
June 30, 1996
Statements of Cash Flows--Six Months Ended
June 30, 1996 and 1995
Notes to Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information:
Legal Proceedings, Exhibits and Reports on Form 8-K
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
BALANCE SHEETS
June 30, December 31,
1996 1995
------------ ------------
ASSETS
Real estate ................................ $ 32,284,572 $ 32,533,972
Cash and cash equivalents .................. 3,842,512 2,450,943
Other assets ............................... 2,173,519 2,121,920
Receivables ................................ 184,216 202,762
------------ ------------
$ 38,484,819 $ 37,309,597
============ ============
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued expenses ...... $ 1,282,550 $ 1,016,797
Due to affiliates .......................... 281,533 352,633
Distributions payable ...................... 252,638 252,638
------------ ------------
1,816,721 1,622,068
------------ ------------
Commitments and contingencies
PARTNERS' EQUITY:
Limited partners' equity (400,010
units issued and outstanding) .......... 39,833,867 38,902,326
General partners' deficit ................ (3,165,769) (3,214,797)
------------ ------------
36,668,098 35,687,529
------------ ------------
$ 38,484,819 $ 37,309,597
============ ============
See notes to financial statements
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
STATEMENTS OF OPERATIONS
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
Rental Revenue ........................................ $ 2,150,499 $ 1,794,930 $ 4,563,889 $ 3,960,234
------------ ------------ ------------ ------------
Costs and Expenses:
Operating expenses ............................... 826,015 878,101 1,683,620 1,727,899
Depreciation and amortization .................... 319,365 220,000 638,730 538,000
Partnership management fee ....................... 227,043 227,043 454,086 454,086
Administrative expenses .......................... 116,282 125,190 247,742 242,217
Property management fee .......................... 61,562 72,914 136,859 130,480
Write-down for impairment ........................ -- -- -- 20,469,050
------------ ------------ ------------ ------------
1,550,267 1,523,248 3,161,037 23,561,732
------------ ------------ ------------ ------------
Income (loss) before interest
and other income ................................. 600,232 271,682 1,402,852 (19,601,498)
Interest income .................................. 25,897 38,741 53,183 72,263
Other income ..................................... 15,360 11,950 29,810 26,650
------------ ------------ ------------ ------------
Net income (loss) ..................................... $ 641,489 $ 322,373 $ 1,485,845 $(19,502,585)
============ ============ ============ ============
Net income (loss) attributable to:
Limited partners ................................. $ 609,415 $ 306,254 $ 1,411,553 $(18,527,456)
General partners ................................. 32,074 16,119 74,292 (975,129)
------------ ------------ ------------ ------------
Net income (loss) ..................................... $ 641,489 $ 322,373 $ 1,485,845 $(19,502,585)
============ ============ ============ ============
Net income (loss) per unit of limited
partnership interest (400,010 units
outstanding) ..................................... $ 1.52 $ .77 $ 3.53 $ (46.32)
============ ============ ============ ============
See notes to financial statements
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
STATEMENT OF PARTNERS' EQUITY
General Limited
Partners' Partners'
(Deficit) Equity Total
------------ ------------ ------------
Balance, January 1, 1996 ...................................... $ (3,214,797) $ 38,902,326 $ 35,687,529
Net income for the six
months ended June 30, 1996 ................................ 74,292 1,411,553 1,485,845
Distributions as a return of capital for the
six months ended June 30, 1996
($1.20 per limited partnership unit) ...................... (25,264) (480,012) (505,276)
------------ ------------ ------------
Balance, June 30, 1996 ........................................ $ (3,165,769) $ 39,833,867 $ 36,668,098
============ ============ ============
See notes to financial statements
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
STATEMENTS OF CASH FLOWS
For The Six Months Ended
June 30,
1996 1995
------------ ------------
Cash Flows From Operating Activities:
Net income (loss) ......................... $ 1,485,845 $(19,502,585)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Write-down for impairment ........... -- 20,469,050
Depreciation and amortization ....... 638,730 538,000
Straight-line adjustment for stepped
lease rentals ....................... (20,884) (15,297)
Changes in assets and liabilities:
Accounts payable and accrued expenses 265,753 618,715
Receivables ......................... 18,546 141,756
Due to affiliates ................... (71,100) (27,248)
Other assets ........................ (130,264) (242,675)
------------ ------------
Net cash provided by
operating activities ................ 2,186,626 1,979,716
------------ ------------
Cash Flows From Investing Activities:
Improvements to real estate ............... (289,781) (491,073)
------------ ------------
Cash Flows From Financing Activities:
Distributions to partners ................. (505,276) (505,276)
------------ ------------
Increase In Cash And Cash Equivalents .......... 1,391,569 983,367
Cash And Cash Equivalents,
Beginning of Year ......................... 2,450,943 2,666,385
------------ ------------
Cash And Cash Equivalents,
End of Quarter ............................ $ 3,842,512 $ 3,649,752
============ ============
See notes to financial statements
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
NOTES TO FINANCIAL STATEMENTS
l. GENERAL
The accompanying financial statements, notes and discussions should be
read in conjunction with the financial statements, related notes and
discussions contained in the Partnership's annual report on Form 10-K
for the year ended December 31, 1995. The December 31, 1995 year end
balance sheet data presented herein was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
The financial information contained herein is unaudited; however, in
the opinion of management, all adjustments necessary for a fair
presentation of such financial information have been included. Other
than the write-down for impairment, all of the aforementioned
adjustments are of a normal recurring nature and there have not been
any non-recurring adjustments included in the results reported for the
current period.
2. SIGNIFICANT ACCOUNTING POLICIES
Impairment of Assets
In March 1995, the Financial Accounting Standards Board issued
Statement # 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of" ("SFAS # 121"). Although
the adoption of the statement was not required until fiscal years
beginning after December 15, 1995, the Partnership implemented SFAS
#121 for the year ended December 31, 1995.
Under SFAS #121 the initial test to determine if an impairment exists
is to compute the recoverability of the asset based on anticipated cash
flows (net realizable value) compared to the net carrying value of the
asset. If anticipated cash flows on an undiscounted basis are
insufficient to recover the net carrying value of the asset, an
impairment loss should be recognized, and the asset written down to its
estimated fair value. The fair value of the asset is the amount by
which the asset could be bought or sold in a current transaction
between willing parties, that is, other than in a forced or liquidation
sale. The net realizable value of an asset will generally be greater
than its fair value because net realizable value does not discount cash
flows to present value and discounting is usually one of the
assumptions used in determining fair value. The write-downs for
impairment do not affect the tax basis of the assets and the
write-downs are not included in the determination of taxable income or
loss.
Because the determination of both net realizable value and fair value
is based upon projections of future economic events such as property
occupancy rates, rental rates, operating cost inflation and market
capitalization rates which are inherently subjective, the amounts
ultimately realized at disposition may differ materially from the net
carrying value as of the balance sheet date. The cash flows used to
determine fair value and net realizable value are based on good faith
estimates and assumptions developed by management. Inevitably,
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
NOTES TO FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
unanticipated events and circumstances may occur and some assumptions
may not materialize; therefore actual results may vary from our
estimate and the variances may be material.
The Partnership may provide additional losses in subsequent periods if
the real estate market or local economic conditions change and such
write-downs could be material.
Certain reclassifications were made to the prior year financial
statements in order to conform them to the current period presentation.
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
The Managing General Partner of the Partnership, Resources High Equity,
Inc. was, until November 3, 1994, a wholly-owned subsidiary of
Integrated Resources, Inc. ("Integrated") at which time, pursuant to
the consummation of the plan of reorganization, substantially all of
the assets of Integrated were sold to Presidio Capital Corp., a British
Virgin Islands corporation ("Presidio") and the Managing General
Partner became a wholly owned subsidiary of Presidio. Presidio AGP
Corp., which is a wholly-owned subsidiary of Presidio, became the
Associate General Partner on February 28, 1995, replacing Z Square G
Partners II which withdrew as of that date. The General Partners and
affiliates of the General Partners are also engaged in businesses
related to the acquisition and operation of real estate. Presidio is
also the parent of other corporations that are or may in the future be
engaged in businesses that may be in competition with the Partnership.
Accordingly, conflicts of interest may arise between the Partnership
and such other businesses. Wexford Management LLC ("Wexford") has been
engaged to perform administrative services to Presidio and its direct
and indirect subsidiaries as well as the Partnership. During the three
months ended June 30, 1996, reimbursable expenses to Wexford by the
Partnership amounted to $23,650. Wexford is engaged to perform similar
services for other similar entities that may be in competition with the
Partnership.
The Partnership has entered into a property management services
agreement with Resources Supervisory Management Corp. ("Resources
Supervisory"), an affiliate of the General Partner, to perform certain
functions relating to the management of the properties of the
Partnership. A portion of the property management fees were paid to
unaffiliated management companies which are engaged for the purpose of
performing the management functions for certain properties. For the
quarters ended June 30, 1996 and 1995, Resources Supervisory was
entitled to receive $61,562 and $72,912, respectively, of which $44,572
and $52,864 was paid to unaffiliated management companies,
respectively. These fees were paid in the quarters subsequent to June
30, 1996 and 1995, respectively.
For the administration of the Partnership, the Managing General Partner
is entitled to receive reimbursement of expenses up to a maximum of
$150,000 per year (exclusive of the administrative expenses paid to
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
NOTES TO FINANCIAL STATEMENTS
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
Wexford ). For each of the quarters ended June 30, 1996 and 1995, the
Managing General Partner was entitled to receive $37,500 which was paid
in the quarters subsequent to June 30, 1996 and 1995, respectively.
For managing the affairs of the Partnership, the Managing General
Partner is entitled to receive an annual partnership management fee
equal to 1.05% of the amount of original gross proceeds paid or
allocable to the acquisition of property by the Partnership. For each
of the quarters ended June 30, 1996 and 1995, the Managing General
Partner was entitled to receive $227,043 which was paid in the quarters
subsequent to June 30, 1996 and 1995, respectively.
The general partners are allocated 5% of the net income of the
Partnership which amounted to $32,074 and $16,119 for the quarters
ended June 30, 1996 and 1995, respectively. They are also entitled to
receive 5% of distributions which amounted to $12,632 for each of the
quarters ended June 30, 1996 and 1995.
During the liquidation stage of the Partnership, the Managing 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.
In July 1996, Millenium Funding II Corp., a wholly owned indirect
subsidiary of Presidio, purchased 598 units of the Partnership from
various limited partners. These purchases represent less than .2% of
the outstanding limited partnership units of the Partnership.
4. REAL ESTATE
Management recorded write-downs for impairment totaling $20,469,050 in
the first quarter 1995 pursuant to adoption of SFAS #121 as discussed
in Note 2. No write-downs were recorded for the six months ended June
30, 1996.
The following table represents the write-downs for impairment recorded
on the Partnership's properties:
Six Months Ended June 30,
------------------------------------------
Property 1996 1995
------------------ ----------------- ----------------
Seattle Tower $ --- $ 3,550,000
Century Park I --- 1,250,000
568 Broadway --- 2,569,050
Westbrook --- 3,400,000
Loch Raven --- 4,800,000
Southport --- 4,900,000
----------------- ----------------
$ --- $ 20,469,050
================= ================
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
NOTES TO FINANCIAL STATEMENTS
4. REAL ESTATE (CONTINUED)
The following table is a summary of the Partnership's real estate as
of:
June 30, December 31,
1996 1995
--------------- ---------------
Land $ 11,056,966 $ 11,056,966
Building and improvements 34,461,574 34,171,794
------------ ---------------
45,518,540 45,228,760
Less: Accumulated depreciation (13,233,968) (12,694,788)
-------------- ---------------
$ 32,284,572 $ 32,533,972
============== ===============
5. DISTRIBUTIONS PAYABLE
June 30, December 31,
1996 1995
------------- -------------
Limited partners ($.60 per unit) $ 240,006 $ 240,006
General partners 12,632 12,632
------------ -------------
$ 252,638 $ 252,638
============ ==============
Such distributions were paid in the quarters subsequent to June 30,
1996 and December 31, 1995, respectively.
6. DUE TO AFFILIATES
June 30, December 31,
1996 1995
------------ -------------
Partnership management fee $ 227,043 $ 227,044
Property management fee 16,990 88,089
Non-accountable expense reimbursement 37,500 37,500
------------ ------------
$ 281,533 $ 352,633
============ ============
Such amounts were paid in the quarters subsequent to June 30, 1996 and
December 31, 1995, respectively.
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES
a) 568 Broadway Joint Venture is currently involved in litigation
with a number of present or former tenants who are in default on their
lease obligations. Several of these tenants have asserted claims or
counter claims seeking monetary damages. The plaintiffs' allegations
include but are not limited to claims for breach of contract, failure
to provide certain services, overcharging of expenses and loss of
profits and income. These suits seek total damages in excess of $20
million plus additional damages of an indeterminate amount. The 568
Broadway Joint Ventures action for rent against Solo Press was tried in
1992 and resulted in a judgement in favor of the 568 Broadway Joint
Venture for rent owed. The Partnership believes this will result in
dismissal of the action brought by Solo Press against the 568 Broadway
Joint Venture. Since the facts of the other actions which involve
material claims or counterclaims are substantially similar, the 568
Partnership believes that the 568 Broadway Joint Venture will prevail
in those actions as well.
b) A former retail tenant of 568 Broadway (Galix Shops, Inc.) and
a related corporation which is a retail tenant of a building adjacent
to 568 Broadway filed a lawsuit in the Supreme Court of the state of
New York, County of New York, against the Broadway Joint Venture which
owns 568 Broadway. The action was filed on April 13, 1994. The
plaintiffs allege that by erecting a sidewalk shed in 1991, 568
Broadway deprived plaintiffs of light, air and visibility to their
customers. The sidewalk shed was erected, as required by local law, in
connection with the inspection and restoration of the 568 Broadway
building facade, which is also required by local law. Plaintiffs
further allege that the erection of the sidewalk shed for a continuous
period of over two years is unreasonable and unjustified and that such
conduct by defendants has deprived plaintiffs of the use and enjoyment
of property. The suit seeks a judgement requiring removal of the
sidewalk shed, compensatory damages of $20 million, and punitive
damages of $10 million. The Partnership believes that this suit is
meritless and intends to vigorously defend it.
c) On or about May 11, 1993 High Equity Partners L.P. - Series 86
("HEP-86"), an affiliated partnership, was advised of the existence of
an action (the "B&S Litigation') in which a complaint (the "HEP
Complaint") was filed in the Superior Court for the State of California
for the County of Los Angeles (the "Court") on behalf of a purported
class consisting of all of the purchasers of limited partnership
interests in HEP-86.
On April 7, 1994 the plaintiffs were granted leave to file an amended
complaint (the "Amended Complaint"). The Amended Complaint asserted
claims against the General Partners of the Partnership, the general
partners of HEP-86, the managing general partner of HEP-88 and certain
officers of the Managing General Partner, among others. The Managing
General Partner of the Partnership is also a general partner of HEP-86
and HEP-88.
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On July 19, 1995, the Court preliminarily approved a settlement of the
B&S Litigation and approved the form of a notice (the "Notice")
concerning such proposed settlement. In response to the Notice,
approximately 1.1% of the limited partners of the three HEP
partnerships (representing approximately 4% of outstanding units)
requested exclusion and 15 limited partners filed written objections to
the settlement. The California Department of Corporations also sent a
letter to the Court opposing the settlement. Five objecting limited
partners, represented by two law firms, also made motions to intervene
so they could participate more directly in the action. The motions to
intervene were granted by the Court on September 14, 1995.
In October and November 1995, the attorneys for the plaintiffs-
intervenors conducted extensive discovery. At the same time, there were
continuing negotiations concerning possible revisions to the proposed
settlement.
On November 30, 1995, the original plaintiffs and the intervening
plaintiffs filed a Consolidated Class and Derivative Action Complaint
("Consolidated Complaint") against the Managing General Partner, two of
the general partners of HEP-86, the managing general partner of HEP-88
and the indirect corporate parent of the General Partners, alleging
various state law class and derivative claims, including claims for
breach of fiduciary duties; breach of contract; unfair and fraudulent
business practices under California Bus. & Prof. Code Section 17200;
negligence; dissolution, accounting, receivership, and removal of
general partner; fraud; and negligent misrepresentation. The
Consolidated Complaint alleges, among other things, that the general
partners caused a waste of HEP Partnership assets by collecting
management fees in lieu of pursuing a strategy to maximize the value of
the investments owned by the limited partners; that the general
partners breached their duty of loyalty and due care to the limited
partners by expropriating management fees from the Partnerships without
trying to run the HEP Partnerships for the purposes for which they are
intended; that the general partners are acting improperly to enrich
themselves in their position of control over the HEP Partnerships and
that their actions prevent non-affiliated entities from making the
completing tender offers to purchase HEP Partnership Units; that by
refusing to seek the sale of the HEP Partnerships' properties, the
general partners have diminished the value of the limited partners'
equity in the HEP Partnerships; that the general partners have taken a
heavily overvalued partnership asset management fee; that the limited
partnership units were sold and marketed through the use of false and
misleading statements.
On or about January 31, 1996, the parties to the B & S Litigation
agreed upon a revised settlement, which would be significantly more
favorable to limited partners than the previously proposed settlement,
The revised settlement proposal, like the previous proposal, involves
the reorganization of (i) the Partnership, (ii) HEP-86 and, (iii)
HEP-88 (collectively, the "HEP Partnerships"), through an exchange (the
"Exchange") in which limited partners (the "Participating Investors")
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
of the partnerships participating in the Exchange (the "Participating
Partnerships") would receive, in exchange for the partnership units,
shares of common stock ("Shares") of a newly-formed corporation,
Millennium Properties Inc. ("Millennium") which intends to qualify as a
real estate investment trust. Such reorganization would only be
effected with respect to a particular partnership if holders of a
majority of the outstanding units of that partnership consent to such
reorganization pursuant to a Consent Solicitation Statement (the
"Consent Solicitation Statement") which would be sent to all limited
partners after the settlement is approved by the Court. In connection
with the Exchange, Participating Investors would receive Shares of
Millennium in exchange for their limited partnership units. 84.65% of
the Shares would be allocated to Participating Investors in the
aggregate (assuming each of the Partnerships participate in the
Exchange) and 15.35% of the Shares would be allocated to the general
partners in consideration of the general partner's existing interests
in the Participating Partnerships, their relinquishment of entitlement
to receive fees and expense reimbursements, and the payment by the
general partners or an affiliate of certain amounts for legal fees.
As part of the Exchange, Shares issued to Participating Investors would
be accompanied by options granting such Investors the right to require
an affiliate of the general partners to purchase Shares at a price of
$11.50 per Share, exercisable during the three month period commencing
nine months after the effective date of the Exchange. A maximum of 1.5
million Shares (representing approximately 17.7% of the total Shares
issued to investors if all partnerships participate) would be required
to be purchased if all partnerships participate in the Exchange. Also
as part of the Exchange, the indirect parent of the General Partners
would agree that in the event that dividends paid with respect to the
Shares do not aggregate at least $1.10 per Share for the first four
complete fiscal quarters following the Effective Date, it would make a
supplemental payment to holders of such Shares in the amount of such
difference. The general partners or an affiliate would also provide an
amount, not to exceed $2,232,500 in the aggregate, for the payment of
attorneys' fees and reimbursable expenses of class counsel, as approved
by the Court, and the costs of providing notice to the class (assuming
that all three Partnerships participate in the Exchange). In the event
that fewer than all of the Partnerships participate in the Exchange,
such amount would be reduced. The general partners would advance to the
Partnerships the amounts necessary to cover such fees and expenses of
the Exchange (but not their litigation costs and expenses, which the
general partners would bear). Upon the effectuation of the Exchange,
the B & S Litigation would be dismissed with prejudice.
On February 8, 1996, at a hearing on preliminary approval of the
revised settlement, the Court determined that in light of renewed
objections to the settlement by the California Department of
Corporations, the Court would appoint a securities litigation expert to
evaluate the settlement. The Court stated that it would rule on the
issue of preliminary approval of the settlement after receiving the
expert's report. On May 6, 1996, the expert submitted a report stating
that he was unable to conclude that the revised settlement as proposed
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
is fair, reasonable and adequate, and recommending that the revised
settlement be restructured so as to allocate Shares to the general
partners based solely on the value of their 5% equity interests in the
Partnerships, that the allocation of Shares be based on independent
appraisals of all of the Partnerships' properties, and that
Participating Investors be provided with dissenters' rights. On May 28,
1996, at a hearing in connection with the expert's report, the Court
ordered the parties to brief certain valuation issues, the requisite
consents required from limited partners to approve the Exchange and the
applicability of exemptions from the California securities law.
Thereafter, in response to the expert's report, the proposed settlement
was further revised to require independent appraisals of all the
Partnerships' properties and to provide Participating Investors with
dissenters' rights, which would entitle Participating Investors who
elected dissenters' rights to receive, as compensation for their Units,
unsecured notes issued by Millennium, the face amount of which would be
based on the independent appraisals.
A hearing on the issues the Court had ordered the parties to brief was
held on July 9, 1996. On July 18, 1996, the Court preliminarily
approved the proposed, revised settlement of the B & S Litigation, and
made a preliminary finding that the proposed, revised settlement is
fair, adequate and reasonable to the class, and that a settlement class
should be conditionally certified. The Court also set a hearing for
August 19, 1996 to settle the form and method of notice to limited
partners regarding the proposed, revised settlement.
After a notice regarding the proposed, revised settlement is sent to
limited partners, the Court would hold a fairness hearing in order to
determine whether the settlement would be given final approval. If
final approval of the settlement is granted by the Court, the Consent
Solicitation Statement concerning the settlement and the reorganization
would be sent to all limited partners. There would be at least a 60 day
solicitation period and a reorganization of the Partnership cannot be
consummated unless a majority of the limited partners in the
Partnership affirmatively voted to approve it.
8. RESULTS OF OPERATIONS
Results of operations for the six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the entire
year.
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's real estate properties are office buildings and shopping
centers, all of which were acquired for cash. The public offering of the Units
commenced on February 4, 1985 and was terminated on May 30, 1986. Upon
termination, the Partnership had accepted subscriptions for 400,010 Units
(including Units held by the initial limited partner) for aggregate net proceeds
of $98,502,500 (gross proceeds of $100,002,500 less organization and offering
expenses aggregating $1,500,000).
The Partnership uses working capital reserves remaining from the net proceeds of
its public offering and any undistributed cash from operations as its primary
source of liquidity. For the six months ended June 30, 1996, 100% of
distributions and capital expenditures were funded from cash flows. As of June
30, 1996, the Partnership had total working capital reserves of approximately
$2,293,000. The Partnership intends to distribute less than all of its future
cash flow from operations to maintain adequate reserves for capital improvements
and capitalized lease procurement costs. In addition, if real estate market
conditions deteriorate in any areas where the Partnership's properties are
located, there is substantial risk that this would have an adverse effect on
future cash flow distributions. Working capital reserves 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.
During the six months ended June 30, 1996, cash and cash equivalents increased
$1,391,569 as a result of cash provided by operations in excess of capital
expenditures and distributions to partners. The Partnership's primary source of
funds is cash flow from the operation of its properties, principally rents
received from tenants, which amounted to $2,186,626 for the six months ended
June 30, 1996. The Partnership used $289,781 for capital expenditures related to
capital and tenant improvements to the properties and $505,276 for distributions
to partners for the six months ended June 30, 1996.
The Partnership expects to continue to utilize a portion of its cash flow from
operations to pay for various capital and tenant improvements to the properties
and leasing commissions (the amount of which cannot be predicted with
certainty). Capital and tenant improvements and leasing commisssions may in the
future exceed the Partnership's cash flow from operations which would otherwise
be available for distributions. In that event, the Partnership would utilize the
remaining working capital reserves or sell one or more properties, which would
have an adverse effect on future distributions. Except as discussed above,
management is not aware of any other trends, events, commitments or
uncertainties that will have a significant impact on liquidity.
REAL ESTATE MARKET
The real estate market continues to suffer from the effects of the recession
which included a substantial decline in the market value of existing properties.
Market values have been slow to recover, and while the pace of new construction
has slowed, high vacancy rates continue to exist in many areas. Technological
changes are also occurring which may reduce the office space needs of many
users. These factors may continue to reduce rental rates. As a result, the
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Partnership's potential for realizing the full value of its investment in its
properties is at increased risk.
IMPAIRMENT OF ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement # 121,
"Accounting for The Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of" ("SFAS # 121"). Although the adoption of the statement was not
required until fiscal years beginning after December 15, 1995, the Partnership
implemented SFAS #121 for the year ended December 31, 1995.
Under SFAS #121 the initial test to determine if an impairment exists is to
compute the recoverability of the asset based on anticipated cash flows (net
realizable value) compared to the net carrying value of the asset. If
anticipated cash flows on an undiscounted basis are insufficient to recover the
net carrying value of the asset, an impairment loss should be recognized, and
the asset written down to its estimated fair value. The fair value of the asset
is the amount by which the asset could be bought or sold in a current
transaction between willing parties, that is, other than in a forced or
liquidation sale. The net realizable value of an asset will generally be greater
than its fair value because net realizable value does not discount cash flows to
present value and discounting is usually one of the assumptions used in
determining fair value. The write-downs for impairment do not affect the tax
basis of the assets and the write-downs are not included in the determination of
taxable income or loss.
Because the determination of both net realizable value and fair value is based
upon projections of future economic events such as property occupancy rates,
rental rates, operating cost inflation and market capitalization rates which are
inherently subjective, the amounts ultimately realized at disposition may differ
materially from the net carrying values as of the balance sheet date. The cash
flows used to determine fair value and net realizable value are based on good
faith estimates and assumptions developed by management. Inevitably,
unanticipated events and circumstances may occur and some assumptions may not
materialize; therefore actual results may vary from our estimate and the
variances may be material. The Partnership may provide additional losses in
subsequent periods if the real estate market or local economic conditions change
and such write-downs could be material.
Management recorded write-downs for impairment totaling $20,469,050 in the first
quarter 1995 pursuant to the adoption of SFAS #121 as discussed above. No
write-downs were recorded for the six months ended June 30,1996.
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table represents the write-downs for impairment recorded on the
Partnership's properties:
Six Months Ended June 30,
----------------------------------
Property 1996 1995
-------- ------------- -------------
Seattle Tower $ --- $ 3,550,000
Century Park I --- 1,250,000
568 Broadway --- 2,569,050
Westbrook --- 3,400,000
Loch Raven --- 4,800,000
Southport --- 4,900,000
------------ -------------
$ --- $ 20,469,050
============ =============
RESULTS OF OPERATIONS
The Partnership experienced net income for the six months ended June 30, 1996
compared to a net loss for the six months ended June 30, 1995 due primarily to
the significant write-down for impairment recorded in 1995. The Partnership
experienced an increase in net income for the three months ended June 30, 1996
compared to the same period in the prior year due primarily to higher revenues
at certain properties in 1996.
Rental revenue increased for the six months and three months ended June 30, 1996
compared to the same periods in the prior year. Revenues at Century Park, 568
Broadway, and Seattle Tower increased during both periods in 1996 due to higher
occupancy rates as new leases were executed in late 1995 and in 1996. Revenues
at Southport increased as higher percentage rent and real estate tax
reimbursements were collected from certain tenants during 1996 compared to 1995.
Costs and expenses decreased during the six months ended June 30, 1996 compared
to the same period in 1995 due primarily to the write-down for impairment
recorded in 1995 while costs and expenses increased slightly for the three
months ended June 30, 1996 compared to the same period in the prior year.
Operating expenses decreased slightly for the six and three months ended June
30, 1996 compared to 1995 due primarily to fewer bad debt write-offs and lower
real estate taxes partially offset by higher repair and maintenance costs. Bad
debt expenses decreased at Southport and Westbrook during 1996 compared to 1995
and real estate taxes at 568 Broadway were reduced as a result of appeals of
current and prior year's assessed values. Repairs and maintenance expenses
increased at Century Park due to higher occupancy and at Loch Raven due to costs
related to severe weather.
Depreciation and amortization increased for both the six and three month periods
in 1996 due to significant capital and tenant improvement work in 1995. The
partnership management fees and administrative expenses for the six and three
months ended June 30, 1996 were relatively consistent with the same periods in
the prior year. Property management fees increased during the six months ended
June 30, 1996 as compared to the prior period due to the increase in rental
revenue at certain properties as previously discussed. However, property
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
management fees were lower for the three months ended June 30, 1996 compared to
the same period in the prior year due to certain adjustments recorded in 1995
which affect the computation of the property management fee.
Interest income decreased due to lower interest rates for the six months and
three months ended June 30, 1996 as compared to the same periods in 1995. Other
income, which consists of investor ownership transfer fees, increased during the
six and three month periods ended June 30, 1996 compared to the same periods in
1995 due to a greater number of ownership transfers during the second quarter of
1996.
Inflation is not expected to have a material impact on the Partnership's
operations or financial position.
Legal Proceedings
The Partnership is a party to certain litigation. See Note 7 to the financial
statements for a description thereof.
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
Part II. - Other Information
Item 1 - Legal Proceedings
(a) See Management's Discussion and Analysis of Financial
Condition and Results of Operations and Notes to Financial
Statements - Note 7 which is herein incorporated by reference.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits: There were no exhibits filed.
(b) Reports on Form 8-K: There were no reports filed.
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - June 30, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Integrated Resources High Equity
Partners, Series 85,
A California Limited Partnership
By: Resources High Equity, Inc.,
Managing General Partner
Dated: August 14, 1996 By: /S/ Joseph M. Jacobs
--------------------
Joseph M. Jacobs
President
(Duly Authorized Officer)
Dated: August 14, 1996 By: /S/ Jay L. Maymudes
-------------------
Jay L. Maymudes
Vice President, Secretary
and Treasurer
(Principal Financial and
Accounting Officer)