-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G+fF4l9PtMjJIU+H6a3iFivUZxuI+XfAgZU450BCbT8BPRDwKcAXKzkgPYNJmvNO NuPMr7lJsMYNDGAHOGXkQg== 0000914317-99-000208.txt : 19990402 0000914317-99-000208.hdr.sgml : 19990402 ACCESSION NUMBER: 0000914317-99-000208 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED RESOURCES HIGH EQUITY PARTNERS SERIES 85 CENTRAL INDEX KEY: 0000730067 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 133239107 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14438 FILM NUMBER: 99582755 BUSINESS ADDRESS: STREET 1: 411 WEST PUTNAM AVE CITY: GREENWICH STATE: CT ZIP: 06830 BUSINESS PHONE: 2038627000 MAIL ADDRESS: STREET 1: 411 WEST PUTNAM AVENUE CITY: GREENWICH STATE: CT ZIP: 06830 FORMER COMPANY: FORMER CONFORMED NAME: HIGH EQUITY PARTNERS SERIES 85 DATE OF NAME CHANGE: 19850626 FORMER COMPANY: FORMER CONFORMED NAME: RESOURCES HIGH EQUITY PARTNERS DATE OF NAME CHANGE: 19850203 10-K 1 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 for the Transition Period from _______to _______ 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) (Zip Code) Registrant's telephone number, including area code: (203) 862-7444 Securities registered pursuant to Section 12(b) of the Act: None None -------------------- ----------------------------------------- (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interest, $250 Per Unit (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 ] DOCUMENTS INCORPORATED BY REFERENCE Exhibit A to the Prospectus of the registrant dated February 4, 1985, filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, is incorporated by reference in Part IV of this Form 10- K. 2 PART I Item 1. Business -------- Integrated Resources High Equity Partners, Series 85, a California Limited Partnership (the "Partnership"), was formed as of August 19, 1983. The Partnership is engaged in the business of operating and holding for investment previously acquired income-producing properties, consisting of office buildings, shopping centers and other commercial and industrial properties. Resources High Equity, Inc., a Delaware corporation and a wholly owned subsidiary of Presidio Capital Corp., a British Virgin Islands corporation ("Presidio"), is the Partnership's managing general partner (the "Managing General Partner"). Effective July 31, 1998, Presidio is indirectly controlled by NorthStar Capital Investment Corp., a Maryland corporation. Until November 3, 1994, Resources High Equity, Inc. was a wholly owned subsidiary of Integrated Resources, Inc. ("Integrated"). On November 3, 1994 Integrated consummated its plan of reorganization under Chapter 11 of the United States Bankruptcy Code at which time, pursuant to such plan of reorganization, the newly-formed Presidio purchased substantially all of Integrated's assets. Presidio AGP Corp., which is a wholly-owned subsidiary of Presidio, became the associate general partner (the "Associate General Partner") on February 28, 1995 replacing Z Square G Partners II which withdrew as of that date. The Managing General Partner and the Associate General Partner are referred to collectively hereinafter as the "General Partners." Affiliates of the General Partners are also engaged in businesses related to the acquisition and operation of real estate. The Partnership offered 400,000 units of limited partnership interest (the "Units") pursuant to the Prospectus of the Partnership dated February 4, 1985, as supplemented by Supplements dated January 27, 1986 and April 11, 1986 (collectively, the "Prospectus"), filed pursuant to Rules 424(b) and 424(c) under the Securities Act of 1933, as amended. The Prospectus was filed as part of the Partnership's Registration Statement on Form S-11, Commission File No. 2-92319 (the "Registration Statement"), pursuant to which the Units were registered and offered. The offering was terminated on May 30, 1986. Upon final admission of limited partners, the Partnership had accepted subscriptions for 400,010 Units (including the initial limited partner) for an aggregate of $100,002,500 in gross proceeds, resulting in net proceeds from the offering of $98,502,500 (gross proceeds of $100,002,500 less organization and offering costs of $1,500,000). All underwriting and sales commissions were paid by Integrated or its affiliates and not by the Partnership. As of March 15, 1999, the Partnership had invested all of its net proceeds in real estate. Revenues from the following properties represented 15% or more of the Partnership's gross revenues during each of the last three fiscal years: in 1998, Southport and 568 Broadway represented 33% and 28% of gross revenues, respectively; during 1997, Southport and 568 Broadway represented 31% and 27% of gross revenues, respectively; during 1996, Southport and 568 Broadway represented 30% and 25% of gross revenues, respectively. The Partnership owned the following properties as of March 15, 1999: (1) Southport Shopping Center ------------------------- On April 15, 1986, the Partnership purchased the fee simple interest in Southport Shopping Center ("Southport"), a regional shopping center located on the 17th Street Causeway in Fort Lauderdale, Florida near the intercoastal waterway and beach area. The center's three buildings, comprising a total of 143,089 square feet, are situated on a 9.45 acre site. Southport was 3 built in phases from 1968 to 1977 and expanded again and renovated in 1985. The site provides parking for 563 cars. Southport was 99% occupied as of January 1, 1999 as compared to 100% on January 1, 1998. There are no leases that represent at least 10% of the square footage of the center scheduled to expire in 1999. The roof on the West quadrant of the main center building was replaced in 1998 and the center was repainted. There are no significant capital expenditures budgeted for 1999, however, unanticipated expenses to upgrade the common area to meet new ADA code requirements will be incurred in an amount yet to be determined. Southport is highly visible from S.E. 17th Street, the major east/west artery in the commercially-oriented area. Developments in the area are diversified and include hotels, restaurants, retail centers, office buildings and the 750,000 square foot Broward County Convention Center, which opened in 1991, is within walking distance. In 1996, the new 75,000 square foot, three story mixed-use NorthPort Marketplace opened on county owned land adjacent to the Convention Center. The development has attracted national restaurant/entertainment chains and is not considered competition for Southport's tenants. The center continues to maintain a solid tenant base and anchor tenants, Publix, Eckerd and McCrory's, combined square footage represents 39% of the center's leasable area. (2) Loch Raven Plaza ---------------- On June 26, 1986, the Partnership purchased the fee simple interest in Loch Raven Plaza ("Loch Raven"), a retail/office complex located in Towson, Maryland. It contains approximately 25,000 square feet of office and storage space and 125,000 square feet of retail space, with parking for approximately 655 vehicles. The property was 93% occupied as of January 1, 1999, compared to 90% at January 1, 1998. There are no leases which represent at least 10% of the square footage of the center scheduled to expire during 1999, however, Super Fresh (A&P) grocery will vacate its 26,648 square foot store by year end and relocate to a new superstore at Towson Marketplace Shopping Center located less than a mile from Loch Raven Plaza. Towson Marketplace is being redeveloped and includes Michael's Crafts, Marshall's, Target, Montgomery Ward and TOYS "R" US as tenants. Super Fresh's lease does not have a continuous operation clause or radius restriction and is negotiating a sublease with Jo-Ann Fabrics for the space. Jo-Ann currently occupies 9,700 square feet at Loch Raven with lease expiration 12/31/99. Phase II of the exterior renovation on the lower level of the center was completed in 1998 at a cost of $400,000. The renovation was deemed necessary in order to retain tenants as neighboring centers have recently undertaken renovation and re-tenanting programs. (3) Century Park I -------------- On November 7, 1986, a joint venture (the "Century Park Joint Venture") comprised of the Partnership and High Equity Partners L.P. - Series 86 ("HEP-86"), an affiliated public limited partnership, purchased the fee simple interest in Century Park I ("Century Park I"), an office complex. The Partnership and HEP-86 each have a 50% interest in the Century Park Joint Venture. Century Park I, situated on approximately 8.6 acres, is located in the center of San Diego County in Kearny Mesa, California, directly adjacent to Highway 163 at the northeast corner of Balboa Avenue and Kearny Villa Road. Century Park I is part of an office park consisting of six office 4 buildings and two parking garages, in which Century Park Joint Venture owns three buildings, comprising 200,002 net rentable square feet and one garage with approximately 810 parking spaces. One of the three buildings was completed in the latter half of 1985, and the other two buildings were completed in February 1986. The property was 100% leased as of January 1, 1999 compared to 91% at January 1, 1998. There are no leases that represent at least 10% of the square footage of the center scheduled to expire in 1999. Capital expenditures during 1998 included an upgrade to the lobby of Building 2 and construction costs associated with leasing the remaining vacant space will be paid in 1999. Additional capital expenditures for 1999 include a refurbishment allowance to SDG&E as provided in tenant's original lease. Century Park I competes with other office parks and office buildings in the Kearny Mesa sub-market. New competition in the sub-market includes the redevelopment of the adjacent property into the Cabrillo Technology Center with 141,800 square feet available plus an additional 284,000 square feet planned and redevelopment of the 234 acre former General Dynamics site, now known as New Century Center. Plans for New Century Center call for development of the site with mixed use commercial, industrial, retail and entertainment areas. (4) 568 Broadway ------------ On December 2, 1986, a joint venture (the "Broadway Joint Venture") comprised of the Partnership and HEP-86 acquired a fee simple interest in 568-578 Broadway ("568 Broadway"), a commercial building in New York City, New York. Until February 1, 1990, the Partnership and HEP-86 each had a 50% interest in the Broadway Joint Venture. On February 1, 1990, the Broadway Joint Venture admitted a third joint venture partner, High Equity Partners L.P. - Series 88 ("HEP-88"), an affiliated public limited partnership sponsored by Integrated. HEP-88 contributed $10,000,000 for a 22.15% interest in the joint venture. The Partnership and HEP-86 each retain a 38.925% interest in the joint venture. 568 Broadway is located in the SoHo district of Manhattan on the northeast corner of Broadway and Prince Street. 568 Broadway is a 12-story plus basement and sub-basement building constructed in 1898. It is situated on a site of approximately 23,600 square feet, has a rentable square footage of approximately 299,000 square feet and a floor size of approximately 26,000 square feet. Formerly catering primarily to industrial light manufacturing, the building has been converted to an office building and is currently being leased to art galleries, photography studios, retail and office tenants. The last manufacturing tenant vacated in January 1993. The building was 100% leased as of January 1, 1999 and January 1, 1998. There are no leases which represent at least 10% of the square footage of the property scheduled to expire during 1999. 568 Broadway competes with several other buildings in the SoHo area. (5) Seattle Tower ------------- On December 16, 1986, a joint venture (the "Seattle Landmark Joint Venture") comprised of the Partnership and HEP-86 acquired a fee simple interest in Seattle Tower, a commercial office building located in downtown Seattle ("Seattle Tower"). The Partnership and HEP-86 each have a 50% interest in the Seattle Landmark Joint Venture. 5 Seattle Tower is located at Third Avenue and University Street on the eastern shore of Puget Sound in the financial and retail core of the Seattle central business district. Seattle Tower, built in 1928, is a 27-story commercial building containing approximately 141,000 rentable square feet, including almost 10,000 square feet of retail space and approximately 2,211 square feet of storage space. The building also contains a 55-car garage. Seattle Tower is connected to the Unigard Financial Center and the Olympic Four Seasons Hotel by a skybridge system. Seattle Tower, formerly Northern Life Tower, represented the first appearance in Seattle of a major building in the Art Deco style. It was accepted into the National Register of Historic Places in 1975. . Seattle Tower's occupancy at January 1, 1999 was 96% as it was at January 1, 1998. There are approximately seventy tenants occupying the building. Leasing efforts are focused on consolidating space to create single floor tenants. There are no leases which represent at least 10% of the square footage of the property scheduled to expire during 1999. Repairs to the exterior building facade to include pointing, caulking and waterproofing were completed in 1998 at a cost of $825,000 and replacement of the penthouse roof was postponed until 1999 due to weather. The Partnership believes that Seattle Tower's primary direct competition comes from three office buildings of similar size or age in the immediate vicinity of Seattle Tower, which buildings have current occupancy rates which are comparable to Seattle Tower's. Write-downs for Impairment - -------------------------- See Note 4 to the financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for details of write-downs for impairment. Competition - ----------- The real estate business is highly competitive and, as discussed more particularly above, the properties acquired by the Partnership may have active competition from similar properties in the vicinity. In addition, various limited partnerships have been formed by the Managing General Partner and/or its affiliates that engage in businesses that may be competitive with the Partnership. The Partnership will also experience competition for potential buyers at such time as it seeks to sell any of its properties. Employees - --------- On-site personnel perform services for the Partnership at the properties. Salaries for such on-site personnel are paid by unaffiliated management companies that service the Partnership's properties. Services are also performed by the Managing General Partner and by Resources Supervisory Management Corp. ("Resources Supervisory"), each of which is an affiliate of the Partnership. Resources Supervisory currently provides supervisory management and leasing services for all of the Partnership's properties and subcontracts certain management and leasing functions to unaffiliated third parties. The Partnership does not have any employees. NorthStar Presidio Management Company, LLC ("NorthStar") performs accounting, secretarial, transfer and administrative services for the Partnership. See Item 10, "Directors and Executive Officers of the Registrant", Item 11, "Executive Compensation", and Item 13, "Certain Relationships and Related Transactions". 6 Item 2. Properties ---------- A description of the Partnership's properties is contained in Item 1 above (see Schedule III to the financial statements for additional information with respect to the properties). Item 3. Legal Proceedings ----------------- The 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 counterclaims 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 Broadway Joint Venture's action for rent against Solo Press was tried in 1992 and resulted in a judgment in favor of the Broadway Joint Venture for rent owed. The Partnership believes this will result in dismissal of the action brought by Solo Press against the Broadway Joint Venture. Since the facts of the other actions which involve similar claims and counterclaims are substantially similar, the Partnership believes that the Broadway Joint Venture will prevail in those actions as well. A former retail tenant of 568 Broadway (Galix Shops, Inc.) and a related corporation that 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 alleged that by erecting a sidewalk shed in 1991, 568 Broadway deprived plaintiffs of light, air and visibility to their customers. The sidewalk shed was erected, as required by local law, in connection with the inspection and restoration of the 568 Broadway building facade, which is also required by local law. Plaintiffs further alleged that the 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 their property. The suit seeks a judgment 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. In May 1993, limited partners in High Equity Partners L.P. - Series 86 ("HEP-86"), an affiliated partnership, commenced an action (the "Action") in the Superior Court for the State of California for the County of Los Angeles (the "Court") on behalf of a purported class consisting of all the purchasers of limited partnership interests in HEP-86. On April 7, 1994 the plaintiffs were granted leave to file an amended complaint on behalf of a class consisting of all the purchasers of limited partnership interests in HEP-86, the Partnership, and High Equity Partners L.P. - Series 88 ("HEP-88"), another affiliated partnership (collectively, the "HEP Partnerships"). 7 In November 1995, the original plaintiffs and intervening plaintiffs filed a consolidated class and derivative action complaint (the "Consolidated Complaint") alleging various state law class and derivative claims, including claims for breach of fiduciary duty; breach of contract; unfair and fraudulent business practices under California Bus. & Prof. Code Section 17200; negligence; dissolution, accounting, receivership and removal of general partner; fraud; and negligent misrepresentation. The Consolidated Complaint alleges, among other things, that the general partners of the HEP Partnerships collectively, "HEP General Partners" caused a waste of the HEP Partnerships' assets by collecting management fees in lieu of pursuing a strategy to maximize the value of the investments owned by the investors in the HEP Partnerships, that the HEP General Partners breached their duty of loyalty and due care to the investors by expropriating management fees from the HEP Partnerships without trying to run the HEP Partnerships for the purposes for which they were intended; that the HEP General Partners were acting improperly to entrench themselves in their position of control over the HEP Partnerships and that their actions prevented non-affiliated entities from making and completing tender offers to purchase units of limited partnership interest in the HEP Partnerships (collectively, the "HEP Units"); that, by refusing to seek the sale of the HEP Partnerships' properties, the HEP General Partners diminished the value of the investors' equity in the HEP Partnerships; that the HEP General Partners took heavily overvalued asset management fees; and that HEP Units were sold and marketed through the use of false and misleading statements. In early 1996, the parties submitted a proposed settlement to the Court (the "Proposed Settlement"), which contemplated a reorganization of the three HEP Partnerships into a single real estate investment trust, pursuant to which approximately 85% of the shares of the real estate investment trust would have been allocated to investors in the three HEP Partnerships (assuming each of the HEP Partnerships participated in the reorganization), and approximately 15% of the shares would have been allocated to the HEP General Partners. As a consequence, the Proposed Settlement would, among other things, have approximately tripled the HEP General Partners' equity interests in the HEP Partnerships. In late 1996, the California Department of Corporations informed the Court of the conclusion that the Proposed Settlement was unfair, and, in early 1997, the Court declined to grant final approval of the Proposed Settlement because the Court was not persuaded that the Proposed Settlement was fair, adequate or reasonable as to the proposed class. In July 1997, the plaintiffs filed an amended complaint, which generally asserts the same claims as the earlier Consolidated Complaint but contains more detailed factual assertions and eliminates some claims they had previously asserted. The HEP General Partners challenged the amended complaint on legal grounds and filed demurrers and a motion to strike. In October 1997, the Court granted substantial portions of the HEP General Partners' motions. Thereafter, the HEP General Partners served answers denying the allegations and asserting numerous defenses. 8 In February 1998, the Court certified three separate plaintiff classes consisting of the current owners of record of HEP Units (but excluding all defendants or entities related to such defendants), and appointed class counsel and liaison counsel. In mid-1998, the parties actively engaged in negotiations concerning a possible settlement of the Action. In September 1998, the parties reached an agreement in principle, and, during the following months, negotiated a more formal settlement stipulation (the "Settlement Stipulation"), which they executed in December 1998. The Settlement Stipulation was submitted to the Court for preliminary approval in early January 1999. In February 1999, the Court gave preliminary approval to the Settlement Stipulation and directed that notice of the proposed settlement be sent to the previously certified class. The proposed settlement contemplates (I) amendments to the Partnership Agreement that would modify the existing fee structure; (II) a tender offer whereby the General Partners would purchase up to 6.7% of the units from limited partners; and (III) that the General Partners will use their best efforts to effect a reorganization of the HEP Partnerships into REITs or other publicly traded entities. A hearing to consider whether the Court should give final approval to the Settlement Stipulation is scheduled for April 14, 1999. The settlement is subject to a number of conditions. There can be no assurance that such conditions will be fulfilled. The General Partners believe that each of the claims asserted in the Action are meritless and, if for any reason a final settlement pursuant to the Settlement Stipulation is not consummated, intend to continue to vigorously defend the Action. The Limited Partnership Agreement provides for indemnification of the General Partners and their affiliates in certain circumstances. The Partnership has agreed to reimburse the General Partners for their actual costs incurred in defending this litigation and the costs of preparing settlement materials. Through December 31, 1998, the Partnership paid the General Partners a total of $1,034,510 for these costs. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report through the solicitation of proxies or otherwise. 9 PART II Item 5. Market for Registrant's Securities and Related Security Holder Matters --------------------------------------- Units of the Partnership are not publicly traded. There are certain restrictions set forth in the Partnership's amended limited partnership agreement (the "Limited Partnership Agreement") which may limit the ability of a limited partner to transfer Units. Such restrictions could impair the ability of a limited partner to liquidate its investment in the event of an emergency or for any other reason. In 1987, the Internal Revenue Service adopted certain rules concerning publicly traded partnerships. The effect of being classified as a publicly traded partnership would be that income produced by the Partnership would be classified as portfolio income rather than passive income. In order to avoid this effect, the Limited Partnership Agreement contains limitations on the ability of a limited partner to transfer Units in circumstances in which such transfers could result in the Partnership being classified as a publicly traded partnership. However, due to the low volume of transfers of Units, it is not anticipated that this will occur. As of March 15, 1999, there were 9,176 holders of Units of the Partnership, owning an aggregate of 400,010 Units (including Units held by the initial limited partner). Distributions per Unit of the Partnership for periods during 1997 and 1998 were as follows: Distributions for the Amount of Distribution Quarter Ended Per Unit - --------------------- ----------------------- March 31, 1997 $ 0.75 June 30, 1997 $ 0.94 September 30, 1997 $ 0.94 December 31, 1997 $ 0.94 March 31, 1998 $ 0.94 June 30, 1998 $ 0.94 September 30, 1998 $ 0.94 December 31, 1998 $ 0.94 The source of distributions in 1997 and 1998 was cash flow from operations. All distributions are in excess of accumulated undistributed net income and, therefore, represent a return of capital to investors on a generally accepted accounting principles basis. In 1997 and 1998, capital expenditures were funded from cash flow. There are no material legal restrictions set forth in the Limited Partnership Agreement upon the Partnership's present or future ability to make distributions. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", for a discussion of factors which may affect the Partnership's ability to pay distributions. 10 From July 1996 through March 12, 1998, Millennium Funding II Corp., a wholly owned indirect subsidiary of Presidio, purchased 39,123 units of the Partnership from various limited partners. In connection with a tender offer for units of the Partnership made March 12, 1998 (the "Offer") by Olympia Investors, L.P., a Delaware limited partnership controlled by Carl Ichan ("Olympia"), Olympia and Presidio entered into an agreement dated March 6, 1998 (the "Agreement"). Subsequent to the expiration of the offer, Olympia announced that it had accepted for payment 31,132 units properly tendered pursuant to the Offer. Pursuant to the Agreement, Presidio purchased 50% of the units owned by Olympia as a result of the Offer, or 15,566 units, for $101.81 per unit. Presidio may be deemed to beneficially own the remaining units owned by Olympia as a consequence of the Agreement. Subsequent to the expiration of the tender offer described above, Millennium Funding II Corp. purchased 12,451 limited partnership units from August 1998 through February 1999. The total of these purchases and the units purchased from Olympia (as described above) represents approximately 16.8% of the outstanding limited partnership units of the Partnership. Item 6. Selected Financial Data -----------------------
For the Years Ended December 31, ------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 ----------- ----------- ------------- ------------ ------------- Revenue $ 9,189,542 (4) $ 9,021,378 $ 8,888,016 $ - $ 7,995,126 7,877,644 Net Income (Loss) 2,931,223 (4) 2,134,659 2,134,717 (18,624,934) (3) 1,442,884 (1) Net Income (Loss) per Unit 6.96 5.07 5.07 (44.23) (3) 3.43 (1) Distribution Per Unit(5) 3.76 3.57 2.40 2.40 14.39 (2) Total Assets 40,814,689 39,600,417 39,290,185 37,309,597 56,742,945
(1) Net income for the year ended December 31, 1994 includes a write-down for impairment on Southern National of $181,000, or $0.43 per Unit. (2) Distributions for the year ended December 31, 1994 include a $9.45 per Unit distribution from the proceeds of the sale of Southern National. (3) Net loss for the year ended December 31, 1995 includes a write-down for impairment on Century Park I, Seattle Tower, 568 Broadway, Loch Raven, Southport and Westbrook in the aggregate amount of $20,469,050, or $48.61 per Unit. (4) Revenues and Net Income for the year ended December 31, 1998 include a $389,359 gain, or $0.92 per unit, from the sale of the Westbrook property. (5) All distributions are in excess of accumulated undistributed net income and, therefore represent a return of capital to investors on a generally accepted accounting principles basis. 11 Item 7. 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 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 year ended December 31, 1998, all capital expenditures and distributions were funded from cash flow. As of December 31, 1998, the Partnership had total working capital reserves of approximately $2,603,000. The Partnership intends to distribute less than all of its future cash flow from operations in order to maintain adequate reserves for capital improvements and capitalized lease procurement costs. If real estate market conditions deteriorate in any areas where the Partnership's properties are located, there is substantial risk that future cash flow distributions may be reduced. Working capital reserves are temporarily invested in short-term instruments and, together with operating cash flow, are expected to be sufficient to fund anticipated capital improvements to the Partnership's properties. During the year ended December 31, 1998, cash and cash equivalents increased $1,950,754 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 $3,574,184 for the year ended December 31, 1998. In addition, the Partnership received $2,042,964 from the sale of the Westbrook property. The Partnership used $2,083,198 for capital expenditures related to capital and tenant improvements to the properties and $1,583,196 for distributions to partners for the year ended December 31, 1998. 12 The following table sets forth, for each of the last three fiscal years, the Partnership's expenditures at each of its properties for capital improvements and capitalized tenant procurement costs: Capital Improvements and Capitalized Tenant Procurement Costs
1998 1997 1996 ---------- ---------- ---------- Seattle Tower ............ $ 490,322 $ 78,754 $ 352,522 Century Park I ........... 89,729 506,704 28,010 568 Broadway ............. 293,021 84,805 233,376 Westbrook(a) ............. 0 0 0 Loch Raven ............... 908,324 990,911 224,666 Southport ................ 502,081 520,032 58,571 ---------- ---------- ---------- Totals ................... $2,283,477 $2,181,206 $ 897,145 ========== ========== ==========
(a) Property sold in 1998. The Partnership has budgeted expenditures for capital improvements and capitalized tenant procurement costs in 1999 which are expected to be funded from cash flow from operations. However, such expenditures will depend upon the level of leasing activity and other factors which cannot be predicted with certainty. 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 may in the future exceed the Partnership's current working capital reserves. In that event, the Partnership would utilize the remaining working capital reserves, eliminate or reduce distributions, or sell one or more properties. Except as discussed above, management is not aware of any other trends, events, commitments or uncertainties that will have a significant impact on liquidity. Real Estate Market - ------------------ The real estate market has begun to recover (for selected markets and property types) from the effects of the substantial decline in the market value of existing properties which occurred in the early 1990's. However, market values have been slow to recover and high vacancy rates continue to exist in some areas. Technological changes are also occurring which may reduce the office space needs of many users. As a result, the Partnership's potential for realizing the full value of its investment in its properties is at continued risk. 13 Impairment of Assets - -------------------- The Partnership evaluates the recoverability of the net carrying value of its real estate and related assets at least annually, and more often if circumstances dictate. The Partnership estimates the future cash flows expected to result from the use of each property and its eventual disposition, generally over a five-year holding period. In performing this review, management takes into account, among other things, the existing occupancy, the expected leasing prospects of the property and the economic situation in the region where the property is located. If the sum of the expected future cash flows, undiscounted, is less than the carrying amount of the property, the Partnership recognizes an impairment loss, and reduces the carrying amount of the asset to its estimated fair value. Fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Management estimates fair value using discounted cash flows or market comparables, as most appropriate for each property. Independent certified appraisers are utilized to assist management, when warranted. Impairment write-downs recorded by the Partnership do not affect the tax basis of the assets and are not included in the determination of taxable income or loss. Because the cash flows used to evaluate the recoverability of the assets and their fair values are based upon projections of future economic events such as property occupancy rates, rental rates, operating cost inflation and market capitalization rates which are inherently subjective, the amounts ultimately realized at disposition may differ materially from the net carrying values at the balance sheet dates. The cash flows and market comparables used in this process are based on good faith estimates and assumptions developed by management. Unanticipated events and circumstances may occur and some assumptions may not materialize; therefore, actual results may vary from the estimates and the variances may be material. The Partnership may provide additional write-downs, which could be material in subsequent years if real estate markets or local economic conditions change. All of the Partnership's properties have experienced varying degrees of operating difficulties and the Partnership recorded significant impairment write-downs in 1995 and prior years. Improvements in the real estate market and in the properties operations resulted in no write-downs for impairment being needed in 1996, 1997 or 1998. 14 The following table represents the write-downs for impairment recorded on the Partnership's properties: Property Seattle Tower $ 6,050,000 Century Park I 11,700,000 568 Broadway 10,821,150 Westbrook(b) 3,400,000 Loch Raven 4,800,000 Southport 4,900,000 Southern National(a) 3,631,000 ----------- $45,302,150 =========== (a) Property sold in August 1994 (b) Property sold in August 1998 Results Of Operations 1998 vs. 1997 - ------------- The Partnership experienced an increase in net income for the year ended December 31, 1998 compared to the prior year due to the gain on the sale of the Westbrook property, higher rental revenues and lower costs and expenses. These increases to net income were partially offset by lower interest and other income during 1998. Rental revenues increased at Century Park and Southport during the year ended December 31, 1998 compared to 1997, primarily due to higher occupancy and rental rates, respectively. These increases were partially offset by lower rental revenues at Westbrook during the second half of 1998 as a result of the sale of the property in August 1998, as previously discussed. Costs and expenses decreased during the year ended December 31, 1998 compared to the same period in 1997, primarily due to decreases in operating expenses, partnership management fees and administrative expenses. Operating expenses decreased during 1998 due to the sale of Westbrook in August 1998 and a decrease in insurance expenses at all of the properties due to the payment of lower premiums while coverage remained the same. Administrative expenses for the year ended December 31, 1998 decreased compared to 1997 due to lower legal and accounting fees related to the ongoing litigation and possible reorganization of the Partnership. Depreciation and amortization increased due to higher depreciation recorded in 1998 on certain capitalized tenant improvements. Property management fees were higher in 1998 due to higher revenues, as previously discussed. Interest income decreased in 1998 due to lower interest rates and lower invested cash balances during the current year compared to 1997. Other income decreased during the year ended December 31, 1998 compared to 1997 due to fewer investor transfers. 15 1997 vs. 1996 - ------------- The Partnership's net income for the year ended December 31, 1997 remained consistent compared to the prior year as higher rental revenues and interest income were offset by higher costs and expenses and lower other income during 1997. Rental revenues increased at Southport and 568 Broadway during the year ended December 31, 1997 compared to 1996, primarily due to higher percentage rents collected during 1997 at Southport and lease renewals at 568 Broadway at rates higher than those in 1996. These increases were partially offset by lower rental revenues at Westbrook primarily due to lower occupancy rates in 1997 as compared to 1996. Costs and expenses increased during the year ended December 31, 1997 compared to the same periods in 1996, primarily due to increases in operating expenses, depreciation and amortization, and property management fees. Operating expenses increased during 1997 due to higher real estate taxes and higher bad debt expenses partially offset by lower insurance expense. Overall real estate tax expense was higher at 568 Broadway in 1997 due to the significant refunds received in 1996 which offset the annual tax payments. Bad debt expense increased at Westbrook as certain tenants' accounts were written-off as the tenants vacated. Insurance expenses decreased during 1997 due to the payment of lower premiums while coverage remained the same. Depreciation and property management fees were higher in 1997 due to significant capital additions in 1996 and higher revenues, respectively. These increases were partially offset by lower administrative expenses, as legal and accounting fees related to ongoing litigation and the HEP reorganization were higher in 1996. Interest income increased in 1997 due to higher interest rates and higher invested cash balances compared to the 1996. Other income decreased during the year ended December 31, 1997 compared to 1996 due to fewer investor transfers. 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 Item 3 and Note 7 to the Partnership's financial statements for a description thereof. 16 Year 2000 Compliance - -------------------- The Year 2000 compliance issue concerns the inability of computerized information systems and equipment to accurately calculate, store or use a date after December 31, 1999, as a result of the year being stored as a two digit number. This could result in a system failure or miscalculations causing disruptions of operations. The Partnership and its Manager (NorthStar Presidio Management Co., LLC) recognize the importance of ensuring that its business operations are not disrupted as a result of Year 2000 related computer system and software issues. The manager is in the process of assessing its internal computer information systems and is now taking the further steps necessary to remediate these systems so that they will be Year 2000 compliant. In connection therewith, the manager is currently in the process of installing a new fully compliant accounting and reporting system. The Manager is also currently reviewing its other internal systems and programs, along with those of its unaffiliated third party service providers, in order to insure compliance. Further, the Manager and these service providers are currently evaluating and assessing those computer systems not related to information technology. These systems, that generally operate in a building include, without limitation, telecommunication systems, security systems (such as card-access door lock systems), energy management systems and elevator systems. As a result of the technology used in this type of equipment, it is possible that this equipment may not be repairable, and accordingly may require complete replacement. Because this assessment is ongoing, the total cost of bringing all systems and equipment into Year 2000 compliance has not been fully quantified. Based upon available information, the Manager does not believe that these costs will have a material adverse effect on the Partnership's business, financial condition or results. However, it is possible that there could be adverse consequences to the Partnership as a result of Year 2000 issues that are outside the Partnership's control. The Manager is in the preliminary stages of evaluating these issues and will be developing contingency plans. Forward-looking Statements - -------------------------- Certain statements made in this report may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1993, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements include statements regarding the intent, belief or current expectations of the Partnership and its management and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Partnership to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: general economic and business conditions, which will, among other things, affect the demand for retail space or retail goods, availability and creditworthiness of prospective tenants, lease rents and the terms and availability of financing, adverse changes in the real estate markets including, among other things, competition with other companies; risks of real estate development and acquisition; governmental actions and initiatives; and environment/safety requirements. 17 Item 8. Financial Statements and Supplementary Data INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85, A CALIFORNIA LIMITED PARTNERSHIP FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 and 1996 I N D E X Page Number ------ Independent Auditors' Report....................................... 19 Financial statements, years ended December 31, 1998, 1997 and 1996 Balance Sheets............................................ 20 Statements of Operations.................................. 21 Statements of Partners' Equity............................ 22 Statements of Cash Flows.................................. 23 Notes to Financial Statements............................. 24 18 INDEPENDENT AUDITORS' REPORT To the Partners of Integrated Resources High Equity Partners, Series 85 We have audited the accompanying balance sheets of Integrated Resources High Equity Partners, Series 85 (a California limited partnership) as of December 31, 1998 and 1997, and the related statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a) 2. These financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule 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, such financial statements present fairly, in all material respects, the financial position of Integrated Resources High Equity Partners, Series 85 at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such 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. /s/DELOITTE & TOUCHE LLP - ------------------------ DELOITTE & TOUCHE LLP March 17, 1999 New York, NY 19
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 BALANCE SHEETS December 31, ----------------------------- 1998 1997 ----------- ----------- ASSETS Real estate ................................ $32,518,352 $33,033,710 Cash and cash equivalents .................. 6,301,641 4,350,887 Other assets ............................... 1,847,273 2,033,252 Receivables ................................ 147,423 182,568 ----------- ----------- TOTAL ASSETS ............................... $40,814,689 $39,600,417 =========== =========== LIABILITIES AND PARTNERS' EQUITY Accounts payable and accrued expenses ...... $ 1,265,264 $ 1,183,720 Due to affiliates .......................... 362,440 577,739 Distributions payable ...................... 395,799 395,799 ----------- ----------- Total liabilities ..................... 2,023,503 2,157,258 ----------- ----------- COMMITMENTS AND CONTINGENCIES PARTNERS' EQUITY: Limited partners' equity (400,010 units issued and outstanding) .......... 36,850,676 35,570,050 General partners' equity ................. 1,940,510 1,873,109 ----------- ----------- Total partners' equity ................ 38,791,186 37,443,159 ----------- ----------- TOTAL LIABILITIES AND PARTNERS' EQUITY ..... $40,814,689 $39,600,417 =========== ===========
See notes to financial statements 20
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 STATEMENTS OF OPERATIONS For the Year Ended December 31 ---------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Rental Revenue ........................................... $9,189,542 $9,021,378 $8,888,016 ---------- ---------- ---------- Costs and Expenses: Operating expenses ........................... 3,276,169 3,426,267 3,139,504 Depreciation and amortization ................ 1,416,510 1,360,929 1,270,172 Partnership management fee ................... 887,329 908,172 908,172 Administrative expenses ...................... 916,066 1,116,971 1,359,027 Property management fee ...................... 371,144 350,490 327,759 ---------- ---------- ---------- 6,867,218 7,162,829 7,004,634 ---------- ---------- ---------- Income before gain on sale of property, interest and other 2,322,324 1,858,549 1,883,382 income Gain on sale of property ........................ 389,359 -- -- Interest income ................................. 185,290 207,420 141,939 Other income .................................... 34,250 68,690 109,396 ---------- ---------- ---------- Net Income ............................................... $2,931,223 $2,134,659 $2,134,717 ========== ========== ========== Net income attributable to: Limited partners ................................. $2,784,662 $2,027,926 $2,027,981 General partners ................................ 146,561 106,733 106,736 ---------- ---------- ---------- Net income ............................................... $2,931,223 $2,134,659 $2,134,717 ========== ========== ========== Net income per unit of limited partnership Interest (400,010 units outstanding) ................ $ 6.96 $ 5.07 $ 5.07 ========== ========== ==========
See notes to financial statements 21
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 STATEMENTS OF PARTNERS' EQUITY General Limited Partners' Partners' Equity Equity Total ------------ ------------ ------------ Balance, January 1, 1996 ........... $ 1,785,328 $ 33,902,201 $ 35,687,529 Net Income ......................... 106,736 2,027,981 2,134,717 Distributions as return of capital . (50,528) (960,024) (1,010,552) ($2.40 per limited partnership unit) ------------ ------------ ------------ Balance, December 31, 1996 ......... 1,841,536 34,970,158 36,811,694 Net Income ......................... 106,733 2,027,926 2,134,659 Distributions as return of capital . (75,160) (1,428,034) (1,503,194) ($3.57 per limited partnership unit) ------------ ------------ ------------ Balance, December 31, 1997 ......... 1,873,109 35,570,050 37,443,159 Net Income ......................... 146,561 2,784,662 2,931,223 Distributions as a return of capital (79,160) (1,504,036) (1,583,196) ($3.76 per limited partnership unit) ------------ ------------ ------------ Balance, December 31, 1998 $ 1,940,510 $ 36,850,676 $ 38,791,186 ============ ============ ============
See notes to financial statements 22
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 STATEMENTS OF CASH FLOWS For the Years Ended December 31, --------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- CASH FLOW FROM OPERATING ACTIVITIES: Net Income ............................................... $ 2,931,223 $ 2,134,659 $ 2,134,717 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of property ............................. (389,359) -- -- Depreciation and amortization ....................... 1,416,510 1,360,929 1,270,172 Straight line adjustment for stepped lease rentals .. (41,629) 3,999 (52,915) Changes in operating assets and liabilities: Accounts payable and accrued expenses ............... 81,544 121,988 44,935 Receivables ......................................... 35,145 (24,364) 44,558 Due to affiliates ................................... (215,299) (586,382) 811,488 Other assets (243,951) (202,800) (177,542) ----------- ----------- ----------- Net cash provided by operating activities ................ 3,574,184 2,808,029 4,075,413 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of real estate ................... 2,042,964 -- -- Improvements to real estate ......................... (2,083,198) (1,967,626) (645,287) ----------- ----------- ----------- Net cash used in investing activities .................... (40,234) (1,967,626) (654,287) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to partners ........................... (1,583,196) (1,360,033) (1,010,552) ----------- ----------- ----------- Increase (Decrease) in Cash and Cash Equivalents ......... 1,950,754 (519,630) 2,419,574 Cash and Cash Equivalents, Beginning of Year ............. 4,350,887 4,870,517 2,450,943 ----------- ----------- ----------- Cash and Cash Equivalents, End of Year ................... $ 6,301,64 $ 4,350,887 $ 4,870,517 =========== =========== ===========
See notes to financial statements 23 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 ---------------------------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- 1. ORGANIZATION Integrated Resources High Equity Partners, Series 85, A California Limited Partnership (the "Partnership"), is a limited partnership, organized under the Uniform Limited Partnership Laws of California on August 19, 1983 for the purpose of investing in, holding and operating income-producing real estate. The Partnership will terminate on December 31, 2008 or sooner, in accordance with terms of the Agreement of Limited Partnership. The Partnership invested in three shopping centers (one of which was sold in 1998) and four office properties (one of which was sold in 1994), none of which are encumbered by debt. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial statements -------------------- The financial statements are prepared on the accrual basis of accounting. 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. Reclassifications ----------------- Certain reclassifications have been made to the financial statements for the prior years in order to conform to the current year's classifications. Cash and cash equivalents ------------------------- For purposes of the balance sheets and statements of cash flows, the Partnership considers all short-term investments which have original maturities of three months or less from the date of issuance to be cash equivalents. Leases ------ The Partnership accounts for its leases under the operating method. Under this method, revenue is recognized as rentals become due, except for stepped leases where the revenue from the lease is averaged over the life of the lease. 24 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 ---------------------------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Depreciation ------------ Depreciation is computed using the straight-line method over the useful life of the property, which is estimated to be 40 years. The cost of properties represents the initial cost of the properties to the Partnership plus acquisition and closing costs less write-downs, if any. Tenant improvements are amortized over the applicable lease term. Investments in joint ventures For properties purchased in joint venture ownership with affiliated partnerships, the financial statements present the assets, liabilities, and expenses of the joint venture on a pro rata basis in accordance with the Partnership's percentage of ownership. Impairment of Assets -------------------- The Partnership evaluates the recoverability of the net carrying value of its real estate and related assets at least annually, and more often if circumstances dictate. The Partnership estimates the future cash flows expected to result from the use of each property and its eventual disposition, generally over a five-year holding period. In performing this review, management takes into account, among other things, the existing occupancy, the expected leasing prospects of the property and the economic situation in the region where the property is located. If the sum of the expected future cash flows, undiscounted, is less than the carrying amount of the property, the Partnership recognizes an impairment loss, and reduces the carrying amount of the asset to its estimated fair value. Fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Management estimates fair value using discounted cash flows or market comparables, as most appropriate for each property. Independent certified appraisers are utilized to assist management, when warranted. Impairment write-downs recorded by the Partnership do not affect the tax basis of the assets and are not included in the determination of taxable income or loss. Because the cash flows used to evaluate the recoverability of the assets and their fair values are based upon projections of future economic events such as property occupancy rates, rental rates, operating cost inflation and market capitalization rates which are inherently subjective, 25 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 ---------------------------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) the amounts ultimately realized at disposition may differ materially from the net carrying values at the balance sheet dates. The cash flows and market comparables used in this process are based on good faith estimates and assumptions developed by management. Unanticipated events and circumstances may occur and some assumptions may not materialize; therefore, actual results may vary from the estimates and the variances may be material. The Partnership may provide additional write-downs, which could be material in subsequent years if real estate markets or local economic conditions change. Income Taxes ------------ No provision has been made for income taxes for federal, state, and local income taxes since they are the personal responsibility of the partners. Net income (loss) and distributions per unit of limited partnership interest ----------------------------------------------------------------------- Net income (loss) and distributions per unit of limited partnership interest is calculated based upon the number of units outstanding (400,010) for each of the years ended December 31, 1998, 1997, and 1996. Comprehensive Income -------------------- Because the Partnership has no items of other comprehensive income, the Partnership's net income and comprehensive net income are the same for all periods presented. In June of 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and for hedging activities, and will be effective for the Partnership in January of 2000. Because the Partnership does not currently utilize derivatives or engage in hedging activities, management does not believe that implementation of this standard will have a material effect on the Partnership's financial statements. The Managing General Partner of the Partnership, Resources High Equity Inc., is a wholly owned subsidiary of Presidio Capital Corp. ("Presidio"). Presidio AGP Corp., which is also a wholly owned subsidiary of Presidio, is the Associate General Partner (together with the Managing General Partner, the "General Partners"). Affiliates of the General Partners are also engaged in businesses related to the acquisition and operation of real estate. 26 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 ---------------------------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- 3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED) ----------------------------------------------------------------------- Presidio is also the parent of other corporations that are or may in the future be engaged in business that may be in competition with the Partnership. Accordingly, conflicts of interest may arise between the Partnership and such other businesses. Subject to the rights of the Limited Partners under the Limited Partnership Agreement, Presidio controls the Partnership through its indirect ownership of all the shares of the General Partners. Effective July 31, 1998, Presidio is indirectly controlled by NorthStar Capital Investment Corp., a Maryland Corporation. Effective as of August 28, 1997, Presidio has a management agreement with NorthStar Presidio Management Company LLC ("NorthStar Presidio"), an affiliate of NorthStar Capital Investment Corp., pursuant to which NorthStar Presidio will provide the day-to-day management of Presidio and its direct and indirect subsidiaries and affiliates. For the year ended December 31, 1998, reimbursable expenses incurred by NorthStar Presidio amounted to approximately $102,007. The Partnership has a property management services agreement with Resources Supervisory Management Corp. ("Resources Supervisory"), an affiliate of the Managing General Partner, to perform certain functions relating to the management of the properties of the Partnership. Portions 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 years ended December 31, 1998, 1997, and 1996, Resources Supervisory was entitled to receive an aggregate of $371,144, $350,490 and $327,759, respectively, of which $212,371, $196,300 and $191,956 was paid to unaffiliated management companies, respectively. For the administration of the Partnership the Managing General Partner is entitled to receive reimbursement of expenses of a maximum of $150,000 per year for each of the years ended December 31, 1998, 1997 and 1996. For managing the affairs of the Partnership, the Managing General Partner is entitled to receive a 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 the years ended December 31, 1998, 1997, and 1996 the Managing General Partner earned $887,329, $908,172 and $908,172, respectively. The General Partners are allocated 5% of the net income of the Partnership which amounted to $146,561, $106,733 and $106,736 in 1998, 1997 and 1996, respectively. The General Partners are also entitled to receive 5% of distributions which amounted to $79,160, $75,160 and $50,528 in 1998, 1997 and 1996, respectively. 27 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 ---------------------------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- 3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED) ----------------------------------------------------------------------- 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 returns on their investments. All fees received by the General Partners are subject to certain limitations as set forth in the Partnership Agreement. From July 1996 through March 12, 1998, Millennium Funding II Corp., a wholly owned indirect subsidiary of Presidio, purchased 39,123 units of the Partnership from various limited partners. In connection with a tender offer for units of the Partnership made March 12, 1998 (the "Offer") by Olympia Investors, L.P., a Delaware limited partnership controlled by Carl Ichan ("Olympia"), Olympia and Presidio entered into an agreement dated March 6, 1998 (the "Agreement"). Subsequent to the expiration of the offer, Olympia announced that it had accepted for payment 31,132 units properly tendered pursuant to the Offer. Pursuant to the Agreement, Presidio purchased 50% of the units owned by Olympia as a result of the Offer, or 15,566 units, for $101.81 per unit. Presidio may be deemed to beneficially own the remaining units owned by Olympia as a consequence of the Agreement Subsequent to the expiration of the tender offer described above, Millennium Funding II Corp. purchased 12,451 limited partnership units from August 1998 through February 1999. The total of these purchases and the units purchased from Olympia (as described above) represents approximately 16.8% of the outstanding limited partnership units of the Partnership. 28 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 ---------------------------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- 4. REAL ESTATE ----------- The Partnership recorded substantial write-downs prior to 1996. No write-downs were required for 1996, 1997 or 1998. The following table summarizes write-downs recorded on the properties: Property -------- Seattle Tower $ 6,050,000 Century Park I 11,700,000 568 Broadway 10,821,150 Westbrook(b) 3,400,000 Loch Raven 4,800,000 Southport 4,900,000 Southern National(a) 3,631,000 ----------- $45,302,150 =========== (a) Property sold in August 1994. (b) Property sold in August 1998. The following table is a summary of the Partnership's real estate as of:
December 31, --------------------------------- 1998 1997 ------------ ------------- Land ................................... $ 10,370,965 $ 11,056,966 Buildings and improvements ............. 36,790,720 36,784,708 ------------ ------------ 47,161,685 47,841,674 Less: Accumulated depreciation ........ (14,643,333) (14,807,964) ------------ ------------ $ 32,518,352 $ 33,033,710 ============ ============
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 ---------------------------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- 4. REAL ESTATE (continued) ----------- During 1998, revenues from the Southport and 568 Broadway properties represented 33% and 28% of gross revenues, respectively. No single tenant accounted for more than 10% of the Partnerships' rental revenues in 1998. The following is a summary of the Partnership's share of anticipated future receipts under noncancellable leases:
1999 2000 2001 2002 2003 Thereafter Total --------- ---------- ---------- ---------- ---------- ----------- ----------- Total: $6,436,000 $5,977,000 $5,082,000 $4,421,000 $3,868,000 $6,093,000 $31,877,000 ========== ========== ========== ========== ========== =========== ===========
29 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 ---------------------------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- 5. DISTRIBUTIONS PAYABLE ---------------------
December 31, --------------------------------------- 1998 1997 ---------------- ---------------- Limited Partners ($.94 per unit) $ 376,009 $ 376,009 General Partners 19,790 19,790 ---------------- ---------------- $ 395,799 $ 395,799 ================ ================
Such distributions were paid in the subsequent quarters. 6. DUE TO AFFILIATES -----------------
December 31, --------------------- 1998 1997 -------- -------- Partnership management fee .............................. $211,409 $227,044 Reorganization and litigation cost reimbursement (Note 7) -- 210,000 Property management fee ................................. 113,531 103,195 Non-accountable expense reimbursement ................... 37,500 37,500 ======== ======== $362,440 $577,739 ======== ========
Such amounts were paid in the subsequent quarters 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 indeterminable amount. The Broadway Joint Venture's action for rent against Solo Press was tried in 1992 and INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 ---------------------------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) ----------------------------------------- resulted in a judgement in favor of the Broadway Joint Venture for rent owed. The Partnership believes this will result in dismissal of the action brought by Solo Press against the Broadway Joint Venture. Since the facts of the other actions which involve material claims or counterclaims are substantially similar, the Partnership believes that the Broadway Joint Venture will prevail in those actions as well. 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 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 their 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 without merit and intends to vigorously defend it. 30 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 ---------------------------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) ----------------------------------------- In May 1993, limited partners in High Equity Partners L.P. - Series 86 ("HEP-86"), an affiliated partnership, commenced an action (the "Action") in the Superior Court for the State of California for the County of Los Angeles (the "Court") on behalf of a purported class consisting of all the purchasers of limited partnership interests in HEP-86. On April 7, 1994 the plaintiffs were granted leave to file an amended complaint on behalf of a class consisting of all the purchasers of limited partnership interests in HEP-86, the Partnership, and High Equity Partners L.P. - Series 88 ("HEP-88"), another affiliated partnership (collectively, the "HEP Partnerships"). In November 1995, the original plaintiffs and intervening plaintiffs filed a consolidated class and derivative action complaint (the "Consolidated Complaint") alleging various state law class and derivative claims, including claims for breach of fiduciary duty; breach of contract; unfair and fraudulent business practices under California Bus. & Prof. Code Section 17200; negligence; dissolution, accounting, receivership and removal of general partner; fraud; and negligent misrepresentation. The Consolidated Complaint alleges, among other things, that the general partners of the HEP Partnerships collectively, "HEP General Partners" caused a waste of the HEP Partnerships' assets by collecting management fees in lieu of pursuing a strategy to maximize the value of the investments owned by the investors in the HEP Partnerships, that the HEP General Partners breached their duty of loyalty and due care to the investors by expropriating management fees from the HEP Partnerships without trying to run the HEP Partnerships for the purposes for which they were intended; that the HEP General Partners were acting improperly to entrench themselves in their position of control over the HEP Partnerships and that their actions prevented non-affiliated entities from making and completing tender offers to purchase units of limited partnership interest in the HEP Partnerships (collectively, the "HEP Units"); that, by refusing to seek the sale of the HEP Partnerships' properties, the HEP General Partners diminished the value of the investors' equity in the HEP Partnerships; that the HEP General Partners took heavily overvalued asset management fees; and that HEP Units were sold and marketed through the use of false and misleading statements. 31 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 NOTES TO FINANCIAL STATEMENTS 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) ----------------------------------------- In early 1996, the parties submitted a proposed settlement to the Court (the "Proposed Settlement"), which contemplated a reorganization of the three HEP Partnerships into a single real estate investment trust, pursuant to which approximately 85% of the shares of the real estate investment trust would have been allocated to investors in the three HEP Partnerships (assuming each of the HEP Partnerships participated in the reorganization), and approximately 15% of the shares would have been allocated to the HEP General Partners. As a consequence, the Proposed Settlement would, among other things, have approximately tripled the HEP General Partners' equity interests in the HEP Partnerships. In late 1996, the California Department of Corporations informed the Court of the conclusion that the Proposed Settlement was unfair, and, in early 1997, the Court declined to grant final approval of the Proposed Settlement because the Court was not persuaded that the Proposed Settlement was fair, adequate or reasonable as to the proposed class. In July 1997, the plaintiffs filed an amended complaint, which generally asserts the same claims as the earlier Consolidated Complaint but contains more detailed factual assertions and eliminates some claims they had previously asserted. The HEP General Partners challenged the amended complaint on legal grounds and filed demurrers and a motion to strike. In October 1997, the Court granted substantial portions of the HEP General Partners' motions. Thereafter, the HEP General Partners served answers denying the allegations and asserting numerous defenses. In February 1998, the Court certified three separate plaintiff classes consisting of the current owners of record of HEP Units (but excluding all defendants or entities related to such defendants), and appointed class counsel and liaison counsel. In mid-1998, the parties actively engaged in negotiations concerning a possible settlement of the Action. In September 1998, the parties reached an agreement in principle, and, during the following months, negotiated a more formal settlement stipulation (the "Settlement Stipulation"), which they executed in December 1998. The Settlement Stipulation was submitted to the Court for preliminary approval in early January 1999. In February 1999, the Court gave preliminary approval to the Settlement Stipulation and directed that notice of the proposed settlement be sent to the previously certified class. The proposed settlement contemplates (I) amendments to the Partnership Agreement that would modify the existing fee structure; (II) a tender offer whereby the General Partners would purchase up to 6.7% of the units from limited partners; and (III) that the General Partners will use their best efforts to effect a reorganization of the HEP Partnerships into REITs or other publicly traded entitites. A hearing to consider whether the Court should give final approval to the Settlement Stipulation is scheduled for April 14, 1999. The settlement is subject to a number of conditions. There can be no assurance that such conditions will be fulfilled. The General Partners believe that each of the claims asserted in the Action are meritless and, if for any reason a final settlement pursuant to the Settlement Stipulation is not consummated, intend to continue to vigorously defend the Action. 32 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 NOTES TO FINANCIAL STATEMENTS 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) ----------------------------------------- The Limited Partnership Agreement provides for indemnification of the General Partners and their affiliates in certain circumstances. The Partnership has agreed to reimburse the General Partners for their actual costs incurred in defending this litigation and the costs of preparing settlement materials. Through December 31, 1998, the Partnership paid the General Partners a total of $1,034,510 for these costs. 8. RECONCILIATION OF NET INCOME AND NET ASSETS PER FINANCIAL STATEMENTS TO ----------------------------------------------------------------------- TAX REPORTING ------------- The Partnership files its tax returns on an accrual basis and has computed depreciation for tax purposes using the accelerated cost recovery systems, which is not in accordance with generally accepted accounting principles. The following is a reconciliation of the net income per the financial statements to the net taxable income.
Years Ended December 31, --------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Net income per financial statements $ 2,931,223 $ 2,134,659 $ 2,134,717 Difference in gain/loss on sale of Westbrook (2,357,221) -- -- Tax depreciation in excess of financial statement depreciation (1,499,402) (1,524,130) (1,553,354) ------------ ------------ ------------ Net taxable income (loss) $ (925,400) $ 610,529 $ 581,363 ============ =========== ============
The differences between the Partnership's assets and liabilities for tax purposes and financial reporting purposes are as follows:
December 31, 1998 ------------ Net assets per financial statements ...................................... $ 38,791,186 Write-down for impairment ................................................ 38,271,150 Tax depreciation in excess of financial statement depreciation ........... (15,018,589) Gain on admission of joint venture partner not recognized for tax purposes (307,093) Organization costs not charged to partners' equity for tax purposes ...... 1,500,000 ------------ Net assets per tax reporting ............................................. $ 63,236,654 ============
33 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 Partnership has no officers or directors. The Managing General Partner manages and controls substantially all of the Partnership's affairs and has general responsibility and ultimate authority in all matters affecting its business. The Managing General Partner is also the investment general partner of HEP-86 and the managing general partner of HEP-88, both limited partnerships with investment objectives similar to those of the Partnership. The Associate General Partner is also a general partner in other partnerships affiliated with Presidio and whose investment objectives are similar to those of the Partnership. The Associate General Partner, in its capacity as such, does not devote any material amount of its business time and attention to the Partnership's affairs. Based on a review of Forms 3 and 4 and amendments thereto furnished to the Partnership pursuant to Rule 16a-3(e) during its most recent fiscal year and Form 5 and amendments thereto furnished to the Partnership with respect to its most recent fiscal year, and written representations pursuant to Item 405(b)(2)(i) of Regulation S-K, none of the General Partners, directors or officers of the Managing General Partner or beneficial owners of more than 10% of the Units failed to file on a timely basis reports required by Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") during the most recent fiscal or prior fiscal years. No written representations were received from the partners of the Associate General Partner. 34 As of March 1, 1999 the names and ages of, as well as the positions held by, the officers and directors of the Managing and Associate General Partners were as follows:
Name Age Position Held Has served as a Director and/or Officer of the Managing General Partner since - ------------------------------------------------------------------------------------------------------- W. Edward Scheetz 34 Director November 1997 David Hamamoto 39 Director November 1997 Dallas E. Lucas 36 Director August 1998 David King 36 Executive Vice President and Assistant November 1997 Treasurer, Director Lawrence R. Schachter 42 Senior Vice President and Chief January 1998 Financial Officer J. Peter Paganelli 40 Senior Vice President, Secretary and March 1998 Treasurer Allan B. Rothschild 37 President, Director December 1997 Marc Gordon 34 Vice President November 1997 Charles Humber 25 Vice President November 1997 Adam Anhang 25 Vice President November 1997 Gregory Peck 24 Assistant Secretary November 1997
There are no family relationships between or among any of the directors and/or executive officers of the General Partner. W. Edward Scheetz co-founded NorthStar Capital Partners LLC with David Hamamoto in July 1997, From 1993 through 1997, Mr. Scheetz was a partner at Apollo Real Estate Advisors L.P. From 1989 to 1993, Mr. Scheetz was a principal with Trammell Crow Ventures. David Hamamoto co-founded NorthStar Capital Partners LLC with W. Edward Scheetz in July 1997. From 1988 to 1997, Mr Hamamoto was a partner and a co-head of the real estate principal investment area at Goldman, Sachs & Co. Dallas E. Lucas joined Northstar Capital Partners LLC in August 1998. From 1994 until then he was the Chief Financial Officer of Crescent Real Estate Equities Company. Prior to that he was a financial consulting and audit manager in the real estate services group of Arthur Anderson LLP. 35 David King joined NorthStar Capital Partners LLC in November 1997. From 1990 to 1997, Mr. King was associated with Olympia & York Companies (USA) where he held the position of Senior Vice President of Finance. Prior to that Mr. King was employed with Bankers Trust in its real estate finance group. Lawrence R. Schachter joined NorthStar Presidio in January 1998 From 1996 to 1998, Mr. Schachter was Controller at CB Commercial/Hampshire LLC. From 1995 to 1996, Mr. Schachter was Controller at Goodrich Associates. From 1992 to 1995, Mr. Schachter was Controller at Greenthal/Harlan Realty Services Co. J. Peter Paganelli joined NorthStar Presido in March 1998. From 1997 to 1998, Mr. Paganelli was Director of Asset Management at Argent Ventures LLC, a private real estate aompany. From 1994 to 1997, Mr. Paganelli was a Vice President at Starwood Capital Group, LLC in its Asset Management Group. From 1986 to 1994, Mr. Paganelli was an Associate Director at Cushman & Wakefield, Inc. in its Financial Services and Asset Services Groups. Allan B. Rothschild joined NorthStar Presidio in December 1997 From 1995 to 1997, Mr. Rothschild was Senior Vice President and General Counsel of Newkirk Limited Partnership. From 1987 to 1995, Mr. Rothschild was associated with the law firm of Proskauer, Rose LLP in its real estate group. Marc Gordon joined NorthStar Capital Partners LLC in October 1997 From 1993 to 1997, Mr. Gordon was Vice President in the real estate investment banking group at Merrill Lynch. Prior to That, Mr. Gordon was associated with the law firm of Irell & Manella in its real estate and banking group. Charles Humber joined NorthStar Capital Partners LLC in September 1997. From 1996 to 1997, Mr Humber was employed with Merrill Lynch in its real estate investment banking group. Prior to that, Mr. Humber was a student at Brown University. Adam Anhang joined NorthStar Capital Partners LLC in August 1997. From 1996 to 1997, Mr. Anhang was employed by The Athena Group as part of its Russia and former Soviet Union development team. Prior to that, Mr. Anhang was a student at the Wharton School of the University of Pennsylvania. Gregory Peck joined NorthStar Capital Partners LLC in July 1997. From 1996 to 1997, Mr. Peck was employed by Morgan Stanley as part of Morgan Stanley Realty Real Estate Funds (MSREF) and Morgan Stanley's Real Estate Investment Banking Group. From 1994 to 1996, Mr. Peck worked for Lazard Freres & Co. LLC in the Real Estate Investment Banking Group. Many of the above officers and directors of the Managing General Partner and Associate General Partner are also officers and/or directors of the general partners of other public partnerships affiliated with Presidio or of various subsidiaries of Presidio. 36 All of the directors will hold office, subject to the bylaws of the Managing General Partner, until the next annual meeting of stockholders of the Managing General Partner and until their successors are elected and qualified. There are no family relationships between any executive officer and any other executive officer or director of the Managing General Partner. Affiliates of the General Partners are also engaged in business related to the acquisition and operation of real estate. Many of the officers, directors and partners of the Managing General Partner and the Associate General Partner are also officers and/or directors of the general partners of other public partnerships controlled by Presidio and various subsidiaries of Presidio. Item 11. Executive Compensation ---------------------- The Partnership is not required to and did not pay renumeration to the officers and directors of the Managing General Partner or the partners of the Associate General Partner. Certain officers and directors of the Managing General Partner receive compensation from the Managing General Partner and/or its affiliates (but not from the Partnership) for services performed for various affiliated entities, which may include services performed for the Partnership; however, the Managing General Partner believes that any compensation attributable to services performed for the Partnership is immaterial. See also "Item 13. Certain Relationships and Related Transactions." Item 12. Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- As of March 1, 1999, an affiliate of the General Partners owned approximately 16.8% of the Units. No directors, officers or partners of the Managing General Partner presently own any Units. To the knowledge of the Registrant, the following sets forth certain information regarding ownership of the Class A shares of Presidio as of March 15, 1999 (except as otherwise noted) by: (i) each person or entity who owns of record or beneficially five percent or more of the Class A shares, (ii) each director and executive officer of Presidio, and (iii) all directors and executive officers of Presidio as a group. To the knowledge of Presidio, each of such share-holders has sole voting and investment power as to the shares shown unless otherwise noted. 37 All outstanding shares of Presidio are owned by Presidio Capital Investment Company, LLC ("PCIC"), a Delaware limited liability company. The interests in PCIC (and beneficial ownership in Presidio) are held as follows: Percentage Ownership in PCIC and Percentage Beneficial Ownership Name of Beneficial Owner in Presidio ------------------------ --------------------------------- Five Percent Holders: NorthStar Presidio Capital Holding Corp. (1) 71.93% AG Presidio Investors, LLC (2) 14.12% DK Presidio Investors, LLC (3) 8.45% Stonehill Partners, L.P. (4) 5.50% The holdings of the directors and executive officers of Presidio are as follows: Percentage Ownership in PCIC and Percentage Beneficial Ownership Name of Beneficial Owner in Presidio ------------------------ --------------------------------- Name of Beneficial Owner Directors and Officers: ----------------------- Adam Anhang (5) 0% Marc Gordon (5) 0% David Hamamoto (5) 71.93% Charles Humber (5) 0% David King (5) 0% Gregory Peck (5) 0% Dallas Lucas (5) 0% Allan Rothschild (5) 0% J. Peter Paganelli (5) 0% Lawrence Schachter (5) 0% W. Edward Scheetz (5) 71.93% Directors and Officers as a group: 71.93% ---------------------------------- 38 (1) NorthStar Presidio Capital Holding Corp. ("NS Presidio") is a Delaware corporation whose address is c/o NorthStar Capital Investment Corp., 527 Madison Avenue, 16th Floor, New York, New York, 10022. NS Presidio has three shareholders: (1) NorthStar Partnership L.P., a Delaware limited partnership whose address is c/o NorthStar Capital Investment Corp., 527 Madison Avenue, 16th Floor, New York, New York, 10022, holds 99% of the common stock (non-voting);(II) David T. Hamamoto holds 0.5& of the common stock (voting); and (III) W. Edward Scheetz holds 0.5% of the common stock (voting). (2) Each of Angelo, Gordon & Co., L.P., as sole manager of AG Presidio Investors, LLC and John M. Angelo and Michael L. Gordon, as general partners of the general partner of Angelo, Gordon & Co., L.P., may be deemed to beneficially own for purposes of Rule 13d-3 of the Exchange Act the securities beneficially owned by AG Presidio Investors, LLC. Each of John M. Angelo and Michael L. Gordon disclaims such beneficial ownership. The business address for such persons is c/o Angelo, Gordon & Co., L.P., 245 Park Avenue, 26th Floor, New York, New York 10167. 39 (3) M.H. Davidson & Company, as sole manager of DK Presidio Investors, LLC, may be deemed to beneficially own for purposes of Rule 13d-3 of the Exchange Act the securities beneficially owned by DK Presidio Investors, LLC. The business address for such persons is c/o M.H. Davidson & Company, 885 Third Avenue, New York, New York 10022. (4) Includes shares of PCIC beneficially owned by Stonehill Offshore Partners Limited and Stonehill Partners, L.P. John A. Motulsky is a managing general partner of Stonehill Partners, L.P., a managing member of the investment advisor to Stonehill Offshore Partners Limited and a general partner of Stonehill Institutional Partners L.P. John A. Motulsky disclaims beneficial ownership of the shares held by these entities. The business address for such persons is c/o Stonehill Investment Corporation, 110 East 59th Street, New York, New York 10022. (5) The Business address for such person is 527 Madison Avenue, 16th Floor, New York, New York, 10022. Item 13. Certain Relationships and Related Transactions ---------------------------------------------- The General Partners and certain affiliated entities have, during the year ended December 31, 1998, earned or received compensation or payments for services or reimbursements from the Partnership or Presidio subsidiaries as follows:
Compensation from Name of Recipient Capacity in Which Served the Partnership - ----------------- ------------------------ --------------- Resources High Equity Inc. Managing General Partner $1,114,905(1) Presidio AGP Corp. Associate General Partner 1,584(2) Resources Supervisory Management Corp. Affiliated Property Managers 158,774(3)
- ----------- 1 Of this amount $77,576 represents the Managing General Partner's share of distributions of cash from operations, $150,000 represents payment for non-accountable expenses of the Managing General Partner based upon the number of Units sold and $887,329 represents a Partnership Management Fee for managing the affairs of the Partnership. Furthermore, under the Partnership's Limited Partnership Agreement, 5% of the Partnership's net income and net loss is allocated to the General Partners (0.1% to the Associate General Partner and 4.9% to the Managing General Partner). Pursuant thereto, for the year ended December 31, 1998, $42,773 of the Partnership's taxable income was allocated to the Managing General Partner. 40 2 This amount represents the Associate General Partner's share of distributions of cash from operations. In addition, for the year ended December 31, 1998, $873 of the Partnership's taxable income was allocated to the Associate General Partner. 3 This amount was earned pursuant to a management agreement with Resources Supervisory, a wholly owned subsidiary of Presidio, for performance of certain functions relating to the management of the Partnership's properties. The total fee payable to Resources Supervisory was $371,144, of which $212,371 was paid to unaffiliated management companies. 41 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ---------------------------------------- (a) (1) Financial Statements: see Index to Financial Statements in Item 8. (a) (2) Financial Statement Schedule: III. Real Estate and Accumulated Depreciation (a) (3) Exhibits: 3, 4. (a) Amended and Restated Partnership Agreement ("Partnership Agreement") of the Partnership, incorporated by reference to Exhibit A to the Prospectus of the Partnership dated February 4, 1985, included in the Partnership's Registration Statement on Form S-11 (Reg. No. 2-92319). (b) Amendment dated April 1, 1985 to the Partnership's Partnership Agreement, incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1985. (c) Restatement of Amendment dated December 1, 1986 to the Partnership's Partnership Agreement, incorporated by reference to the Partnership's Current Report on Form 8-K dated December 8, 1986. (d) Amendment dated as of April 1, 1988 to the Partnership's Partnership Agreement, incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1988. 10. (a) Agent's Agreement between the Partnership and Resources Property Management Corp., incorporated by reference to Exhibit 10(b) to the Partnership's Registration Statement on Form S-11 (Reg. No. 2-92319). (b) Acquisition and Disposition Services Agreement among the Partnership and Realty Resources Inc., and Resources Acquisitions, Inc., incorporated by reference to Exhibit 10(c) to the Partnership's Registration Statement on Form S-11 (Reg. No. 2-92319). (c) Agreement among Resources High Equity, Inc., Integrated Resources, Inc. and Z Square G Partners II, incorporated by reference to Exhibit 10(d) to the Partnership's Registration Statement on Form S-11 (Reg. No. 2-92319). 42 (d) Lease Agreement dated June 12, 1985, between the Partnership and First Federal Savings and Loan Association of South Carolina for the First Federal Office Building, incorporated by reference to Exhibit 10(g) to the Partnership's Post-Effective Amendment No. 1 to Registration Statement on Form S-11 (Reg. No. 2-92319). (e) Joint Venture Agreement dated November 2, 1986 between the Partnership and High Equity Partners, L.P. - Series 86, A California Limited Partnership, with respect to Century Park I, incorporated by reference to Exhibit 10(b) to the Partnership's Current Report on Form 8-K dated November 7, 1986. (f) Joint Venture Agreement dated October 27, 1986 between the Partnership and High Equity Partners, L.P. - Series 86, with respect to 568 Broadway, incorporated by reference to Exhibit 10(b) to the Partnership's Current Report on Form 8-K dated November 19, 1986. (g) Joint Venture Agreement dated November 24, 1986 between the Partnership and High Equity Partners, L.P. - Series 86, with respect to Seattle Tower, incorporated by reference to Exhibit 10(b) to the Partnership's Current Report on Form 8-K dated December 8, 1986. (h) Amended and Restated Joint Venture Agreement dated February 1, 1990 among the Partnership, High Equity Partners, L.P. - Series 86 and High Equity Partners, L.P. - Series 88, with respect to 568 Broadway, incorporated by reference to Exhibit 10(a) to the Partnership's Current Report on Form 8-K dated February 1, 1990. (i) First Amendment to Amended and Restated Joint Venture Agreement of 568 Broadway Joint Venture, dated as of February 1, 1990, among the Partnership, High Equity Partners, L.P. Series 86 and High Equity Partners, L.P. - Series 88, incorporated by reference to Exhibit 10(p) to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1990. (j) Agreement, dated as of March 23, 1990, among the Partnership, Resources High Equity Inc. and Resources Property Management Corp., with respect to the payment of deferred fees, incorporated by reference to Exhibit 10(q) to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1990. (k) Amending Agreement, dated as of December 31, 1991, to Agreement dated as of March 23, 1990, among the Partnership, Resources High Equity Inc. and Resources Property Management Corp., with respect to the payment of deferred fees, incorporated by reference to Exhibit 10(r) to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1991. 43 (l) Form of Termination of Supervisory Management Agreement (separate agreement entered into with respect to each individual property) and Form of Supervisory Management Agreement between the Partnership and Resources Supervisory (separate agreement entered into with respect to each property), incorporated by reference to Exhibit 10(s) to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1991. (m) Amending Agreement, dated as of December 30, 1992, to Agreement dated as of March 23, 1990, among the Partnership, Resources High Equity, Inc. and Resources Property Management Corp., with respect to the payment of deferred fees, incorporated by reference to Exhibit 10(m) to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1992. (n) Amending Agreement, dated as of December 29, 1993, to Agreement dated as of March 23, 1990, among the Partnership, Resources High Equity, Inc. and Resources Property Management Corp., incorporated by reference with respect to the payment of deferred fees. (b) Reports on Form 8-K: -------------------- The Partnership filed the following reports on Form 8-K during the last quarter of the fiscal year: None. 44 Financial Statement Schedule Filed Pursuant to ---------------------------------------------- Item 14(a)(2) ------------- INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85, A CALIFORNIA LIMITED PARTNERSHIP -------------------------------- ADDITIONAL INFORMATION ---------------------- YEARS ENDED DECEMBER 31, 1998 1997 AND 1996 ------------------------------------------- INDEX ----- Page Number ------ Additional financial information furnished pursuant to the requirements of Form 10-K: Schedules - December 31, 1998, 1997 and 1996 and years then ended, as required: Schedule III - Real estate and accumulated depreciation S-1 - Notes to Schedule III - Real estate and S-2 accumulated depreciation All other schedules have been omitted because they are inapplicable, not required, or the information is included in the financial statements or notes thereto. 45 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. INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85, A CALIFORNIA LIMITED PARTNERSHIP By: RESOURCES HIGH EQUITY, INC. Managing General Partner Dated: March 29, 1999 By: /s/ Allan Rothschild --------------------- Allan Rothschild President and Director (Principal Executive 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 and in their capacities on the dates indicated. Dated: March 29, 1999 By: /s/ Allan Rothschild --------------------- Allan Rothschild President and Director (Principal Executive Officer) Dated: March 29, 1999 By: /s/ Lawrence Schachter ----------------------- Lawrence Schachter Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Dated: March 29, 1999 By: /s/ Dallas Lucas ----------------- Dallas Lucas Director Dated: March 29, 1999 By: /s/ David King --------------- David King Director 46
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 A California Limited Partnership SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 Costs Reductions Capitalized Recorded Subsequent to Subsequent to Initial Cost Acquisition Acquisition ------------------------------- ----------------------------- ----------- Description Buildings ----------- And Encumbrances Land Improvements Improvements Carrying Costs Write Downs ------------ ---- ------------ ------------ -------------- ----------- RETAIL: The Southport Ft. $ -- $ 6,961,667 $13,723,333 $ 1,833,613 $ 1,866,962 $(4,900,000) Shopping Center Lauderdale, FL The Loch Raven Towson, MD -- 2,469,871 6,860,748 2,839,104 953,837 (4,800,000) Shopping Center ---------- ------------- ----------- ----------- ----------- ----------- -- 9,431,538 20,584,081 4,672,717 2,820,799 (9,700,000) ---------- ------------- ----------- ----------- ---------- ----------- OFFICE: Century Park Kearny Mesa, -- 3,122,064 12,717,936 1,952,221 1,363,130 (11,700,000) Office Complex CA 568 Broadway New York, NY -- 2,318,801 9,821,517 5,108,031 1,556,212 (10,821,150) Office Building Seattle Tower Seattle, WA -- 2,163,253 5,030,803 2,160,343 609,392 (6,050,000) Office Building ---------- ------------ ----------- ----------- ---------- ------------ -- 7,604,118 27,570,256 9,220,595 3,528,734 (28,571,150) ---------- ------------ ----------- ----------- ---------- ------------ $ -- $ 17,035,656 $48,154,337 $13,893,312 $6,349,533 $(38,271,150) ========== ============ =========== =========== ========== ============
Gross Amount at Which Carried at Close of Period --------------------------------------------------- Buildings And Accumulated Date Land Improvements Total Depreciation Acquired -------------- ----------- ----------- ----------- -------- RETAIL: The Southport Ft. Shopping Center Lauderdale, FL $ 5,998,194 $13,487,381 $19,485,575 $ 4,957,302 1986 The Loch Raven Towson, MD Shopping Center 1,507,227 6,816,330 8,323,557 2,329,632 1986 -------------- ----------- ----------- ----------- 7,505,421 20,303,711 27,809,132 7,286,934 OFFICE: -------------- ----------- ----------- ----------- Century Park Kearny Mesa, 1,123,811 6,331,540 7,455,351 3,048,080 1986 Office Complex CA 568 Broadway New York, NY 977,120 7,006,291 7,983,411 2,873,194 1986 Office Building Seattle Tower Seattle, WA Office Building 764,613 3,149,178 3,913,791 1,435,125 1986 -------------- ----------- ----------- ----------- 2,865,544 16,487,009 19,352,553 7,356,399 -------------- ----------- ----------- ----------- $ 10,370,965 $36,790,720 $47,161,685 $14,643,333 ============== =========== =========== ===========
S-1 Note: The aggregate cost for Federal income tax purposes is $85,432,835 at December 31, 1998. INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 A California Limited Partnership NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (A) RECONCILIATION OF REAL ESTATE OWNED:
For the Years Ended December 31, ----------------------------------------------- 1998 1997 1996 ------------ ------------- ------------- BALANCE AT BEGINNING OF YEAR ... $ 47,841,674 $ 45,874,047 $ 45,228,760 ADDITIONS DURING THE YEAR Improvements to Real Estate 2,083,198 1,967,627 645,287 SUBTRACTIONS DURING THE YEAR Sales - Net (2,763,187) -- -- ------------ ------------ ------------ BALANCE AT END OF YEAR (1) ..... $ 47,161,685 $ 47,841,674 $ 45,874,047 ============ ============ ============
(1) INCLUDES THE INITIAL COST OF THE PROPERTIES PLUS ACQUISITION AND CLOSING COSTS. (B) RECONCILIATION OF ACCUMULATED DEPRECIATION:
For the Years Ended December 31, ----------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ BALANCE AT BEGINNING OF YEAR $ 14,807,964 $ 13,719,794 $ 12,694,788 ADDITIONS DURING THE YEAR Depreciation Expense(1) 1,164,109 1,088,170 1,025,006 SUBTRACTIONS DURING THE YEAR Sales ................. (1,328,740) -- -- ------------ ------------ ------------ BALANCE AT END OF YEAR ..... $ 14,643,333 $ 14,807,964 $ 13,719,794 ============ ============ ============
(1) DEPRECIATION IS PROVIDED ON BUILDINGS USING THE STRAIGHT-LINE METHOD OVER THE USEFUL LIFE OF THE PROPERTY, WHICH IS ESTIMATED TO BE 40 YEARS AND ON TENANT IMPROVEMENTS OVER THE ESTIMATED TERM OF THE RELATED LEASE. S-2 EX-27 2
5 The schedule contains summary information extracted from the financial statements of the December 31, 1998 Form 10-K of Integrated Resources High Equity Partners, Series 85 and is qualified in its entirety by reference to such financial statemens. YEAR DEC-31-1998 DEC-31-1998 6,301,641 0 147,423 0 0 0 0 0 40,814,689 0 0 0 0 0 38,791,186 40,814,689 0 9,189,542 0 3,276,169 3,591,049 0 0 2,931,223 0 2,931,223 0 0 0 2,931,223 0 0
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