-----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, B99pes2YFc+nZXiLfPAjlZZ9x8dtRD844swKs2UgWenaeDKz5PdZfFh935VnLg+n RQa0ABBH1WC4OdK8KpBWRA== 0001073339-99-000039.txt : 19990330 0001073339-99-000039.hdr.sgml : 19990330 ACCESSION NUMBER: 0001073339-99-000039 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARTICIPATING DEVELOPMENT FUND 86 CENTRAL INDEX KEY: 0000785940 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 061153833 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-02294 FILM NUMBER: 99576343 BUSINESS ADDRESS: STREET 1: SHEARSON LEHAMAN DEVELOPMENT STREET 2: 3 WORLD FINANCIAL CENTER 29TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10285 BUSINESS PHONE: 2125263237 MAIL ADDRESS: STREET 1: 3 WORLD FINANCIAL CENTER STREET 2: 29TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10285 10-K 1 ANNUAL REPORT 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF - ----- THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 1998 ----------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF - ----- THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 33-2294 ------- PARTICIPATING DEVELOPMENT FUND 86 A Real Estate Limited Partnership --------------------------------- Exact name of registrant as specified in its charter Connecticut 06-1153833 ----------- ---------- State or other jurisdiction of IRS employer identification No. incorporation or organization 3 World Financial Center, 29th Floor New York, New York Attn.: Andre Anderson 10285 - ------------------------------------------- ----- Address of principal executive offices Zip code Registrant's Telephone Number, Including Area Code: (212) 526-3183 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: UNITS OF LIMITED PARTNERSHIP INTERESTS -------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ----- State the aggregate market value of the voting stock held by non-affiliates of the registrant: Not applicable. DOCUMENTS INCORPORATED BY REFERENCE: Portions of Prospectus dated February 21, 1986 filed with the Securities and Exchange Commission pursuant to Rule 424(b) on February 27, 1986 are incorporated by reference into Parts I, II, III, and IV of this report. Portions of Parts I, II, III and IV are incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1998 filed as an exhibit under Item 14. 2 PART I Item 1. Business (a) General Development of Business ------------------------------- Participating Development Fund 86, a Real Estate Limited Partnership (the "Partnership"), was formed on December 9, 1985 under the Uniform Limited Partnership Act of the State of Connecticut. The Partnership was originally formed to make five participating investments by entering into land purchase leaseback transactions and concurrently funding leasehold mortgage loans secured by commercial and multi-family residential real estate (the "Participating Investments"). The Partnership made its Participating Investments in the following five properties (the "Properties"): Sunnyvale R&D, a one-story research and development building located in Sunnyvale, California; Foothills Tech Plaza, two research and development/service buildings in Phoenix, Arizona; Harris Pond Apartments, a 170-unit luxury apartment complex in Charlotte, North Carolina; Pebblebrook Apartments, a 267-unit luxury apartment complex in Overland Park (Kansas City), Kansas; and 1899 Powers Ferry, a four-story office building located in Atlanta, Georgia. The Participating Investment in Harris Pond Apartments was sold on November 1, 1989. As a result of defaults under ground leases on the Sunnyvale, Phoenix, Atlanta and Overland Park Properties, the Partnership took title to these Properties in their entirety. The Partnership does not plan to invest in any additional property. On June 15, 1992, Phoenix Realty Management, Inc., ("Phoenix") sent a notice of resignation as co-General Partner of the Partnership to PDF86 Real Estate Services Inc. ("RE Services" or the "General Partner"), formerly Shearson Lehman Brothers/PDF 86, Inc. (See Item 10. "Certain Matters Involving Affiliates of RE Services"), the Partnership's other co-General Partner. The effective date of the resignation was June 16, 1992. As a result of the resignation of Phoenix, RE Services, as sole General Partner, manages the affairs of the Partnership. Foothills Tech Plaza was sold on September 29, 1995 for $10,011,512, net of $226,000 in contracted roof repairs, and Pebblebrook Apartments was sold on May 23, 1996 for a net sales price of $10,210,955. Additional information regarding these sales is incorporated by reference to Note 3 "Real Estate Investments" of the Notes to the Financial Statements contained in the Partnership's Annual Report to Unitholders for the year ended December 31, 1998 filed as an exhibit under Item 14. The Partnership engaged real estate brokers in 1998 to assist in selling the Partnership's two remaining Properties, Sunnyvale R&D and 1899 Powers Ferry. On March 19, 1999, the Partnership closed on the sale of 1899 Powers Ferry pursuant to a purchase offer executed in February 1999. See Item 7 for a discussion of such sale. The Partnership has executed a letter of intent with a buyer to purchase Sunnyvale R&D and is currently negotiating a purchase and sale agreement. It is currently anticipated that Sunnyvale R&D will be sold and the Partnership liquidated in 1999, however, there can be no assurance that Sunnyvale R&D will be sold within this time frame, or that the sale will result in a particular price. Additional information regarding the historical development of business is incorporated by reference to Note 1 "Organization," Note 2 "Significant Accounting Policies" and Note 3 "Real Estate Investments" of the Notes to the Financial Statements contained in the Partnership's Annual Report to Unitholders for the year ended December 31, 1998 filed as an exhibit under Item 14. (b) Financial Information About Industry Segment -------------------------------------------- The Partnership's sole business is the ownership and operation of the Properties. All of the Partnership's revenues, operating profit or losses and assets relate solely to such industry segment. (c) Narrative Description of Business --------------------------------- Incorporated by reference to Note 1 "Organization" and Note 3 "Real Estate Investments" of the Notes to the Financial Statements contained in the Partnership's Annual Report to Unitholders for the year ended December 31, 1998 filed as an exhibit under Item 14. 3 (d) Competition ----------- Incorporated by reference to the section entitled "Property Profiles and Leasing Update" contained in the Partnership's Annual Report to Unitholders for the year ended December 31, 1998 filed as an exhibit under Item 14. (e) Employees --------- The Partnership has no employees. Item 2. Properties Description of Properties and material leases incorporated by reference to the section entitled "Message to Investors" and Note 3 "Real Estate Investments" of the Notes to the Financial Statements contained in the Partnership's Annual Report to Unitholders for the year ended December 31, 1998, filed as an exhibit under Item 14. Item 3. Legal Proceedings The Registrant is not subject to any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of Unit Holders during the fourth quarter of 1998. PART II Item 5. Market for the Partnership's Limited Partnership Units and Related Security Holder Matters (a) Market Information ------------------ There is no established trading market for the Units of the Partnership. (b) Holders ------- As of December 31, 1998, there were 7,376 holders of record, owning an aggregate of 1,124,000 Units. (c) Distributions ------------- In consideration of the Partnership's marketing efforts, quarterly cash distributions from operations were suspended commencing with the 1998 third quarter distribution which would have been paid in November 1998. The General Partner intends to pay a cash distribution shortly from the net proceeds of the sale of 1899 Powers Ferry, which sale closed on March 19, 1999. Once the remaining Property is sold, the General Partner will distribute the net proceeds, together with the Partnership's remaining cash reserves (after payment of, or provision for, the Partnership's liabilities and expenses), and dissolve the Partnership. The following distributions were paid to the Limited Partners for the two years ended December 31, 1998 and December 31, 1997.
Cash Distributions Per Limited Partnership Unit First Second Third Fourth Quarter Quarter Quarter Quarter Total 1997 $0.30 $0.30 $0.30 $0.30 $ 1.20 1998 $0.30 $0.30 $0.00 $0.00 $ 0.60
4 Item 6. Selected Financial Data
For the Years Ended December 31, 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------- Dollars in thousands, except per Unit data Total revenues $ 2,095 $ 2,142 $ 2,964 $ 4,549 $ 4,589 Total expenses 1,218 1,427 2,035 2,975 3,139 Gain on sale of real estate -- -- 2,405 1,089 -- Net income 877 715 3,334 2,662 1,450 Total assets 17,660 17,709 18,301 27,446 36,106 Net income per Unit .76 .62 2.92 2.32 1.25 Cash distributions per Limited Partnership Unit .90(3) 1.20 10.75(1) 9.79(2) 1.20 - --------------------------------------------------------------------------------------------------------- (1) Includes a special one time cash distribution of $0.55 per Unit paid on March 29, 1996, and $9.00 in return of capital from the sale of Pebblebrook Apartments paid on August 30, 1996. (2) Includes $8.59 in return of capital from the sale of Foothills Tech Plaza paid on November 24, 1995. (3) Includes fourth quarter 1997 distribution and first and second quarter 1998 distributions which were paid in 1998.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources - ------------------------------- The Partnership engaged real estate brokers in 1998 to assist in selling the Partnership's two remaining Properties, Sunnyvale R&D and 1899 Powers Ferry. Accordingly, on July 1, 1998, the Partnership's real estate assets were reclassified on the balance sheet to "Real estate assets held for disposition" and the Partnership suspended depreciation and amortization in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." On March 19, 1999, the Partnership closed on the sale of 1899 Powers Ferry pursuant to a purchase offer executed in February 1999. The Property was sold to Devon Realty (the "Buyer"), an unaffiliated entity, for a selling price of approximately $7,674,000, net of closing adjustments. The selling price was determined by arm's length negotiations between the Partnership and the Buyer. The Partnership has executed a letter of intent with a buyer to purchase Sunnyvale R&D and is currently negotiating a purchase and sale agreement. It is currently anticipated that the Property will be sold and the Partnership liquidated in 1999. However, there can be no assurance that Sunnyvale R&D will be sold within this time frame, or that the sale will result in a particular price. In consideration of the Partnership's marketing efforts, quarterly cash distributions from operations were suspended commencing with the 1998 third quarter distribution which would have been paid in November 1998. The General Partner intends to pay a cash distribution shortly from the net proceeds of the sale of 1899 Powers Ferry, which sale closed on March 19, 1999. Once the remaining Property is sold, the General Partner will distribute the net proceeds. At December 31, 1998, the Partnership had cash and cash equivalents of $756,758, compared with $739,170 at December 31, 1997. The slight increase is primarily due to net cash provided by operating activities for the period exceeding cash distributions and additions to real estate. Accounts receivable totaled $4,173 at December 31, 1998, compared to $44,091 at December 31, 1997. The decrease is primarily due to the write-off of receivables from two former tenants at 1899 Powers Ferry. In connection with the General Partner's intent to sell the Partnership's remaining properties, deferred rent receivable, deferred leasing costs and incentives to lease were reclassified to "Real estate assets held for disposition." Accounts payable and accrued expenses totaled $191,616 at December 31, 1998, compared to $93,906 at December 31, 1997. The increase is primarily due to the timing of payments for Partnership servicing fees. 5 A discussion of leasing activity and material leases at the Partnership's Properties is incorporated by reference to the section entitled "Message to Investors" and Note 3 "Real Estate Investments" of the Notes to the Financial Statements, both contained in the Partnership's Annual Report to Unitholders for the year ended December 31, 1998, filed as an exhibit under Item 14. As of December 31, 1998, lease levels at each of the properties were as follows: Sunnyvale R&D - 100%; 1899 Powers Ferry - 86%. Market Risk - ----------- Interest rate risk comprises the Partnership's principal exposure. The Partnership has no long-term debt and its remaining Properties have no mortgage debt. Accordingly, the Partnership's interest risk exposure is primarily limited to interest earned on the Partnership's cash and cash equivalents, which are invested at short-term rates. Such risk is not considered material to the Partnership's operations. Year 2000 Initiatives - --------------------- The Year 2000 compliance issue concerns the ability of computerized information systems to accurately calculate, store or use a date after 1999. This could result in computer system failures or miscalculations causing disruptions of operations. The Year 2000 issue affects almost all companies and organizations. The Partnership sold the Powers Ferry property on March 19, 1999 and executed a letter of intent to sell the Sunnyvale property on March 12, 1999. It is anticipated that a sale of Sunnyvale will be completed and the Partnership dissolved prior to December 31, 1999. In the event that the Partnership is not dissolved prior to December 31, 1999, potential Year 2000 issues relate to the outside vendors which provide the Partnership's administrative services, including accounting, tax preparation and transfer agent services. Such services are reliant on computer systems, software products and equipment which are expected to be Year 2000 compliant by December 31, 1999. The General Partner continues to discuss Year 2000 compliance with these outside vendors. It is anticipated that the cost of vendor compliance with Year 2000 issues will be borne primarily by these vendors. Although it is not possible at the present time to estimate the cost of this remediation work based on available information, the General Partner does not expect such costs to have a material adverse impact on the Partnership's business, results or operations or financial condition. The Partnership may also have potential Year 2000 issues related to vendors which provide accounting and property management services to Sunnyvale as well as Year 2000 issues related to property management systems at the property. Due to the General Partner's intent to sell the Sunnyvale property and to liquidate the Partnership before December 31, 1999, no assessment has been made by the General Partner as to the potential adverse impact of Year 2000 related issues at the property level. Due to the General Partner's intent to sell Sunnyvale and dissolve the Partnership before December 31, 1999, the General Partner currently does not have Year 2000 contingency plans. In the event it appears that the Sunnyvale property will not be sold during 1999, the General Partner intends to develop and implement contingency plans in 1999. However, there is no certainty such plans would fully mitigate any Year 2000 problems. Results of Operations - --------------------- 1998 Versus 1997 - ---------------- The Partnership's operations resulted in net income of $877,481 for the year ended December 31, 1998, compared to $714,981 in fiscal 1997. The increase is primarily due to the suspension of recording depreciation and amortization expense in connection with reclassifying the Partnership's remaining real estate assets as "Real estate assets held for disposition." Rental income totaled $2,055,337 for the year ended December 31, 1998, unchanged from $2,062,875 in fiscal 1997, reflecting stable leasing conditions at both properties. Interest income decreased from $33,664 for the year ended December 31, 1997 to $28,123 for the year ended December 31, 1998, due to the Partnership's lower average cash balances in 1998. Other income totaled $11,815 for the year ended December 31, 1998, compared with $45,631 in fiscal 1997. The decrease is primarily due to the receipt of a real estate tax refund for 1899 Powers Ferry, recorded in 1997. Property operating expenses totaled $542,683 for the year ended December 31, 1998, compared with $575,893 a year earlier. The slight decrease is primarily due to lower repairs and maintenance expenses at 1899 Powers Ferry. 6 General and administrative expenses totaled $373,656 for the year ended December 31, 1998, compared with $220,607 in fiscal 1997. The increases are primarily due to higher Partnership administrative servicing costs and costs incurred to market the properties for sale. 1997 Versus 1996 - ---------------- The Partnership's operations resulted in net income of $714,981 for the year ended December 31, 1997, compared to $3,333,580 for the year ended December 31, 1996. Net income in 1996 included a gain from the sale of Pebblebrook Apartments of $2,405,209. Excluding this gain, income before gain on sale of real estate totaled $928,371 in 1996. The decrease from 1996 to 1997 is primarily a result of the sale of Pebblebrook and the resulting reduction in rental income. As a result of the sale of Pebblebrook Apartments, the following income and expense categories decreased from 1996 to 1997: rental income, property operating expense and depreciation and amortization. Rental income for the Partnership's two remaining properties, Sunnyvale R&D and 1899 Powers Ferry (the "Remaining Properties") totaled $2,062,875 for the year ended December 31, 1997, largely unchanged from $2,065,537 in 1996. Interest income totaled $33,664 for the year ended December 31, 1997, compared to $201,466 for the year ended December 31, 1996. The decrease is largely due to the Partnership's lower average cash balance in 1997. Property operating expenses for the Remaining Properties totaled $571,035 for the year ended December 31, 1997, compared with $817,102 in 1996. The decrease is primarily a result of lower repairs and maintenance, real estate taxes and administrative expenses at 1899 Powers Ferry. General and administrative expenses totaled $220,607 for the year ended December 31, 1997, largely unchanged from $225,804 in 1996, as decreases in legal, appraisal and other professional fees were offset by increases in audit expense and printing costs. Item 8. Financial Statements and Supplementary Data Incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1998 filed as an exhibit under Item 14. Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The General Partner of the Partnership is PDF86 Real Estate Services Inc. ("RE Services"), formerly Shearson Lehman Brothers, Inc./PDF 86, Inc., an affiliate of Lehman Brothers Inc. ("Lehman"). See section captioned "Certain Matters Involving Affiliates of RE Services" for a description of the sale of certain of Shearson Lehman Brothers, Inc. ("Shearson") domestic retail brokerage and asset management business to Smith Barney, Harris Upham & Co. Incorporated, which resulted in a change in the general partner's name. Brief descriptions of the business experience of the directors and officers of the General Partner are provided below. Each of the directors of the General Partner is elected annually. There is no family relationship among any of the persons currently serving as directors or officers of the General Partner. Certain officers and directors of RE Services are now serving (or in the past have served) as officers and directors of entities which act as general partners of a number of real estate limited partnerships which have sought protection under the provisions of the Federal Bankruptcy Code. The partnerships which have filed bankruptcy petitions own real estate which has been adversely affected by the economic conditions in the markets in which the real estate is located and, consequently, the partnerships sought the protection of bankruptcy laws to protect the partnership's assets from losses through foreclosure. 7 The executive officers and directors of RE Services are listed below. Name Office ---- ------ Rocco F. Andriola Director Michael T. Marron Director, President and Chief Financial Officer William T. McDermott Vice President Rocco F. Andriola, 40, is a Managing Director of Lehman Brothers in its Diversified Asset Group and has held such position since October 1996. Since joining Lehman in 1986, Mr. Andriola has been involved in a wide range of restructuring and asset management activities involving real estate and other direct investment transactions. From June 1991 through September 1996, Mr. Andriola held the position of Senior Vice President in Lehman's Diversified Asset Group. From June 1989 through May 1991, Mr. Andriola held the position of First Vice President in Lehman's Capital Preservation and Restructuring Group. From 1986 to 1989, Mr. Andriola served as a Vice President in the Corporate Transactions Group of Shearson Lehman Brothers' office of the general counsel. Prior to joining Lehman, Mr. Andriola practiced corporate and securities law at Donovan Leisure Newton & Irvine in New York. Mr. Andriola received a B.A. from Fordham University, a J.D. from New York University School of Law, and an LL.M in Corporate Law from New York University's Graduate School of Law. Michael T. Marron, 35, is a Vice President of Lehman Brothers and has been a member of the Diversified Asset Group since 1990 where he has actively managed and restructured a diverse portfolio of syndicated limited partnerships. Prior to joining Lehman Brothers, Mr. Marron was associated with Peat Marwick Mitchell & Co. serving in both its audit and tax divisions from 1985 to 1989. Mr. Marron received his B.S. degree from the State University of New York at Albany and an M.B.A. from Columbia University. William T. McDermott, 35, is a Vice President of Lehman Brothers and has been a member of the Diversified Asset Group since 1998. Mr. McDermott joined Lehman Brothers in 1993 and held various positions within the firm before joining the Diversified Asset Group. Prior to joining Lehman Brothers, Mr. McDermott was a financial analyst with Cantor Fitzgerald Inc. from 1991 - 1993 and was associated with Arthur Andersen & Co. serving in both its audit and bankruptcy consulting divisions from 1985 to 1991. Mr. McDermott received his B.B.A. degree from the University of Notre Dame and is a Certified Public Accountant. Certain Matters Involving Affiliates of RE Services - --------------------------------------------------- On July 31, 1993, Shearson Lehman Brothers, Inc. sold certain of its domestic retail brokerage and asset management businesses to Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson changed its name to Lehman Brothers Inc. The transaction did not affect the ownership of the Partnership's General Partner. However, the assets acquired by Smith Barney included the name "Shearson." Consequently, the Shearson Lehman Brothers/PDF 86, Inc. general partner changed its name to PDF86 Real Estate Services Inc. to delete any reference to "Shearson." Item 11. Executive Compensation The General Partner and its Affiliates have received certain fees, commissions and reimbursements for expenses incurred as provided for on pages 13 through 17 of the Prospectus which are contained under "Management Compensation" (See Exhibit 3 incorporated herein by reference). The General Partner is entitled to receive a share of cash distributed when and as cash distributions are made to Unit Holders and a share of taxable income or taxable loss, and may be reimbursed for certain out-of-pocket expenses. In addition, the General Partner is entitled to receive various fees and distributions during the liquidation stages of the Partnership. Descriptions of such fees, distribution allocations, and reimbursements is incorporated by reference to Note 5 "Transactions with Related Parties" and Note 6 "Partners' Capital (Deficit)" of the Notes to the Financial Statements. Certain officers and directors of the General Partner are employees of Lehman Brothers Inc. and are not compensated by the Partnership or the General Partner for services rendered in connection with the Partnership. 8 Item 12. Security Ownership of Certain Beneficial Owners and Management (a) Security of Ownership of Certain Beneficial Owners -------------------------------------------------- No person (including any "group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) is known to the Registrant to be the beneficial owner of more than five percent of the outstanding voting Interests as of December 31, 1998. (b) Security Ownership of Management -------------------------------- No officer or director of the General Partner beneficially owned or owned of record directly or indirectly any Interests as of December 31, 1998. (c) Changes in Control ------------------ None. Item 13. Certain Relationships and Related Transactions (a) Transactions With Management and Others --------------------------------------- Incorporated by reference to Note 5 "Transactions with Related Parties" and Note 6 "Partners' Capital (Deficit)" of the Notes to the Financial Statements contained in the Partnership's Annual Report to Unitholders for the year ended December 31, 1998 filed as an exhibit under Item 14. (b) Certain Business Relationships ------------------------------ There have been no business transactions between any of the Directors and the Partnership. (c) Indebtedness of Management -------------------------- No management person is indebted in any amount to the Partnership. (d) Transactions With Promoters --------------------------- There have been no transactions with promoters other than as described above in (a). 9 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(i) Index to Financial Statements Balance Sheets at December 31, 1998 and 1997.......................(1) Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996...................................(1) Statements of Partners' Capital (Deficit) for the Years Ended December 31, 1998, 1997 and 1996...............(1) Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996...................................(1) Notes to the Financial Statements..................................(1) Independent Auditors' Report.......................................(1) (a)(ii) Financial Statement Schedule Independent Auditors' Report.......................................F-1 Schedule III - Real Estate and Accumulated Depreciation............F-2 (1) Incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1998. (b) No reports on form 8-K were filed in the fourth quarter of the calendar year 1998. (c) See Exhibit Index contained herein. Exhibit Number - ------ 3 Agreement of Limited Partnership of Participating Development Fund 86, A Real Estate Limited Partnership. Reference is made to Exhibit A of the Prospectus (the "Prospectus") contained in Amendment No. 2 to Registrant's Form S-11 Registration Statement filed with the Securities and Exchange Commission on December 20, 1985 (the "Registration Statement"). 13 Annual Report to Unitholders for the year ended December 31, 1998. 27 Financial Data Schedule 10 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PARTICIPATING DEVELOPMENT FUND 86 BY: PDF86 Real Estate Services Inc. General Partner Date: March 29, 1999 BY: /s/Michael T. Marron -------------------- Name: Michael T. Marron Title: Director, President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. PDF86 REAL ESTATE SERVICES INC. General Partner Date: March 29, 1999 BY: /s/Rocco F. Andriola -------------------- Name: Rocco F. Andriola Title: Director Date: March 29, 1999 BY: /s/Michael T. Marron -------------------- Name: Michael T. Marron Title: Director, President and Chief Financial Officer Date: March 29, 1999 BY: /s/William T. McDermott ----------------------- Name: William T. McDermott Title: Vice President
EX-13 2 ANNUAL REPORT TO UNITHOLDERS Exhibit 13 Participating Development Fund 86 1998 Annual Report to Unitholders - -------------------------------------------------------------------------------- PARTICIPATING DEVELOPMENT FUND 86 - -------------------------------------------------------------------------------- Participating Development Fund 86 is a limited partnership formed in 1986 to fund participating investments secured by commercial and multi-family residential real estate properties. The Partnership subsequently took title to four of the five participating investments. One of the participating investments and three of the Partnership's properties have been sold. The Partnership's remaining property is a combined office/research and development facility, containing 105,285 rentable square feet. Provided below is a comparison of lease levels at the property as of December 31, 1998 and 1997. Percentage Leased Property Location 1998 1997 -------- -------- ---- ---- Sunnyvale R&D Sunnyvale, CA 100% 100% Contents 1 Message to Investors 3 Financial Statements 6 Notes to the Financial Statements 12 Independent Auditors' Report 13 Net Asset Valuation 1 - -------------------------------------------------------------------------------- MESSAGE TO INVESTORS - -------------------------------------------------------------------------------- We are pleased to present the 1998 Annual Report for Participating Development Fund 86 (the "Partnership"). Included in this report is information on the recent sale of 1899 Powers Ferry and an update on our marketing efforts relating to the Partnership's remaining property, Sunnyvale R&D. Also included are financial highlights and the Partnership's audited financial statements for the year ended December 31, 1998. Sales & Marketing Update As discussed in previous correspondence, we have been actively marketing the remaining properties for sale. We are pleased to report that as a result of a successful marketing effort, the Partnership closed on the sale of 1899 Powers Ferry on March 19, 1999 to an unaffiliated purchaser for approximately $7,674,000, net of closing adjustments and selling costs (the "Sale"). We anticipate that a special cash distribution, representing a majority of the net proceeds from the Sale, will be made to Limited Partners in the near future. In addition, the Partnership has executed a letter of intent with a buyer to purchase Sunnyvale R&D and is currently negotiating a purchase and sale agreement. Leasing Update Tandem Computers Inc. ("Tandem"), which leases 100% of Sunnyvale R&D, continues to sublease the entire space to a computer networking company through the expiration of its lease on March 31, 1999. We have been notified that Tandem has elected not to exercise its option to renew its lease and will vacate the property in April. We do not anticipate that this will significantly impact our objective to sell the property during 1999. Market Update The Partnership's remaining property is located in the Sunnyvale submarket of Silicon Valley, which is the area's largest submarket. While Silicon Valley performed well in 1998, there were some signs of softening in the market. Average rental rates increased, but the overall vacancy rate in the market also increased to 8.9% at year-end 1998, compared to 4.5% at year-end 1997. As a result, planned construction of new space has also declined. Trends in the Sunnyvale area have mirrored those within Silicon Valley. Despite the slight softening of the market, Sunnyvale provides a central location for many top high-tech firms, and the outlook for 1999 looks favorable given a stable economy. Cash Distributions In light of our current sales efforts, cash distributions were suspended in the third quarter of 1998. However, as discussed above, a special cash distribution relating to the 1899 Powers Ferry Sale will be made shortly. After the Sunnyvale R&D property is sold, the net proceeds together with the Partnership's remaining cash reserves (after payment of, or provision for, the Partnership's liabilities and expenses) will be distributed, and the Partnership will be liquidated. Since inception, the Partnership has paid total cash distributions of $43.06 per original $50 Unit, including $23.66 per Unit in return of capital payments which have reduced the Unit size from $50 to $26.34. Financial Highlights Provided below is a review of Partnership operations for the year ended December 31,
1998 1997 ---------------------------------------------------------------------- Total Income $2,095,275 $2,142,170 Property Operating Expenses 542,683 575,893 Net Income 877,481 714,981 Net Cash provided by Operating Activities 1,338,250 1,415,035 ----------------------------------------------------------------------
2 o Total income decreased primarily due to lower other income in 1998. The decrease in other income is due to the receipt of a real estate tax refund in 1997. o The slight decrease in property operating expenses is primarily due to lower repairs and maintenance expenses at 1899 Powers Ferry. o The increase in net income is primarily attributable to a reduction in depreciation and amortization expense as a result of the reclassification of the properties as "Real estate assets held for disposition." o The decrease in net cash provided by operating activities is primarily attributable to a decrease in total income. General Information We will keep you updated with respect to our marketing efforts relating to the Partnership's remaining property in future reports. In the interim, questions regarding the Partnership should be directed to your Financial Consultant or Partnership Investor Services. All requests for a change of address or transfer should be submitted in writing to the Partnership's administrative agent at P.O. Box 7090, Troy, MI 48007-7090. Partnership Investor Services can be reached at (617) 342-4225, and the Partnership's administrative agent can be reached at (248) 637-7900. Very truly yours, PDF 86 Real Estate Services Inc. General Partner Michael T. Marron President March 29, 1999 3 PARTICIPATING DEVELOPMENT FUND 86
- ------------------------------------------------------------------------------------- BALANCE SHEETS At December 31, At December 31, 1998 1997 - ------------------------------------------------------------------------------------- Assets Real estate, at cost: Land $ -- $ 8,387,590 Buildings and personal property -- 11,450,426 Tenant improvements -- 915,023 ----------------------------- -- 20,753,039 Less accumulated depreciation -- (4,372,698) ----------------------------- -- 16,380,341 Real estate assets held for disposition 16,848,012 -- Cash and cash equivalents 756,758 739,170 Restricted cash 44,980 39,381 Accounts receivable 4,173 44,091 Deferred leasing costs, net of accumulated amortization of $173,403 in 1997 -- 180,242 Incentives to lease, net of accumulated amortization of $113,606 in 1997 -- 123,652 Deferred rent receivable -- 195,868 Prepaid expenses 6,445 5,816 - ------------------------------------------------------------------------------------- Total Assets $17,660,368 $17,708,561 ===================================================================================== Liabilities and Partners' Capital (Deficit) Liabilities: Accounts payable and accrued expenses $ 191,616 $ 93,906 Due to General Partner 20,858 6,953 Security deposits payable 44,979 39,381 Prepaid rent 71,594 71,594 ----------------------------- Total Liabilities 329,047 211,834 ----------------------------- Partners' Capital (Deficit): General Partner (573,142) (568,179) Limited Partners (1,124,000 units outstanding) 17,904,463 18,064,906 ----------------------------- Total Partners' Capital 17,331,321 17,496,727 - ------------------------------------------------------------------------------------- Total Liabilities and Partners' Capital $17,660,368 $17,708,561 =====================================================================================
- ------------------------------------------------------------------------------------- STATEMENTS OF PARTNERS' CAPITAL (DEFICIT) For the years ended December 31, 1998, 1997 and 1996 General Limited Partner Partners Total - ------------------------------------------------------------------------------------- Balance at December 31, 1995 $(436,797) $ 27,521,646 $ 27,084,849 Distributions (163,018) (12,083,149) (12,246,167) Net income 51,903 3,281,677 3,333,580 - ------------------------------------------------------------------------------------- Balance at December 31, 1996 (547,912) 18,720,174 18,172,262 Distributions (41,716) (1,348,800) (1,390,516) Net income 21,449 693,532 714,981 - ------------------------------------------------------------------------------------- Balance at December 31, 1997 (568,179) 18,064,906 17,496,727 Distributions (31,287) (1,011,600) (1,042,887) Net income 26,324 851,157 877,481 - ------------------------------------------------------------------------------------- Balance at December 31, 1998 $(573,142) $ 17,904,463 $ 17,331,321 =====================================================================================
See accompanying notes to the financial statements. 4 PARTICIPATING DEVELOPMENT FUND 86
- ------------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS For the years ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------- Income Rental $2,055,337 $2,062,875 $2,706,140 Interest 28,123 33,664 201,466 Other 11,815 45,631 55,944 ------------------------------------------ Total Income 2,095,275 2,142,170 2,963,550 - ------------------------------------------------------------------------------------- Expenses Property operating 542,683 575,893 1,131,167 Depreciation and amortization 301,455 630,689 678,208 General and administrative 373,656 220,607 225,804 ------------------------------------------ Total Expenses 1,217,794 1,427,189 2,035,179 - ------------------------------------------------------------------------------------- Income before gain on sale of real estate 877,481 714,981 928,371 Gain on sale of real estate -- -- 2,405,209 ------------------------------------------ Net Income $ 877,481 $ 714,981 $3,333,580 ===================================================================================== Net Income Allocated: To the General Partner $ 26,324 $ 21,449 $ 51,903 To the Limited Partners 851,157 693,532 3,281,677 - ------------------------------------------------------------------------------------- $ 877,481 $ 714,981 $3,333,580 ===================================================================================== Per limited partnership unit (1,124,000 outstanding) $ .76 $ .62 $ 2.92 - -------------------------------------------------------------------------------------
See accompanying notes to the financial statements. 5 PARTICIPATING DEVELOPMENT FUND 86
- ------------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS For the years ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------- Cash Flows From Operating Activities: Net income $ 877,481 $ 714,981 $ 3,333,580 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 257,319 537,271 678,208 Amortization 44,136 93,418 -- Gain on sale of real estate -- -- (2,405,209) Increase (decrease) in cash arising from changes in operating assets and liabilities: Restricted cash (5,599) 4,948 55,957 Accounts receivable 39,918 (13,903) 1,116 Prepaid expenses (629) 453 (42,564) Deferred leasing costs -- (8,627) -- Deferred rent receivable 8,411 3,468 (5,702) Accounts payable and accrued expenses 97,710 8,826 (57,876) Due to General Partner 13,905 3,295 (35,152) Security deposits payable 5,598 (689) (60,216) Prepaid rent -- 71,594 (79,555) ------------------------------------------- Net cash provided by operating activities 1,338,250 1,415,035 1,382,587 - ------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Proceeds from sale of real estate -- -- 10,210,955 Additions to real estate (277,775) (21,778) (90,980) ------------------------------------------- Net cash (used for) provided by investing activities (277,775) (21,778) 10,119,975 - ------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Cash distributions (1,042,887) (1,390,516) (12,246,167) ------------------------------------------- Net cash used for financing activities (1,042,887) (1,390,516) (12,246,167) - ------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 17,588 2,741 (743,605) Cash and cash equivalents, beginning of year 739,170 736,429 1,480,034 ------------------------------------------- Cash and cash equivalents, end of year $ 756,758 $ 739,170 $ 736,429 ===================================================================================== Supplemental Schedule of Non-Cash Investing Activities: Write-off of fully depreciated tenant improvements $ 175,961 $ 295,667 $ 120,653 - ------------------------------------------------------------------------------------- Supplemental Disclosure of Non-Cash Operating Activities: In connection with the General Partner's intent to sell the Partnership's properties, deferred rent receivable, deferred leasing costs and incentives to lease in the amounts of $187,457, $182,634 and $108,123, respectively, were reclassified to "Real estate assets held for disposition." - -------------------------------------------------------------------------------------
See accompanying notes to the financial statements. 6 PARTICIPATING DEVELOPMENT FUND 86 NOTES TO THE FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 1. Organization Participating Development Fund 86, a Real Estate Limited Partnership (the "Partnership") was formed on December 9, 1985, under the Uniform Limited Partnership Act of the State of Connecticut. The Partnership was originally formed to invest in participating investments, secured by commercial and multi-family residential real estate, by entering into land purchase leaseback transactions and funding leasehold mortgage loans on improvements constructed on such land (the "Participating Investments"). The Partnership ultimately took title to four of the Participating Investments funded. One Participating Investment was sold during 1989, two of the four properties directly owned by the Partnership were sold during 1995 and 1996, and one was sold in March 1999. The Partnership now leases and operates the remaining property, and is currently marketing such property for sale. The General Partners were PDF86 Real Estate Services, Inc. ("RE Services"), formerly Shearson Lehman Brothers/PDF 86, Inc. (see below), and Phoenix Realty/PDF 86, Inc. ("Phoenix"), a Connecticut corporation and an indirect wholly-owned subsidiary of Phoenix Home Life Mutual Insurance Company ("Phoenix Mutual"). The Partnership commenced operations on April 23, 1986. On June 15, 1992, Phoenix sent a notice of resignation as co-general partner of the Partnership to RE Services. The effective date of resignation was June 16, 1992. As a result of the resignation of Phoenix, RE Services as sole General Partner manages the affairs of the Partnership. Since RE Services had been a co-general partner and was actively involved in the management of the Partnership since it was formed, the resignation of Phoenix has not had any adverse impact on the continuing operations of the Partnership. On July 31, 1993, Shearson Lehman Brothers Inc. sold certain of its domestic retail brokerage and asset management businesses to Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson Lehman Brothers Inc. changed its name to Lehman Brothers Inc. The transaction did not affect the ownership of the general partner. However, the assets acquired by Smith Barney included the name "Shearson." Consequently, effective October 22, 1993, Shearson Lehman Brothers/PDF 86, Inc. changed its name to PDF86 Real Estate Services Inc. to delete any reference to "Shearson." 2. Significant Accounting Policies Real Estate Investments Buildings and personal property are stated at cost, less accumulated depreciation and amortization. Costs related to the selection and acquisition of the Partnership's properties have been capitalized as part of the costs of those Properties. Prior to July 1, 1998, depreciation on buildings and personal property was provided over the estimated economic lives of the Properties (5 - 35 years) using the straight-line method. Additionally, tenant improvements, deferred leasing costs and incentives to lease were amortized over the term of the related lease agreements using the straight-line method. Impairment of Long-Lived Assets Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("FAS 121"), requires the Partnership to assess its real estate investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the real estate may not be recoverable. Recoverability of real estate to be held and used is measured by a comparison of the carrying amount of the real estate to future net cash flows (undiscounted and without interest) expected to be generated by the real estate. If the real estate is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the real estate exceeds the fair value of the real estate. The carrying amount of the real estate investment is not considered impaired by management as of December 31, 1998. 7 PARTICIPATING DEVELOPMENT FUND 86 On July 1, 1998, the Partnership's real estate assets were reclassified on the balance sheet to "Real estate assets held for disposition," and are recorded at the lower of net carrying cost or fair market value less selling expenses. Accordingly, the Partnership suspended depreciation and amortization in accordance with Statement of Financial Accounting Standards No. 121 after July 1, 1998. Rental Income and Deferred Rent Rental income is recognized as earned over the terms of the lease agreements. Deferred rent receivable consists of rental income which is recognized on a straight-line basis over the lease terms, but will not be received until later periods as a result of scheduled rental increases. Cash and Cash Equivalents Cash and cash equivalents consist of short-term, highly liquid debt instruments purchased with an original maturity of three months or less. The carrying value approximates fair value because of the short maturity of these instruments. Restricted Cash Restricted cash represents cash held in connection with tenant security deposits. Income Taxes The Partnership files Federal and applicable state partnership income tax returns which indicate each partner's and unit holder's share of taxable income or loss to be reported on their respective individual income tax returns. As a result, no provision for income taxes has been made in the accompanying financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments The carrying amount of trade receivables and payables approximates fair value. 3. Real Estate Investments Foothills Tech Plaza On May 30, 1986, the Partnership acquired the land and participating mortgage loan receivable on Foothills Tech Plaza from Phoenix Mutual, which had funded the investment on behalf of the Partnership on November 12, 1985. Foothills Tech Plaza is an office/service center located in Phoenix, Arizona, comprised of two single-story buildings containing an aggregate of 172,655 square feet of net leasable space. On June 25, 1986, the Partnership acquired the property in its entirety, including the improvements located thereon, in full satisfaction of the mortgagor/lessee's obligation under the terms of the mortgage and ground lease. On September 29, 1995, Foothills Tech Plaza was sold for $10,011,512 net of $226,000 in contracted roof repairs. The gain on disposition totaled $1,088,860 in 1995. 1899 Powers Ferry On May 30, 1986, the Partnership acquired the land and participating mortgage loan receivable on 1899 Powers Ferry ("Powers Ferry") from Phoenix Mutual, which had funded the investment on behalf of the Partnership on April 4, 1986. Powers Ferry is a four-story office building located in Marietta, Georgia containing approximately 93,000 square feet of space. 8 PARTICIPATING DEVELOPMENT FUND 86 The mortgagor/lessee of Powers Ferry did not make the ground rent and mortgage loan payments due May 1, 1987, and, as a result, the Partnership issued a notice of default. On July 7, 1987, the Partnership became the owner of the property in its entirety through a foreclosure sale transaction. On that date, the Partnership's Participating Investment in Powers Ferry, net of escrowed funds returned and debt service payments received totaled $8,916,094. For Federal income tax purposes, the debt service payments paid from mortgage loan proceeds in escrow ($904,593 including interest) were recorded as income and no depreciation was recorded through July 7, 1987. As a result, the Partnership's depreciable basis in the Powers Ferry property is greater for tax purposes than for financial reporting purposes. In connection with the acquisitions of Powers Ferry and Foothills Tech Plaza, the Partnership paid Phoenix Mutual $19,392,519, representing the cost to Phoenix Mutual plus net interest of $102,482 on funds disbursed by Phoenix Mutual. On March 19, 1999, the Partnership sold Powers Ferry pursuant to a purchase offer executed in February 1999. The Property was sold to an unaffiliated entity, for a selling price of approximately $7,674,000, net of closing adjustments. Sunnyvale R&D On August 28, 1986, the Partnership acquired the land and funded a participating mortgage loan on the improvements for the Sunnyvale R&D building located in Sunnyvale, California. Sunnyvale R&D is a one-story research and development building containing approximately 105,285 square feet of net leasable space. The Partnership purchased the land from the lessee for $6,050,000 and concurrently funded a mortgage loan of $4,531,190. On October 30, 1986, the Partnership served notice of default on the mortgagor/lessee for non-payment of amounts due under the ground lease and mortgage. As a result of the default and pursuant to certain terms provided in the Agreement of Ground Lease, the lessee transferred all of its right and title under the ground lease to the Partnership on November 26, 1986 and the Partnership became the owner of the Property in its entirety, including the improvements located thereon in full satisfaction of the mortgagor/lessee's obligation under the terms of the mortgage and ground lease. As of December 31, 1998, Sunnyvale R&D was 100% leased to a single tenant, Tandem Computers Inc. ("Tandem"). The tenant signed a six-year lease (the "Master Lease") which commenced April 1, 1988 at an annual rental rate of $7.68 per square foot, triple net, and on April 1, 1994 negotiated a five year extension at an average annual rental rate of $8.16 per square foot with an option for an additional five years, by written notice, on or before six months from the expiration of this extension period. During the fourth quarter of 1994 Tandem agreed to sublease its entire space, effective April 1, 1995. The sublease is subject to the terms, conditions and termination date of the above mentioned Master Lease. Tandem has notified the Partnership that it has elected not to exercise its option to renew its lease, and will vacate the property upon expiration of its lease in March 1999. The Partnership has executed a letter of intent with a buyer to purchase Sunnyvale R&D and is currently negotiating a purchase and sale agreement. It is currently anticipated that Sunnyvale R&D will be sold and the Partnership liquidated in 1999, however, there can be no assurance that Sunnyvale R&D will be sold within this time frame, or that the sale will result in a particular price. Pebblebrook Apartments On September 4, 1986, the Partnership acquired the land for $2,000,000 and funded a mortgage loan of $7,750,000 on the improvements for the Pebblebrook Apartments ("Pebblebrook") located in Overland Park, Kansas. Pebblebrook is a 267-unit luxury garden apartment complex located in a suburb of Kansas City. On April 16, 1991, the Partnership became the owner of the property in its entirety through a special conveyance transaction. On May 23, 1996 Pebblebrook Apartments was sold by the Partnership for a net sales price of $10,210,955. The transaction resulted in a gain on sale of $2,405,209 in 1996. 4. Leases and Rental Revenues Tandem leases 100% of Sunnyvale R&D pursuant to a lease which expires in March 1999. As of December 31, 1998, the 1999 future rentable payments relating to Sunnyvale R&D are $214,781. 9 PARTICIPATING DEVELOPMENT FUND 86 Certain leases contain provisions whereby the rent can change annually based upon changes in the Consumer Price Index. All the leases at Powers Ferry provide that tenants pay their pro-rata share of any increases in operating expenses over a base amount. The lease at Sunnyvale R&D is triple net with the tenant paying all property operating expenses and real estate taxes. The Sunnyvale R&D building generated rental revenue in excess of 10% of the Partnership's rental revenues for the years ended December 31, 1998, 1997 and 1996. For the years ended December 31, 1998, 1997 and 1996, Sunnyvale R&D contributed $859,126 (42%), $859,126 (42%), and $859,126 (32%), respectively, of the Partnership's rental income. 5. Transactions With Related Parties Pursuant to the Partnership Agreement, the General Partner(s) and their affiliates were paid fees and expenses for services rendered in connection with the formation of the Partnership and the acquisition of the Properties. In addition, the General Partners and their affiliates were paid or are due the following fees and expense reimbursements for ongoing services rendered to the Partnership: a) In connection with the acquisition of the Partnership's investments, the General Partners were paid Investment Fees totaling $2,248,000, which had been capitalized as part of the cost of the investments and allocated to land, buildings, tenant improvements and participating mortgage loans receivable based upon their relative valuations. b) The Partnership has agreed to pay the remaining General Partner a fee for managing and servicing the Partnership's investments. The Asset Management Fee will be equal to the lesser of $50,000 per annum or 1% of all cash revenues received by the Partnership, including any deferred interest after deducting (i) operating expenses, (ii) amounts set aside for working capital reserves, and (iii) payments on the Partnership's other current obligations as defined in the Partnership Agreement. Such fees incurred and expensed by the Partnership totaled $13,905, $13,905 and $17,382 in 1998, 1997 and 1996, respectively. c) The Partnership has agreed to pay the remaining General Partner a Subordinated Disposition Fee, in an amount not to exceed the lesser of (i) one half of the competitive real estate commission applicable at the date of sale, or (ii) 3% of the amount payable to the Partnership in connection with the disposition of such investment. The fee is payable only after the Unit Holders have been returned their original investment and any unpaid Preferred Return. At December 31, amounts due to General Partner are as follows:
1998 1997 ----------------------- Asset management fee $20,858 $6,953 =======================
6. Partners' Capital (Deficit) The Unit Holders will be entitled to receive from distributions of cash from operations ("Current Cash Receipts") or Net Proceeds from Sales, Investment Repayment and Participation Proceeds (as defined in the Partnership Agreement) a cumulative, non-compounded Preferred Return on their average adjusted unreturned invested capital equal to 14% per annum calculated from January 1, 1987. To the extent that Current Cash Receipts distributed to the Unit Holders is less than the Preferred Return for that year, the unpaid amount may be paid from Current Cash Receipts in subsequent years, or upon sale of a Property or repayment of the Partnership's investments and any Participating Proceeds. At December 31, 1998 the Unit Holders have not yet received their cumulative preferred return. The Partnership Agreement provides for the allocation of income, losses and the distribution of cash generally as follows: 10 PARTICIPATING DEVELOPMENT FUND 86 All items of income, loss, deduction and credit from Current Cash Receipts, as defined, will be distributed 97% to Unit Holders and 3% to the General Partner. Net proceeds from Sales, Investment Repayment and Participating Proceeds shall be distributed as follows: a) 99% to the Unit Holders and 1% to the General Partner until the Unit Holders have received cumulative distributions of net proceeds from Sales, Investment Repayment and Participating Proceeds plus Current Cash Receipts equal to their original invested capital plus any unpaid Preferred Return. b) To the General Partner in payment of any unpaid Subordinated Disposition Fee. c) 85% to the Unit Holders and 15% to the General Partner. All items of income, gain, loss, deduction and credit attributable to net proceeds from Sales, Investment Repayment and Participating Proceeds will be allocated between the Unit Holders, as a group, and the General Partner, in the same ratio that each such group received distributions of such net proceeds from Sales, Investment Repayment and Participating Proceeds. The Partnership distributed $1,011,600, $1,348,800 and $12,083,149 to the Unit Holders in 1998, 1997 and 1996, respectively. In addition, the Partnership distributed $31,287, $41,716 and $163,018 to the General Partner in 1998, 1997 and 1996, respectively. 7. Reconciliation of Financial Statement Basis Net Income and Partners' Capital to Federal Income Tax Basis Net Income and Partners' Capital Reconciliation of financial statement basis net income to federal income tax basis net income:
Year Ended December 31, ----------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------- Financial statement basis net income $ 877,481 $ 714,981 $ 3,333,580 Financial statement amortization under tax basis amortization (64,087) (12,286) (12,285) Financial statement depreciation (under) tax basis depreciation (276,465) (20,870) (106,954) Financial statement rental income (over) under tax basis rental income 8,410 75,063 (85,257) Financial statement gain on sale of property (over) tax basis gain on sale of property -- -- (2,213,064) Other 66,088 291 305 ----------------------------------------- (266,054) 42,198 (2,417,255) - ------------------------------------------------------------------------------------- Federal income tax basis net income $ 611,427 $ 757,179 $ 916,325 -----------------------------------------
11 PARTICIPATING DEVELOPMENT FUND 86 Reconciliation of financial statement partners' capital to federal income tax basis partners' capital:
Year Ended December 31, ----------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------- Financial statement basis partners' capital $17,331,321 $17,496,727 $18,172,262 Current year financial statement basis net income (over) under federal income tax basis net income (266,054) 42,198 (2,417,255) Cumulative Federal income tax basis net income over financial statement net income 9,782,495 9,740,297 12,157,552 - ------------------------------------------------------------------------------------- Federal income tax basis partners' capital $26,847,762 $27,279,222 $27,912,559 - -------------------------------------------------------------------------------------
Because many types of transactions are susceptible to varying interpretations under Federal and State income tax laws and regulations, the amounts reported above may be subject to change at a later date upon final determination by the respective taxing authorities. 12 - ------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT - ------------------------------------------------------------------------------- The Partners Participating Development Fund 86: We have audited the accompanying balance sheets of Participating Development Fund 86 (a Connecticut limited partnership) as of December 31, 1998 and 1997, and the related statements of operations, partners' capital (deficit), and cash flows for each of the years in the three-year period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Participating Development Fund 86 as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Boston, Massachusetts February 26, 1999, except as to Note 3, which is as of March 19, 1999 13
- ------------------------------------------------------------------------------------- NET ASSET VALUATION - ------------------------------------------------------------------------------------- Comparison of Acquisition Costs to Estimated Value and Determination of Net Asset Value Per $26.34 Unit at December 31, 1998 (Unaudited) Acquisition 1998 Estimated Property Date of Acquisition Cost (1) Value - ------------------------------------------------------------------------------------- Sunnyvale R&D(2) 08-28-86 $11,185,961 $13,375,000 1899 Powers Ferry(3) 07-07-87 8,916,095 7,674,000 ------------------------------ $20,102,056 21,049,000 Cash and cash equivalents 756,758 Accounts receivable 4,173 Prepaid expenses 6,445 ----------- 21,816,376 Less: Total liabilities (net of security deposits payable) (284,068) ----------- Partnership Net Asset Value(4) $21,532,308 =========== Net Asset Value Allocated: Limited Partners $21,316,985 General Partner 215,323 ----------- $21,532,308 =========== Net Asset Value Per Unit (1,124,000 Units outstanding) $18.96 - ------------------------------------------------------------------------------------- (1) Purchase price plus General Partners' acquisition fees. (2) This represents the Partnership's share of the December 31, 1998 estimated values which were determined by the General Partner, with the assistance of the broker engaged to market the properties. (3) Based on actual sale price. (4) The Net Asset Value assumes a hypothetical sale on December 31, 1998 of the Partnership's properties at their estimated values and the distribution of the net proceeds to Limited Partners in the liquidation of the Partnership. Real estate brokerage commissions and other costs associated with selling the Partnership's properties are not determinable at this time and as such are not included in the calculation. Since the Partnership would incur these expenses in the sale of its properties cash available for the distribution to the Partners would be less than the Net Asset Value. The current market value of the Units may differ substantially from their Net Asset Value.
Limited Partners should note that properties' values are estimated and the actual values realizable upon sale may be significantly different. The estimated value does not reflect the actual costs which would be incurred in selling the properties. As a result of these factors and the illiquid nature of an investment in Units of the Partnership, the variation between the estimated value of the Partnership's properties and the price at which Units of the Partnership could be sold may be significant. Fiduciaries of Limited Partners which are subject to ERISA or other provisions of law requiring valuations of Units should consider all relevant factors, including, but not limited to Net Asset Value per Unit, in determining the fair market value of the investment in the Partnership for such purposes. F-1 PARTICIPATING DEVELOPMENT FUND 86
Schedule III - Real Estate and Accumulated Depreciation December 31, 1998 Sunnyvale 1899 Office Buildings: R & D Powers Ferry Total - ------------------------------------------------------------------------------------- Location Sunnyvale, CA Marietta, GA na Construction date 1986 1986 na Acquisition date 08-28-86 07-07-87 na Life on which depreciation in latest income statements is computed (3) (3) na Encumbrances -- -- -- Initial cost to Partnership(1): Land $ 6,336,962 $2,050,628 $ 8,387,590 Buildings and improvements 4,848,999 6,774,215 11,623,214 Costs capitalized subsequent to acquisition: Land, buildings and improvements 3,146,034 2,398,849 5,544,883 Retirements (2,976,402) (1,875,144) (4,851,546) Deferred rent receivable -- 187,457 187,457 Deferred leasing cost -- 302,347 302,347 Incentive to lease -- 108,123 108,123 Gross amount at which carried at close of period: Land $ 6,336,962 $2,050,628 $ 8,387,590 Buildings and improvements 5,018,631 7,297,920 12,316,551 Deferred rent receivable -- 187,457 187,457 Deferred leasing cost -- 302,347 302,347 Incentive to lease -- 108,123 108,123 ------------------------------------------- $11,355,593 $9,946,475 $21,302,068 ------------------------------------------- Accumulated depreciation(2) $ 1,826,720 $2,627,336 $ 4,454,056 - ------------------------------------------------------------------------------------- (1) Represents aggregate cost for both financial reporting and Federal income tax purposes. (2) The amount of accumulated depreciation for Federal income tax purposes is $6,225,906. (3) Buildings and personal property: 5-35 years, tenant improvements: over the terms of the respective leases.
A reconciliation of the carrying amount of real estate and accumulated depreciation for the years ended December 31, 1998, 1997 and 1996 follows:
1998 1997 1996 - ------------------------------------------------------------------------------------- Real estate investments: Beginning of year $20,753,039 $21,026,928 $30,909,245 Additions 127,063 21,778 90,980 Retirements (175,961) (295,667) (120,653) Deferred rent receivable 187,457 -- -- Deferred leasing cost 302,347 -- -- Incentives to lease 108,123 -- -- Dispositions -- -- (9,852,644) ------------------------------------------- End of year $21,302,068 $20,753,039 $21,026,928 ------------------------------------------- Accumulated depreciation: Beginning of year $ 4,372,698 $ 4,131,094 $ 5,730,421 Depreciation expense 257,319 537,271 568,224 Retirements (175,961) (295,667) (120,653) Dispositions -- -- (2,046,898) ------------------------------------------- End of year $ 4,454,056 $ 4,372,698 $ 4,131,094 - -------------------------------------------------------------------------------------
F-2 INDEPENDENT AUDITORS' REPORT ON SCHEDULE III The Partners Participating Development Fund 86: Under date of February 26, 1999, except as to Note 3, which is as of March 19, 1999, we reported on the balance sheets of Participating Development Fund 86 (a Connecticut limited partnership) as of December 31, 1998 and 1997, and the related statements of operations, partners' capital (deficit) and cash flows for each of the years in the three-year period ended December 31, 1998, as contained in the 1998 annual report to unitholders. These financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1998. In connection with our audits of the aforementioned financial statements, we also have audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Partnership's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Boston, Massachusetts February 26, 1999, except as to Note 3, which is as of March 19, 1999
EX-27 3 FDS FOR 1998 YEAR-END 10-K
5 12-mos Dec-31-1998 Dec-31-1998 756,758 000 4,173 000 000 000 16,848,012 000 17,660,368 329,047 000 000 000 000 17,331,321 17,660,368 000 2,095,275 000 542,683 675,111 000 000 877,481 000 877,481 000 000 000 877,481 .76 .76
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