================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 ------------------ 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.) CAMBRIDGE CENTER, 9TH FLOOR, CAMBRIDGE, MA 02142 ------------------------------------------------ (Address of principal executive offices) (617) 234-3000 --------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- -------- ================================================================================ INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 FORM 10-Q - SEPTEMBER 30, 2000 INDEX Page No. -------- Part I. Financial Information: Balance Sheets - September 30, 2000 and December 31, 1999 3 Statements of Operations -- Three and Nine Months Ended September 30, 2000 and 1999 4 Statement of Partners' Equity -- Nine Months Ended September 30, 2000 5 Statements of Cash Flows -- Nine Months Ended September 30, 2000 and 1999 6 Notes to Financial Statements 7 - 13 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 - 17 Part II. Other Information: Legal Proceedings, Exhibits and Reports on Form 8-K 18 2 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 FORM 10-Q - SEPTEMBER 30, 2000 BALANCE SHEETS SEPTEMBER 30, 2000 DECEMBER 31, 1999 ------------------ ----------------- ASSETS Real estate - net $31,605,913 $32,352,714 Cash and cash equivalents 12,062,920 8,521,370 Other assets 3,022,833 3,095,251 Receivables 299,170 209,418 ----------- ----------- $46,990,836 $44,178,753 =========== =========== LIABILITIES AND PARTNERS' EQUITY Accounts payable and accrued expenses $ 1,022,120 $ 1,224,373 Due to affiliates 259,727 107,255 ----------- ----------- 1,281,847 1,331,628 ----------- ----------- Commitments and contingencies (Note 6) PARTNERS' EQUITY: Limited partners' equity (400,010 units issued and outstanding) 43,422,590 40,703,819 General partners' equity 2,286,399 2,143,306 ----------- ----------- 45,708,989 42,847,125 ----------- ----------- $46,990,836 $44,178,753 =========== =========== SEE NOTES TO FINANCIAL STATEMENTS 3 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 FORM 10-Q - SEPTEMBER 30, 2000 STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED FOR THE ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~JUNE~~SEPTEMBER 30, ------------------------------ --------------------------- 2000 1999 2000 1999 ----------- ---------- ---------- ---------- Rental Revenue $ 2,~~216~~444,~~883~~132 $2,~~224~~347,~~919~~094 $57,~~099~~543,~~110~~242 $57,~~092~~440,~~992~~086 ----------- ---------- ---------- ---------- Costs and Expenses: Operating expenses ~~713~~919,~~743~~204 ~~725~~667,~~468~~294 12,~~541~~460,~~746~~950 12,~~558~~226,~~818~~112 Depreciation and amortization ~~343~~365,~~678~~832 336,096 ~~689~~1,~~166~~054,998 ~~672~~1,~~192~~008,288 Partnership management fee ~~172~~222,~~519~~226 ~~211~~(4,~~409~~049) ~~345~~567,~~038~~264 ~~422~~418,~~818~~769 Administrative expenses ~~298~~186,~~761~~993 ~~159~~214,~~067~~762 ~~587~~774,~~045~~038 ~~862~~1,~~377~~077,139 Property management fee 8152,~~360~~538 7166,~~949~~254 ~~169~~221,~~104~~642 ~~157~~223,~~453~~707 ----------- ---------- ---------- ---------- 1,~~610~~746,~~061~~793 1,~~503~~280,~~989~~357 35,~~332~~078,~~099~~892 34,~~673~~954,~~658~~015 ----------- ---------- ---------- ---------- Income before interest and other income ~~606~~697,~~822~~339 ~~720~~1,~~930~~066,737 12,~~767~~464,~~011~~350 12,~~419~~486,~~334~~071 Interest income ~~123~~150,~~163~~495 9680,~~610~~654 ~~217~~368,~~819~~314 ~~157~~238,~~904~~558 Other income 919,~~500~~700 613,~~990~~180 929,~~500~~200 89102,~~280~~460 ----------- ---------- ---------- ---------- Net income $ ~~739~~867,~~485~~534 $ ~~824~~1,~~530~~160,571 $12,~~994~~861,~~330~~864 $12,~~666~~827,~~518~~089 =========== ========== ========== ========== Net income attributable to: Limited partners $ ~~702~~824,~~511~~157 $ ~~783~~1,~~304~~102,543 $12,~~894~~718,~~614~~771 $12,~~583~~685,~~192~~735 General partners 3643,~~974~~377 4158,~~226~~028 99143,~~716~~093 83141,~~326~~354 ----------- ---------- ---------- ---------- Net income $ ~~739~~867,~~485~~534 $ ~~824~~1,~~530~~160,571 $12,~~994~~861,~~330~~864 $12,~~666~~827,~~518~~089 =========== ========== ========== ========== Net income per unit of limited partnership interest (400,010 units outstanding) $ 12.7606 $ 12.9676 $ 46.7480 $ 36.9671 =========== ========== ========== ==========

SEE NOTES TO FINANCIAL STATEMENTS 4 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 FORM 10-Q - SEPTEMBER 30, 2000 STATEMENT OF PARTNERS' EQUITY GENERAL LIMITED PARTNERS' PARTNERS' EQUITY EQUITY TOTAL ---------- ----------- ----------- Balance, January 1, 2000 $2,143,306 $40,703,819 $42,847,125 Net income for the nine months ended September 30, 2000 143,093 2,718,771 2,861,864 ---------- ----------- ----------- Balance, September 30, 2000 $2,286,399 $43,422,590 $45,708,989 ========== =========== =========== SEE NOTES TO FINANCIAL STATEMENTS 5 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 FORM 10-Q - SEPTEMBER 30, 2000 STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 2000 1999 ----------- ------------ Cash Flows From Operating Activities: Net income $ 2,861,864 $ 2,827,089 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,054,998 1,008,288 Straight-line adjustment for stepped lease rentals (12,500) 25,557 Changes in assets and liabilities: Accounts payable and accrued expenses (202,253) 176,011 Receivables (89,752) (133,057) Due to affiliates 152,472 (310,655) Other assets (116,470) (297,851) ----------- ----------- Net cash provided by operating activities 3,648,359 3,295,382 ----------- ----------- Cash Flows From Investing Activities: Improvements to real estate (106,809) (361,235) ----------- ----------- Cash Flows From Financing Activities: Distributions to partners -- (1,187,397) ----------- ----------- Increase In Cash And Cash Equivalents 3,541,550 1,746,750 Cash And Cash Equivalents, Beginning of Year 8,521,370 6,301,641 ----------- ----------- Cash And Cash Equivalents, End of Quarter $12,062,920 $ 8,048,391 =========== =========== SEE NOTES TO FINANCIAL STATEMENT 6 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 FORM 10-Q - SEPTEMBER 30, 2000 NOTES TO FINANCIAL STATEMENTS 1. GENERAL The accompanying financial statements, notes and discussions should be read in conjunction with the financial statements, related notes and discussions contained in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1999. The financial information contained herein is unaudited; however, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such financial information have been included. Results of operations for the three and nine months ended September 30, 2000 are not necessarily indicative of the results to be expected for the entire year. 2. SIGNIFICANT ACCOUNTING POLICIES Investment in Joint Ventures Certain properties were purchased in joint ventures with affiliated partnerships that have the same, or affiliated, general partners as the Partnership. The Partnership owns an undivided interest and is severally liable for indebtedness it incurs in connection with its ownership interest in those properties. Therefore, the Partnership's financial statements present the assets, liabilities, revenues and expenses of the joint ventures on a pro rata basis in accordance with the Partnership's percentage of ownership. Real Estate Real Estate is carried at cost, net of adjustments for impairment. Repairs and maintenance are charged to expense as incurred. Replacement and betterments are capitalized. 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. If this review indicates that the carrying value of the property may not be recoverable, the Partnership prepares estimates of the future undiscounted cash flows expected to result from the use of the 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. 7 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 FORM 10-Q - SEPTEMBER 30, 2000 NOTES TO FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Real Estate (continued) 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 expected 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, 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 materially vary from the estimates. The Partnership may in the future provide additional write-downs, which could be material, if real estate markets or local economic conditions change. Revenue Recognition The Securities and Exchange Commission released staff accounting bulletin No. 101, "Revenue Recognition in Financial Statements" on December 3, 1999. The Partnership has reviewed its revenue recognition policies and as a result there will be no material change in the revenue recognized by the Partnership. 3. RELATED PARTY TRANSACTIONS 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 a wholly-owned subsidiary of Presidio is the Associate General Partner (together with the Managing General Partner, the "General Partners"). The General Partners and affiliates of the General Partners are also engaged in businesses related to the acquisition and operation of real estate. Presidio is also the parent of other corporations (and affiliated with other entities) that are or may in the future be engaged in businesses that may be in competition with the Partnership. Accordingly, conflicts of interest may arise between the Partnership and such other businesses. Subject to the right of the limited partners under the Limited Partnership Agreement, Presidio controls the Partnership through its indirect ownership of the General Partners. Effective July 31, 1998, Presidio is indirectly controlled by NorthStar Capital Investment Corp., a Maryland corporation. 8 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 FORM 10-Q - SEPTEMBER 30, 2000 NOTES TO FINANCIAL STATEMENTS 3. RELATED PARTY TRANSACTIONS (CONTINUED) From August 28, 1997 to October 21, 1999, Presidio was party to a management agreement with NorthStar Presidio Management Company LLC ("NorthStar Presidio"), an affiliate of NorthStar Capital Investment Corp., pursuant to which NorthStar Presidio provided the day-to-day management of Presidio and its direct and indirect subsidiaries and affiliates, including the Partnership. Effective October 21, 1999, Presidio entered into a Services Agreement with AP-PCC III, L.P. (the "Agent") pursuant to which the Agent was retained to provide the asset management and investor relation services to the Partnership and other entities affiliated with the Partnership previously provided by NorthStar Presidio. The Partnership does not pay any fees to the Agent. The Partnership had a property management services agreement with Resources Supervisory Management Corp. ("Resources Supervisory"), an affiliate of the General Partners, to perform certain functions relating to the management of the properties of the Partnership. Resources Supervisory in turn sub-contracted with management companies to provide property management services for specific properties. For the quarter ended September 30, 2000 Resources Supervisory was entitled to receive $52,538 for property management services, $48,114 of which was paid to Kestrel Management L.P. ("Kestrel"), an affiliate of the General Partners and the Agent, with the balance being retained by Resources Supervisory. For the quarter ended September 30, 1999 Resources Supervisory was entitled to receive $66,254 for property management services, $47,920 of which was paid to unaffiliated management companies with the balance being retained by Resources Supervisory. For the nine months ended September 30, 2000 Resources Supervisory was entitled to receive $221,642 for property management services, $137,022 of which was paid to Kestrel and $78,652 of which was paid to unaffiliated management companies with the balance being retained by Resources Supervisory. For the nine months ended September 30, 1999 Resources Supervisory was entitled to receive $223,707 for property management services, $169,701 of which was paid to unaffiliated management companies with the balance being retained by Resources Supervisory. As of October 1, 2000 all property management services for the Partnership were being performed directly by Kestrel and Resources Supervisory was no longer performing any property management services. For the administration of the Partnership, the Managing General Partner is entitled to receive reimbursement of expenses up to a maximum of $150,000 per year. For each of the quarters ended September 30, 2000 and 1999, the Managing General Partner received $37,500. For the nine months ended September 30, 2000 and 1999, the Managing General Partner received $112,500. For managing the affairs of the Partnership, the Managing General Partner is also entitled to receive an annual partnership management fee. Pursuant to the amendment to the Partnership Agreement, which became effective on August 20, 1999, the annual partnership management fee for 1999 was reduced to $418,769. 9 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 FORM 10-Q - SEPTEMBER 30, 2000 NOTES TO FINANCIAL STATEMENTS 3. RELATED PARTY TRANSACTIONS (CONTINUED) Further, the Partnership Agreement was amended (for the year 2000 and beyond) so that the partnership management fee will be 1.25% of the Gross Asset Value of the Partnership, defined as the appraised value of all the assets of the Partnership based on the most recent appraisal. For the quarters ended September 30, 2000 and 1999 the Managing General Partner earned partnership management fees of $222,226 and ($4,049), respectively. The 1999 partnership management fee reflects an adjustment to reduce the fees as a result of the settlement of the class action suit as discussed in Note 7. For the nine months ended September 30, 2000 and 1999, the Managing General Partner earned partnership management fees of $567,264 and $418,769, respectively. The General Partners are allocated 5% of the net income of the Partnership, which amounted to $43,377 and $58,028 for the quarters ended September 30, 2000 and 1999, respectively. Net income allocated to the General Partners amounted to $143,093 and $141,354 for the nine months ended September 30, 2000 and 1999, respectively. The General Partners are also entitled to receive 5% of distributions, which amounted to $39,580 for the nine months ended September 30, 1999. During the liquidation stage of the Partnership, the Managing General Partner or an affiliate may be entitled to receive certain fees, which are subordinated to the limited partners receiving their original invested capital and certain specified minimum returns on their investment. 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 on March 12, 1998 (the "Offer") by Olympia Investors, L.P. ("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 those units owned by Olympia as a result of the Offer, or 15,566 units, for $101.81 per unit. In addition, Olympia had the right to cause Presidio to purchase its remaining units for a price based on procedures set forth in the agreement. Olympia recently exercised this right and Millennium Funding II, LLC , an affiliate of the General Partners acquired 15,556 units. Subsequent to the expiration of the tender offer described above, Millennium Funding II Corp. purchased an additional 18,042 limited partnership units from August 1998 through July 1999. Pursuant to the settlement of a class action lawsuit (See Note 7), Millennium Funding II, LLC made a tender offer to limited partners to acquire up to 26,936 Units (representing approximately 6.7% of the outstanding Units) at a price of $114.60 per unit. The offer closed in January 2000 and all 26,936 Units were acquired in the offer. 10 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 FORM 10-Q - SEPTEMBER 30, 2000 NOTES TO FINANCIAL STATEMENTS 3. RELATED PARTY TRANSACTIONS (CONTINUED) As a result of these purchases as well as the other purchases of units by affiliates of the General Partners, affiliates of the General Partners own 118,903 units representing approximately 29.725% of the total outstanding Units. 4. REAL ESTATE The following table is a summary of the Partnership's real estate as of: SEPTEMBER 30, 2000 DECEMBER 31, 1999 ------------------ ----------------- Land $10,370,965 $10,370,965 Building and improvement 37,822,888 37,716,078 ----------- ----------- 48,193,853 48,087,043 Less: Accumulated depreciation (16,587,940) (15,734,329) ----------- ----------- $31,605,913 $32,352,714 =========== =========== 5. DUE TO AFFILIATES SEPTEMBER 30, 2000 DECEMBER 31, 1999 ------------------ ----------------- Partnership management fee $222,227 $ -- Property management fee -- 32,255 Non-accountable expense reimbursement 37,500 75,000 -------- -------- $259,727 $107,255 ======== ======== Such amounts were paid in the subsequent quarters . 11 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 FORM 10-Q - SEPTEMBER 30, 2000 NOTES TO FINANCIAL STATEMENTS 6. COMMITMENTS AND CONTINGENCIES 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. a) The Broadway Joint Venture's action for rent against Solo Press was tried in 1992 and 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 (since removed), 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. 7. SETTLEMENT OF LAWSUIT In April 1999, the California Superior Court approved the terms of the settlement of a class action and derivative litigation involving the Partnership. Under the terms of the settlement, the General Partners agreed to take the actions described below subject to first obtaining the consent of limited partners to amendments to the Agreement of Limited Partnership of the Partnership summarized below. The settlement became effective in August 1999 following approval of the amendments. As amended, the Partnership Agreement (a) provides for a Partnership Management Fee equal to 1.25% of the Gross Asset Value of the Partnership for 2000 and thereafter and a fixed 1999 Partnership Management Fee of $418,769 or $426,867 less than the amount that would have been paid for 1999 under the prior formula and (b) fixes the amount that the General Partners will be 12 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 FORM 10-Q - SEPTEMBER 30, 2000 NOTES TO FINANCIAL STATEMENTS 7. SETTLEMENT OF LAWSUIT (CONTINUED) liable to pay to limited partners upon liquidation of the Partnership as repayment of fees previously received (the "Fee Give-Back Amount"). As of December 31, 1999, the Fee Give-Back Amount was $8.80 per Unit which amount will be reduced by approximately $.98 per Unit for each full calendar year after 1999 in which liquidation does not occur. As amended, the Partnership Agreement provides that, upon a reorganization of the Partnership into a real estate investment trust or other public entity, the General Partners will have no further liability to pay the Fee Give-Back Amount. In accordance with the terms of the settlement, Presidio Capital Corp., an affiliate of the General Partners, guaranteed payment of the Fee Give-Back Amount. As required by the settlement, an affiliate of the General Partners, Millennium Funding II, LLC, made a tender offer to limited partners to acquire up to 26,936 Units (representing approximately 6.7% of the outstanding Units) at a price of $114.60 per Unit. The offer closed in January 2000 and all 26,936 Units were acquired in the offer. The final requirement of the settlement obligated the General Partners to use their best efforts to reorganize the Partnership into a real estate investment trust or other entity whose shares were listed on a national securities exchange or on the NASDAQ National Market System. A Registration Statement was filed with the Securities and Exchange Commission on February 11, 2000 with respect to the restructuring of the Partnership into a publicly-traded real estate investment trust. The Registration Statement has not yet become effective and the consent of a majority of limited partners will be needed to effect the restructuring. 13 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 FORM 10-Q - SEPTEMBER 30, 2000 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The matters discussed in this form 10-Q contain certain forward-looking statements and involve risks and uncertainties (including changing market conditions, competitive and regulatory matters, etc.) detailed in the disclosures contained in this Form 10-Q and the other filings with the Securities and Exchange Commission made by the Partnership from time to time. The discussion of the Partnership's liquidity, capital resources and results of operations, including forward-looking statements pertaining to such matters, does not take into account the effects of any changes to the Partnership's operations. Accordingly, actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein. This item should be read in conjunction with the financial statements and other items contained elsewhere in the report. Liquidity and Capital Resources 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 properties. The Partnership holds an interest in five properties. The Partnership generates rental revenues from the commercial properties and is responsible for each property's operating expenses as well as its administrative costs. The Partnership had $12,062,920 in cash and cash equivalents at September 30, 2000. Cash and cash equivalents are temporarily invested in short-term instruments and, together with cash flow from operations, are expected to be sufficient to fund future capital improvements to the Partnership's properties. The Partnership's level of liquidity based upon cash and cash equivalents increased by $3,541,550 for the nine months ended September 30, 2000 as compared to December 31, 1999. The increase is due to $3,648,359 of cash provided by operating activities which was partially offset by $106,089 of cash used in investing activities for capital expenditures. The Partnership's primary source of funds is cash flow from the operation of its properties, principally rents received from the tenants less property operating expenses. 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. Capital and tenant improvements and leasing commissions may in the future exceed the Partnership's cash flow from operations. In that event, the Partnership would utilize its remaining working capital reserves, 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. 14 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 FORM 10-Q - SEPTEMBER 30, 2000 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Liquidity and Capital Resources (continued) As discussed in "Item 1. Financial Statements-Note 7", the Partnership entered into a settlement agreement relating to a class action lawsuit. In light of the current implementation of the settlement and the filing of the Registration Statement pursuant to which the General Partners are using their best efforts to reorganize the Partnership into a real estate investment trust, the General Partners have suspended any distributions until such reorganization is either approved or disapproved. Results of Operations The Partnership experienced a decrease in net income of $293,037 for the three months ended September 30, 2000 and an increase in net income of $34,775 for the nine months ended September 30, 2000 as compared to the same periods in the prior year. The three-month decrease in net income was due to an increase in costs and expenses of $466,436, which was partially offset by an increase in rental revenue of $97,038, interest income of $69,841 and other income of $6,520. The nine-month increase in net income was due to an increase in rental revenue of $103,156, and an increase in interest income of $129,756 which were offset by a decrease in other income of $73,260 along with an increase in costs and expenses of $124,877. Rental revenues increased during the three and nine months ended September 30, 2000 compared to the same periods ended September 30, 1999 due to increased rental rates on new leasing activities. The increase in cost and expenses for the nine months ended September 30, 2000 as compared to the nine months ended September 30, 1999 was the result of increased operating expenses, depreciation and amortization expense and partnership management fees. Property operating expenses increased due to higher real estate taxes as a result of increased assessed values of the properties. Depreciation and amortization expense increased due to expenditures for capital and tenant improvements in the previous year. Partnership management fee expense during the first three quarters of 2000 increased by $148,495 as compared to the first three quarters of 1999 as a result of an amendment to the Partnership Agreement which changed the calculation of such fee. (See Item 1. Financial Statements, Note 3.) These increased expenses were partially offset by a decrease in administrative expenses. This decrease was primarily attributed to non-recurring professional fees in connection with the settled class action litigation during the nine months ended September 30, 1999. The increase in costs and expenses for the three months ended September 30, 2000 as compared to the three months ended September 30, 1999 is the result of increased operating expenses, depreciation and amortization and partnership management fees partially offset by decrease in administrative expenses and property management fees. 15 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 FORM 10-Q - SEPTEMBER 30, 2000 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Results of Operations (continued) Interest income increased during the three months and nine months ended September 30, 2000 due to higher cash balances during both periods as compared to the comparable periods in 1999. Other income increased during the three months ended September 30, 2000 and decreased during the nine months ended September 30, 2000 as compared to the same periods in 1999 due to an increase/decrease in investor transfer fees, respectively. Inflation is not expected to have a material impact on the Partnership's operations or financial position. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Partnership is not subject to market risk as its cash and cash equivalents are invested in short term money market mutual funds. The Partnership has no loans outstanding. 16 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 FORM 10-Q - SEPTEMBER 30, 2000 PART II. OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 27. Financial data schedule is filed as an Exhibit to this report (b) Reports on Form 8-K: No report of Form 8-K was filed during the period. 17 INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85 FORM 10-Q - SEPTEMBER 30, 2000 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Integrated Resources High Equity Partners, Series 85, A California Limited Partnership By: Resources High Equity, Inc., Managing General Partner Dated: November ___, 2000 By: /s/ MICHAEL L. ASHNER ------------------------------ Michael L. Ashner President and Director (Principal Executive Officer) Dated: November ___, 2000 By: /s/ CAROLYN B. TIFFANY ------------------------------ Carolyn B. Tiffany Vice President and Treasurer (Principal Financial and Accounting Officer) 18

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