<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-K
<TABLE>
<CAPTION>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
<S> <C> <C>
For the fiscal year ended December 31, 1998
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------------------------------ to ------------------------------------
Commission File Number 0-12945
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First Capital Institutional Real Estate, Ltd. - 2
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(Exact name of registrant as specified in its charter)
Florida 59-2313852
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two North Riverside Plaza, Suite 1000, Chicago, Illinois 60606-2607
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 207-0020
--------------------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
--------------------------------
Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Units
--------------------------------
</TABLE>
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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
Documents incorporated by reference:
The First Amended and Restated Certificate and Agreement of Limited Partnership
filed as Exhibit A to the definitive Prospectus dated October 19, 1983, included
in the Registrant's Registration Statement on Form S-11 (Registration No. 2-
86361), is incorporated herein by reference in Part IV of this report.
Exhibit Index - Page A-1
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<PAGE>
PART I
ITEM 1. BUSINESS
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The registrant, First Capital Institutional Real Estate, Ltd.- 2 (the
"Partnership"), is a limited partnership organized in 1983 under the Florida
Uniform Limited Partnership Law. The Partnership sold 84,886 Limited
Partnership Units (the "Units") to the public from November 1983 to October
1984, pursuant to a Registration Statement on Form S-11 filed with the
Securities and Exchange Commission (Registration Statement No. 2-86361).
Capitalized terms used in this report have the same meaning as those terms have
in the Partnership's Registration Statement.
The business of the Partnership was to invest primarily in existing, improved,
income-producing real estate, such as shopping centers, warehouses and office
buildings, and, to a lesser extent, in other types of income-producing real
estate. From May 1984 to May 1986, the Partnership made seven real property
investments and purchased 50% interests in four joint ventures, which were each
formed with an Affiliated partnership for the purpose of acquiring a 100%
interest in certain real property. In addition, in January 1987 the Partnership
formed a joint venture with an Affiliated partnership (the "Joint Venture"), in
which they are each 50% partners. The Joint Venture was formed for the purpose
of entering into a limited partnership agreement with an unaffiliated third
party to which the Joint Venture contributed 75% of the total purchase price of
a property in order to obtain a preferred majority interest in the limited
partnership. All of the Partnership's joint ventures were operated under the
common control of First Capital Financial Corporation (the "General Partner").
During the year ended 1998, the Partnership sold its remaining three real
property investments. The Partnership is currently addressing post sale
matters, including monitoring the remediation of an environmental matter at one
of the properties sold during 1997. Upon the successful remediation of the
environmental matter and the resolution of other post closing matters, the
Partnership will make a liquidating distribution and dissolve.
ITEM 2. PROPERTIES
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During the year ended December 31, 1998, the Partnership sold its remaining
property investments.
ITEM 3. LEGAL PROCEEDINGS
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(a & b) The Partnership and its properties were not a party to, nor the subject
of, any material pending legal proceedings, nor were any such proceedings
terminated during the quarter ended December 31, 1998. Ordinary routine legal
matters incidental to the business which were not deemed material, were pursued
during the quarter ended December 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
(a, b, c & d) None.
2
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED SECURITY HOLDER MATTERS
- ------- ----------------------------------------------------------------------
There has not been, nor is there expected to be, a public market for units.
As of March 1, 1999, there were 12,328 Holders of Units.
3
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
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1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Total revenues $ 6,477,900 $ 6,849,100 $ 7,003,700 $ 7,054,400 $ 6,715,900
Net income (loss) $ 7,098,600 $ 4,044,900 $ 3,203,200 $ 1,797,300 $(1,017,200)
Net income (loss)
allocated to Limited
Partners $ 6,883,800 $ 3,663,600 $ 2,778,800 $ 1,326,300 $(1,324,200)
Net income (loss)
allocated to Limited
Partners per Unit
(84,886 Units
outstanding) $ 81.09 $ 43.16 $ 32.74 $ 15.62 $ (15.60)
Total assets $19,116,600 $30,019,700 $44,166,200 $50,803,100 $53,442,100
Distributions to Limited
Partners per Unit
(84,886 Units
outstanding) (a) $ 262.36 $ 301.44 $ 104.00 $ 51.00 $ 35.50
Return of capital to
Limited Partners per
Unit (84,886 Units
outstanding) (b) $ 181.27 $ 258.28 $ 71.26 $ 35.38 $ 35.50
OTHER DATA:
Investment in:
Commercial rental
properties (net of
accumulated
depreciation and
amortization) None $10,111,300 $32,480,000 $32,902,700 $34,620,300
Real estate joint
venture None $ 5,311,400 $ 5,852,800 $ 5,424,600 $ 5,990,800
Number of real property
interests owned at
December 31 None 3 7 7 7
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</TABLE>
(a) Distributions to Limited Partners per Unit for the years ended December 31,
1998, 1997 and 1996 included Sales Proceeds of $247.36, $274.94 and $59.00,
respectively.
(b) For the purposes of this table, return of capital represents either: 1) the
amount by which distributions, if any, exceed net income for the respective
year or 2) total distributions, if any, when the Partnership incurs a net
loss for the respective year. Pursuant to the Partnership Agreement,
Capital Investment is only reduced by distributions of Sale Proceeds.
Accordingly, return of capital as used in the above table does not impact
Capital Investment.
The following table includes a reconciliation of Cash Flow (as defined in the
Partnership Agreement) to cash flow provided by operating activities as
determined by generally accepted accounting principles ("GAAP"):
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Cash Flow (as defined in
the Partnership
Agreement) (a) $ 1,477,900 $ 3,847,700 $ 4,657,000 $ 4,742,800 $ 4,118,700
Items of reconciliation:
(Cash Flow) from joint
venture (453,100) (719,500) (574,700) (490,900) (493,100)
Changes in current
assets and
liabilities:
Decrease in current
assets 64,400 56,500 23,900 74,100 138,700
(Decrease) increase in
current liabilities (133,200) (184,400) (164,600) 118,200 (118,500)
- --------------------------------------------------------------------------------------------
Net cash provided by
operating activities $ 956,000 $ 3,000,300 $ 3,941,600 $ 4,444,200 $ 3,645,800
- --------------------------------------------------------------------------------------------
Net cash provided by
(used for) investing
activities $ 21,546,500 $ 24,877,900 $(1,960,700) $ (182,100) $ 2,228,700
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Net cash (used for)
financing activities $(17,868,500) $(18,007,000) $(9,675,500) $(4,554,500) $(2,816,500)
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</TABLE>
(a) Cash Flow is defined in the Partnership Agreement as Partnership revenues
earned from operations (excluding tenant deposits and proceeds from the
sale or disposition of any Partnership properties), minus all expenses
incurred (including Operating Expenses and any reserves of revenues from
operations deemed reasonably necessary by the General Partner), except
depreciation and amortization expenses and capital expenditures, lease
acquisition expenditures and the General Partner's Partnership Management
Fee.
The above selected financial data should be read in conjunction with the
financial statements and the related notes appearing on pages A-1 through A-7.
4
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The ordinary business of the Partnership is expected to pass through three
phases: (i) Offering of Units and investment in properties, (ii) operation of
properties and (iii) sale or other disposition of properties.
Statements contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, which are not historical facts, may be
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof.
The Partnership commenced the Offering of Units on November 10, 1983 and began
operations on December 5, 1983, after achieving the required minimum
subscription level. On October 15, 1984, the Offering was terminated upon the
sale of 84,886 Units. From May 1984 to May 1986, the Partnership made seven
real property investments and purchased 50% interests in four joint ventures,
which were each formed with an Affiliated partnership for the purpose of
acquiring a 100% interest in certain real property. In addition, in January
1987 the Partnership formed a joint venture with an Affiliated partnership (the
"Joint Venture"), in which they are each 50% partners. The Joint Venture was
formed for the purpose of entering into a limited partnership agreement with an
unaffiliated third party to which the Joint Venture contributed 75% of the
total purchase price of a property in order to obtain a preferred majority
interest in the limited partnership. All of the Partnership's joint ventures
were operated under the common control of First Capital Financial Corporation
(the "General Partner").
One of the Partnership's objectives is to dispose of its properties when market
conditions allow for the achievement of the maximum possible sales price. In
1991 the Partnership, in addition to being in the operation of properties
phase, entered the disposition phase of its life cycle. During the disposition
phase of the Partnership's life cycle, comparisons of operating results are
complicated due to the timing and effect of property sales. Partnership
operating results are generally expected to decline as real property interests
are sold since the Partnership no longer receives income generated from such
real property interests. During the years ended December 31, 1998 and 1997, the
Partnership sold its remaining seven real property investments.
OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED DECEMBER 31,
1997
Net income increased by $3,053,700 for the year ended December 31, 1998 when
compared to the year ended December 31, 1997. The increase was primarily due to
the 1998 gains recognized on the sales of Ellis Building ("Ellis"), Holiday
Office Park North and South ("Holiday") and Marketplace at Rivergate Shopping
Center ("Rivergate") exceeding the 1997 gains recorded on the sales of Foxhall
Square Office Building ("Foxhall"), Lakewood Square Shopping Center
("Lakewood") and Banana River Shopping Center ("Banana River"). The increase
was also due to an increase in interest earned on the Partnership's short-term
investments, which was due to an increase in cash available for investment in
1998. The increase was partially offset by diminished operating results, which
was due to the sales of Partnership properties during 1998 and 1997.
Rental revenues decreased by $3,729,100 or 78.9% for the year ended December
31, 1998 when compared to the year ended December 31, 1997. The decrease was
primarily due to the effects of property sales in 1998 and 1997.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996
Net income increased by $841,700 for the year ended December 31, 1997 when
compared to the year ended December 31, 1996. The increase was primarily due to
the net gain recorded on the 1997 sales of four Partnership properties (the
"Sold Properties"). Partially offsetting the increase was the absence of
operating results from the Sold Properties during a portion of 1997.
Net income, exclusive of Sold Properties increased by $197,800 for the year
ended December 31, 1997 when compared to the year ended December 31, 1996. The
increase was primarily due to improved operating results at Ellis, Rivergate
and the Partnership's equity investment in Holiday. Also contributing to the
increase was a decrease in general and administrative expenses, which was
primarily due to a decrease in accounting expenses and salaries.
The following comparative discussion excludes the results of the Sold
Properties.
Rental revenues increased by $121,900 or 5.5% for the year ended December 31,
1997 when compared to the year ended December 31, 1996. The increase was
primarily due to an increase in rental income at Ellis, which was the result of
an increase in the average occupancy and the rates charged to new and renewing
tenants. Also contributing to the increase was an increase in tenant expense
reimbursements at Ellis.
Real estate taxes increased by $36,500 for the year ended December 31, 1997
when compared to the year ended December 31, 1996. The increase was primarily
due to an increase in the assessed value for tax purposes at Rivergate.
Repair and maintenance expense decreased by $10,600 for the year ended December
31, 1997 when compared to the year ended December 31, 1996. The decrease was
primarily due to a reduction in snow removal costs at Rivergate.
Property operating expenses increased by $9,400 for the year ended December 31,
1997 when compared to the year ended December 31, 1996. The increase was
primarily due to an increase in management fees at Ellis, which was due to the
increase in revenues.
The Partnership's equity share of net income from Holiday increased by $40,300
for the year ended December 31, 1997 when compared to the year ended December
31, 1996. The increase was primarily the result of increased tenant expense
reimbursements. Partially offsetting the increase was an increase in
depreciation and amortization expense, which was the result of an increase in
improvements, made to the property together with an increase in lease expense.
The rate of inflation has remained relatively stable during the years under
comparison and has had a minimal impact on the operating results of the
Partnership. The nature of various tenants' lease clauses protected the
Partnership, to some extent, from increases in the rate of inflation. Certain
of the lease clauses provide for the following: 1) annual rent increases based
on the Consumer Price Index or graduated rental increases, 2) percentage
rentals at shopping centers, under which the Partnership receives as additional
rent, a percentage of a tenant's sales over predetermined amounts, and 3) total
or partial tenant reimbursement of property
5
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
operating expenses (e.g., common area maintenance, real estate taxes, etc.).
LIQUIDITY AND CAPITAL RESOURCES
One of the Partnership's objectives is to dispose of its properties when market
conditions allow for the achievement of the maximum possible sales price.
Notwithstanding the Partnership's intention relative to property sales, another
primary objective of the Partnership is to provide cash distributions to
Partners from Partnership operations. Cash Flow (as defined in the Partnership
Agreement) is generally not equal to Partnership net income or cash flow as
determined by GAAP, since certain items are treated differently under the
Partnership Agreement than under GAAP. The General Partner believes that to
facilitate a clear understanding of the Partnership's operations, an analysis
of Cash Flow (as defined in the Partnership Agreement) should be examined in
conjunction with an analysis of net income or cash flow as determined by GAAP.
The second table in Selected Financial Data includes a reconciliation of Cash
Flow (as defined in the Partnership Agreement) to cash flow provided by
operating activities as determined by GAAP. Such amounts are not indicative of
actual distributions to Partners and should not necessarily be considered as an
alternative to the results disclosed in the Statements of Income and Expenses
and Statements of Cash Flows.
Cash Flow (as defined in the Partnership Agreement) for the year ended December
31, 1998 was $1,477,900, a decrease of $2,369,800 when compared to the year
ended December 31, 1997. The decrease was primarily due to the absence of 1998
operating results from Foxhall, Lakewood, and Banana River due to their sales
in 1997. In addition, the decrease is also due to the partial absence of 1998
results from Ellis, Rivergate and Holiday resulting from their sales in 1998.
Partially offsetting the decrease was increased interest income, as previously
discussed.
The increase in the Partnership's cash position of $4,634,000 for the year
ended December 31, 1998 was primarily due to the receipt of proceeds from the
sales of Ellis and Holiday exceeding the special distribution of Foxhall Sale
Proceeds. Liquid assets (including cash and cash equivalents) of the
Partnership as of December 31, 1998 were comprised of amounts held for working
capital purposes and undistributed Sale Proceeds.
The decrease of $2,044,300 in net cash provided by operating activities for the
year ended December 31, 1998 when compared to the year ended December 31, 1997
was primarily due to the absence of 1998 results from Foxhall, Lakewood and
Banana River due to their 1997 sales and the partial absence of 1998 results of
Ellis, Holiday and Rivergate, resulting from their 1998 sales, as previously
discussed. Partially offsetting the decrease was the increase in interest
income, as previously discussed.
Net cash provided by investing activities decreased by $3,331,400 for the year
ended December 31, 1998 when compared to the year ended December 31, 1997. The
decrease was primarily due to the proceeds received from the 1997 sales of four
Partnership properties exceeding the proceeds from the 1998 sales of three
Partnership properties, which included the sale of Holiday.
On September 22, 1998, the Partnership's investment in joint venture completed
the sale of Holiday. The Partnership's share of Sale Proceeds from this
transaction amounted to $6,526,900, which was net of closing expenses. On
February 28, 1999, in connection with this sale, the Partnership distributed
$6,499,700 or $76.57 per Unit to Limited Partners of record as of September 22,
1998.
On August 21, 1998, a joint venture in which the Partnership owned a 50%
interest completed the sale of Ellis. Sale Proceeds from this transaction
amounted to $6,673,800, which was net of closing expenses. On February 28,
1999, in connection with this sale, the Partnership distributed $6,672,900 or
$78.61 per Unit to Limited Partners of record as of August 21, 1998.
On March 4, 1998, the Partnership completed the sale of Rivergate. Sale
Proceeds from this transaction amounted to $7,823,200, which was net of closing
expenses. On August 31, 1998, in connection with this sale, the Partnership
distributed $7,824,800 or $92.18 per Unit to Limited Partners of record as of
March 4, 1998.
The decrease of $138,500 in net cash used for financing activities for the year
ended December 31, 1998 when compared to the year ended December 31, 1997 was
primarily due to lower quarterly distributions resulting from reduced Cash Flow
(as defined in the Partnership Agreement). The decrease was partially offset by
an increase in 1998 special distributions of Sales Proceeds over the comparable
1997 amount.
The Year 2000 problem is the result of the inability of existing computer
programs to distinguish between a year beginning with "20" rather than "19".
This is the result of computer programs using two rather than four digits to
define an applicable year. If not corrected, any program having time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a variety of problems including miscalculations,
loss of data and failure of entire systems. Critical areas that could be
effected are accounts receivable, accounts payable, general ledger, cash
management, investor services, computer hardware and telecommunications
systems.
The Partnership has engaged Affiliated and unaffiliated entities to perform all
of its critical functions that utilize software that may have time-sensitive
applications. All of these service providers are providing these services for
their own organizations as well as for their clients. The General Partner, on
behalf of the Partnership, has been in close communication with each of these
service providers regarding steps that they are taking to assure that there
will be no serious interruption of the operations of the Partnership resulting
from Year 2000 problems. Based on the results of these inquiries, as well as a
review of the disclosures by these service providers, the General Partner
believes that the Partnership will be able to continue normal business
operations and will incur no material costs related to Year 2000 issues.
The Partnership has not formulated a contingency plan. However, the General
Partner believes that based on the status of the Partnership's real estate
portfolio and its limited number of transactions, aside from catastrophic
failure of banks, governmental agencies, etc., it could carry out substantially
all of its critical operations on a manual basis or easily convert to systems
that are Year 2000 compliant.
As described in Note 5 of Notes to Financial Statements, the Partnership is
awaiting resolution of an environmental matter at Lakewood. The General Partner
is continuing to monitor the documentation delivered by the purchaser of
Lakewood
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership has no financial instruments for which there are significant
risks.
6
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
regarding the purchaser's activities to remedy the hazardous substances at
Lakewood. There can be no assurance as to the actual timeframe for the
remediation or that it will be completed without cost to the Partnership.
Distributions to Limited Partners for the quarter ended December 31, 1998 were
declared in the amount of $169,800 or $2.00 per Unit. Cash distributions are
made 60 days after the last day of each fiscal quarter. Distributions of Cash
Flow (as defined in the Partnership Agreement) to Limited Partners for the year
ended December 31, 1998, amounted to $1,273,300 or $15.00 per Unit. To fund
these distributions, the Partnership utilized Cash Flow (as defined by the
Partnership Agreement) generated during 1998.
As disclosed above, the Partnership consummated the sale of its last remaining
property in September 1998. The General Partner has begun the process of
winding up the affairs of the Partnership. This process will include the
resolution of all post closing property sale matters. In addition, the
environmental matter at Lakewood will be closely monitored. While these matters
are pending, the Partnership will remain in existence. Following the February
28, 1999 distributions, distributions will be suspended. When the environmental
matter is satisfactorily remediated and the other post closing matters are
resolved, the Partnership will pay a liquidating distribution of the remaining
assets held by the Partnership, less amounts reserved for administrative
expenses and any amounts deemed necessary for contingencies and other post
closing matters.
7
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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The response to this item is submitted as a separate section of this report.
See page A-1 "Index of Financial Statements, Schedule and Exhibits."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
7
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
(a) & (e) DIRECTORS
----------
The Partnership has no directors. First Capital Financial Corporation
("FCFC") is the General Partner. The directors of FCFC, as of March 31, 1999,
are shown in the table below. Directors serve for one year or until their
successors are elected. The next annual meeting of FCFC will be held in June
1999.
Name Office
---- ------
Douglas Crocker II.................................. Director
Sheli Z. Rosenberg.................................. Director
Douglas Crocker II, 58, has been President and Chief Executive Officer since
December 1992 and a Director since January 1993 of the General Partner. Mr.
Crocker has been President, Chief Executive Officer and trustee of Equity
Residential Properties Trust since March 31, 1993. Mr. Crocker is a member of
the Board of Directors of Wellsford Real Properties, Inc. and Ventas Inc. and
was a member of the Board of Directors of Horizon Group, Inc. from July 1996
to June 1998. Mr. Crocker was an Executive Vice President of Equity Financial
and Management Company ("EFMC") from November 1992 until March 31, 1997.
Sheli Z. Rosenberg, 57, was President and Chief Executive Officer of the
General Partner from December 1990 to December 1992 and has been a Director of
the General Partner since September 1983; was Executive Vice President and
General Counsel for EFMC from October 1980 to November 1994; has been
President and Chief Executive Officer of Equity Group Investments, LLC ("EGI")
since November 1994; has been a Director of Great American Management and
Investment Inc. ("Great American") since June 1984 and is a director of
various subsidiaries of Great American. She is also a director of Anixter
International Inc., Capital Trust Inc., CVS Corporation, Illinova Corporation,
Illinois Power Co., Jacor Communications, Inc., and Manufactured Home
Communities, Inc. She is also a trustee of Equity Residential Properties
Trust and Equity Office Properties Trust. Ms. Rosenberg was a Principal of
Rosenberg & Liebentritt, P.C., counsel to the Partnership, the General Partner
and certain of their Affiliates from 1980 to September 1997. She had been
Vice President of First Capital Benefit Administrators, Inc. ("Benefit
Administrators") since July 22, 1987 until its liquidation in November 1995.
Benefit Administrators filed for protection under the Federal Bankruptcy laws
on January 3, 1995.
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
- -------- --------------------------------------------------
(b) & (e) EXECUTIVE OFFICERS
------------------
The Partnership does not have any executive officers. The executive officers
of the General Partner as of March 31, 1999 are shown in the table. All
officers are elected to serve for one year or until their successors are
elected and qualified.
Name Office
---- ------
Douglas Crocker II......................President and Chief Executive Officer
Donald J. Liebentritt...................Vice President
Norman M. Field.........................Vice President - Finance andTreasurer
PRESIDENT AND CEO - See Table of Directors above.
Donald J. Liebentritt, 48, has been Vice President of the General Partner
since July 1997 and is Chief Operating Officer and General Counsel of EGI,
Vice President and Assistant Secretary of Great American and Principal and
Chairman of the Board of Rosenberg & Liebentritt, P.C.
Norman M. Field, 50, has been Vice President of Finance and Treasurer of the
General Partner since February 1984, and also served as Vice President of
Great American from July 1983 until March 1995 and from July 1997 to the
present. Mr. Field had been Treasurer of Benefit Administrators since July 22,
1987 until its liquidation in November 1995. He was Chief Financial Officer of
Equality Specialties, Inc. ("Equality"), a subsidiary of Great American, from
August 1994 to April 1995.
(d) FAMILY RELATIONSHIPS
- ------------------------
There are no family relationships among any of the foregoing directors and
officers.
(f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
- --------------------------------------------
With the exception of the bankruptcy matter disclosed under Items 10 (a), (b)
and (e), there are no involvements in certain legal proceedings among any of
the foregoing directors and officers.
9
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
(a, b, c & d) As stated in Item 10, the Partnership has no officers or
directors. Neither the General Partner, nor any director or officer of the
General Partner, received any direct remuneration from the Partnership during
the year ended December 31, 1998. However, Affiliates of the General Partner do
compensate the directors and officers.
For additional information see Item 13 (a) Certain Relationships and Related
Transactions.
(e) None.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
(a) As of March 1, 1999, no person owned of record or was known by the Partner-
ship to own beneficially more than 5% of the Partnership's 84,886 Units then
outstanding.
(b) The Partnership has no directors or executive officers. As of March 1,
1999, the executive officers and directors of the General Partner, as a
group, did not own any Units.
(c) None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
(a) Affiliates of the General Partner, provided leasing, property management
and supervisory services to the Partnership. Compensation for these property
management services may not exceed 6% of the gross receipts from the property
being managed where the General Partner or Affiliates provide leasing, re-
leasing, and/or leasing related services, or 3% of gross receipts where the
General Partner or Affiliates do not perform leasing, re-leasing and/or
leasing related services. For the year ended December 31, 1998, these
Affiliates were entitled to supervisory and property management and leasing
fees of $34,600. In addition, other Affiliates of the General Partner were
entitled to compensation and reimbursements of $41,600 from the Partnership
for insurance, personnel, and other miscellaneous services. Compensation for
these services are on terms which are fair, reasonable and no less favorable
to the Partnership than reasonably could be obtained from unaffiliated
persons. As of December 31, 1998, total fees and reimbursements of $2,000
were due to Affiliates.
In accordance with the Partnership Agreement, subsequent to October 19, 1984,
the Termination of the Offering, the General Partner is entitled to 10% of
Cash Flow (as defined in the Partnership Agreement) as a Partnership
Management Fee. Net Profits (exclusive of Net Profits from the sale or
disposition of Partnership properties) are allocated: first, to the General
Partner, in an amount equal to the greater of the General Partner's
Partnership Management Fee or 1% of such Net Profits; second, the balance, if
any, to the Limited Partners. Net Profits from the sale or disposition of a
Partnership property are allocated: first, prior to giving effect to any
distributions of Sale Proceeds from the transaction, to the General Partner
and the Limited Partners with negative balances in their capital accounts pro
rata in proportion to such respective negative balances, to the extent of the
total of such negative balances; second, to the General Partner, in an amount
necessary to make the balance in its capital account equal to the amount of
Sale Proceeds to be distributed to the General Partner with respect to the
sale or disposition of such property and third, the balance, if any, to the
Limited Partners. Net Losses (exclusive of Net Losses from the sale,
disposition or provision for value impairment of Partnership properties) are
allocated 1% to the General Partner and 99% to the Limited Partners. Net
Losses from the sale, disposition or provision for value impairment of
Partnership properties are allocated: first, prior to giving effect to any
distributions of Sale Proceeds from the transaction, to the extent that the
balance in the General Partner's capital account exceeds its Capital
Investment or the balance in the capital accounts of the Limited Partners
exceeds the amount of their Capital Investment (the "Excess
10
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
- -------- ----------------------------------------------
Balances"), to the General Partner and the Limited Partners pro rata in
proportion to such Excess Balances until such Excess Balances are reduced to
zero; second, to the General Partner and the Limited Partners and among them
(in the ratio which balances) until the balance in their capital accounts
shall be reduced to zero; third, the balance, if any, 99% to the Limited
Partners and 1% to the General Partner. Notwithstanding the foregoing, in
all events there shall be allocated to the General Partner not less than 1%
of Net Profits and Net Losses from the sale, disposition or provision for
value impairment of a Partnership property. For the year ended December 31,
1998, the General Partner was paid a Partnership Management Fee of $141,500,
and was allocated Net Profits of $214,800, which included $73,300 from the
sale of Partnership properties.
(b) Rosenberg & Liebentritt, P.C. ("Rosenberg"), serves as legal counsel to the
Partnership, the General Partner and certain of their Affiliates. Donald J.
Liebentritt, Vice President of the General Partner is a Principal and the
Chairman of the Board of Rosenberg. Compensation for these services are on
terms which are fair, reasonable and no less favorable to the Partnership
than reasonably could have been obtained from unaffiliated persons. Total
legal fees, which Rosenberg was entitled to, for the year ended December 31,
1998 was $51,700.
(c) No management person is indebted to the Partnership.
(d) None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
(a, c & d) (1, 2 & 3) See Index of Financial Statements, Schedule and Exhibits
on page A-1 of Form 10-K.
(b) Reports on Form 8-K:
A report filed on Form 8-K reporting the sale of Holiday filed on October 6,
1998.
11
<PAGE>
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.
FIRST CAPITAL INSTITUTIONAL REAL ESTATE, LTD. - 2
BY: FIRST CAPITAL FINANCIAL CORPORATION
GENERAL PARTNER
Dated: March 26, 1999 By: /s/ DOUGLAS CROCKER II
-------------- --- ------------------
DOUGLAS CROCKER II
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
/s/ DOUGLAS CROCKER II March 26, 1999 President, Chief Executive Officer and
- ----- --------------------- -------------- Director of the General Partner
DOUGLAS CROCKER II
/s/ SHELI Z. ROSENBERG March 26, 1999 Director of the General Partner
- ----- --------------------- --------------
SHELI Z. ROSENBERG
/s/ DONALD J. LIEBENTRITT March 26, 1999 Vice President
- ----- --------------------- --------------
DONALD J. LIEBENTRITT
/s/ NORMAN M. FIELD March 26, 1999 Vice President - Finance and Treasurer
- ----- --------------------- --------------
NORMAN M. FIELD
</TABLE>
<PAGE>
INDEX OF FINANCIAL STATEMENTS, SCHEDULE AND EXHIBITS
FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT
<TABLE>
<CAPTION>
Pages
----------------------------
<S> <C>
Report of Independent Auditors A-2
Balance Sheets as of December 31, 1998 and 1997 A-3
Statements of Partners' Capital for the Years Ended
December 31, 1998, 1997 and 1996 A-3
Statements of Income and Expenses for the Years Ended
December 31, 1998, 1997 and 1996 A-4
Statements of Cash Flows for the Years Ended December
31, 1998, 1997 and 1996 A-4
Notes to Financial Statements A-5 to A-7
</TABLE>
SCHEDULES FILED AS PART OF THIS REPORT
All schedules have been omitted as inapplicable, or for the reason that the
required information is shown in the financial statements or notes thereto.
EXHIBITS FILED AS PART OF THIS REPORT
EXHIBITS (3 & 4) First Amended and Restated Certificate and Agreement of
Limited Partnership as set forth on pages A-1 through A-31 of the Partnership's
definitive Prospectus dated October 19, 1983; Registration Statement No.
2-86361, filed pursuant to Rule 424 (b), is incorporated herein by reference.
EXHIBIT (10) Material Contracts
- ------------
Real Estate Sale Agreement and Closing Documents for the sale of Marketplace at
Rivergate Shopping Center filed as an exhibit to the Partnership's Report on
form 8-K filed on March 18, 1998 is incorporated herein by reference.
Real Estate Sale Agreement and Closing Documents for the sale of Ellis Building
filed as an exhibit to the Partnership's Report on form 8-K filed on September
8, 1998 is incorporated herein by reference.
Real Estate Sale Agreement and Closing Documents for the sale of Holiday Office
Park North and South filed as an exhibit to the Partnership's Report on form 8-K
filed on October 6, 1998 is incorporated herein by reference.
Real Estate Sale Agreement and Closing Documents for the sale of Lakewood Square
Shopping Center filed as an exhibit to the Partnership's Report on form 8-K
filed on June 2, 1997 is incorporated herein by reference.
Real Estate Sale Agreement and Closing Documents for the sale of Banana River
Square Shopping Center filed as an exhibit to the Partnership's Report on form
8-K filed on August 6, 1997 is incorporated herein by reference.
Real Estate Sale Agreement and Closing Documents for the sale of Foxhall Square
Office Building filed as an exhibit to the Partnership's Report on form 8-K
filed on November 24, 1997 is incorporated herein by reference.
EXHIBIT (13) Annual Report to Security Holders
- ------------
The 1997 Annual Report to Limited Partners is being sent under separate cover,
not as a filed document and not via EDGAR, for the information of the
Commission.
EXHIBIT (27) Financial Data Schedule
- ------------
A-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Partners
First Capital Institutional Real Estate, Ltd. - 2
Chicago, Illinois
We have audited the accompanying balance sheets of First Capital Institutional
Real Estate, Ltd. - 2 as of December 31, 1998 and 1997, and the related
statements of income and expenses, partners' capital and cash flows for each of
the three years in the 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 First Capital Institutional
Real Estate, Ltd. - 2 at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
February 26, 1999
A-2
<PAGE>
BALANCE SHEETS
December 31, 1998 and 1997
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investment in commercial rental properties:
Land $ $ 3,848,300
Buildings and improvements 11,067,100
- -------------------------------------------------------------------------
14,915,400
Accumulated depreciation and amortization (4,804,100)
- -------------------------------------------------------------------------
Total investment properties, net of accumulated
depreciation and amortization 10,111,300
Cash and cash equivalents 19,078,600 14,444,600
Restricted cash 50,000
Rents receivable 27,800 67,300
Investment in joint venture 5,311,400
Other assets 10,200 35,100
- -------------------------------------------------------------------------
$19,116,600 $30,019,700
- -------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 115,500 $ 220,100
State income taxes payable 75,300
Due to Affiliates 2,000 52,100
Security deposits 49,500
Distributions payable 13,361,200 8,768,000
Other liabilities 3,100 56,900
- -------------------------------------------------------------------------
13,557,100 9,146,600
- -------------------------------------------------------------------------
Partners' capital:
General Partner 73,300 --
Limited Partners (84,886 Units issued and
outstanding) 5,486,200 20,873,100
- -------------------------------------------------------------------------
5,559,500 20,873,100
- -------------------------------------------------------------------------
$19,116,600 $30,019,700
- -------------------------------------------------------------------------
</TABLE>
STATEMENTS OF PARTNERS' CAPITAL
For the years ended December 31, 1998, 1997 and 1996
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Partners' (deficit) capital, January 1,
1996 $(131,300) $ 48,846,800 $ 48,715,500
Net income for the year ended December
31, 1996 424,400 2,778,800 3,203,200
Distributions for the year ended
December 31, 1996 (424,400) (8,828,100) (9,252,500)
- -------------------------------------------------------------------------------
Partners' (deficit) capital, December
31, 1996 (131,300) 42,797,500 42,666,200
Net income for the year ended December
31, 1997 381,300 3,663,600 4,044,900
Distributions for the year ended
December 31, 1997 (250,000) (25,588,000) (25,838,000)
- -------------------------------------------------------------------------------
Partners' capital, December 31, 1997 -- 20,873,100 20,873,100
Net income for the year ended December
31, 1998 214,800 6,883,800 7,098,600
Distributions for the year ended
December 31, 1998 (141,500) (22,270,700) (22,412,200)
- -------------------------------------------------------------------------------
Partners' capital, December 31, 1998 $ 73,300 $ 5,486,200 $ 5,559,500
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATEMENTS OF INCOME AND EXPENSES
For the years ended December 31, 1998, 1997 and 1996
(All dollars rounded to nearest 00s except per Unit amounts)
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Rental $ 995,500 $4,724,600 $6,342,500
Interest 860,900 663,200 661,200
Net gain on sales of property 4,621,500 1,461,300
- ------------------------------------------------------------------------------
6,477,900 6,849,100 7,003,700
- ------------------------------------------------------------------------------
Expenses:
Depreciation and amortization 199,700 968,200 1,262,400
Property operating:
Affiliates 34,300 244,300 390,000
Nonaffiliates 200,400 793,600 912,200
Real estate taxes 48,800 415,700 520,600
Insurance--Affiliate 7,600 47,600 77,500
Repairs and maintenance 161,900 514,500 702,900
General and administrative:
Affiliates 39,000 37,100 55,300
Nonaffiliates 168,400 205,800 231,300
- ------------------------------------------------------------------------------
860,100 3,226,800 4,152,200
- ------------------------------------------------------------------------------
Net income before income from participation 5,617,800 3,622,300 2,851,500
in joint venture and state income tax expense
Income from participation in joint venture:
Operations 295,200 428,400 403,100
Gain on sale of property 1,439,100
- ------------------------------------------------------------------------------
Income before state income tax expense 7,352,100 4,050,700 3,254,600
State income tax expense 253,500 5,800 51,400
- ------------------------------------------------------------------------------
Net income $7,098,600 $4,044,900 $3,203,200
- ------------------------------------------------------------------------------
Net income allocated to General Partner $ 214,800 $ 381,300 $ 424,400
- ------------------------------------------------------------------------------
Net income allocated to Limited Partners $6,883,800 $3,663,600 $2,778,800
- ------------------------------------------------------------------------------
Net income allocated to Limited Partners per
Unit (84,886 Units outstanding) $ 81.09 $ 43.16 $ 32.74
- ------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,098,600 $ 4,044,900 $ 3,203,200
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 199,700 968,200 1,262,400
Net gain on sales of property (4,621,500) (1,461,300)
(Income) from participation in joint
venture (1,652,000) (423,600) (383,300)
Changes in assets and liabilities:
Decrease in rents receivable 39,500 32,500 70,000
Decrease (increase) in other assets 24,900 24,000 (46,100)
(Decrease) in accounts payable and
accrued expenses (104,600) (102,800) (168,100)
Increase in state income tax
payable 75,300
(Decrease) increase in due to
Affiliates (50,100) (24,100) 1,300
(Decrease) increase in other
liabilities (53,800) (57,500) 2,200
- -------------------------------------------------------------------------------
Net cash provided by operating
activities 956,000 3,000,300 3,941,600
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Net proceeds from sales of property 14,537,200 23,383,400
Payments for capital and tenant
improvements (4,100) (521,600) (839,700)
Decrease (increase) in investments in
debt securities 1,051,100 (1,051,100)
Decrease (increase) in restricted
cash 50,000 (25,000)
Net distributions received from
(contributions to) joint venture 6,963,400 965,000 (44,900)
- -------------------------------------------------------------------------------
Net cash provided by (used for)
investing activities 21,546,500 24,877,900 (1,960,700)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions paid to Partners (17,819,000) (17,918,900) (9,676,900)
(Decrease) increase in security
deposits (49,500) (88,100) 1,400
- -------------------------------------------------------------------------------
Net cash (used for) financing
activities (17,868,500) (18,007,000) (9,675,500)
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 4,634,000 9,871,200 (7,694,600)
Cash and cash equivalents at the
beginning of the year 14,444,600 4,573,400 12,268,000
- -------------------------------------------------------------------------------
Cash and cash equivalents at the end
of the year $ 19,078,600 $ 14,444,600 $ 4,573,400
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DEFINITION OF SPECIAL TERMS:
Capitalized terms used in this report have the same meaning as those terms in
the Partnership's Registration Statement filed with the Securities and Exchange
Commission on Form S-11. Definitions of these terms are contained in Article
III of the First Amended and Restated Certificate and Agreement of Limited
Partnership, which is included in the Registration Statement and incorporated
herein by reference.
ORGANIZATION:
The Partnership was formed on August 22, 1983, by the filing of a Certificate
and Agreement of Limited Partnership with the Department of State of the State
of Florida, and commenced the Offering of Units on November 10, 1983. The
Certificate and Agreement, as amended and restated, authorized the sale to the
public of up to 85,000 Units and not less than 1,400 Units pursuant to the
Prospectus. On December 5, 1983, the required minimum subscription level was
reached and Partnership operations commenced. A total of 84,886 Units were sold
prior to Termination of the Offering in October, 1984. The Partnership was
formed to invest primarily in existing, income-producing commercial real
estate.
The Partnership has disposed of its real estate properties. Upon resolution of
the environmental matter disclosed in Note 5 and other post closing matters
related to the sales of the Partnership's properties, the Partnership will make
a liquidating distribution and dissolve.
In 1998, the Company adopted Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which was effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for the
way that public business enterprises report information about operating
segments and major customers in their annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports in the second year of application. The Partnership
has one reportable segment as the Partnership is in the disposition phase of
its life cycle, wherein it is seeking to resolve post-closing matters relating
to properties sold by the Partnership. The adoption of Statement 131 did not
affect the results of operations or financial position.
The Partnership Agreement provides that the Partnership will be dissolved on or
before December 2014. The Limited Partners, by a majority vote, may dissolve
the Partnership at any time.
ACCOUNTING POLICIES:
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). The Partnership utilizes the accrual
method of accounting. Under this method, revenues are recorded when earned and
expenses are recorded when incurred.
Preparation of the Partnership's financial statements in conformity with GAAP
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.
The financial statements include the Partnership's 50% interest in a joint
venture with an Affiliated partnership. This joint venture was formed for the
purpose of acquiring a 100% interest in certain real property and until its
sale in August 1998, was operated under the common control of the General
Partner. Accordingly, the Partnership's pro rata share of the ventures'
revenues, expenses, assets, liabilities and Partners' capital is included in
the financial statements.
Investment in joint venture, represented the recording of the Partnership's
interest, under the equity method of accounting, in a joint venture with an
Affiliated partnership. The joint venture acquired a preferred majority
interest in a limited partnership with the sellers of the Lansing, Michigan
property ("Holiday"). Under the equity method of accounting, the Partnership
recorded its initial investment at cost and adjusts its investment account for
its share of Holiday's income or loss and its distributions of cash flow (as
defined in the limited partnership agreement). During 1998, Holiday was sold
and the remaining assets and liabilities of the limited partnership were
distributed to the Partnership. In December 1998, the limited partnership was
dissolved.
The Partnership is not liable for Federal income taxes as the Partners
recognize their proportionate share of the Partnership's income or loss on
their income tax returns; therefore, no provision for Federal income taxes is
made in the financial statements of the Partnership. It is not practicable for
the Partnership to determine the aggregate tax bases of the Limited Partners;
therefore, the disclosure of the difference between the tax bases and the
reported assets and liabilities of the Partnership would not be meaningful.
Commercial rental properties are recorded at cost, net of any provisions for
value impairment, and depreciated (exclusive of amounts allocated to land) on
the straight-line method over their estimated useful lives. Lease acquisition
fees are recorded at cost and amortized on the straight-line method over the
life of each respective lease. Maintenance and repair costs are expensed
against operations as incurred; expenditures for improvements are capitalized
to the appropriate property accounts and depreciated on the straight-line
method over the estimated life of such improvements.
The Partnership evaluates its rental properties for impairment when conditions
exist which indicate that it is probable that the sum of expected future cash
flows (undiscounted) from a property is less than its carrying basis. Upon
determination that an impairment has occurred, the basis in the rental property
is reduced to estimated fair value. Management was not aware of any indicator
that would result in a significant impairment loss during the periods reported.
Property sales are recorded when title transfers and sufficient consideration
has been received by the Partnership. Upon disposition, the related costs and
accumulated depreciation are removed from the respective accounts. Any gain or
loss on sale is recognized in accordance with GAAP.
A-5
<PAGE>
Cash equivalents are considered all highly liquid investments with maturity of
three months or less when purchased.
Certain reclassifications have been made to the previously reported 1997 and
1996 statements in order to provide comparability with the 1998 statements.
These reclassifications have no effect on net income or Partners' capital.
The Partnership's financial statements include financial instruments, including
receivables, trade liabilities and investment in joint venture. The Partnership
considers the disclosure of the fair value of its investment in joint venture
to be impracticable due to the illiquid nature of its investment. The fair
value of financial instruments, including cash, cash equivalents and restricted
cash, was not materially different from their carrying values at December 31,
1998 and 1997.
2. RELATED PARTY TRANSACTIONS:
In accordance with the Partnership Agreement, subsequent to October 19, 1984,
the Termination of the Offering, the General Partner is entitled to 10% of Cash
Flow (as defined in the Partnership Agreement) as a Partnership Management Fee.
Net Profits (exclusive of Net Profits from the sale or disposition of
Partnership properties) are allocated: first, to the General Partner, in an
amount equal to the greater of the General Partner's Partnership Management Fee
or 1% of such Net Profits; second, the balance, if any, to the Limited
Partners. Net Profits from the sale or disposition of a Partnership property
are allocated: first, prior to giving effect to any distributions of Sale
Proceeds from the transaction, to the General Partner and the Limited Partners
with negative balances in their capital accounts pro rata in proportion to such
respective negative balances, to the extent of the total of such negative
balances; second, to the General Partner, in an amount necessary to make the
balance in its capital account equal to the amount of Sale Proceeds to be
distributed to the General Partner with respect to the sale or disposition of
such property and third, the balance, if any, to the Limited Partners. Net
Losses (exclusive of Net Losses from the sale, disposition or provision for
value impairment of Partnership properties) are allocated 1% to the General
Partner and 99% to the Limited Partners. Net Losses from the sale, disposition
or provision for value impairment of Partnership properties are allocated:
first, prior to giving effect to any distributions of Sale Proceeds from the
transaction, to the extent that the balance in the General Partner's capital
account exceeds its Capital Investment or the balance in the capital accounts
of the Limited Partners exceeds the amount of their Capital Investment (the
"Excess Balances"), to the General Partner and the Limited Partners pro rata in
proportion to such Excess Balances until such Excess Balances are reduced to
zero; second, to the General Partner and the Limited Partners and among them
(in the ratio which balances) until the balance in their capital accounts shall
be reduced to zero; third, the balance, if any, 99% to the Limited Partners and
1% to the General Partner. Notwithstanding the foregoing, in all events there
shall be allocated to the General Partner not less than 1% of Net Profits and
Net Losses from the sale or disposition of a Partnership property. For the year
ended December 31, 1998, the General Partner was paid a Partnership Management
Fee of $141,500 and was allocated Net Profits of $214,800, which includes
$73,300 from the sales of Partnership properties. For the year ended December
31, 1997, the General Partner was paid a Partnership Management Fee of $250,000
and was allocated Net Profits of $381,300, which includes $131,300 from the
sales of Partnership properties. For the year ended December 31, 1996, the
General Partner was paid a Partnership Management Fee and allocated Net Profits
of $424,400.
Fees and reimbursements paid and payable by the Partnership to Affiliates for
the years ended December 31, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
Paid Payable Paid Payable Paid Payable
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Property management and
leasing fees $ 41,000 $(3,300) $230,300 $ 3,100 $333,400 $31,000
Reimbursement of property
insurance premiums 7,700 None 47,600 None 77,500 None
Real estate commissions
(a) None None None 40,300 None 40,300
Legal 59,200 None 104,100 7,500 55,000 600
Reimbursement of
expenses, at cost
--Accounting 17,100 3,300 21,300 900 38,700 3,500
--Investor communication 12,700 2,000 12,000 300 18,600 800
--Other None None 2,300 None 8,100 None
- ------------------------------------------------------------------------------
$137,700 $ 2,000 $417,600 $52,100 $531,300 $76,200
- ------------------------------------------------------------------------------
</TABLE>
The variance between the amounts listed in this table and the Statement of
Income and Expense is due to capitalized legal costs.
(a) As of December 31, 1997, the Partnership owed $40,300 to the General
Partner for real estate commissions earned in connection with the sales of
Partnership properties. These commissions have been accrued but not paid.
In accordance with the Partnership Agreement, no Affiliate of the General
Partner may receive payment of a real estate commission upon the sale of a
Partnership property until Limited Partners have received cumulative
distributions of Sale or Financing Proceeds equal to 100% of their Original
Capital Contribution, plus a cumulative return (including all Cash Flow (as
defined in the Partnership Agreement) which has been distributed to the
Limited Partners) of 6% simple interest per annum on their Capital
Investment. During the year ended December 31, 1998, following the sale of
the Partnership's last property, it was determined that the requirement
would not be fulfilled and, accordingly, the liability was written off and
reported as a gain on the sale of property.
3. INCOME TAX:
The Partnership utilizes the accrual method of accounting for both income tax
reporting and financial statement purposes. Financial statement results will
differ from tax results due to the use of differing depreciation lives and
methods, the recognition of prepaid rents as taxable income and the
Partnership's provisions for value impairment. For the year ended December 31,
1998, net income for tax reporting purposes was $3,485,200.
A-6
<PAGE>
4. PROPERTY SALES:
On September 22, 1998, the joint venture in which the Partnership owns a 50%
interest, treated under the equity method, consummated the sale of its
property, Holiday Office Park North and South, located in Lansing, Michigan for
a sale price of $13,500,000. The Partnership's share of proceeds from this
transaction was $6,526,900, which was net of closing expenses. The Partnership
reported a net gain of $1,439,100 for the year ended December 31, 1998 in
connection with this sale and distributed $6,499,700 or $76.57 per Unit on
February 28, 1999 to Limited Partners of record as of September 22, 1998. For
tax reporting purposes, the Partnership reported a (loss) of $(367,300) for the
year ended December 31, 1998 in connection with this sale.
On August 21, 1998, a joint venture in which the Partnership owns a 50%
interest, consummated the sale of the Ellis Building, located in Sarasota,
Florida, for a sale price of $13,875,000. The Partnership's share of proceeds
from this transaction was $6,673,800, which was net of closing expenses. The
Partnership reported a net of gain of $2,942,000 for the year ended December
31, 1998 in connection with this sale and distributed $6,672,900 or $78.61 per
Unit on February 28, 1999 to Limited Partners of record as of August 21, 1998.
For tax reporting purposes, the Partnership reported a gain of $1,525,100 for
the year ended December 31, 1998 in connection with this sale.
On March 4, 1998, the Partnership sold Marketplace at Rivergate Shopping
Center, located in Nashville, Tennessee, for a sale price of $8,128,000.
Proceeds from this transaction were $7,823,100, which was net of closing
expenses. The Partnership reported a gain for financial reporting purposes of
$1,639,300 for the year ended December 31, 1998 from this sale and distributed
$7,824,800 or $92.18 per Unit on August 31, 1998 to Limited Partners of record
as of March 4, 1998. For tax reporting purposes, the Partnership reported a
gain of $1,013,500 for the year ended December 31, 1998 in connection with this
sale.
On November 10, 1997, a joint venture in which the Partnership owned a 50%
interest, consummated the sale of Foxhall Square Office Building, located in
Washington D.C., for a sale price of $17,125,000. The Partnership's share of
proceeds from this transaction was $8,283,100, which was net of closing
expenses. The Partnership reported a gain for financial reporting purposes of
$1,079,000 for the year ended December 31, 1997 in connection with this sale
and distributed $8,249,200 or $97.18 per Unit on February 28, 1998 to Limited
Partners of record as of November 10, 1997. For tax reporting purposes, the
Partnership reported a gain of $2,316,600 for the year ended December 31, 1997
in connection with this sale.
On July 24, 1997, the Partnership sold Banana River Square Shopping Center,
located in Cocoa Beach, Florida, for a sale price of $5,185,000. Proceeds from
this transaction were $4,948,400, which was net of closing expenses. The
Partnership reported a gain for financial reporting purposes of $269,400 for
the year ended December 31, 1997 from this sale and distributed $4,935,300 or
$58.14 per Unit on November 30, 1997 to Limited Partners of record as of July
24, 1997. For tax reporting purposes, the Partnership reported a gain of
$2,377,800 for the year ended December 31, 1997 in connection with this sale.
On June 27, 1997, a joint venture in which the Partnership owned a 50%
interest, consummated the sale of 12621 Featherwood Office Building, located in
Houston, Texas, for a sale price of $3,146,700. The Partnership's share of
proceeds from this transaction was $1,491,900, which was net of closing
expenses. The Partnership reported a net loss of $53,700 for the year ended
December 31, 1997 in connection with this sale and distributed $1,495,700 or
$17.62 per Unit on November 30, 1997 to Limited Partners of record as of June
27, 1997. For tax reporting purposes, the Partnership reported a (loss) of
$(848,000) for the year ended December 31, 1997 in connection with this sale.
On May 16, 1997, a joint venture in which the Partnership owned a 50% interest,
consummated the sale of Lakewood Square Shopping Center ("Lakewood"), located
in Lakewood California, for a sale price of $17,750,000. The Partnership's
share of proceeds from this transaction was $8,660,000, which was net of
closing expenses. The Partnership reported a net gain of $166,600 for the year
ended December 31, 1997 in connection with this sale and distributed $8,658,400
or $102.00 per Unit on August 31, 1997 to Limited Partners of record as of May
16, 1997. For tax reporting purposes, the Partnership reported a gain of
$3,238,700 for the year ended December 31, 1997 in connection with this sale.
5. ENVIRONMENTAL MATTER:
In 1996, the General Partner became aware of the existence of hazardous
substances in the soil and groundwater of Lakewood. In connection with the 1997
sale of Lakewood, the purchaser assumed the obligation to remedy the hazardous
substances in the manner required by law, which includes, but is not limited
to, payment of all costs in connection with the remediation work. In addition,
the purchaser provided the Partnership with certain indemnification protection
in relation to clean-up costs and related expenses arising from the presence of
these hazardous substances. At the present time, the General Partner is unaware
of any claims or other matters referred to above against the Partnership. In
November 1998, the purchaser submitted its corrective action plan (the "Plan")
for the site to the California Regional Water Quality Control Board ("Water
Board"). The Plan provides for the recommended method of cleanup and the
obtaining of regulatory approval upon completion. In December 1998, the Water
Board authorized the purchaser to proceed with its Plan subject to the Water
Board's satisfactory review of purchaser's pilot study (which will test the
effectiveness of the Plan's proposed remedial method). The timing of the
completion of the remediation process is contingent upon, among other things,
(i) the purchaser's completion of and (ii) the Water Board's approval of the
pilot study. Accordingly, there can be no assurance as to the timing of the
completion of the remediation process. The General Partner continues to monitor
the documentation delivered by the purchaser regarding the purchaser's
activities to remedy the hazardous substances at Lakewood.
6. STATE INCOME TAX EXPENSE:
State income tax expense is comprised substantially of taxes based on taxable
income imposed by the District of Columbia and the states of Michigan and
Florida.
A-7
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