<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
----------------
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 0-15538
FIRST CAPITAL INCOME PROPERTIES, LTD.-SERIES XI
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ILLINOIS 36-3364279
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
TWO NORTH RIVERSIDE PLAZA,
SUITE 700,
CHICAGO, ILLINOIS 60606-2607
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
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
ASSIGNEE UNITS
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 September 12, 1985,
included in the Registrant's Registration Statement on Form S-11 (Registration
No. 2-98749), 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
The registrant, First Capital Income Properties, Ltd.--Series XI (the
"Partnership"), is a limited partnership organized in 1985 under the Uniform
Limited Partnership Act of the State of Illinois. The Partnership sold 57,621
Limited Partnership Assignee Units (the "Units") to the public from September
1985 to March 1987 pursuant to a Registration Statement on Form S-11 filed with
the Securities and Exchange Commission (Registration Statement No. 2-98749).
Capitalized terms used in this report have the same meaning as those terms have
in the Partnership's Registration Statement.
The Partnership was formed to invest primarily in existing commercial income-
producing real estate, such as shopping centers, warehouses and office
buildings, and, to a lesser extent, in other types of commercial, income-
producing real estate. From May 1986 to September 1989, the Partnership: 1)
made one real property investment; 2) purchased 50% interests in four joint
ventures which were each formed with Affiliated partnerships for the purpose of
acquiring a 100% interest in certain real property; 3) purchased 50% interests
in four separate joint ventures which were each formed with Affiliated
partnerships for the purpose of acquiring a preferred majority interest in
certain real property and 4) purchased a 70% preferred majority undivided
interest in a joint venture with an unaffiliated third party that was formed
for the purpose of acquiring certain real property. The joint ventures, prior
to dissolution, were operated under the common control of First Capital
Financial Corporation (the "General Partner"). Through December 31, 1999, the
Partnership, with its respective joint venture partners, has dissolved the 70%
preferred majority undivided interest in a joint venture, three 50% joint
ventures and the four joint ventures with 50% preferred majority interests in
real property all as a result of the sales of the real properties. In addition,
the Partnership sold a 50% joint venture interest to an Affiliated partner.
Property management services for the Partnership's remaining real estate
investment is provided by a third-party real estate management company for fees
calculated as a percentage of gross rents received from the property. An
Affiliate of the General Partner provides property supervisory services for the
Partnership's remaining property at fees based on hourly rates.
The real estate business is highly competitive. Results of operations of the
Partnership will depend upon the availability of suitable tenants, real estate
market conditions and general economic conditions which may impact the success
of these tenants. The property owned by the Partnership frequently competes for
tenants with similar properties owned by others.
As of March 1, 2000, there were 25 employees at the Partnership's property for
on-site property maintenance and administration.
ITEM 2. PROPERTIES (A)(B)
As of December 31, 1999, the Partnership owned directly the following property,
which was owned in fee simple and encumbered by two mortgages. For details of
the material terms of the mortgages, refer to Note 4 of Notes to Financial
Statements.
<TABLE>
<CAPTION>
Net Leasable Number of
Property Name Location Sq. Footage Tenants (c)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Marquette Mall and Office Building Michigan City, Indiana 405,449 86(1)
- -----------------------------------------------------------------------------------
</TABLE>
(a) For a discussion of significant operating results and major capital
expenditures planned for Marquette refer to Item 7--Management's Discussion
and Analysis of Financial Condition and Results of Operations.
(b) For federal income tax purposes, the Partnership depreciates the portion of
the acquisition costs of its properties allocable to real property
(exclusive of land), and all improvements thereafter, over useful lives
ranging from 19 years to 40 years, utilizing either the Accelerated Cost
Recovery System ("ACRS") or straight-line method. Marquette Mall and Office
Building's ("Marquette") real estate taxes were $521,100 for the year ended
December 31, 1999. In the opinion of the General Partner, Marquette is
adequately insured and serviced by all necessary utilities.
(c) Represents the total number of tenants as well as the number of tenants, in
parenthesis, that individually occupy more than 10% of the net leasable
square footage of Marquette.
The following table presents Marquette's occupancy rates as of December 31 for
each of the last five years:
<TABLE>
<CAPTION>
Property Name 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Marquette 80% 82% 80% 83% 83%
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</TABLE>
The amounts in the following table represent Marquette's average annual rental
rate per square foot for each of the last five years ended December 31 and were
computed by dividing Marquette's base rental revenues by its average occupied
square footage:
<TABLE>
<CAPTION>
Property Name 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Marquette $6.54 $7.08 $7.17 $6.90 $6.74
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</TABLE>
2
<PAGE>
The following table summarizes the principal provisions of the lease for the
tenant, which occupies ten percent or more of the leasable square footage at
Marquette:
<TABLE>
<CAPTION>
Partnership's per annum
Base Rent (a) for Percentage of Renewal
------------------------ Expiration Net Leasable Options
Final Twelve Date of Square Footage (Renewal
2000 Months of Lease Lease Occupied Options/Years)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
J.C. Penney (department
store) $139,000 $139,000 1/31/2003 27% 4 / 5
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</TABLE>
(a) The Partnership's per annum base rent for the tenant listed above for each
of the years between 2000 and the final twelve months for the above lease
is no lesser or greater than the amounts listed in the above table.
The amounts in the following table represent the Partnership's base income from
leases in the year of expiration (assuming no lease renewals) through the year
ending December 31, 2009:
<TABLE>
<CAPTION>
Base Rents in
Number of Square Year of % of Total
Year Tenants Feet Expiration (a) Base Rents (b)
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 44 65,908 $471,300 22.62%
2001 12 19,560 $153,500 10.02%
2002 9 12,855 $135,700 9.93%
2003 2 112,119 $ 69,000 6.22%
2004 9 26,036 $246,000 28.11%
2005 4 29,064 $ 80,400 13.99%
2006 0 None None 0.00%
2007 1 81,420 $ 7,300 1.77%
2008 3 23,652 $263,300 69.63%
2009 0 None None 0.00%
------------------------------------------------------------------------
</TABLE>
(a) Represents the amount of base rents to be collected each year on expiring
leases.
(b) Represents the amount of base rents to be collected each year on expiring
leases as a percentage of the Partnership's total base rents to be
collected on leases in effect as of December 31, 1999.
ITEM 3. LEGAL PROCEEDINGS
(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, 1999. Ordinary routine legal
matters incidental to the business which was not deemed material, were pursued
during the quarter ended December 31, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a, b, c & d) None.
3
<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, 2000, there were 4,172 Holders of Units.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $17,001,800 $ 9,134,200 $10,926,100 $11,264,700 $10,436,500
Net income (loss) $11,067,500 $ 214,100 $ 1,280,900 $ 241,900 $(7,553,400)
Net income (loss)
allocated to Limited
Partners $ 8,925,800 None None None $(5,330,200)
Net income (loss)
allocated to Limited
Partners per Unit
(57,621 Units
outstanding) $ 154.91 None None None $ (92.50)
Total assets $18,098,300 $36,930,500 $36,756,800 $43,459,800 $49,323,600
Mortgage loans payable $ 1,290,000 $25,646,200 $26,735,900 $34,803,200 $41,189,600
Front-End Fees loan
payable to Affiliate
(a) $ 8,295,200 $ 8,295,200 $ 8,295,200 $ 8,295,200 $ 8,295,200
Distributions to Limited
Partners per Unit (b) $ 95.00 None None None None
OTHER DATA:
Investment in commercial
rental properties (net
of accumulated
depreciation and
amortization) $11,174,100 $31,663,000 $32,428,200 $40,962,400 $46,724,100
Number of real property
interests owned at
December 31 1 3 3 4 5
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</TABLE>
(a) Excludes deferred interest payable.
(b) Distributions to Limited Partners for the year ended December 31, 1999 was
comprised of Sale Proceeds.
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,
----------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash Flow (deficit) (as
defined in the
Partnership Agreement)
(a) $ 2,977,100 $ 615,700 $ 534,600 $ 152,200 $ (241,700)
Items of reconciliation:
Adjustment for
extinguishment of
deferred interest to
affiliate $ (2,257,200) None None None None
Principal payments on
mortgage loans payable 819,500 1,089,700 653,700 923,200 630,100
Changes in current
assets and
liabilities:
Decrease (increase) in
current assets 666,000 (130,800) 48,200 64,100 (53,800)
(Decrease) increase in
current liabilities (229,800) 380,800 (256,800) (31,500) (100,700)
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Net cash provided by
operating activities $ 1,975,600 $ 1,955,400 $ 979,700 $ 1,108,000 $ 233,900
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Net cash provided by
(used for) investing
activities $ 32,100,700 $(2,141,600) $ 6,995,100 $ 4,810,400 $(1,227,500)
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Net cash (used for)
provided by financing
activities $(29,669,900) $ (421,200) $(7,580,200) $(5,877,100) $ 712,600
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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, disposition or financing of any Partnership properties or the
refinancing of any Partnership indebtedness), minus all expenses incurred
(including Operating Expenses, payments of principal (other than balloon
payments of principal out of Offering proceeds) and interest on any
Partnership indebtedness, and any reserves of revenues from operations
deemed reasonably necessary by the General Partner), except depreciation
and amortization expenses and capital expenditures and lease acquisition
expenditures.
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-8
in this report and the supplemental schedule on pages A-9 and A-10.
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 its life
cycle in three phases: (i) the Offering of Units and investment in properties;
(ii) the operation of properties and (iii) the 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 September 12, 1985 and began
operations on December 3, 1985 after reaching the required minimum subscription
level. On March 31, 1987, the Offering was Terminated upon the sale of 57,621
Units. From May 1986 to September 1989, the Partnership: 1) made one real
property investment; 2) purchased 50% interests in four joint ventures which
were each formed with Affiliated partnerships for the purpose of acquiring a
100% interest in certain real property; 3) purchased 50% interests in four
separate joint ventures which were each formed with Affiliated partnerships for
the purpose of acquiring a preferred majority interest in certain real property
and 4) purchased a 70% preferred majority undivided interest in a joint venture
with an unaffiliated third party that was formed for the purpose of acquiring
certain real property.
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
1993, 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 and dispositions.
Components of the Partnership's operating results are generally expected to
decline as real property interests are sold or disposed of since the
Partnership no longer realizes income and incurs expenses from such real
property interests. During the year ended December 31, 1999, the Partnership
sold two of its interests in real property. Cumulatively, through December 31,
1999 the Partnership, with its respective joint venture partners, has dissolved
the 70% preferred majority undivided interest in a joint venture, three joint
ventures with a 50% interest in real property and the four joint ventures with
50% preferred majority interests in real property all as a result of the sales
of the real properties. In addition, the Partnership sold a 50% joint venture
interest to an Affiliated partner.
OPERATIONS
The table below is a recap of certain operating results of each of the
Partnership's properties for the years ended December 31, 1999, 1998 and 1997.
The discussion following the table should be read in conjunction with the
Financial Statements and Notes thereto appearing in this report.
<TABLE>
<CAPTION>
Comparative Operating Results
(a)
For the Years Ended December 31,
--------------------------------
1999 1998 1997
- -------------------------------------------------
<S> <C> <C> <C>
MARQUETTE MALL AND OFFICE BUILDING
Rental revenues $4,236,600 $4,319,600 $4,141,100
- -------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Comparative Operating Results
(a)
For the Years Ended December 31,
--------------------------------
1999 1998 1997
- ---------------------------------------------------------
<S> <C> <C> <C>
Property net income (b) $ 777,200 $ 291,900 $ 99,400
- ---------------------------------------------------------
Average occupancy 82% 81% 82%
- ---------------------------------------------------------
SOLD PROPERTIES (C)
Rental revenues $1,964,200 $4,544,000 $5,055,200
- ---------------------------------------------------------
Property net income (c) $ 214,400 $ 464,200 $ 258,100
- ---------------------------------------------------------
</TABLE>
(a) Excludes certain income and expense items which are either not directly
related to individual property operating results such as interest income,
interest expense on the Partnership's Front-End Fees loan, general and
administrative and state income tax expenses or are related to properties
disposed of by the Partnership prior to the periods under comparison.
(b) Property net income excludes the gain recorded on the sale of a land
parcel. For further information regarding this sale, see Note 7 of Notes to
Financial Statements.
(c) Sold Properties includes the results of Prentice Plaza (sold July 1999),
Burlington Office Center I, II and III ("Burlington") (sold May 1999) and
Regency Park Shopping Center ("Regency") (sold June 1997), exclusive of the
gains recorded on these sales. For further information regarding these
sales, see Note 7 of Notes to Financial Statements.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31,
1998
Net income increased by $10,853,400 for the year ended December 31, 1999 when
compared to the year ended December 31, 1998. The increase was primarily due to
the 1999 gains recorded on the sales of Prentice Plaza and Burlington. The
increase was also due to improved operating results at Marquette Mall and
Office Building ("Marquette") and an increase in interest earned on the
Partnership's short-term investments. In addition, interest expense on the
Front-End Fees loan was reduced in 1999 as compared to 1998 as a result of the
waiving of all future interest (see discussion in Liquidity section). Partially
offsetting these increases, were reductions in income in 1999 resulting from
the partial absence of operating results from the properties sold together with
increased state income tax expense resulting from the gains reported on the
properties sold.
Net income, exclusive of Sold Properties and interest on the Front-End Fees
loan, increased by $350,400 for the year ended December 31, 1999 when compared
to the year ended December 31, 1998. The increase was primarily due to improved
operating results at Marquette and the increase in interest earned on the
Partnership's short-term investments.
The following discussion includes only the operating results of Marquette.
Rental revenues decreased by $83,000 or 1.9% for the year ended December 31,
1999 when compared to the year ended December 31, 1998. The decrease was
primarily due to a decrease in base rental income resulting from a reduction in
the average rental rates charged to new and renewing tenants and reimbursements
for common area maintenance expenditures. The decrease was partially offset by
the 1999 receipt of consideration for the early termination of a tenant's
lease.
5
<PAGE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
Interest expense decreased by $468,900 for the year ended December 31, 1999
when compared to the year ended December 31, 1998. The decrease was primarily
due to the effects of the June 1999 repayment of the junior mortgage
collateralized by Marquette. The decrease was also due to increased principal
payments on the senior mortgages collateralized by Marquette.
Real estate taxes decreased by $85,700 for the year ended December 31, 1999
when compared to the year ended December 31, 1998. The decrease was primarily
due to the effects of an underestimate of 1997 real estate taxes for Marquette,
adjusted during 1998.
Repairs and maintenance expenses increased by $66,500 for the year ended
December 31, 1999 when compared to the year ended December 31, 1998. The
increase was primarily due to an increase in snow removal costs. The increase
was also due to an increase in repairs to the energy plant and elevators.
Property operating expenses decreased by $58,500 for the year ended December
31, 1999 when compared to the year ended December 31, 1998. The decrease was
primarily due to a decrease in advertising and security costs.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED DECEMBER 31,
1997
Net income decreased by $1,066,800 for the year ended December 31, 1998 when
compared to the year ended December 31, 1997. The decrease was primarily due to
the 1997 gain recorded on the sale of Regency. The decrease was also due to the
absence of operating results in 1998 due to the sale of Regency. The decrease
was partially offset by improved operating results at Marquette and Prentice
Plaza.
Net results, exclusive of Regency, changed from $(353,600) for the year ended
December 31, 1997 to $214,100 for the year ended December 31, 1998. The change
was primarily due to the improved operating results at Marquette and Prentice
Plaza. The change 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. The change was partially offset by diminished
operating results at Burlington.
The following comparative discussion includes the results of Marquette,
Burlington and Prentice Plaza.
Rental revenues increased by $237,300 or 2.8% for the year ended December 31,
1998 when compared to the year ended December 31, 1997. The increase was
primarily due to an increase in base rental income at Prentice Plaza, which was
due to an increase in rates charged to new and renewing tenants. The increase
was also due to an increase in tenant expense reimbursements at Marquette. The
increase was partially offset by a decrease in base rental revenues at
Burlington, which was due to the loss of a significant tenant at Burlington I.
During the third quarter of 1998, this vacant space was leased for five years.
The tenant began paying rent during December.
Mortgage interest expense decreased by $160,600 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 the 1997 refinancing of the mortgage loan
collateralized by Burlington, which resulted in a lower average interest rate.
The effects of principal reductions on the mortgage loans collateralized by
Marquette also contributed to the decrease.
Repair and maintenance expense decreased by $55,400 for the year ended December
31, 1998 when compared to the year ended December 31, 1997. The decrease was
primarily due to a decrease in costs associated with snow removal at Burlington
and in general repairs to the elevators and HVAC at Prentice Plaza.
Real estate tax expense increased by $85,000 for the year ended December 31,
1998 when compared to the year ended December 31, 1997. The increase was
primarily due to an underestimate of 1997 real estate taxes for Marquette,
adjusted during 1998. The increase was partially offset by a decrease in real
estate taxes at Prentice Plaza.
To increase and/or maintain the occupancy level at the Partnership's remaining
property, the General Partner, through its asset and property management
groups, continues to take the following actions: 1) implementation of marketing
programs, including hiring of third-party leasing agents or providing on-site
leasing personnel, advertising, direct mail campaigns and development of
building brochures; 2) early renewal of existing tenant leases and addressing
any expansion needs these tenants may have; 3) promotion of local broker events
and networking with local brokers; 4) networking with national level retailers;
5) cold-calling other businesses and tenants in the market area; and 6)
providing rental concessions or competitively pricing rental rates depending on
market conditions.
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 tenant lease clauses protects 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, for 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 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. In
the interim, the Partnership continues to manage and maintain its remaining
property. Cash Flow (as defined in the Partnership Agreement) is generally not
equal to Partnership net income or cash flows as determined by GAAP, since
certain items are treated differently under the Partnership Agreement than
under GAAP. Management 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 flows 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 flows 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) increased by $2,361,400 for
the year ended December 31, 1999 when compared to the year ended December 31,
1998. The increase was primarily due to the 1999 waiving of
6
<PAGE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
deferred interest due to an Affiliate of the General Partner. Interest expense
deferred on the Front-End Fees Loan payable to an Affiliate of the General
Partner since 1996 was considered in the previous computations of Cash Flow (as
defined in the Partnership Agreement). Cash Flow (as defined in the Partnership
Agreement), exclusive of interest expense on the Front-End Fees Loan, decreased
by $246,400. The decrease was primarily due to the partial absence of operating
results from Burlington and Prentice Plaza, exclusive of depreciation and
amortization, due to their 1999 sales. The decrease was partially offset by
improved operating results at Marquette, exclusive of depreciation and
amortization, an increase in interest earned on the Partnership's short-term
investments, as previously discussed, and reduced principal payments on the
Partnership's mortgage debt.
The increase of $4,406,400 in the Partnership's cash position for the year
ended December 31, 1999 was primarily the result of the net maturity of a
portion of the Partnership's investments in debt securities. The increase was
also due to net cash provided by operating activities exceeding regularly
scheduled principal payments on the Partnership's mortgage debt and payments
for capital and tenant improvements. The liquid assets of the Partnership as of
December 31, 1999 were comprised of amounts held for working capital purposes.
Net cash provided by operating activities increased by $20,200 for the year
ended December 31, 1999 when compared to the year ended December 31, 1998. The
increase was due to the timing of rental payments at Burlington and Marquette.
The increase was partially offset by the timing of the payment of certain
expenses resulting from the purchaser of Prentice Plaza receiving credit for
assuming the Partnership's trade liabilities.
Net cash (used for) provided by investing activities changed from $(2,141,600)
for the year ended December 31, 1998 to $32,100,700 for the year ended December
31, 1999. The change was primarily due to the gross proceeds received in 1999
from the sales of Burlington and Prentice Plaza. The change was also due to the
1999 net maturity of investments in debt securities as opposed to the 1998 net
increase in investments in debt securities.
Investments in debt securities is a result of the extension of the maturities
of certain of the Partnership's short-term investments in an effort to maximize
the return on these amounts while they are held for working capital purposes.
These investments are of investment-grade and mature less than one year from
their date of purchase.
The Partnership has no financial instruments for which there are significant
risks. Based on the timing of the maturities and liquid nature of its
investments in debt securities, the Partnership believes that it does not have
material market risk.
The Partnership maintains working capital reserves to pay for capital
expenditures such as building and tenant improvements and leasing costs. During
the year ended December 31, 1999, the Partnership spent $299,000 for building
and tenant improvements and leasing costs and has budgeted to spend
approximately $350,000 during 2000. The General Partner believes these
improvements and leasing costs are necessary in order to increase and/or
maintain the occupancy level in a very competitive market, maximize rental
rates charged to new and renewing tenants and to prepare the remaining property
for eventual disposition.
Net cash used for financing activities increased by $29,248,700 for the year
ended December 31, 1999 when compared to the year ended December 31, 1998. The
increase was primarily due to the 1999 repayment of the mortgage loans
described below with a portion of the proceeds from the sales of Burlington and
Prentice Plaza. The increase was also due to the 1999 special distribution of a
portion of the proceeds from the sale of Prentice Plaza.
On March 30, 1999, the Partnership consummated the sale of an outparcel of land
at Marquette for a sale price of $500,000. Net proceeds from this transaction
were utilized to repay a portion of the mortgage loans collateralized by
Marquette.
On May 11, 1999, a joint venture in which the Partnership owned a 70% preferred
majority interest, completed the sale of Burlington for a sale price of
$19,650,000. Proceeds from this sale were utilized to repay the Burlington loan
in the amount of $11,000,000 and the $6,798,000 junior mortgage collateralized
by Marquette. The remaining proceeds were added to working capital reserves.
On July 12, 1999, a joint venture with an Affiliated Partnership in which the
Partnership owned a 50% interest consummated the sale of Prentice Plaza for a
sale price of $22,100,000. The Partnership's share of net sale proceeds from
this transaction amounted to $6,179,800, which was net of closing expenses and
the repayment of the mortgage loan collateralized by the property. The
Partnership distributed $5,474,000 or $95.00 per Unit on November 30, 1999 to
Limited Partners of record as of July 12, 1999.
Pursuant to a modification of the Partnership's Front-End Fees loan agreement,
the Affiliate of the General Partner has elected to waive the Partnership's
obligation for all deferred interest on this loan and charge no interest in the
future.
In prior years, the Partnership discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Partnership experienced no significant disruptions in mission
critical information technology and non-information technology systems and
believes those systems successfully responded to the Year 2000 date change. The
Partnership incurred minimal expenses in connection with remediating its
systems. The Partnership is not aware of any material problems resulting from
Year 2000 issues, either with its products, its internal systems, or the
products and services of third parties. The Partnership will continue to
monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000
matters that may arise are addressed promptly.
During 1999, the Partnership sold two of its remaining three properties. With
one property remaining in its portfolio, the Partnership believes that the cash
generated by the remaining property, deducting amounts to be utilized for
building and tenant improvements and principal payments on the Partnership's
loans, may not be substantial enough to maintain distributions of Cash Flow (as
defined in the Partnership Agreement). Accordingly, cash distributions of Cash
Flow (as defined in the Partnership Agreement) to Partners continue to be
suspended. The General Partner believes that Cash Flow (as defined in the
Partnership Agreement) is one of the best and least expensive sources of cash
available to the Partnership. The General Partner will
7
<PAGE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
continue to evaluate the Partnership's needs for working capital and the
feasibility of making distributions to Limited Partners. For the year ended
December 31, 1999, Cash Flow (as defined in the Partnership Agreement),
exclusive of the waiving of deferred interest payable to an Affiliate, of
$719,900 was retained to supplement working capital reserves.
Based upon the estimated current value of its assets, net of its outstanding
liabilities, together with its expected operating results and capital
expenditure requirements, the General Partner believes that the Partnership's
cumulative distributions to its Limited Partners from inception through the
termination of the Partnership will be substantially less than such Limited
Partners' Original Capital Contribution.
8
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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.
9
<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, 2000, 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 2000.
<TABLE>
<CAPTION>
NAME OFFICE
---- --------
<S> <C>
Douglas Crocker II.............................................. Director
Sheli Z. Rosenberg.............................................. Director
</TABLE>
Douglas Crocker II, 59, 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 1997.
Sheli Z. Rosenberg, 58, 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 vice
chairman of Equity Group Investments, LLC ("EGI") since January 2000. From
November 1994 until 1999 Ms. Rosenberg had been President and Chief Executive
Officer of EGI. Ms. Rosenberg 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, Dynergy, Inc., Danka
Business Systems PLC 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 until September 1997.
(B) & (E) EXECUTIVE OFFICERS
The Partnership does not have any executive officers. The executive officers of
the General Partner as of March 31, 2000 are shown in the table. All officers
are elected to serve for one year or until their successors are elected and
qualified.
<TABLE>
<CAPTION>
NAME OFFICE
---- ------
<S> <C>
Douglas Crocker II................. President and Chief Executive Officer
Donald J. Liebentritt.............. Vice President
Norman M. Field.................... Vice President--Finance and Treasurer
</TABLE>
PRESIDENT AND CEO--See Table of Directors above.
Donald J. Liebentritt, 49, has been Vice President of the General Partner since
July 1997 and is President of EGI, Vice President and Assistant Secretary of
Great American and was Principal and Chairman of the Board of Rosenberg &
Liebentritt, P.C. until its dissolution in December 1999.
Norman M. Field, 51, 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.
(D) FAMILY RELATIONSHIPS
There are no family relationships among any of the foregoing directors and
officers.
(F) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
There are no involvements in certain legal proceedings among any of the
foregoing directors and officers.
ITEM 11. EXECUTIVE COMPENSATION
(a-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, 1999. However, the General Partner and its
Affiliates do compensate its directors and officers.
For additional information see Item 13 Certain Relationships and Related
Transactions.
(e) None.
10
<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, 1999 and 1998 A-3
Statements of Partners' Capital for the Years Ended
December 31, 1999, 1998 and 1997 A-3
Statements of Income and Expenses for the Years
Ended December 31, 1999, 1998 and 1997 A-4
Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 A-4
Notes to Financial Statements A-5 to A-8
SCHEDULE FILED AS PART OF THIS REPORT
III--Real Estate and Accumulated Depreciation as of December 31,
1999 A-9 and A-10
- ------------------------------------------------------------------------------
</TABLE>
All other 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-34 OF THE PARTNERSHIP'S
DEFINITIVE PROSPECTUS DATED SEPTEMBER 12, 1985; REGISTRATION STATEMENT NO. 2-
98749, FILED PURSUANT TO RULE 424 (B), IS INCORPORATED HEREIN BY REFERENCE.
EXHIBIT (10) MATERIAL CONTRACTS
Real Estate Sale Agreement and Closing Statements for the sale of the
Partnership's investment in Burlington Office Center I, II & III filed as an
exhibit to the Partnership's Report on Form 8-K filed on May 21, 1999 is
incorporated herein by reference.
Real Estate Sale Agreement and Closing Statements for the sale of the
Partnership's investment in Prentice Plaza filed as an exhibit to the
Partnership's Report on Form 8-K filed on July 27, 1999 is incorporated herein
by reference.
EXHIBIT (13) ANNUAL REPORT TO SECURITY HOLDERS
The 1998 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 Income Properties, Ltd.-Series XI
Chicago, Illinois
We have audited the accompanying balance sheets of First Capital Income
Properties, Ltd.-Series XI as of December 31, 1999 and 1998, 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, 1999. Our audit also included
the financial statement schedule listed in the accompanying index. These
financial statements and schedule are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 Income
Properties, Ltd.-Series XI at December 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Chicago, Illinois
February 15, 2000
A-2
<PAGE>
BALANCE SHEETS
December 31, 1999 and 1998
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investment in commercial rental properties:
Land $ 1,879,500 $ 6,070,100
Buildings and improvements 17,355,900 42,793,500
- ---------------------------------------------------------------------------
19,235,400 48,863,600
Accumulated depreciation and amortization (8,061,300) (17,200,600)
- ---------------------------------------------------------------------------
Total investment properties, net of
accumulated depreciation and amortization 11,174,100 31,663,000
Cash and cash equivalents 5,566,500 1,160,100
Investments in debt securities 964,200 2,995,700
Rents receivable 380,300 811,900
Other assets (including loan acquisition
costs, net of accumulated amortization of
$262,100 and $568,500, respectively) 13,200 299,800
- ---------------------------------------------------------------------------
$18,098,300 $ 36,930,500
- ---------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgage loans payable $ 1,290,000 $ 25,646,200
Front-End Fees loan payable to Affiliate 8,295,200 8,295,200
Accounts payable and accrued expenses 849,200 1,294,100
Due to Affiliates, net 4,300 1,956,800
Prepaid rent 90,300 197,400
State income taxes payable 300,000
Security deposits 81,600 211,500
Other liabilities 112,200 104,500
- ---------------------------------------------------------------------------
11,022,800 37,705,700
- ---------------------------------------------------------------------------
Partners' Capital (deficit):
General Partner 1,389,100 (775,200)
Limited Partners (57,621 Units issued and
outstanding) 5,686,400
- ---------------------------------------------------------------------------
7,075,500 (775,200)
- ---------------------------------------------------------------------------
$18,098,300 $ 36,930,500
- ---------------------------------------------------------------------------
</TABLE>
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1999, 1998 and 1997
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Partners' (deficit), January 1, 1997 $(2,270,200) $ 0 $(2,270,200)
Net income for the year ended December
31, 1997 1,280,900 0 1,280,900
- ------------------------------------------------------------------------------
Partners' (deficit), December 31, 1997 (989,300) 0 (989,300)
Net income for the year ended December
31, 1998 214,100 0 214,100
- ------------------------------------------------------------------------------
Partners' (deficit), December 31, 1998 (775,200) 0 (775,200)
Net income for the year ended December
31, 1999 2,141,700 8,925,800 11,067,500
Capital adjustment, extinguishment of
debt to affiliate of General Partner 22,600 2,234,600 2,257,200
Distributions for the year ended
December 31, 1999 0 (5,474,000) (5,474,000)
- ------------------------------------------------------------------------------
Partners' Capital, December 31, 1999 $ 1,389,100 $ 5,686,400 $ 7,075,500
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-3
<PAGE>
STATEMENTS OF INCOME AND EXPENSES
For the years ended December 31, 1999, 1998 and 1997
(All dollars rounded to nearest 00s except per Unit amounts)
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Rental $ 6,200,800 $8,934,600 $ 9,201,000
Interest 398,800 199,600 126,300
Gain on sales of property 10,402,200 1,598,800
- ----------------------------------------------------------------------------
17,001,800 9,134,200 10,926,100
- ----------------------------------------------------------------------------
Expenses:
Interest:
Affiliates 290,200 640,800 642,700
Nonaffiliates 876,500 2,070,700 2,573,000
Depreciation and amortization 874,100 1,491,300 1,506,200
Property operating:
Affiliates 148,100 166,600 269,800
Nonaffiliates 1,559,400 1,992,200 2,014,100
Real estate taxes 835,400 1,288,000 1,264,300
Insurance--Affiliate 102,200 104,200 118,200
Repairs and maintenance 814,300 1,003,500 1,096,300
General and administrative:
Affiliates 29,500 27,800 28,000
Nonaffiliates 82,900 134,600 132,200
- ----------------------------------------------------------------------------
5,612,600 8,919,700 9,644,800
- ----------------------------------------------------------------------------
Income before state income tax expense 11,389,200 214,500 1,281,300
State income tax expense 321,700 400 400
- ----------------------------------------------------------------------------
Net income $11,067,500 $ 214,100 $ 1,280,900
- ----------------------------------------------------------------------------
Net income allocated to General Partner $ 2,141,700 $ 214,100 $ 1,280,900
- ----------------------------------------------------------------------------
Net income allocated to Limited Partners $ 8,925,800 $ 0 $ 0
- ----------------------------------------------------------------------------
Net income allocated to Limited Partners
per Unit (57,621 Units outstanding) $ 154.91 $ 0 $ 0
- ----------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 11,067,500 $ 214,100 $ 1,280,900
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 874,100 1,491,300 1,506,200
(Gain) on sales of property (10,402,200) (1,598,800)
Changes in assets and liabilities:
Decrease (increase) in rents
receivable 431,600 (145,800) (41,700)
Decrease in other assets 234,400 15,000 89,900
(Decrease) increase in accounts
payable and accrued expenses (444,900) 228,900 (195,500)
Increase (decrease) in due to
Affiliates 14,500 4,500 (76,800)
(Decrease) increase in prepaid rent (107,100) 62,400 12,000
Increase in state income taxes
payable 300,000
Increase in other liabilities 7,700 85,000 3,500
- -------------------------------------------------------------------------------
Net cash provided by operating
activities 1,975,600 1,955,400 979,700
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of commercial
rental properties 30,368,200 9,375,100
Payments for building and tenant
improvements (299,000) (633,500) (892,400)
Decrease (increase) in investments
in debt securities, net 2,031,500 (1,508,100) (1,487,600)
- -------------------------------------------------------------------------------
Net cash provided by (used for)
investing activities 32,100,700 (2,141,600) 6,995,100
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments on mortgage loans
payable (819,500) (1,089,700) (653,700)
Repayment of mortgage loans payable (23,536,700) (18,413,600)
Proceeds from mortgage loan payable 11,000,000
Interest deferred on Front-End Fees
loan payable to Affiliate 290,200 640,800 642,700
Payment of loan acquisition or
extension fees (153,100)
Distribution to Limited Partners (5,474,000)
(Decrease) increase in security
deposits (129,900) 27,700 (2,500)
- -------------------------------------------------------------------------------
Net cash (used for) financing
activities (29,669,900) (421,200) (7,580,200)
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 4,406,400 (607,400) 394,600
Cash and cash equivalents at the
beginning of the year 1,160,100 1,767,500 1,372,900
- -------------------------------------------------------------------------------
Cash and cash equivalents at the end
of the year $ 5,566,500 $ 1,160,100 $ 1,767,500
- -------------------------------------------------------------------------------
Supplemental information:
Interest paid during the year $ 906,300 $ 2,072,100 $ 2,786,800
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
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 have
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 May 24, 1985, by the filing of a Certificate and
Agreement of Limited Partnership with the Recorder of Deeds of Cook County,
Illinois, and commenced the Offering of Units on September 12, 1985. The
Certificate and Agreement, as amended and restated, authorized the sale to the
public of 50,000 Units (with the General Partner's option to increase to
100,000 Units) and not less than 1,400 Units pursuant to the Prospectus. On
December 3, 1985, the required minimum subscription level was reached and the
Partnership's operations commenced. The General Partner exercised its option to
increase the Offering to 100,000 Units and the Partnership Agreement was
subsequently amended to extend the Offering until March 31, 1987, through which
date 57,621 Units were sold. The Partnership was formed to invest primarily in
existing, improved, income-producing commercial real estate.
In 1998, the Company adopted Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 131. The Partnership has one reportable
segment as the Partnership is in the disposition phase of its life cycle,
wherein it is seeking to liquidate its remaining operating asset. Management's
main focus, therefore, is to prepare its asset for sale and find a purchaser
for its remaining asset when market conditions warrant such an action. The
adoption of Statement 131 did not affect the results of operations or financial
position. The Partnership has one tenant who occupies 27% of the Partnership's
rental space at the Partnership's property.
The Partnership Agreement provides that the Partnership will be dissolved on or
before December 31, 2015. 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 accounting
principles generally accepted in the United States ("GAAP"). The Partnership
utilizes the accrual method of accounting. Under this method, revenues are
recorded when earned and expenses are recorded when incurred. Effective July 1,
1998, the Partnership recognizes rental income which is contingent upon
tenants' achieving specified targets only to the extent that such targets are
attained.
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 Prentice Plaza. This joint venture,
until Prentice Plaza's July 1999 sale, was operated under the common control of
the General Partner. Accordingly, the Partnership's pro rata share of the joint
ventures' revenues, expenses, assets, liabilities and Partners' capital is
included in the financial statements.
The financial statements include the Partnership's 70% undivided preferred
interest in a joint venture with an unaffiliated third party. The joint venture
owned a 100% interest in the Burlington Office Center I, II and III
("Burlington"). This joint venture, until Burlington's May 1999 sale, was
operated under the control of the General Partner. The Partnership has included
100% of the venture's revenues, expenses, assets, liabilities and Partner's
capital in the financial statements.
The Partnership is not liable for federal income taxes as the Partners
recognize their proportionate share of the Partnership income or loss in their
income tax returns; therefore, no provision for federal income taxes is made in
the financial statements of the Partnership. In addition, it is not practicable
for the Partnership to determine the aggregate tax bases of the individual
Partners; therefore, the disclosure of the differences between the tax bases
and the reported assets and liabilities of the Partnership would not be
meaningful.
Commercial rental properties held for investment 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. Upon classifying a commercial rental property as held for disposition,
no further depreciation or amortization of such property is provided for in the
financial statements. Lease acquisition fees are recorded at cost and amortized
over the life of each respective lease. Repair and maintenance expenditures are
expensed as incurred; expenditures for improvements are capitalized and
depreciated over the estimated life of such improvements.
The Partnership evaluates its commercial rental properties for impairment when
conditions exist which may 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
carrying basis in the rental property is reduced to its estimated fair value.
Management was not aware of any indicator that would result in a significant
impairment loss during the periods reported.
Loan acquisition costs are amortized over the term of the mortgage loan made in
connection with the acquisition of Partnership properties or refinancing of
Partnership loans. When a property is disposed of or a loan is refinanced, the
related loan acquisition costs and accumulated amortization are removed from
the respective accounts and any unamortized balance is charged to expense.
A-5
<PAGE>
Property sales are recorded when title transfers and sufficient consideration
has been received by the Partnership. Upon disposition, the related costs and
accumulated depreciation and amortization are removed from the respective
accounts. Any gain on sale is recognized in accordance with GAAP.
Cash equivalents are considered all highly liquid investments with a maturity
of three months or less when purchased.
Investments in debt securities are comprised of obligations of the United
States government and are classified as held-to-maturity. These investments are
carried at their amortized cost basis in the financial statements which
approximated fair value. All of these securities had a maturity of less than
one year when purchased.
Certain reclassifications have been made to the previously reported 1998 and
1997 statements in order to provide comparability with the 1999 statements.
These reclassifications have no effect on net income or Partners (Deficit).
The Partnership's financial statements include financial instruments, including
receivables, trade liabilities and mortgage debt. The Partnership considers the
disclosure of the fair value of its mortgage debt to be impracticable due to
the general illiquid nature of the real estate financing market and an
inability to obtain comparable financing on its property. The fair value of all
other financial instruments, including cash and cash equivalents, was not
materially different from their carrying value at December 31, 1999 and 1998.
2. RELATED PARTY TRANSACTIONS:
In accordance with the Partnership Agreement, Net Profits and Net Losses
(exclusive of Net Profits and Net Losses from the sale, disposition or
provision for value impairment of Partnership properties) shall be allocated 1%
to the General Partner and 99% 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 or Refinancing Proceeds from the
transaction, to the General Partner and 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 each
Limited Partner in an amount, if any, necessary to make the positive balance in
its Capital Account equal to the Sale or Refinancing Proceeds to be distributed
to such Limited Partner with respect to the sale or disposition of such
property; third, to the General Partner in an amount, if any, necessary to make
the positive balance in its Capital Account equal to the Sale or Refinancing
Proceeds to be distributed to the General Partner with respect to the sale or
disposition of such property; and fourth, the balance, if any, 25% to the
General Partner and 75% to the Limited Partners. Net Losses from the sale,
disposition or provision for value impairment of Partnership properties are
allocated: first, after giving effect to any distributions of Sale or
Refinancing Proceeds from the transaction, to the General Partner and Limited
Partners with positive balances in their Capital Accounts, pro rata in
proportion to such respective positive balances, to the extent of the total
amount of such positive balances; and second, the balance, if any, 1% to the
General Partner and 99% to the Limited Partners. Notwithstanding anything to
the contrary, there shall be allocated to the General Partner not less than 1%
of all items of Partnership income, gain, loss, deduction and credit during the
existence of the Partnership. For the year ended December 31, 1999, the General
Partner was allocated Net Profits of $2,141,700, which included $2,135,100 of
gains from the sales of Partnership properties. For the year ended December 31,
1998 the General Partner was allocated 100% of Net Profits of $214,100. For the
year ended December 31, 1997, the General Partner was allocated 100% of the Net
Profits of $1,280,900, which included the gain on the sale of property of
$1,598,800. For the years ended December 31, 1998 and 1997, no amounts were
allocated to Limited Partners as the cumulative computation of Limited
Partners' capital account resulted in a deficit balance.
Fees and reimbursements paid and payable/(receivable) by the Partnership
to/(from) Affiliates were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------
1999 1998 1997
---------------- ------------------- -------------------
Paid Payable Paid Payable Paid Payable
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Property management and
leasing fees $ 80,100 $ (400) $ 85,300 $ (15,500) $263,600 $ (16,000)
Interest expense on
Front-End Fees loan
(Note 3) None None None 1,967,000 None 1,326,300
Reimbursement of
property insurance
premiums 102,200 None 104,100 None 118,200 None
Legal 147,500 None 90,100 1,500 138,800 None
Reimbursement of
expenses, at cost:
--Accounting 16,700 3,600 18,500 3,200 20,400 1,100
--Investor
communication 10,300 1,100 3,500 600 2,900 100
- ------------------------------------------------------------------------------------
$356,800 $4,300 $301,500 $1,956,800 $543,900 $1,311,500
- ------------------------------------------------------------------------------------
</TABLE>
The variance between the amounts listed on this table and the Statement of
Income and Expense is due to capitalized legal costs.
Manufactured Home Communities, Inc. ("MHC"), a real estate investment trust,
which is an Affiliate of the General Partner and is in the business of owning
and operating mobile home communities, was obligated to the Partnership under a
lease of office space at Prentice Plaza. During the years ended December 31,
1999, 1998 and 1997, the Partnership's share of MHC's rent and reimbursement of
expenses was $23,400, $39,000 and $21,800, respectively. The per square foot
rent paid by MHC was comparable to that paid by other tenants at Prentice
Plaza.
On-site property management for the Partnership's remaining property is
provided by a third-party management company for fees ranging from 3% to 6% of
gross rents received by the property. Affiliates of the General Partner
provided on-site property management, leasing and supervisory services for fees
based upon various percentage rates of gross rents for the properties. These
fees ranged from 1% to 6% based upon the terms of the individual management
agreements.
A-6
<PAGE>
3. FRONT-END FEES LOAN PAYABLE TO AFFILIATE:
The Partnership borrowed $8,295,200 from an Affiliate of the General Partner,
the amount needed for the payment of securities sales commissions, Offering and
Organizational Expenses and other Front-End Fees, other than Acquisition Fees.
Repayment of the principal amount of the Front-End Fees loan is subordinated to
payment to the Limited Partners of 100% of their Original Capital Contribution
from Sale or Refinancing Proceeds (as defined in the Partnership Agreement). In
the event that the Front-End Fees loan is not repaid, such amount will be
written off to Partners Capital.
Pursuant to a modification of this loan agreement, beginning January 1, 1996,
the Partnership elected to defer payment of interest on the Front-End Fees
Loan. During the year ended December 31, 1999, the Affiliate of the General
Partner elected to waive the Partnership's obligation for all outstanding
deferred interest on this loan and charge no interest in the future. During the
year ended December 31, 1999, the Partnership reflected the waiving of deferred
interest in the financial statements through an adjustment of $2,257,700 to
Partners' Capital.
4. MORTGAGE LOANS PAYABLE:
Mortgage loans payable at December 31, 1999 and 1998 consisted of the following
loans, which are non-recourse unless otherwise noted:
<TABLE>
<CAPTION>
Principal Balance at Average Estimated
Property Pledged as -------------------------- Interest Maturity Periodic Balloon
Collateral 12/31/99 12/31/98 Rate Date Payment Payment
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Marquette Mall and
Office Building $1,194,000 (a) $ 1,941,800 7.75% 7/1/2002 $37,142 $223,100
96,000 (a) 730,000 7.75% 7/1/2002 $21,458 None
(b) 7,220,000
Burlington I, II and III
Office Center (c) 11,000,000
Prentice Plaza (50%) (d) 4,754,400
- -----------------------------------------------------------------------------------------
$1,290,000 $25,646,200
- -----------------------------------------------------------------------------------------
</TABLE>
(a) Upon 30 days written notice by Lender, loan is due in full. Based on cash
reserves the Partnership would be able to meet this notice.
(b) On June 7, 1999, the Partnership repaid the junior mortgage loan
collateralized by Marquette utilizing a portion of the proceeds generated
from the sale of Burlington. Prior to repayment, this loan was recourse to
the Partnership.
(c) On May 11, 1999, the Partnership repaid the mortgage loan collateralized by
Burlington utilizing a portion of the proceeds generated from its sale. For
further information regarding this sale, see Note 7. Prior to repayment,
this loan was recourse to the Partnership.
(d) On July 12, 1999, the Partnership, repaid the mortgage loan collateralized
by Prentice Plaza utilizing a portion of the proceeds generated from its
sale. For further information regarding this sale, see Note 7.
Principal amortization on the Partnership's mortgage loans, based on their
terms as of December 31, 1999, for the years ended December 31, 2000, 2001 and
2002 is $462,000, $395,400 and $432,600, respectively.
5. FUTURE MINIMUM RENTS:
The Partnership's share of future minimum rental income due on noncancelable
leases as of December 31, 1999 was as follows:
<TABLE>
<CAPTION>
Minimum
Year Rent
----- ----------
<S> <C>
2000 $2,083,800
2001 1,531,900
2002 1,367,100
2003 1,108,700
2004 875,100
Thereafter 2,344,600
-------------
$9,311,200
-------------
</TABLE>
The Partnership is subject to the usual business risks associated with the
collection of the above-scheduled rents. In addition to the amounts scheduled
above, the Partnership expects to receive rental revenue from (i) operating
expense and real estate tax reimbursements and percentage rents. Percentage
rents earned for the years ended December 31, 1999, 1998 and 1997 were
$371,700, $396,800 and $271,500, respectively.
6. 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 income tax results due to the use of differing depreciation lives
and methods, the recognition of rents received in advance as taxable income and
the Partnership's provisions for value impairment. For the years ended December
31, 1999, 1998 and 1997, the net income (loss) for income tax reporting
purposes was $8,275,700, $30,900 and $(5,434,700), respectively. The aggregate
cost of commercial rental properties for federal income tax purposes at
December 31, 1999 was $26,335,400.
A-7
<PAGE>
7. PROPERTY SALES:
On July 12, 1999, a joint venture in which the Partnership owned a 50%
interest, consummated the sale of Prentice Plaza for a sale price of
$22,100,000. The Partnership's share of net proceeds from this transaction was
$6,179,800, which was net of closing expenses and the repayment of the mortgage
loan encumbering the property. The Partnership recorded a gain of $4,602,000
for the year ended December 31, 1999 and distributed $5,474,000 or $95.00 per
Unit on November 30, 1999 to Limited Partners of record as of July 12, 1999.
On May 11, 1999, the joint venture in which the Partnership owned a 70%
preferred interest, sold Burlington for a sale price of $19,650,000. Net
proceeds from this transaction amounted to $8,136,200, which was net of closing
expenses and the repayment of the mortgage loan collateralizing the property.
The Partnership recorded a gain of $5,525,600 for the year ended December 31,
1999 in connection with this transaction. The Partnership utilized $6,798,000
of the net proceeds generated from this sale to pay off the junior mortgage
loan collateralized by Marquette. The remaining proceeds were added to working
capital reserves.
On March 30, 1999, the Partnership consummated the sale of a 1.056 acre
outparcel of land at Marquette for a sale price of $500,000. Proceeds from this
transaction, which were net of concessions to obtain requisite approvals and
transaction expenses, amounted to $325,500. These proceeds were utilized to
make principal payments on the loans collateralized by Marquette. The
Partnership recorded a gain of $274,500 in connection with this transaction.
On June 16, 1997, a joint venture in which the Partnership owned a 50% interest
sold Regency for a sale price of $19,325,000, of which the Partnership's share
was $9,662,500. The Partnership's share of net proceeds from this transaction
was $1,735,600, which is net of closing expenses and the repayment of the
mortgage loan encumbering the property. The Partnership recorded a gain of
$1,598,800 for the year ended December 31, 1997 in connection with this sale.
Net proceeds received from this transaction were retained to supplement working
capital reserves.
All of the above sales, with the exception of post-closing matters, were all-
cash transactions, with no further involvement on the part of the Partnership.
8. STATE INCOME TAX:
State income tax expense is comprised substantially of taxes based on the
taxable income imposed by Michigan and Indiana.
A-8
<PAGE>
SCHEDULE III-- REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
-------- ---------- ---------------------- -------------------- ------------------------------------ ----------
Costs capitalized
Initial cost subsequent Gross amount at which
to Partnership to acquisition carried at close of period
---------------------- -------------------- ------------------------------------
Buildings Accumu-
and Buildings lated
Encum- Improve- Improve- Carrying and Deprecia-
Description brances Land ments ments Costs (1) Land (5) Improvements Total (2)(3) tion (2)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHOPPING CENTER:
Marquette Mall
and Office
Building
(Michigan City,
IN)
(100% Interest) $1,290,000 $2,000,000 $20,306,700 $3,984,400 $164,800 $1,879,500 $17,355,900 $19,235,400 (4) $8,061,300
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Column A Column G Column H Column I
-------- --------- --------- ------------
Life on
which
deprecia-
tion in lat-
est income
Date of statements
construc- Date is com-
Description tion Acquired puted
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHOPPING CENTER:
Marquette Mall
and Office
Building
(Michigan City,
IN) 35 (6)
(100% Interest) 1967 Dec. 1986 2-10 (7)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes on the following page.
A-9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,566,500
<SECURITIES> 964,200
<RECEIVABLES> 380,300
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,911,000
<PP&E> 19,235,400
<DEPRECIATION> 8,061,300
<TOTAL-ASSETS> 18,088,300
<CURRENT-LIABILITIES> 1,325,400
<BONDS> 9,585,200
0
0
<COMMON> 0
<OTHER-SE> 7,075,500
<TOTAL-LIABILITY-AND-EQUITY> 18,098,300
<SALES> 0
<TOTAL-REVENUES> 17,001,800
<CGS> 0
<TOTAL-COSTS> 3,459,400
<OTHER-EXPENSES> 112,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,166,700
<INCOME-PRETAX> 11,389,200
<INCOME-TAX> 321,700
<INCOME-CONTINUING> 11,067,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,067,500
<EPS-BASIC> 154.91
<EPS-DILUTED> 154.91
</TABLE>
