UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] 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: 1-9331
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
Exact name of Registrant as specified in its charter
Delaware 13-3384643
State or other jurisdiction of
incorporation or organization I.R.S. Employer Identification No.
Attn. Andre Anderson
3 World Financial Center, 29th Floor, New York, NY 10285-2900
Address of principal executive offices zip code
Registrant's telephone number, including area code: (212) 526-3237
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
10,700,000 UNITS OF LIMITED PARTNERSHIP SECURITIES
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. (x)
Aggregate market value of voting stock held by non-affiliates of the
registrant: Not applicable.
Documents Incorporated by Reference: Agreement of Limited Partnership,
dated December 1, 1986, incorporated by reference to Exhibit A to the
prospectus contained in the Registration Statement No. 33-9937. Proxy
Statement used in connection with solicitation of Unitholders on June 7,
1994 (the "Proxy Statement"). With the exception of the pages of the Proxy
Statement specifically incorporated by reference herein, the Proxy
Statement is not deemed to be filed as part of this Form 10-K.
PART I
Item 1. Business
(a) General Development of Business
Midwest Real Estate Shopping Center L.P. (formerly Equitable Real Estate
Shopping Centers, L.P.), a Delaware limited partnership (the
"Partnership"), was formed on October 28, 1986. Midwest Centers Inc.
(formerly Shearson ESC/GP Inc.), a Delaware corporation, is the general
partner of the Partnership (the "General Partner"). Midwest Centers
Depositary Inc. (the "Assignor Limited Partner", formerly Shearson ESC
Corp.) is the sole limited partner of the Partnership. The General Partner
and the Assignor Limited Partner are affiliates of Lehman Brothers
Holdings, Inc.
On December 30, 1986, the Partnership completed an offering of $107,000,000
of limited partnership securities ("Units," the holders of which are
referred to herein as "Unitholders" or "Limited Partners") representing
assignments of limited partnership interests from the Assignor Limited
Partner. The net proceeds of the offering after payment of syndication and
organizational costs aggregated $97,925,000.
The Partnership was formed to acquire from The Equitable Life Assurance
Society of the United States ("Equitable") two regional shopping malls
which Equitable had owned since 1978: Brookdale Center, located in
Brooklyn Center (Hennepin County), Minnesota ("Brookdale"), and Northland
Center, located in Southfield (Oakland County), Michigan ("Northland")
(together the "Properties"). On December 30, 1986 the Partnership acquired
the lease fee interest in the land and improvements constituting the
Properties for a total purchase price of $130,025,000 ($49,000,000 for
Brookdale and $81,025,000 for Northland).
Two mortgage notes from Equitable were issued on December 30, 1986 in the
initial principal amounts of $15,175,000 (the "Brookdale Note") and
$25,675,000 (the "Northland Note") (together, the "Notes"). The
Partnership had deferred payment of principal and interest on the Northland
Note until its scheduled maturity on June 30, 1995. In connection with the
impending maturity of the Northland Note, the Partnership executed a
contract with Equitable on March 28, 1994 for the sale of Northland at the
price of $6,600,000 in excess of the balance of the Northland Note. On
July 22, 1994, the sale was completed and the Northland Note paid off. The
effective date of the sale of Northland was January 1, 1994 and any
positive cash flow generated by Northland Center from January 1, 1994 to
the closing belonged to Equitable.
The Partnership also deferred payment of principal and interest on the
Brookdale Note until its maturity date on June 30, 1995. The General
Partner attempted, but was unable, to sell Brookdale and pay off the
Brookdale Note prior to its maturity date. On July 5, 1995, Equitable
notified the Partnership of its default under the terms of the Brookdale
Note and that it would pursue all remedies available to it, including,
without limitation, foreclosure of the lien of the Mortgage by power of
sale or judicial foreclosure and the appointment of the receiver. Further
to its July 5, 1995 notice of default to the Partnership, Equitable
commenced advertising Brookdale for a public nonjudicial foreclosure sale
to be held on September 12, 1995. The date of this foreclosure sale was
subsequently postponed on several occasions. On June 21, 1996, the
Partnership filed for bankruptcy protection under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of New York in order to prevent the foreclosure sale of Brookdale,
which was scheduled for June 21, 1996. The Partnership and Equitable
executed a letter of intent that outlined the principal terms of a proposed
loan work-out relating to Brookdale and a plan of reorganization (the
"Plan") for the Partnership under Chapter 11 of the Bankruptcy Code that
would be supported by Equitable.
On December 16, 1996, the Partnership transferred ownership of Brookdale,
in accordance with the terms of the Plan, to Equitable and EML Associates
("EML") in consideration of a $500,000 payment to the Partnership from
Equitable. In accordance with the disposition of Brookdale, the
Partnership was relieved of its mortgage obligation on Brookdale. Please
refer to Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," for a detailed discussion of the
Partnership's loan work-out with Equitable, its filing for protection under
Chapter 11 of the Bankruptcy Code and events subsequent to such filing.
The Unitholders were solicited with a consent statement on June 7, 1994 in
connection with the above-mentioned sale of Northland. This solicitation
informed the Unitholders that the sale of Northland would be the first step
in the disposition of the assets of the Partnership with a view to the
orderly dissolution and liquidation of the Partnership. Information
involving the plan to dispose of all the assets of the Partnership with a
view to its liquidation is contained under the caption "The Plan to
Liquidate" in the Partnership's definitive proxy statement filed on May 27,
1994 pursuant to Regulation 14A and is incorporated herein by reference.
(b) Financial Information About Industry Segments
The Partnership's sole business was the ownership and operation of its
remaining property, Brookdale. Pursuant to the Plan, Equitable obtained
title to Brookdale in December 1996 and relieved the Partnership of its
entire mortgage obligation on Brookdale. See Item 7.
(c) Narrative Description of Business
The Registrant's principal business was to own and operate its remaining
property. The Partnership's principal objective was to produce
distributions to Unitholders on sale. Pursuant to the Plan, Equitable
obtained title to Brookdale in December 1996. See Item 7.
Employees
The Partnership has no employees. The affairs of the Partnership are
conducted by the General Partner.
Item 2. Properties
On December 16, 1996, the Partnership transferred ownership of Brookdale,
the Partnership's one remaining property, to Equitable and EML, in
accordance with the terms of the Plan. As of December 31, 1997, the
Partnership owned no real estate.
Item 3. Legal Proceedings
On January 17, 1995, the Partnership announced that an action had been
filed against the General Partner, the Partnership and other defendants in
the United States District Court for the Southern District of New York on
behalf of all persons who owned Limited Partnership Units of the
Partnership on June 7, 1994. The complaint alleged, among other things,
that the solicitation statement used by the Partnership to solicit the
consent of the Unitholders to the July 1994 sale of Northland (the
"Solicitation Statement") contained material misrepresentations and
omissions in violation of Section 14(a) of the Securities Exchange Act of
1934 and Rule 14a-9 promulgated thereunder. The complaint also alleged
claims for breach of fiduciary duty, negligent misrepresentation and breach
of the limited partnership agreement related to the Northland sale and the
partial liquidation of the assets. Plaintiffs sought, among other things,
compensatory damages and to have their action certified as a class action
under the Federal Rules of Civil Procedure. On May 12, 1995, the
Partnership announced that two similar actions had been filed in the
District Court for the Southern District of New York. On November 16, 1995,
the complaints in one of these three actions was amended to add a
derivative claim for breach of fiduciary duty on behalf of the Partnership.
The amended complaint also alleged that the General Partner, assisted by
the other defendants, breached its fiduciary duties by failing to take
steps to maximize the value of Brookdale.
On May 12, 1995, the Partnership also announced that an action had been
filed against the General Partner and other defendants in the Federal
District Court for the Central District of California on behalf of all
persons who owned Limited Partnership Units during the period June 7, 1994
to April 21, 1995. The complaint alleged that the Solicitation Statement
contained material misrepresentations and omissions in violation of Section
14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated
thereunder. Plaintiffs sought, among other things, compensatory damages,
and to have their action certified as a class action under the Federal
Rules of Civil Procedure. This action was transferred to the District
Court for the Southern District of New York to be coordinated with the New
York actions for pre-trial proceedings.
The Partnership also announced on May 12, 1995, that a lawsuit had been
filed against the General Partner and other defendants in the Superior
Court for Los Angeles County and removed to the District Court for the
Central District Court of California. This action was brought on behalf of
all persons who purchased Limited Partnership Units of the Partnership
during the period from December 26, 1986 to the present. The complaint
alleged, among other things, that the General Partner, assisted by the
other defendants, breached its fiduciary duty to the plaintiffs in
connection with the offer and sale of Limited Partnership Units, the
operation of the Partnership and the Northland sale. Plaintiffs sought,
among other things, compensatory damages, punitive damages, and to have
their action certified as a class action under the Federal Rules of Civil
Procedure. This action also was transferred to the District Court for the
Southern District of New York (the "District Court") to be coordinated with
the pre-trial proceedings. The plaintiff subsequently amended the
complaint to name the Partnership as a defendant.
In January 1997, the Partnership, the General Partner and the other
defendants in these unitholder actions engaged with the plaintiffs in
mediation proceedings supervised by a former U.S. magistrate judge. In
early October 1997, the Partnership entered into a stipulation and
agreement of settlement (the "Settlement") of the unitholder actions.
Pursuant to the Settlement, which resolves all matters among the parties,
the Partnership contributed $500,000 toward a fund for the payment of all
plaintiffs' claims. On February 20, 1998, the District Court issued an
order approving the Settlement which included a full and final release of
the Unitholder claims against the Partnership, the General Partner and the
other defendants. The General Partner decided to settle the actions solely
to avoid further expense and the burden of continued litigation, and
continues to deny the allegations asserted against it in the complaints.
The Partnership is currently pursuing a property tax assessment appeal with
respect to Brookdale for the period 1991 through 1995. In order to avoid a
costly and time consuming trial, the General Partner negotiated a
settlement in March 1998 with Hennepin County, Minnesota, however, the
amount of the recovery which will be distributed to current and former
tenants and the Partnership is subject to future determinations. In
accordance with the Partnership's bankruptcy plan, any settlement the
Partnership finalizes with respect to this appeal must be approved by the
Bankruptcy Court, which has retained jurisdiction over such matters. The
General Partner is taking all necessary steps to secure such approval.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Unit Holders at a meeting or
otherwise during the fourth quarter in the year for which this report is
filed.
PART II
Item 5. Market for the Registrant's Limited Partnership Units and Related
Security Holder Matters
Market Information
Prior to June 24, 1996, the Partnership's Units were listed on the New York
Stock Exchange (the "NYSE") and traded under the symbol "EQM". On
June 24, 1996, the NYSE notified the Partnership that the trading of the
Units had been suspended and would be delisted from the NYSE effective as
of the close of business on June 24, 1996. According to a press release
issued by the NYSE, its action was taken in view of the fact that the
Partnership had fallen below the NYSE's continued listing criterion
relating to aggregate market value of shares outstanding (less than $8
million) together with average net income after taxes for the past three
years (less than $600,000); aggregate market value of publicly-held shares
(less than $5 million); and the Partnership's announcement on June 20, 1996
that it had filed for bankruptcy protection under Chapter 11 of the
Bankruptcy Code.
The high and low sales prices of the Units as reported on the consolidated
transaction reporting system during the first two quarters of 1996 were as
follows.
High Low
1996*
First Quarter $.38 $ .11
Second Quarter * .34 .06
*Trading of Partnership Units was suspended and delisted
from the NYSE effective as of the close of business on
June 24, 1996.
As of December 31, 1997, there were 5,582 Unit Holders.
Cash Distributions
Cash distributions to the Limited Partners were suspended during the fourth
quarter of 1995. No distributions were paid during the years ended
December 31, 1996 and 1997. See Item 7.
Related Security Holder Matters
The Partnership is a "publicly traded partnership" for purposes of Federal
income taxation. The Revenue Act of 1987 (the "Act") changed the Federal
income tax treatment of "publicly traded partnerships." Under the Act, the
Partnership could be taxed as a corporation for Federal income tax purposes
beginning in 1998 if the Partnership does not satisfy an income test under
the Act. Under the modified rules applicable to publicly traded
partnerships, the passive loss rules are applied separately for the items
attributable to each publicly traded partnership.
Any Tax-Exempt Entity acquiring Units after December 17, 1987 (including
any acquired pursuant to a reinvestment plan) realizes unrelated business
income ("UBI"), with respect to such Units for periods during which the
Partnership is a "publicly traded partnership", and such UBI may cause the
Tax-Exempt Entity to incur a federal income tax liability. It should be
noted that the Partnership Agreement stated that an investment in the Units
is not suitable for Tax-Exempt Entities, including Individual Retirement
Accounts ("IRA's") and Keogh and other retirement plans, because such
investment would give rise to unrelated business taxable income."
Item 6. Selected Financial Data
(dollars in thousands except per Unit data)
As of and for the years ended December 31,
1997 1996 1995 1994 1993
Total Income $ 145 $ 9,868 $11,772 $12,695 $30,312
Extraordinary Gain on
Forgiveness of
Mortgage Loan Obligation - 15,727 - - -
Net Income (Loss) (838) 11,621 (10,764) (1) (7,567) (2) (18,377) (3)
Net Income (Loss) per
Limited Partnership Unit
(10,700,000 outstanding) (.08) 1.07 (1.00) (1) (.79) (2) (1.70) (3)
Real Estate - - 24,500 35,072 100,264
Mortgage Notes Payable - - 38,029 33,652 82,011
Total Assets 4,585 5,954 32,365 42,302 113,448
Cash Distributions per
Limited Partnership Unit
(10,700,000 outstanding) $ - $ - $ .21 $1.145 (4) $ .50
(1) Includes write-down in carrying value of Brookdale.
(2) Includes gain on sale of Northland and write-down of Brookdale.
(3) Includes write-downs in carrying value of the Northland property.
(4) Includes a special distribution resulting primarily from the sale
of the Northland property in 1994 in the amount of $.865 per unit.
The above selected financial data should be read in conjunction with the
financial statements and notes thereto contained in Item 8.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The General Partner was unable to consummate a sale of its remaining
property, Brookdale, and repay the mortgage (the "Brookdale Note") held by
The Equitable Life Assurance Society of the United States ("Equitable")
prior to June 30, 1995, the maturity date of the Brookdale Note. As a
result, on July 5, 1995, Equitable issued a notice of default to the
Partnership and commenced advertising Brookdale for a public nonjudicial
foreclosure sale to be held on September 12, 1995. Such date was
subsequently postponed on several occasions.
On April 12, 1996, the Partnership and Equitable executed a letter of
intent that outlined the principal terms, as described below, of a plan of
reorganization (the "Plan") for the Partnership under Chapter 11 of the
Bankruptcy Code that would be supported by Equitable. On June 21, 1996,
the Partnership filed for bankruptcy protection under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of New York in order to prevent the foreclosure sale of Brookdale,
which was scheduled for June 21, 1996. The Partnership undertook the
bankruptcy filing after extended negotiations with Equitable. As a result
of the bankruptcy filing, among other reasons, trading of the Partnership's
Units on the New York Stock Exchange was suspended as of June 24, 1996.
Under the Plan, which was filed on October 16, 1996 and subsequently
approved by the holders of Limited Partnership Units (the "Unitholders"),
its creditors and the bankruptcy court, the Brookdale Note remained in
default and the Partnership was to market Brookdale to a third-party buyer.
In the event no acceptable third-party offer was received by
November 15, 1996, or a third party failed to close the acquisition by
December 1, 1996, both the Partnership and Equitable had the right to
transfer ownership of Brookdale to Equitable and Equitable's participant,
EML Associates ("EML"), for a $500,000 cash purchase price. Equitable and
EML were also granted certain limited rights of first refusal to acquire
Brookdale. Pending a sale of Brookdale, all available cash flow from
Brookdale (after payment of property expenses and administrative costs
associated with the bankruptcy) was paid to Equitable. Equitable was
required to fund necessary capital and leasing costs pursuant to a super-
priority, non-recourse, debtor-in-possession loan by Equitable payable upon
the disposition of Brookdale.
All parties holding claims on or interests in the Partnership were sent on
October 18, 1996 a copy of the Plan and Disclosure Statement, together with
a ballot which was due on November 15, 1996. The Plan was subsequently
approved by the Unitholders and the Partnership's creditors. A
confirmation hearing to approve the Plan took place on November 25, 1996
and the Plan was confirmed by the bankruptcy court.
Despite intensive marketing efforts, the Partnership was unable to secure
an acceptable third-party buyer for Brookdale by November 15, 1996.
Consequently, on December 16, 1996, the Partnership transferred ownership
of Brookdale, in accordance with the terms of the Plan, to Equitable and
EML for the aforementioned purchase price of $500,000. In accordance with
the disposition of Brookdale, the Partnership was relieved of its mortgage
obligation on Brookdale.
The Partnership is currently pursuing a property tax assessment appeal with
respect to Brookdale for a period of the time that the Partnership owned
it. In order to avoid a costly and time consuming trial, the General
Partner negotiated a settlement in March 1998 with Hennepin County,
Minnesota, however, the amount of the recovery which will be distributed to
current and former tenants and the Partnership is subject to future
determinations. In accordance with the Partnership's bankruptcy plan, any
settlement the Partnership finalizes with respect to this property
assessment must be approved by the Bankruptcy Court, which has retained
jurisdiction over such matters. The General Partner is taking all
necessary steps to secure such approval.
The General Partner intends to pay a cash distribution in April 1998,
representing the Partnership's cash, less reserves for current and
contingent liabilities. Upon Bankruptcy Court approval of the Brookdale
Center tax appeal settlement, the General Partner intends to distribute the
rebated real estate taxes to the Limited Partners and proceed with the
dissolution of the Partnership.
At December 31, 1997, the Partnership had cash and cash equivalents
totaling $4,430,503 compared to $5,812,917 at December 31, 1996. The
decrease is due to the payment of $500,000 pursuant to the terms of the
Settlement of Unitholder actions (see Item 3) and expenditures for
partnership operations and professional fees.
Accounts payable and accrued expenses decreased from $644,151 at
December 31, 1996 to $113,313 at December 31, 1997 primarily due to the
payment of certain outstanding legal fees associated with the Partnership's
1996 bankruptcy filing and disposition of Brookdale.
Results of Operations
1997 versus 1996
Net cash used for operating activities totaled $1,382,414 for the year
ended December 31, 1997 compared to $658,106 in 1996. The increased cash
flow deficit is primarily due to the payment of $500,000 pursuant to the
terms of the Settlement (see Item 3), and the payment of general and
administrative expenses and professional fees.
As a result of the disposition of Brookdale, the following categories
decreased from their respective balances for the year ended December 31,
1996 to $0 in 1997: rental income; escalation income; property operating
expense, real estate taxes, interest expense, depreciation and amortization
and management fees. Additionally, miscellaneous income decreased from
$126,582 for the year ended December 31, 1996 to $3,897 in 1997 due to the
disposition of Brookdale.
Interest income decreased from $298,324 for the year ended December
31, 1996 to $140,681 in 1997, reflecting lower average cash balances and a
slight reduction in interest rates in 1997 compared to 1996.
Professional fees totaled $273,993 for the year ended December 31, 1997
compared with $823,894 for the year ended December 31, 1996. The decrease
reflects lower legal fees related to the disposition of Brookdale and the
Partnership's 1996 bankruptcy filing.
General and administrative expenses totaled $161,539 for the year ended
December 31, 1997 compared with $304,532 for the year ended December 31,
1996. The decrease reflects lower partnership servicing costs.
Additionally, the 1996 balance included amounts accrued for Michigan state
taxes incurred on the Northland sale.
1996 versus 1995
Cash used for operating activities totaled $658,106 for the year ended
December 31, 1996 compared to cash provided by operating activities of
$2,817,025 during 1995. The reduced cash flow is primarily due to the
payment of all net cash flow generated by Brookdale to Equitable commencing
on August 2, 1995.
The Partnership recognized net income of $11,620,656 for the year ended
December 31, 1996 compared to a net loss of $10,763,695 during 1995. The
change from net loss to net income is primarily due to the $15,726,730 gain
recognized in 1996 on the forgiveness of the Brookdale Note.
Escalation income decreased from $6,053,160 for the year ended
December 31, 1995 to $4,957,157 for the year ended December 31, 1996 due to
a decrease in real estate tax income and common area maintenance income.
Interest income decreased from $421,179 for the year ended
December 31, 1995 to $298,324 for the year ended December 31, 1996. The
decrease reflects lower average cash balances and a reduction in interest
rates in 1996 compared to 1995.
Miscellaneous income decreased from $606,678 for the year ended
December 31, 1995 to $126,582 for the year ended December 31, 1996.
Miscellaneous income during 1995 primarily consisted of lease buyout
settlements related to three Brookdale tenants totaling $444,000, whereas
the balance for 1996 primarily consisted of a lease settlement totaling
$60,000 for one Brookdale tenant.
Total expenses decreased from $22,535,891 for the year ended
December 31, 1995 to $13,974,118 for the year ended December 31, 1996. The
decrease is primarily due to the loss recorded on the write-down of
Brookdale at December 31, 1995 of $9,498,921 and lower depreciation and
amortization during the 1996 period.
Loss on write-down of real estate decreased from $9,498,921 for the year
ended December 31, 1995 to $0 for the year ended December 31, 1996. During
1995, the Partnership wrote down the net book value of Brookdale by
$9,498,921 to its estimated fair market value less selling costs. The
determination of the estimated fair market value of the property was based
upon an appraisal of the property, which was conducted annually.
Real estate taxes decreased from $3,205,621 for the year ended
December 31, 1995 to $2,487,771 during 1996 due to a decrease in the
assessed value of Brookdale.
Interest expense increased from $5,076,282 for the year ended
December 31, 1995 to $7,004,184 for the year ended December 31, 1996
primarily due to the accrual of interest on the Brookdale Note at the
default rate of 19% subsequent to the Partnership's default on the
Brookdale Note.
Depreciation and amortization decreased from $1,196,967 for the year ended
December 31, 1995 to $0 for the year ended December 31, 1996. Effective
January 1, 1996, the Partnership's assets were no longer depreciable due to
the adoption of Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of," which requires the carrying amount of assets
held for disposition to equal fair value less estimated costs to sell.
Depreciation and amortization was not recorded during the period in which
the asset was being held for disposition in accordance with this accounting
standard.
Professional fees increased from $209,014 for the year ended
December 31, 1995 to $823,894 for the year ended December 31, 1996
primarily due to higher legal and other professional fees relating to the
Brookdale Note and the Partnership's bankruptcy filing as described under
"Liquidity and Capital Resources" above.
Item 8. Financial Statements and Supplementary Data
See Item 14a for a listing of the Financial Statements and Supplementary
data filed in this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Partnership has no officers or directors. The General Partner manages
and controls substantially all of the Partnership's affairs and has general
responsibility and ultimate authority in all matters affecting the
Partnership's business. Certain officers and directors of the General
Partner are now serving (or in the past have served) as officers and
directors of entities which act as general partners of a number of real
estate limited partnerships which have sought protection under the
provisions of the federal Bankruptcy Code. The partnerships which have
filed bankruptcy petitions own real estate which has been adversely
affected by the economic conditions in the markets in which that real
estate is located and, consequently, the partnerships sought protection of
the bankruptcy laws to protect the partnerships' assets from loss through
foreclosure.
On July 31, 1993, Shearson Lehman Brothers, Inc. ("Shearson") sold certain
of its domestic retail brokerage and asset management businesses to Smith
Barney, Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to
this sale, Shearson changed its name to Lehman Brothers Inc. The
transaction did not affect the ownership of the Partnership or the
Partnership's General Partner. However, the assets acquired by Smith
Barney included the name "Shearson." Consequently, the general partner
changed its name to Midwest Centers Inc. to delete any references to
"Shearson."
The directors and executive officers of the General Partner are as follows:
Name Office
Stevan N. Bach Director
Kathleen B. Carey Director
Raymond C. Mikulich Director
Robert J. Hellman President, Director and
Chairman of the Board
Joan B. Berkowitz Vice President, Director and
Chief Financial Officer
Robert Sternlieb Vice President
Stevan N. Bach, 58, is President of Bach Realty Advisors, Inc., a real
estate valuation and consulting firm based in Houston, Texas. Mr. Bach has
over 33 years of experience in the real estate business. From 1985 to
1997, Mr. Bach was President then CEO of Bach, Thoreen, McDermott, Inc.
From December 1980 through July 1984, Mr. Bach was a Senior Vice President,
National Director and General Manager of the Southwestern Region for
Landauer Associates, Inc. From December 1975 through December 1980, Mr.
Bach was the Vice President and Manager of Coldwell Banker Appraisal
Services. Mr. Bach is a graduate of the University of Southern California.
Kathleen B. Carey, 44, is an attorney specializing in commercial real
estate. She is a graduate of the State University of New York at Albany
and St. John's University Law School. In 1987, she joined the Connecticut
law firm of Cummings & Lockwood and served as a partner in the firm from
1989 until mid-1994. Kathleen's practice has involved all facets of
acquisitions, sales and financing of commercial properties, including
multifamily housing, office buildings and shopping centers. She is
admitted to practice in New York, Connecticut and California and worked as
an independent commercial real estate consultant until August of 1996 when
she joined GE Capital Investment Advisors as a Managing Director.
Raymond C. Mikulich, 44, is a Managing Director of Lehman, and since
January 1988, has been head of the Real Estate Investment Banking Group.
Prior to joining Lehman Brothers Kuhn Loeb in 1982, Mr. Mikulich was a Vice
President with LaSalle National Bank, Chicago, in the Real Estate Advisory
Group, where he was responsible for the acquisition of equity interests in
commercial real estate. Over his 23 years in the real estate business, Mr.
Mikulich has arranged acquisitions and dispositions on behalf of both
individuals and institutional investors. Mr. Mikulich holds a BA degree
from Knox College and a JD degree from Kent College of Law.
Robert J. Hellman, 43, is a Senior Vice President of Lehman Brothers and is
responsible for investment management of retail, commercial and residential
real estate. Since joining Lehman Brothers in 1983, Mr. Hellman has been
involved in a wide range of activities involving real estate and direct
investments including origination of new investment products,
restructurings, asset management and the sale of commercial, retail and
residential properties. Prior to joining Lehman Brothers, Mr. Hellman
worked in strategic planning for Mobil Oil Corporation and was an associate
with an international consulting firm. Mr. Hellman received a bachelor's
degree from Cornell University, a master's degree from Columbia University,
and a law degree from Fordham University.
Joan B. Berkowitz, 38, is a Vice President of Lehman Brothers, responsible
for investment management of retail, commercial and residential real estate
within the Diversified Asset Group. Ms. Berkowitz joined Lehman Brothers
in May 1986 as an accountant in the Realty Investment Group. From October
1984 to May 1986, she was an Assistant Controller to the Patrician Group.
From November 1983 to October 1984, she was employed by Diversified
Holdings Corporation. From September 1981 to November 1983, she was
employed by Deloitte Haskins & Sells. Ms. Berkowitz, a Certified Public
Accountant, received a B.S. degree from Syracuse University in 1981.
Robert Sternlieb, 33, is an Assistant Vice President of Lehman Brothers and
is responsible for asset management within the Diversified Asset Group.
Mr. Sternlieb joined Lehman Brothers in April 1989 as an asset manager.
From May 1986 to April 1989, he was a systems analyst at Drexel Burnham
Lambert. Mr. Sternlieb received a B.S. degree in Finance from Lehigh
University in 1986.
Item 11. Executive Compensation
The Directors and Officers of the General Partner do not receive any
salaries or other compensation from the Partnership, except that Mr. Bach
and Ms. Carey receive $12,000 per year for serving as Directors of the
General Partner. During 1997, Mr. Bach and Ms. Carey each were paid
$19,200 relating to 1996 and 1997 director fees.
The General Partner is entitled to receive 1% of Operating Cash Flow
distributed in any fiscal year and to varying percentages of the Net
Proceeds of capital transactions. See pages 84 and 85 of the Partnership
Agreement for a description of such arrangements which description is
incorporated by reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners - To the knowledge of
the Partnership, no person owns more than 5% of the outstanding Units as
of December 31, 1997.
(b) Security Ownership of Management - Various employees of Lehman
Brothers that perform services on behalf of the General Partner own no
units of the Partnership as of December 31, 1997.
(c) Changes in Control - None
Item 13. Certain Relationships and Related Transactions
The General Partner, an affiliate of Lehman Brothers, is entitled to
receive a portion of Operating Cash Flow and Net Proceeds from Capital
Transactions. No distributions of either Operating Cash Flow or Net
Proceeds from Capital Transactions were made.
Affiliates of the General Partner have been responsible for certain
administrative functions of the Partnership. For amounts paid to such
affiliates, see Note 5 of the Notes to Financial Statements.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2).
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
(a Delaware limited partnership)
Index to Financial Statements and Schedule
Page
Number
Independent Auditors' Report F-1
Balance Sheets
At December 31, 1997 and 1996 F-2
Statements of Partners' Capital
For the years ended December 31, 1997, 1996 and 1995 F-2
Statements of Operations
For the years ended December 31, 1997, 1996 and 1995 F-3
Statements of Cash Flows
For the years ended December 31, 1997, 1996 and 1995 F-4
Notes to the Financial Statements F-5
Schedule II - Valuation and Qualifying Accounts F-10
(b) Exhibits.
Subject to Rule 12b-32 of the Securities Exchange Act of 1934 regarding
incorporation by reference, listed below are the exhibits which are filed
as part of this report:
3.* Registrant's Agreement of Limited Partnership, dated December 1, 1986,
is hereby incorporated by reference to Exhibit A to the Prospectus
contained in Registration Statement No. 33-9937, which Registration
Statement (the "Registration Statement") was declared effective by the
SEC on December 23, 1986.
4.1* The form of Certificate of Limited Partnership Interest is hereby
incorporated by reference to Exhibit 4.1 to the Registration
Statement.
4.2* The form of Unit Certificate is hereby incorporated by reference to
Exhibit 4.2 to the Registration Statement.
10.1* The form of Property Management Agreement between Registrant and
Center Management Venture is hereby incorporated by reference to
Exhibit 2 to the Registration Statement.
10.2* The form of Transfer Agent Agreement is hereby incorporated by
reference to Exhibit 10.7 to the Registration Statement.
10.3* The form of Promissory Note (Brookdale) is hereby incorporated by
reference to Exhibit 10.8.1 to the Registration Statement.
10.4* The form of Promissory Note (Northland) is hereby incorporated by
reference to Exhibit 10.8.2 to the Registration Statement.
10.5* The form of Mortgage is hereby incorporated by reference to Exhibit
10.9 to the Registration Statement.
10.6* The form of Assignments of Leases and Rents is hereby incorporated
by reference to Exhibit 10.10 to the Registration Statement.
10.7* The Indemnification Agreement is hereby incorporated by reference to
Exhibit 10.11 to the Registration Statement.
10.8* The Agreement of Indemnification is hereby incorporated by reference
to Exhibit 10.11 to the Registration Statement.
10.9* The Second Mortgage Loan Agreement from Equitable to the Partnership
dated June 25, 1991 is hereby incorporated by reference to Exhibit
10.13 to the Registrant's Form 10-K for the year ended December 31,
1991.
10.10*Letter of Intent to Purchase Northland Center by Equitable Life
Assurance Society of the United States is hereby incorporated by
reference to Exhibit A to the Partnership's Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 19, 1994.
10.11*The Engagement Letter between the Partnership and Lehman Brothers
securing Lehman Brothers services as exclusive financial advisor with
respect to the sale of Northland Center and Brookdale Center, dated
October 25, 1993 is hereby incorporated by reference to Exhibit 10.13
to the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1993.
10.12*Termination and Release Agreement between the Partnership and
Equitable Real Estate Investment Management, Inc. dated March 28, 1994
is hereby incorporated by reference to Exhibit 10.14 to the
Partnership's Annual Report on Form 10-K for the year ended December
31, 1993.
27 Financial Data Schedule.
99* Debtor's First Amended Chapter 11 Plan, dated October 16, 1996, is
hereby incorporated by reference to documents filed with the United
States Bankruptcy Court for the Southern District of New York Chapter
11, Case No. 96B43335 (CB).
* Previously filed
(c) Reports on Form 8-K during the three months ended December 31, 1997:
On October 16, 1997, the Partnership filed a Form 8-K reporting that the
Partnership had entered into a stipulation and agreement of settlement of
its unitholder actions. See Item 3 for a discussion of the settlement.
On March 6, 1998, the Partnership filed a Form 8-K reporting the approval
and execution of the settlement of certain unitholder actions. See Item 3
for a discussion of the settlement.
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.
Dated: March 30, 1998
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
BY: Midwest Centers Inc.
General Partner
BY: /s/Robert J. Hellman
Name: Robert J. Hellman
Title: President, Director
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant in the capacities and on the dates
indicated.
MIDWEST CENTERS INC.
General Partner
Date: March 30, 1998
BY: /s/Raymond Mikulich
Raymond Mikulich
Director
Date: March 30, 1998
BY: /s/Stevan N. Bach
Stevan N. Bach
Director
Date: March 30, 1998
BY: /s/Kathleen Carey
Kathleen Carey
Director
Date: March 30, 1998
BY: /s/Robert J. Hellman
Robert J. Hellman
President, Director
and Chairman of the Board
Date: March 30, 1998
BY: /s/Joan Berkowitz
Joan Berkowitz
Vice President & Chief
Financial Officer
Date: March 30, 1998
BY: /s/Robert J. Sternlieb
Robert J. Sternlieb
Vice President
Independent Auditors' Report
The Partners
Midwest Real Estate Shopping Center L.P.:
We have audited the financial statements of Midwest Real Estate
Shopping Center L.P. (a Delaware limited partnership) as listed
in the accompanying index. In connection with our audits of the
financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These
financial statements and financial statement schedule are the
responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Midwest Real Estate Shopping Center L.P. as of December 31,
1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended
December 31, 1997, in conformity with generally accepted
accounting principles. 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.
As discussed in Note 1 to the financial statements, the
Partnership filed for bankruptcy protection under Chapter 11 of
the U.S. Bankruptcy Code in 1996. The General Partner has
finalized a property tax assessment appeal settlement with
respect to a property previously owned by the Partnership. Upon
approval of this settlement by the bankruptcy court, the General
Partner intends to distribute the Partnership's remaining cash
reserves to the Unitholders and dissolve the Partnership.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 25, 1998
Balance Sheets At December 31, At December 31,
1997 1996
Assets
Cash and cash equivalents $4,430,503 $5,812,917
Due from affiliates, net (note 5) 141,345 141,284
Prepaid expenses 13,530
Total Assets $4,585,378 $5,954,201
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $113,313 $644,151
Total Liabilities 113,313 644,151
Partners' Capital (note 4):
General Partner 44,722 53,101
Limited Partners (10,700,000 securities outstanding) 4,427,343 5,256,949
Total Partners' Capital 4,472,065 5,310,050
Total Liabilities and Partners' Capital $4,585,378 $5,954,201
Statement of Partners' Capital
For the years ended December 31, 1997, 1996 and 1995
General Limited
Partner Partners Total
Balance at December 31, 1994 $ 19,065 $6,703,722 $6,722,787
Net loss (107,637) (10,656,058) (10,763,695)
Cash distributions (22,698) (2,247,000) (2,269,698)
Balance at December 31, 1995 (111,270) (6,199,336) (6,310,606)
Net income 164,371 11,456,285 11,620,656
Balance at December 31, 1996 53,101 5,256,949 5,310,050
Net loss (8,379) (829,606) (837,985)
Balance at December 31, 1997 $ 44,722 $4,427,343 $4,472,065
Statements of Operations
For the years ended December 31, 1997 1996 1995
Income
Rental income $ _ $4,485,981 $4,691,179
Escalation income _ 4,957,157 6,053,160
Interest income 140,681 298,324 421,179
Miscellaneous income 3,897 126,582 606,678
Total Income 144,578 9,868,044 11,772,196
Expenses
Property operating expenses _ 3,147,576 2,897,546
Loss on write-down of real estate (note 2) _ _ 9,498,921
Real estate taxes _ 2,487,771 3,205,621
Interest expense _ 7,004,184 5,076,282
Depreciation and amortization _ _ 1,196,967
Management fees (note 6) _ 206,161 215,365
Professional fees 273,993 823,894 209,014
Litigation settlement (note 7) 500,000 _ _
General and administrative 161,539 304,532 236,175
Other expenses 47,031 _ _
Total Expenses 982,563 13,974,118 22,535,891
Loss from operations before extraordinary
item (837,985) (4,106,074) (10,763,695)
Extraordinary Item:
Gain on forgiveness of mortgage loan
obligation (note 3) _ 15,726,730 _
Net Income (Loss) $(837,985) $11,620,656 $(10,763,695)
Net Income (Loss) Allocated:
To the General Partner $(8,379) $164,371 $ (107,637)
To the Limited Partners (829,606) 11,456,285 (10,656,058)
$(837,985) $ 11,620,656 $(10,763,695)
Per limited partnership unit
(10,700,000 units outstanding)
Net loss from operations before
extraordinary item $ (.08) $ (.38) $ (1.00)
Extraordinary item _ 1.45 _
Net Income (Loss) $ (.08) $ 1.07 $ (1.00)
Statements of Cash Flows
For the years ended December 31, 1997 1996 1995
Cash Flows From Operating Activities
Net income (loss) $(837,985) $11,620,656 $ (10,763,695)
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation and amortization _ _ 1,196,967
Loss on write-down of real estate _ _ 9,498,921
Gain on forgiveness of mortgage loan obligation _ (15,726,730) _
Increase in interest on zero coupon mortgage
note payable _ 2,139,126 4,376,282
Increase (decrease) in cash arising from changes
in operating assets and liabilities:
Restricted cash _ 688,633 (1,012,296)
Accounts receivable _ 172,654 (356,203)
Deferred rent receivable _ 112,931 (21,962)
Due from affiliates, net (61) (2,222) 814
Prepaid expenses (13,530) (1,409) 50,072
Accounts payable and accrued expenses (530,838) 338,255 (151,875)
Net cash provided by (used for) operating
activities (1,382,414) (658,106) 2,817,025
Cash Flows From Investing Activities
Proceeds from Brookdale settlement _ 500,000 _
Additions to real estate _ _ (513,241)
Net cash provided by (used for)
investing activities _ 500,000 (513,241)
Cash Flows From Financing Activities
Distributions paid _ _ (3,026,263)
Net cash used for financing activities _ _ (3,026,263)
Net decrease in cash and cash
equivalents (1,382,414) (158,106) (722,479)
Cash and cash equivalents, beginning of
period 5,812,917 5,971,023 6,693,502
Cash and cash equivalents, end of period $4,430,503 $5,812,917 $5,971,023
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ _ $6,097,817 $ 700,000
Supplemental Disclosure of Non-Cash Operating Activities:
The Partnership transferred $440,982 of net operating assets of
Brookdale to Equitable pursuant to the foreclosure sale in 1996.
Supplemental Disclosure of Non-Cash Financing Activities:
In connection with the foreclosure sale of Brookdale in 1996, the
Partnership was released from the $40,167,712 mortgage loan
obligation.
Notes to the Financial Statements
December 31, 1997, 1996 and 1995
1. Organization
Midwest Real Estate Shopping Center L.P., formerly Equitable Real
Estate Shopping Center L.P. (the "Partnership") was formed as a
limited partnership on October 28, 1986, under the laws of the
State of Delaware. The Partnership was formed to acquire two
regional shopping malls, Brookdale Center ("Brookdale") and
Northland Center from Equitable Life Assurance Society of the
United States ("Equitable").
In conjunction with the termination of the former asset
management agreement with Equitable Real Estate Investment
Management, Inc., the Partnership was required to cease using
"Equitable" and "Equitable Real Estate" in its name.
Consequently, effective November 21, 1994, the Partnership
changed its name to Midwest Real Estate Shopping Center, L.P.
The general partner of the Partnership is Midwest Centers Inc.,
(the "General Partner"), formerly Shearson ESC/GP Inc. (see
below), an affiliate of Lehman Brothers Inc., formerly Shearson
Lehman Brothers Inc.
The Partnership was initially capitalized with $1,000,
representing a capital contribution by the General Partner. The
Partnership commenced investment operations on December 30, 1986,
with the acceptance of subscriptions for 10,700,000 limited
partnership securities from Unitholders, the maximum authorized
by the agreement of limited partnership (the "Partnership
Agreement").
On July 31, 1993, Shearson Lehman Brothers Inc. ("Shearson") sold
certain of its domestic retail brokerage and asset management
businesses to Smith Barney, Harris Upham & Co. Incorporated
("Smith Barney"). Subsequent to the sale, Shearson changed its
name to Lehman Brothers Inc. ("Lehman Brothers"). The
transaction did not affect the ownership of the General Partner.
However, the assets acquired by Smith Barney included the name
"Shearson". Consequently, effective November 12, 1993, the
General Partner changed its name to Midwest Centers Inc. to
delete any reference to "Shearson".
On July 22, 1994, the Partnership sold back Northland Center to
Equitable.
As described in Note 3, the Partnership defaulted on its purchase
money note due to Equitable at its maturity date. On April 12,
1996, the Partnership and Equitable executed a letter of intent
that outlined the principal terms, as described below, of a plan
of reorganization (the "Plan") for the Partnership under Chapter
11 of the Bankruptcy Code that would be supported by Equitable.
On June 21, 1996, the Partnership filed for bankruptcy protection
under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court") in order to prevent the foreclosure sale of
Brookdale, which was scheduled for June 21, 1996. The
Partnership undertook the bankruptcy filing after extended
negotiations with Equitable. As a result of the bankruptcy
filing, among other reasons, trading of the Partnership's Units
on the New York Stock Exchange was suspended as of June 24, 1996.
Under the Plan, which was filed on October 16, 1996 with the
Bankruptcy Court, the Partnership was permitted to market
Brookdale to potential third-party buyers. In the event no
acceptable third-party offer was received by November 15, 1996,
or a third party failed to close the acquisition by
December 1, 1996, both the Partnership and Equitable had the
right to transfer ownership of Brookdale to Equitable and
Equitable's participant in the mortgage, EML Associates ("EML"),
for $500,000. Pursuant to the Plan, all available cash flow from
Brookdale during the marketing period (after payment of property
expenses and administrative costs associated with the bankruptcy)
was paid to Equitable.
No acceptable offer was received by the deadline and, as a
result, on December 16, 1996, Equitable obtained title to
Brookdale pursuant to the Plan. The Partnership was relieved of
its mortgage obligation on Brookdale and received $500,000 from
Equitable, pursuant to the Plan. The Partnership recorded a gain
on foreclosure of Brookdale in the amount of $15,726,730.
Pursuant to the Partnership Agreement (see note 4), the gain on
foreclosure was allocated $205,432 to the General Partner and
$15,521,298 to the Unitholders.
The Partnership is currently pursuing a property tax assessment appeal with
respect to Brookdale for the period 1991 through 1995. In order to avoid a
costly and time consuming trial, the General Partner negotiated a settlement
with Hennepin County, Minnesota in March 1998, however, the amount of the
recovery which will be distributed to current and former tenants and the
Partnership is subject to future determinations. In accordance with the
Partnership's bankruptcy plan, any settlement the Partnership finalizes with
respect to this appeal must be approved by the Bankruptcy Court, which has
retained jurisdiction over such matters. The General Partner is taking all
necessary steps to secure such approval. Given the uncertainty regarding the
amount of settlement proceeds, if any, to be retained by the Partnership, no
settlement amounts have been recorded as a receivable in the accompanying
balance sheet.
Upon approval of the Brookdale property tax settlement, the
General Partner will distribute the Partnership's remaining cash
reserves to the Unitholders and proceed with the dissolution of
the Partnership.
2. Summary of Significant Accounting Policies
Basis of Accounting The financial statements of the Partnership
have been prepared on the accrual basis of accounting.
Real Estate Investment Brookdale, which consisted of land,
buildings and personal property, was recorded at fair value, as
determined by an independent appraisal, less costs to sell at
December 31, 1995. Prior to December 31, 1994, Brookdale was held
for use. Effective January 1, 1996, due to the Partnership's
decision to sell Brookdale, Brookdale's buildings and personal
property were no longer depreciated. Prior to January 1, 1996,
after adjustment for write downs, depreciation of the buildings
was computed using the straight-line method over an estimated
useful life of 33 years. Depreciation of personal property was
computed using the straight-line method over an estimated useful
life of 12 years. Amortization of tenant leasehold improvements
was computed using the straight-line method over the lease term.
The Partnership adopted the provisions of Statement of Financial
Accounting Standards No. 121 Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of ("FAS
121"), in the fourth quarter of 1995. FAS 121 requires long-
lived assets that are expected to be disposed of to be recorded
at the lower of its carrying value or fair value less costs to
sell. Based upon a decline in its appraised value, the
Partnership wrote down the carrying value of Brookdale by
$9,498,921 to its estimated fair value less cost to sell at
December 31, 1995. Additionally, long-lived assets to be
disposed of should not be depreciated and, as a result, the
Partnership ceased depreciation of the carrying value of
Brookdale effective January 1, 1996.
Fair Value of Financial Instruments Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments" ("FAS 107"), requires the Partnership to
disclose the estimated fair values of its financial instruments.
The carrying amount of cash and cash equivalents, due from
affiliates, prepaid expenses and accounts payable and accrued
expenses are reasonable estimates of their fair values due to the
short-term nature of those instruments.
Offering Costs Offering costs are nonamortizable and have been
deducted from partners' capital
Transfer of Units and Distributions Upon the transfer of a
limited partnership unit, net income and net loss from operations
attributable to such unit generally will be allocated between the
transferor and the transferee based on the number of days during
the year of transfer that each is deemed to have owned the unit.
The Unitholder of record on the last day of a calendar month will
be deemed to have owned the unit for the entire month.
Distributions of operating cash flow, as defined in the
Partnership Agreement, will be paid on a quarterly basis to
registered holders of units on record dates established by the
Partnership, which generally will be the last day of each
quarter.
Income Taxes No provision is made for income taxes since such
liability is the liability of the individual partners
Net Income (Loss) Per Limited Partnership Unit Net income (loss)
per limited partnership unit is based upon the limited
partnership units outstanding at year-end and the amount of net
loss allocated to the limited partners.
Cash and Cash Equivalents Cash equivalents consists of short-
term highly liquid investments which have maturities of three
months or less from the date of purchase.
Rental and Escalation Income The Partnership had leased
Brookdale to tenants under operating leases with various terms.
Rental income was recognized using the straight-line method over
the lease period. In addition to minimum rental income, the
leases provided for percentage rent and escalation charges to
tenants for common area maintenance and real estate taxes (See
Note 1).
Concentration of Credit Risk Financial instruments which
potentially subject the Partnership to a concentration of credit
risk principally consist of cash and cash equivalents in excess
of the financial institutions' insurance limits. The Partnership
invests available cash with high credit quality financial
institutions.
Use of Estimates The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those
estimates.
3. Real Estate and Mortgage Notes Payable
The Partnership's real estate, which was purchased on December
30, 1986 from Equitable, originally consisted of two regional
shopping malls known as Brookdale Center, located in Brooklyn
Center, Hennepin County, Minnesota; and Northland Center, located
in Southfield, Oakland County, Michigan ("Northland"),
collectively, the "Properties."
Financing for the purchase of the Properties from Equitable was
provided by two nonrecourse zero coupon mortgage notes in the
initial principal amounts of $15,175,000 (the "Brookdale Note")
and $25,675,000 (the "Northland Note"). On July 22, 1994, the
Partnership executed an agreement with Equitable for the sale of
Northland for the price of $6,600,000 in excess of the balance of
the existing first mortgage loan. The Partnership received net
proceeds of $5,625,304 and recognized a gain of $4,610,550 from
the sale in 1994. Pursuant to the Partnership Agreement (see
note 4), the gain was allocated $984,449 to the General Partner
and $3,626,101 to the Unitholders. The Brookdale Note had an
interest rate of 10.2% per annum, compounded semiannually and
matured June 30, 1995. As described in Note 1, the Partnership
was unable to pay off the Brookdale Note at June 30, 1995. On
July 5, 1995, the Partnership received notice from Equitable that
the Partnership failed to pay all principal and accrued interest
due under the terms of the Brookdale Note. Beginning on July 1,
1995, the Partnership started to accrue interest on the Mortgage
at the default rate of 19%, in accordance with the Brookdale
Note. As of December 16, 1996, the Partnership incurred
$10,364,199 in default interest. On December 16, 1996, pursuant
to the Plan, Equitable obtained title to Brookdale and relieved
the Partnership of its obligations under the Brookdale Note in
the amount of $40,167,712.
The Partnership was relieved of its mortgage obligation on
Brookdale and received $500,000 from Equitable, pursuant to the
Plan. The Partnership recorded a gain on foreclosure of
Brookdale in the amount of $15,726,730. Pursuant to the
Partnership agreement (see note 4), the gain on foreclosure was
allocated $205,432 to the General Partner and $15,521,298 to the
Unitholders.
4. Partnership Agreement
Pursuant to the terms of the Partnership Agreement, profits,
losses and distributions of net cash flow from operations shall
generally be allocated 99% to the Unitholders and 1% to the
General Partner. Net income from capital transactions shall be
allocated in the following order: (i) first, to all partners
having negative balances in their capital accounts, in proportion
to the negative balances, the portion of such net income that is
necessary to increase their negative balance to zero; (ii)
second, to each partner in the same proportions as net proceeds
from capital transactions are distributed; and (iii) third, the
balance, if any, 11.76% to the General Partner and 88.24% to the
Unitholders.
Distributions of net proceeds from capital transactions shall be
distributed 99% to the Unitholders and 1% to the General Partner,
until the Unitholders have received, from aggregate distributions
of operating cash flow and net proceeds from capital
transactions, an amount equal to a cumulative annual return of
11% compounded quarterly on their adjusted capital contributions.
As of December 31, 1997, the Unitholders have not yet received
their cumulative annual return.
5. Transactions with Related Parties
The General Partner or its affiliates earned fees and
compensation in connection with the syndication, acquisition and
administrative services rendered to the Partnership of
$11,342,000 and incurred unreimbursed costs on behalf of the
Partnership of $570,352. The aggregate amount of the
aforementioned fees and compensation earned and unreimbursed
costs was composed of $7,490,000 included in offering costs and
$4,422,352 included in deferred charges. As of December 31, 1997
and 1996, $141,345 and $141,284, respectively, is due from
affiliates.
For the years ended December 31, 1997, 1996 and 1995, $2,111,
$5,931 and $70,237 respectively, was earned by or expenses
reimbursed to affiliates.
6. Management Agreement
The Partnership entered into a management agreement (the
"Management Agreement") with General Growth, a third party, for
the day-to-day operations of the Properties. General Growth
received a monthly fee of 4.45% (increased from 4% commencing
February 1, 1989) of the net rents as defined in the Management
Agreement. The Management Agreement expired January 31, 1989 and
was extended for two years. The Properties were managed pursuant
to the terms of the Management Agreement through August 2, 1995.
Pursuant to the default of the Brookdale Note and the appointment
of General Growth as the receiver of Brookdale, General Growth
was entitled to receiver's fees equal to 4.45% of all fixed
minimum rents and percentage or overage rents collected. During
1996, General Growth was reinstated as property manager under the
terms of the Management Agreement until December 16, 1996. For
the years ended December 31, 1996 and 1995, General Growth earned
property management/receiver fees of $206,161 and $215,365,
respectively.
7. Settlement of Securities Litigation
In January 1997, the Partnership, the General Partner and the
other defendants in these unitholder actions engaged with the
plaintiffs in mediation proceedings supervised by a former U.S.
magistrate judge. In early October 1997, the Partnership entered
into a stipulation and agreement of settlement (the "Settlement")
of the following civil actions pending in the United States
District Court for the Southern District of New York (the
"District Court"):
(i) Donato J. Carone et al. v. Midwest Centers, Inc. et al.,
94 Civ. 9293;
(ii) Barry Tannenbaum v. Midwest Centers, Inc. et al.,
95 Civ. 3123
(iii) Vernon Lindbloom v. Midwest Centers, Inc. et al.,
95 Civ. 3051
(iv) Norman D. Rom v. Paul L. Abbott et al., 95 Civ. 5202; and
(v) Norman D. Rom v. Paul L. Abbott et al., 95 Civ. 8006.
Pursuant to the Settlement, which resolves all matters among the
parties, the Partnership contributed $500,000 toward a fund for
the payment of all plaintiffs' claims. On February 20, 1998, the
District Court issued and executed an order approving the
Settlement which included a full and final release of the
Unitholder claims against the Partnership, the General Partner
and the other defendants. The General Partner decided to settle
the actions solely to avoid further expense and the burden of
continued litigation, and continues to deny the allegations
asserted against it in the complaints.
8. Reconciliation of Financial Statement Net Income (Loss) and
Partners' Capital (Deficit) to Federal Income Tax Basis Net
Income (Loss) and Partners' Capital
1997 1996 1995
Financial statement net income (loss) $(837,985) $11,620,656 $(10,763,695)
Tax basis depreciation over financial
statement depreciation _ (2,383,610) (1,539,664)
Tax basis rental income over (under) financial
statement rental income _ 8,005 (54,816)
Tax basis loss on sale of property over
financial statement gain on sale of property _ (5,102,993) _
Financial statement loss on write-down of
real estate over tax basis loss on
write-down of real estate _ _ 9,498,921
Other (200,000) (14,811) 74,568
Federal income tax basis net income
(loss) $(1,037,985) $4,127,247 $(2,784,686)
Financial statement partners' capital
(deficit) $4,472,065 $5,310,050 $(6,310,606)
Current year financial statement net income
(loss) over (under) federal income tax
basis net income (loss) (200,000) (7,493,409) 7,979,009
Cumulative financial statement net income
(loss) over (under) federal income tax
basis net income (loss) (200,000) 7,493,409 (485,600)
Federal income tax basis partners'
capital $4,272,065 $5,310,050 $1,182,803
Because many types of transactions are susceptible to varying
interpretations under Federal and state income tax laws and
regulations, the amounts reported above may be subject to change
at a later date upon final determination by the taxing
authorities.
Schedule II Valuation and Qualifying Accounts
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Period
Allowance for doubtful accounts:
Year ended December 31, 1995: $95,229 $87,621 $8,250 $174,600
Year ended December 31, 1996: $174,600 $282,375 $456,975 $ _
Year ended December 31, 1997: $ _ $ _ $ _ $ _
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,430,503
<SECURITIES> 000
<RECEIVABLES> 000
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> 000
<PP&E> 000
<DEPRECIATION> 000
<TOTAL-ASSETS> 4,585,378
<CURRENT-LIABILITIES> 113,313
<BONDS> 000
<COMMON> 000
000
000
<OTHER-SE> 4,472,065
<TOTAL-LIABILITY-AND-EQUITY> 4,585,378
<SALES> 000
<TOTAL-REVENUES> 144,578
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 982,563
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 000
<INCOME-TAX> 000
<INCOME-CONTINUING> 000
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> (837,985)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
