UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report pursuant to Section 13 or 15(d) of
- ----- the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
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Transition Report Pursuant to Section 13 or 15(d) of
- ----- the Securities Exchange Act of 1934
For the Transition period from to
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Commission file number: 1-9331
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MIDWEST REAL ESTATE SHOPPING CENTER L.P.
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Exact name of Registrant as specified in its charter
Delaware 13-3384643
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State or other jurisdiction of I.R.S. Employer
incorporation or organization 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) 526-3183
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.
<PAGE>
2
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.) was 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 was 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 date 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.
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 then scheduled for June 21, 1996. Subsequently, 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 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.
<PAGE>
3
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.
Upon resolution of the claim made by the former mortgage lender, the General
Partner intends to distribute the Partnership's share of the rebated taxes, if
any, along with the Partnership's remaining cash reserves (after payment of, or
provision for, the Partnership's liabilities and expenses) and proceed with the
dissolution of the Partnership. (See Item 3.)
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, 1998, the Partnership owned no real
estate.
Item 3. Legal Proceedings
Legal Settlement
- ----------------
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.
<PAGE>
4
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 October 1997, the Partnership
entered into a stipulation and agreement of settlement (the "Settlement") of the
class action litigation originally brought against it and other parties in 1994.
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 complaint. 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 Bankruptcy 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.
Brookdale Property Tax Settlement
- ---------------------------------
The Partnership pursued a property tax assessment appeal with respect to
Brookdale Center for a portion of the time that the Partnership owned it. A
settlement was negotiated with Hennepin County, Minnesota (the "Tax
Settlement"), and at a hearing on July 16, 1998, the Tax Settlement was approved
by the Bankruptcy Court. However, the allocation and distribution of the
refunded taxes, which total approximately $5.4 million, was challenged by
certain former tenants of Brookdale Center and the Partnership's former mortgage
lender. On September 30, 1998, the Bankruptcy Court issued an order approving
the distribution of tax refunds to the former tenants which totaled $3,994,133.
The balance of the tax settlement will be held by the Partnership pending
resolution of the challenge by the former mortgage lender which is being
considered by the bankruptcy judge.
On July 28, 1998, after receiving approval from the Bankruptcy Court, the
Partnership paid a cash distribution in the amount of $0.2825 per Limited
Partnership Unit.
Upon resolution of the claim made by the former mortgage lender, the General
Partner intends to distribute the Partnership's share of the rebated taxes, if
any, along with the Partnership's remaining cash reserves (after payment of, or
provision for, the Partnership's liabilities and expenses) and proceed with the
dissolution of the Partnership.
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.
As of December 31, 1998, there were 4,853 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. On July 27, 1998, the Partnership made a distribution in the
amount of $0.2825 per Limited Partnership Unit.
<PAGE>
5
Related Security Holder Matters
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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 have been taxed as a corporation for Federal income tax purposes beginning
in 1998 if the Partnership did not satisfy income tests under the Act. In 1998,
the Partnership satisfied such tests. 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
<TABLE>
<CAPTION>
(dollars in thousands except per Unit data)
As of and for the years ended December 31,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Income $ 4,364(1) $ 145 $25,595(2) $11,772 $12,695
Net Income (Loss) (375) (838) 11,621 (10,764)(3) (7,567)(4)
Net Income (Loss) per Unit (.03) (.08) 1.07 (1.00) (.79)
Real Estate -- -- -- 24,500 35,072
Mortgage Notes Payable -- -- -- 38,029 33,652
Total Assets 2,414 4,585 5,954 32,365 42,302
Cash Distributions per Unit (5) $ .28 $ -- $ -- $ .21 $ 1.145
<FN>
(1) Includes property tax settlement with respect to Brookdale Center. See Item 7 below.
(2) Includes $15,726,730 extraordinary gain on forgiveness of mortgage loan obligation.
(3) Includes write-down in carrying value of Brookdale.
(4) Includes gain on sale of Northland and write-down in carrying value of Brookdale.
(5) Includes a special distribution resulting primarily from the sale of the Northland property in
1994 in the amount of $.865 per unit.
</FN>
</TABLE>
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.
<PAGE>
6
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
("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 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. 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 obligation to repay the Brookdale
Note.
In October 1997, the Partnership entered into a stipulation and agreement of
settlement (the "Settlement") of the class action litigation originally brought
against it and other parties in 1994. 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 complaint.
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 Bankruptcy 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 Partnership pursued a property tax assessment appeal with respect to
Brookdale for a portion of the time that the Partnership owned it. A settlement
was negotiated with Hennepin County, Minnesota (the "Tax Settlement"), and at a
hearing on July 16, 1998, the Tax Settlement was approved by the Bankruptcy
Court. However, the allocation and distribution of the refunded property taxes,
which total approximately $5.4 million, was challenged by certain former tenants
of Brookdale and Equitable, as the Partnership's former mortgage lender. On
September 30, 1998, the Bankruptcy Court issued an order approving the
distribution of property tax refunds to the former tenants which totaled
$3,994,133. The balance of the tax settlement is classified on the Partnership's
balance sheet at December 31, 1998 as deferred credit, and will be held by the
Partnership pending resolution of the challenge by Equitable. The Bankruptcy
Court with jurisdiction over the Partnership's bankruptcy case heard the
argument on Equitable's challenge on September 16, 1998. The issue has been
fully briefed and the Partnership is awaiting a decision from the Bankruptcy
Court.
On July 28, 1998, after receiving approval from the Bankruptcy Court, the
Partnership paid a cash distribution in the amount of $0.2825 per Limited
Partnership Unit. This amount represents the Partnership's cash, less reserves
for current and contingent liabilities, which was paid out following the
Settlement.
Upon resolution of the claim made by Equitable for a portion of the refunded
property taxes, the General Partner intends to distribute the Partnership's
share of the rebated taxes, if any, along with the Partnership's remaining cash
reserves (after payment of, or provision for, the Partnership's liabilities and
expenses) and proceed with the dissolution of the Partnership.
<PAGE>
7
At December 31, 1998, the Partnership had cash and cash equivalents totaling
$2,409,947 compared to $4,430,503 at December 31, 1997. The decrease is due to
the payment of a cash distribution on July 27, 1998 (see Item 5) and
expenditures for partnership operations and professional fees.
Due from affiliates totaled $4,216 at December 31, 1998 compared with $141,345
at December 31, 1997. The decrease reflects the payment of certain amounts due
from affiliates of Midwest Centers Inc. during the second quarter of 1998.
Accounts payable and accrued expenses increased from $113,313 at December 31,
1997 to $237,954 at December 31, 1998 primarily due to certain outstanding legal
fees associated with the Partnership's 1996 bankruptcy filing and other
professional fees incurred in connection with the Partnership's administration.
Year 2000 Initiatives
- ---------------------
The Year 2000 compliance issue concerns the ability of computerized information
systems to accurately calculate, store or use a date after 1999. This could
result in computer system failures or miscalculations causing disruptions of
operations. The Year 2000 issue affects almost all companies and organizations.
It is anticipated that the Partnership will be dissolved prior to December 31,
1999. In the event that the Partnership is not dissolved prior to December 31,
1999, potential Year 2000 issues relate to the outside vendors which provide the
Partnership's administrative services, including accounting, tax preparation and
transfer agent services. Such services are reliant on computer systems, software
products and equipment which are expected to be Year 2000 compliant by December
31, 1999. The General Partner continues to discuss Year 2000 compliance with
these outside vendors. It is anticipated that the cost of vendor compliance with
Year 2000 issues will be borne primarily by these vendors. Although it is not
possible at the present time to estimate the cost of this remediation work based
on available information, the General Partner does not expect such costs to have
a material adverse impact on the Partnership's business, results of operations
or financial condition.
Due to the General Partner's intent to dissolve the Partnership before December
31, 1999, the General Partner currently does not have Year 2000 contingency
plans. In the event it appears that the Partnership will not be dissolved during
1999, the General Partner intends to develop and implement contingency plans in
1999. However, there is no certainty such plans would fully mitigate any Year
2000 problems.
Market Risk
- -----------
The Partnership's principal market risk exposure is interest rate risk. The
Partnership has no long-term debt, and as a result of the sale of Brookdale
Center, the Partnership no longer has any mortgage debt. Accordingly, the
Partnership's interest risk exposure is primarily limited to interest earned on
the Partnership's cash and cash equivalents which are invested at short-term
rates. Such risk is not considered material to the Partnership's operations.
Results of Operations
- ---------------------
1998 versus 1997
Cash provided by operating activities totaled $1,032,727 for the year ended
December 31, 1998 compared to cash used for operating activities of $1,382,414
during 1997. The increased cash flow is primarily due to the Brookdale Center
property tax settlement discussed above.
The Partnership reported a net loss of $374,796 for the year ended December 31,
1998 compared to a net loss of $837,985 during 1997. The change is primarily due
to Brookdale property tax refunds, net of funds allocated to former tenants, and
the costs of the litigation settled in 1997.
Interest income decreased from $140,681 for the year ended December 31, 1997 to
$107,558 in 1998, reflecting lower average cash balances.
Professional fees totaled $541,724 for the year ended December 31, 1998 compared
to $273,993 during 1997. The increase reflects higher legal fees related to the
Partnership's bankruptcy filing and property tax appeal.
<PAGE>
8
General and administrative expenses totaled $184,674 for the year ended December
31, 1998 compared with $161,539 for the year ended December 31, 1997. The
increase reflect higher postage and administrative expenses related to the
Partnership's bankruptcy filing, property tax appeal and cash distribution to
partners during 1998.
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 and interest expense. 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.
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."
<PAGE>
9
The directors and executive officers of the General Partner are as follows:
Name Office
---- ------
Rocco F. Andriola Director
Stevan N. Bach Director
Kathleen B. Carey Director
Raymond C. Mikulich Director
Michael T. Marron President, Director and Chairman of the Board
William T. McDermott Vice President and Chief Financial Officer
Rocco F. Andriola, 40, is a Managing Director of Lehman Brothers Inc. in its
Diversified Asset Group and has held such position since October 1996.
Since joining Lehman in 1986, Mr. Andriola has been involved in a wide range
of restructuring and asset management activities involving real estate and
other direct investment transactions. From June 1991 through September
1996, Mr. Andriola held the position of Senior Vice President in Lehman's
Diversified Asset Group. From June 1989 through May 1991, Mr. Andriola held
the position of First Vice President in Lehman's Capital Preservation and
Restructuring Group. From 1986-89, Mr. Andriola served as a Vice President
in the Corporate Transactions Group of Shearson Lehman Brothers' office of
the general counsel. Prior to joining Lehman, Mr. Andriola practiced
corporate and securities law at Donovan Leisure Newton & Irvine in New
York. Mr. Andriola received a B.A. from Fordham University, a J.D. from New
York University School of Law, and an LL.M in Corporate Law from New York
University's Graduate School of Law.
Stevan N. Bach, 59, 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, 45, 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. In November 1998 she became President.
Raymond C. Mikulich, 45, is a Managing Director of Lehman Brothers, 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.
Michael T. Marron, 35, is a Vice President of Lehman Brothers and has been a
member of the Diversified Asset Group since 1990 where he has actively
managed and restructured a diverse portfolio of syndicated limited
partnerships. Prior to joining Lehman Brothers, Mr. Marron was associated
with Peat Marwick Mitchell & Co. serving in both its audit and tax divisions
from 1985 to 1989. Mr. Marron received his B.S. degree from the State
University of New York at Albany and an M.B.A. from Columbia University.
William T. McDermott, 35, is a Vice President of Lehman Brothers and has
been a member of the Diversified Asset Group since 1998. Mr. McDermott
joined Lehman Brothers in 1993 and held various positions within the firm
before joining the Diversified Asset Group. Prior to joining Lehman
Brothers, Mr. McDermott was a financial analyst with Cantor Fitzgerald Inc.
from 1991 - 1993 and was associated with Arthur Andersen & Co. serving in
both its audit and bankruptcy consulting divisions from 1985 to 1991. Mr.
McDermott received his B.B.A. degree from the University of Notre Dame and
is a Certified Public Accountant.
<PAGE>
10
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 1998, Mr. Bach and Ms. Carey each were paid $6,000
relating to 1998 director fees. During 1997, Mr. Bach and Ms. Carey each
were paid $19,200 relating to 1996 and 1997 director fees.
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, 1998.
(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, 1998.
(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.
During 1998, the General Partner received distributions totaling $30,533,
representing its allocable share of the Partnership's cash, less reserves for
current and contingent liabilities, which was paid out following approval by the
Court of certain modifications to the Partnership's bankruptcy plan facilitating
interim distributions.
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.
<PAGE>
11
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, 1998 and 1997 ...................................F-2
Statements of Partners' Capital (Deficit)
For the years ended December 31, 1998, 1997 and 1996 ............F-2
Statements of Operations
For the years ended December 31, 1998, 1997 and 1996 ............F-3
Statements of Cash Flows
For the years ended December 31, 1998, 1997 and 1996 ............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.
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, 1998:
No reports on Form 8-K were filed during the three months ended
December 31, 1998.
<PAGE>
12
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.
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
BY: Midwest Centers Inc.
General Partner
Date: March 31, 1999 BY: /s/Michael T. Marron
--------------------
Name: Michael T. Marron
Title: President, Director
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
MIDWEST CENTERS INC.
General Partner
Date: March 31, 1999 BY: /s/Rocco F. Andriola
--------------------
Name: Rocco F. Andriola
Title: Director
Date: March 31, 1999 BY: /s/Raymond Mikulich
-------------------
Name: Raymond Mikulich
Title: Director
Date: March 31, 1999 BY: /s/Stevan N. Bach
-----------------
Name: Stevan N. Bach
Title: Director
Date: March 31, 1999 BY: /s/Kathleen Carey
-----------------
Name: Kathleen Carey
Title: Director
Date: March 31, 1999 BY: /s/Michael T. Marron
--------------------
Name: Michael T. Marron
Title: President, Director
and Chairman of the Board
Date: March 31, 1999 BY: /s/William T. McDermott
-----------------------
Name: William T. McDermott
Title: Vice President and Chief Financial
Officer
<PAGE>
F-1
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, 1998 and 1997, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1998, in conformity with generally accepted accounting principles. 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 agreed to a property tax assessment appeal settlement with
respect to a property previously owned by the Partnership. Upon approval by the
bankruptcy court of the distribution of the property tax settlement proceeds
collected during 1998, 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
February 19, 1999
<PAGE>
F-2
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
BALANCE SHEETS
At December 31, At December 31,
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $2,409,947 $4,430,503
Due from affiliates, net (note 5) 4,216 141,345
Prepaid expenses -- 13,530
- --------------------------------------------------------------------------------------
Total Assets $2,414,163 $4,585,378
======================================================================================
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 237,954 $ 113,313
Deferred credit (note 1) 1,132,223 --
----------------------------
Total Liabilities 1,370,177 113,313
----------------------------
Partners' Capital (note 4):
General Partner 10,441 44,722
Limited Partners (10,700,000 securities outstanding) 1,033,545 4,427,343
----------------------------
Total Partners' Capital 1,043,986 4,472,065
- --------------------------------------------------------------------------------------
Total Liabilities and Partners' Capital $2,414,163 $4,585,378
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1998, 1997 and 1996
General Limited
Partner Partners Total
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
Net loss (3,748) (371,048) (374,796)
Distributions (30,533) (3,022,750) (3,053,283)
- --------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 10,441 $ 1,033,545 $ 1,043,986
======================================================================================
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
F-3
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the years ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Rental income $ -- $ -- $ 4,485,981
Escalation income -- -- 4,957,157
Interest income 107,558 140,681 298,324
Miscellaneous income -- 3,897 126,582
---------------------------------------
Total Income 107,558 144,578 9,868,044
- --------------------------------------------------------------------------------------
Expenses
Property operating expenses -- -- 3,353,737
Real estate taxes -- -- 2,487,771
Interest expense -- -- 7,004,184
Professional fees 541,724 273,993 823,894
Litigation settlement (note 6) -- 500,000 --
General and administrative 184,674 161,539 304,532
Other expenses 18,390 47,031 --
---------------------------------------
Total Expenses 744,788 982,563 13,974,118
- --------------------------------------------------------------------------------------
Loss from operations (637,230) (837,985) (4,106,074)
- --------------------------------------------------------------------------------------
Other income (expense):
Other income 4,256,567 -- --
Refunds to former tenants (3,994,133) -- --
---------------------------------------
Total other income 262,434 -- --
- --------------------------------------------------------------------------------------
Loss before extraordinary item (374,796) (837,985) (4,106,074)
- --------------------------------------------------------------------------------------
Extraordinary Item:
Gain on forgiveness of Brookdale mortgage
note (note 3) -- -- 15,726,730
- --------------------------------------------------------------------------------------
Net Income (Loss) $ (374,796) $ (837,985) $11,620,656
======================================================================================
Net Income (Loss) Allocated:
To the General Partner $ (3,748) $ (8,379) $ 164,371
To the Limited Partners (371,048) (829,606) 11,456,285
- --------------------------------------------------------------------------------------
$ (374,796) $ (837,985) $11,620,656
======================================================================================
Per limited partnership unit
(10,700,000 units outstanding)
Net loss from operations before
extraordinary item $ (.03) $ (.08) $ (.38)
Extraordinary item -- -- 1.45
- --------------------------------------------------------------------------------------
Net Income (Loss) $ (.03) $ (.08) $ 1.07
======================================================================================
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
F-4
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
For the years ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ (374,796) $ (837,985) $11,620,656
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Gain on forgiveness of Brookdale mortgage note -- -- (15,726,730)
Increase in interest on Brookdale mortgage note -- -- 2,139,126
Increase (decrease) in cash arising from changes
in operating assets and liabilities:
Restricted cash -- -- 688,633
Accounts receivable -- -- 172,654
Deferred rent receivable -- -- 112,931
Due from affiliates, net 137,129 (61) (2,222)
Prepaid expenses 13,530 (13,530) (1,409)
Deferred credit 1,132,223 -- --
Accounts payable and accrued expenses 124,641 (530,838) 338,255
----------------------------------------
Net cash provided by (used for) operating activities 1,032,727 (1,382,414) (658,106)
- --------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from Brookdale foreclosure sale -- -- 500,000
----------------------------------------
Net cash provided by investing activities -- -- 500,000
- --------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Distributions paid (3,053,283) -- --
----------------------------------------
Net cash used for financing activities (3,053,283) -- --
- --------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2,020,556) (1,382,414) (158,106)
Cash and cash equivalents, beginning of period 4,430,503 5,812,917 5,971,023
----------------------------------------
Cash and cash equivalents, end of period $ 2,409,947 $ 4,430,503 $ 5,812,917
==================================================================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ -- $ -- $ 6,097,817
- --------------------------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
F-5
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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 Northland Center back 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.
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
$15,726,730 gain on forgiveness of the Brookdale Note in 1996.
<PAGE>
F-6
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
The Partnership pursued a property tax assessment appeal with respect to
Brookdale Center for a portion of the time that the Partnership owned it. A
settlement was negotiated with Hennepin County, Minnesota (the "Tax
Settlement"), and on July 16, 1998, the Tax Settlement was approved by the
Bankruptcy Court. However, the allocation and distribution of the refunded
taxes, which total approximately $5.4 million, was challenged by certain former
tenants of Brookdale and the Partnership's former mortgage lender. On September
30, 1998 the Bankruptcy Court issued an order approving the distribution of tax
refunds to the former tenants which totaled $3,994,133. Costs incurred in 1998
by the Partnership to obtain the property tax refund were $164,893 and are
recorded in professional fees. The balance of the tax settlement proceeds will
be held by the Partnership pending resolution of the challenge by the former
mortgage lender which is being considered by the Bankruptcy Court. The former
lender's claim of $1,132,223 has been recorded as a deferred credit on the
December 31, 1998 balance sheet. The Bankruptcy Court with jurisdiction over the
Partnership's bankruptcy case heard the argument on Equitable's challenge on
September 16, 1998. The issue has been fully briefed and the Partnership is
awaiting a decision from the Bankruptcy Court.
Upon resolution of the claim made by the former mortgage lender, the General
Partner intends to distribute the Partnership's share of the rebated taxes, if
any, along with the Partnership's remaining cash reserves (after payment of, or
provision for, the Partnership's liabilities and expenses) 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.
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, deferred credit, 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.
<PAGE>
F-7
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
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.
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 and recognized a gain of $4,610,550 from the sale
in 1994. 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 forgiveness of the Brookdale Note in the amount of $15,726,730.
Pursuant to the Partnership Agreement (see note 4), this gain 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,
1998, the Unitholders have not received their cumulative annual return.
<PAGE>
F-8
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
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 of
offering costs and $4,422,352 of property financing and acquisition expenses. As
of December 31, 1998, 1997 and 1996, $4,216, $141,345 and $141,284,
respectively, is due from affiliates.
For the years ended December 31, 1998, 1997 and 1996, $6,057, $2,111 and $5,931,
respectively, was earned by or expenses reimbursed to affiliates.
6. 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.
<PAGE>
F-9
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
7. Reconciliation of Financial Statement Net Income (Loss) and Partners'
Capital (Deficit) to Federal Income Tax Basis Net Income (Loss) and
Partners' Capital
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial statement net income (loss) $ (374,796) $ (837,985) $ 11,620,656
Tax basis depreciation over financial
statement depreciation -- -- (2,383,610)
Tax basis other income over financial statement
other income 1,132,223 -- --
Tax basis loss on sale of property over
financial statement gain on sale of property -- -- (5,102,993)
Other 200,000 (200,000) (6,806)
----------------------------------------
Federal income tax basis net income (loss) $ 957,427 $(1,037,985) $ 4,127,247
- --------------------------------------------------------------------------------------------------
Financial statement partners' capital $ 1,043,986 $ 4,472,065 $ 5,310,050
Current year financial statement net income
(loss) over (under) federal income tax
basis net income (loss) 1,332,223 (200,000) (7,493,409)
Cumulative financial statement net income (loss) over
(under) federal income tax basis net income (loss) (200,000) -- 7,493,409
----------------------------------------
Federal income tax basis partners' capital $ 2,176,209 $ 4,272,065 $ 5,310,050
- --------------------------------------------------------------------------------------------------
</TABLE>
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.
<PAGE>
F-10
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
<TABLE>
<CAPTION>
Schedule II Valuation and Qualifying Accounts
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Period
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
- --------------------------------
Year ended December 31, 1996: $174,600 $282,375 $456,975 $ --
Year ended December 31, 1997: $ -- $ -- $ -- $ --
Year ended December 31, 1998: $ -- $ -- $ -- $ --
- --------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,409,947
<SECURITIES> 000
<RECEIVABLES> 4,216
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> 2,409,947
<PP&E> 000
<DEPRECIATION> 000
<TOTAL-ASSETS> 2,414,163
<CURRENT-LIABILITIES> 237,954
<BONDS> 000
<COMMON> 000
000
000
<OTHER-SE> 1,043,986
<TOTAL-LIABILITY-AND-EQUITY> 2,414,163
<SALES> 000
<TOTAL-REVENUES> 107,558
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 744,788
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> (374,796)
<INCOME-TAX> 000
<INCOME-CONTINUING> (374,796)
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> (374,796)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
