<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended September 30, 1998
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-16888
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First Capital Income and Growth Fund - Series XII
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Illinois 36-3498223
- ------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two North Riverside Plaza, Suite 1000, Chicago, Illinois 60606-2607
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(Address of principal executive offices) (Zip Code)
(312) 207-0020
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Documents incorporated by reference:
The First Amended and Restated Certificate and Agreement of Limited Partnership
filed as Exhibit A to the Partnership's Prospectus dated May 8, 1987, included
in the Partnership's Registration Statement on Form S-11, is incorporated herein
by reference in Part I of this report.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Reference is made to the Partnership's Annual Report for the year ended
December 31, 1997 for a discussion of the Partnership's business.
Statements contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, which are not historical facts, may be
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof.
One of the Partnership's objectives is to dispose of its properties when market
conditions allow for the achievement of the maximum possible sales price. The
Partnership, in addition to being in the operation of properties phase, is in
the disposition phase of its life cycle. During the disposition phase of the
Partnership's life cycle, comparisons of operating results are complicated due
to the timing and effect of property sales. Components of the Partnership's
operating results are generally expected to decline as real property interests
are sold since the Partnership no longer receives income nor incurs expense
from such real property interests.
OPERATIONS
The table below is a recap of the Partnership's share of certain operating
results of each of its properties for the quarters and nine months ended
September 30, 1998 and 1997. The discussion following the table should be read
in conjunction with the financial statements and notes thereto appearing in
this report.
<TABLE>
<CAPTION>
Comparative Operating Results (a)
For the For the
Quarters Ended Nine Months Ended
9/30/98 9/30/97 9/30/98 9/30/97
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<S> <C> <C> <C> <C>
DEERFIELD MALL
Rental revenues $1,038,500 $ 971,500 $3,136,300 $3,082,700
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Property net income $ 160,200 $ 147,400 $ 527,900 $ 498,000
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Average occupancy 90% 92% 90% 92%
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PRENTICE PLAZA (50%)
Rental revenues $ 334,300 $ 340,300 $1,066,500 $ 927,100
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Property net income (loss) $ 11,900 $ 32,800 $ 97,000 $ (124,900)
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Average occupancy 97% 96% 95% 95%
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SOLD PROPERTIES (B)
Rental revenues $ 164,200 $1,681,600 $2,229,200 $5,201,600
- ------------------------------------------------------------------------
Property net income $ 229,500 $ 69,100 $ 597,800 $ 139,700
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</TABLE>
(a) Excludes certain income and expense items which are either not directly
related to individual property operating results such as interest income,
interest expense on the Partnership's Front-End Fees loan and general and
administrative expenses or are related to properties disposed of by the
Partnership prior to the periods under comparison.
(b) Sold Properties includes results, exclusive of gains recorded on the sales
from 1800 Sherman Office Building ("1800 Sherman") (sold August 6, 1998),
Meidinger Tower (sold April 1, 1998) and Regency Square Shopping Center
("Regency") (sold June 16, 1997).
Unless otherwise disclosed, discussions of fluctuations between 1998 and 1997
refer to both the quarters and nine months ended September 30, 1998 and 1997.
Net income increased by $1,924,000 and $8,798,300 for the quarter and nine
months ended September 30, 1998 when compared to the quarter and nine months
ended September 30, 1997. The increase for the quarterly periods under
comparison was primarily due to the 1998 gain recorded on the sale of 1800
Sherman. Also contributing to the increase was an increase in interest earned
on the Partnership's short-term investments, which was due to an increase in
cash available for investment. The increase for the nine-month periods under
comparison was primarily due to the 1998 gains recorded on the sales of
Meidinger Tower and 1800 Sherman exceeding the 1997 gain recorded on the sale
of Regency. The increase was also due to improved operating results at Prentice
Plaza and the increase in interest earned on the Partnership's short-term
investments. The increase was partially offset by the 1998 absence of results
from the Sold Properties.
Net results, exclusive of Sold Properties, changed to $128,800 and $295,900 for
the quarter and nine months ended September 30, 1998 from $(8,700) and
$(239,100) for the quarter and nine months ended September 30, 1997,
respectively. The changes were primarily due to the increase in interest earned
on the Partnership's short-term investments and improved operating results at
Deerfield Mall. The change for the nine-month periods under comparison was also
due to improved operating results at Prentice Plaza.
The following comparative discussion excludes the results of the Sold
Properties.
Rental revenues increased by $61,000 or 4.7% and $193,000 or 4.8% for the
quarter and nine months ended September 30, 1998 when compared to the quarter
and nine months ended September 30, 1997, respectively. The increases were
primarily due to an increase in base rental income at Prentice Plaza, which was
due to an increase in rates charged to new and renewing tenants. The increases
were also due to an increase in tenant expense reimbursements for real estate
taxes at Deerfield Mall. The increase for the nine-month periods under
comparison was also due to an increase in tenant expense reimbursements at
Prentice Plaza. 1997 tenant expense reimbursement income was reduced due to
credits issued to tenants in 1997 for 1996 activity.
Real estate tax expense increased by $23,300 for the quarterly periods under
comparison. The increase was primarily due to the 1997 receipt of a refund for
1996 taxes at Prentice Plaza. Real estate tax expense decreased by $68,200 for
the nine-month periods under comparison. The decrease was primarily the result
of a decrease in the projected taxes at Prentice Plaza.
Property operating expenses increased by $44,600 and $55,200 for the quarter
and nine months ended September 30, 1998 when compared to the quarter and nine
months ended September 30, 1997, respectively. The increases were primarily the
result of a greater portion of leasing related expenditures were chargeable to
expense in the 1998 periods under comparison than the comparable periods of
1997.
Interest expense on the Partnership's mortgage loans decreased by $11,300 and
$31,600 for the quarter and nine months ended September 30, 1998 when compared
to the quarter and nine months ended September 30, 1997, respectively. The
decreases were primarily due to the effects of principal payments made during
the past 21 months on the mortgage loan collateralized by Deerfield Mall.
Repairs and maintenance expense increased by $21,700 for the quarter ended
September 30, 1998 when compared to the quarter ended September 30, 1997. The
increase was primarily due to an increase in landscaping and regular roof
repairs at Deerfield Mall. Repairs and maintenance expense remained relatively
unchanged for the nine-month periods under comparison.
To increase and/or maintain occupancy levels at the Partnership's properties,
the General Partner, through its asset and property management groups,
continues to take the following actions: 1) implementation of marketing
programs, including hiring of third-party leasing agents or providing on-site
leasing personnel, advertising, direct mail campaigns and development of
property brochures; 2) early renewal of existing tenants' leases and addressing
any expansion needs these tenants may have; 3) promotion of local broker events
and networking with local brokers; 4) networking with national level retailers;
5) cold-calling other businesses and tenants in the market area; and 6)
providing rental concessions or competitively pricing rental rates depending on
market conditions.
LIQUIDITY AND CAPITAL RESOURCES
One of the Partnership's objectives is to dispose of its properties when market
conditions allow for the achievement of the maximum possible sales price. In
the interim, the Partnership continues to manage and maintain it properties.
Cash Flow (as defined in the Partnership Agreement) is generally not equal to
net income or cash flows as determined by generally accepted accounting
principles ("GAAP"), since certain items are treated differently under the
Partnership Agreement than under GAAP. Management believes that to facilitate a
clear understanding of the Partnership's operations, an analysis of Cash Flow
(as defined in the Partnership Agreement) should be examined in conjunction
with an analysis of net income or cash flows as determined by GAAP. The
following table includes a reconciliation of Cash Flow (as defined in the
Partnership Agreement) to cash flow provided by operating activities as
determined by GAAP. Such amounts should not be considered as an alternative to
the results disclosed in the Statements of Income and Expenses and Statements
of Cash Flow.
2
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
Comparative Cash Flow
Results For the
Nine Months Ended
9/30/98 9/30/97
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<S> <C> <C>
Cash Flow (as defined in the Partnership Agreement) $ 1,378,000 $ 966,500
Items of reconciliation:
Scheduled principal payments on mortgage loans
payable 451,900 762,200
Decrease in current assets 241,700 360,100
(Decrease) in current liabilities (729,700) (399,300)
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Net cash provided by operating activities $ 1,341,900 $ 1,689,500
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Net cash provided by investing activities $ 31,855,900 $ 2,759,900
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Net cash (used for) financing activities $(28,403,100) $(4,573,400)
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</TABLE>
The increase in Cash Flow (as defined in the Partnership Agreement) of $411,500
for the nine months ended September 30, 1998 when compared to the nine months
ended September 30, 1997 was primarily due to reduced scheduled principal
payments on the Partnership's mortgage loans, primarily resulting from the
payoff of the Meidinger Tower loan in April 1998. In addition, the increase was
due to improved operating results at the Partnership's properties, exclusive of
gains on sale and depreciation and amortization, as previously discussed.
The net increase in the Partnership's cash of $4,794,700 for the nine months
ended September 30, 1998 was primarily the result of net proceeds, after
repayment of the mortgage loan, received from the sales of Meidinger Tower and
1800 Sherman and net cash provided by operating activities exceeding
distributions to Limited Partners, investments in debt securities and scheduled
principal payments on the Partnership's mortgage loan obligations. Liquid
assets (including cash, cash equivalents and investments in debt securities) of
the Partnership as of September 30, 1998 were comprised of amounts held for
working capital purposes and undistributed Sale Proceeds.
Net cash provided by operating activities decreased by $347,600 for the nine
months ended September 30, 1998 when compared to the nine months ended
September 30, 1997. The decrease was primarily due to the timing of the payment
of expenses at Prentice Plaza and the satisfaction of all trade liabilities in
connection with the sales of 1800 Sherman and Meidinger Tower. The decrease was
partially offset by the timing of the receipt of rental payments at Deerfield.
Net cash provided by investing activities increased by $29,096,000 for the nine
months ended September 30, 1998 when compared to the nine months ended
September 30, 1997. The increase was primarily due to the 1998 receipt of
proceeds from the sales of 1800 Sherman and Meidinger Tower exceeding the 1997
receipt of proceeds from the sale of Regency. The increase was partially offset
by an increase in net investments in debt securities. The increase in
investments in debt securities is a result of the continued extension of the
maturities of certain of the Partnership's short-term investments in an effort
to maximize the return on these amounts while they are held for working capital
purposes or pending distribution to Limited Partners. These investments are of
investment-grade and mature less than one year from their date of purchase.
The Partnership maintains working capital reserves to pay for capital
expenditures such as building and tenant improvements and leasing costs. During
the nine months ended September 30, 1998, the Partnership spent $242,000 for
these items and has projected to spend approximately $200,000 during the
remainder of 1998, which relates to capital and tenant improvements and leasing
related costs at Prentice Plaza. Actual amounts expended may vary depending on
a number of factors including actual leasing activity, results of property
operations, the potential sale of property and other market conditions
throughout the year. The General Partner believes these improvements and
leasing costs are necessary in order to increase and/or maintain occupancy
levels in very competitive markets, maximize rental rates charged to new and
renewing tenants and to prepare the remaining properties for eventual
disposition.
On April 1, 1998, the Partnership consummated the sale of Meidinger Tower. Net
proceeds from this transaction were $6,175,300, which was net of actual and
estimated closing costs and the repayment of the mortgage loan collateralized
by the property. In connection with this transaction, the Partnership
distributed $6,126,500 or $6.45 per Unit on August 31, 1998 to Limited Partners
of record as of April 1, 1998.
On August 6, 1998, a joint venture in which the Partnership owns a 50% interest
consummated the sale of 1800 Sherman. The Partnership's share of net proceeds
from this transaction were approximately $7,280,000, which was net of actual
and estimated closing costs. The joint venture was required to place $500,000
of the proceeds from this transaction into an interest bearing escrow account
for a nine-month period. The escrowed funds are intended to cover potential
claims asserted by the purchaser arising from any representations or warranties
that were made by the joint venture. The Partnership will distribute $7,171,300
or $7.55 per Unit on November 30, 1998 to Limited Partners of record as of
August 6, 1998.
The increase in net cash used for financing activities of $23,829,700 for the
nine months ended September 30, 1998 when compared to the nine months ended
September 30, 1997 was primarily the result of the 1998 repayment of the
Meidinger Tower mortgage loan exceeding the 1997 repayment of the Regency
mortgage loan. The increase was also due to the 1998 distribution to Limited
Partners of Sale Proceeds from Meidinger Tower.
Pursuant to a modification of the Partnership's Front-End Fees loan agreement,
the Partnership has the option to defer payment of interest on this loan for a
69-month period beginning April 1, 1993. In addition, any interest payments
made by the Partnership from April 1, 1993 through December 31, 1998 may be
borrowed from an Affiliate of the General Partner. All deferred and
subsequently borrowed amounts (including accrued interest thereon) shall be due
and payable on January 1, 1999, and shall not be subordinated to payment of
Original Capital Contributions to Limited Partners.
The Year 2000 problem is the result of the inability of existing computer
programs to distinguish between a year beginning with "20" rather than "19".
This is the result of computer programs using two rather than four digits to
define an applicable year. If not corrected, any program having time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a wide variety of problems including
miscalculations, loss of data and failure of entire systems. Critical areas
that could be effected are accounts receivable and rent collections, accounts
payable, general ledger, cash management, fixed assets, investor services,
computer hardware, telecommunications systems and health, security, fire and
life safety systems.
The Partnership has engaged Affiliated and unaffiliated entities to perform all
of its critical functions that utilize software that may have time-sensitive
applications. All of these providers are providing these services for their own
organizations as well as for their clients. The General Partner, on behalf of
the Partnership, has been in close communication with each of these service
providers regarding steps that they are taking to assure that there will be no
serious interruption of the operations of the Partnership resulting from Year
2000 problems. Based on the results of these inquiries, as well as a review of
the disclosures by these service providers, the General Partner believes that
the Partnership will be able to continue normal business operations and will
incur no material costs related to Year 2000 issues.
The Partnership has not formulated a contingency plan. However, the General
Partner believes that based on the size of the Partnership's portfolio and its
limited number of transactions, aside from catastrophic failures of banks,
government agencies, etc., it could carry out substantially all of its critical
operations on a manual basis or easily convert to systems that are Year 2000
compliant.
Since the beginning of 1996, the Partnership has sold five of its remaining
seven properties. As disclosed above, during 1998 the Partnership has and will
distribute a total of $13,297,800 of Sales Proceeds to Limited Partners. With
two properties remaining in its portfolio, the Partnership believes that the
cash generated by the remaining properties, deducting amounts to be utilized
for improvements and principal payments on the Partnership's loans, may not be
substantial enough to maintain distributions of Cash Flow (as defined in the
Partnership Agreement). In light of this, the General Partner believes that it
is in the Partnership's best interest to retain all cash available.
Accordingly, cash distributions, with the exception of the distributions of
Sales Proceeds, to Partners continue to be suspended. The General Partner
believes that Cash Flow (as defined in the Partnership Agreement) is one of the
best and cheapest sources of cash available to the Partnership. For the nine
months ended September 30, 1998, Cash Flow (as defined in the Partnership
Agreement) of $1,378,000 was retained to supplement working capital reserves.
The General Partner continues to review other sources of cash available to the
Partnership.
Based upon the current estimated value of its assets, net of its outstanding
liabilities, together with its expected operating results and capital
expenditure requirements, the General Partner believes that the Partnership's
cumulative distributions to its Limited Partners from inception through the
termination of the Partnership will be significantly less than such Limited
Partners' Original Capital Contribution. There can be no assurance as to the
amount and/or availability of cash for future distributions to Partners.
3
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
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<S> <C> <C>
ASSETS
Investment in commercial rental properties:
Land $ 9,757,200 $ 12,034,200
Buildings and improvements 33,863,900 69,717,000
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43,621,100 81,751,200
Accumulated depreciation and amortization (11,041,400) (21,860,700)
- -------------------------------------------------------------------------------
Total investment properties, net of accumulated
depreciation and amortization 32,579,700 59,890,500
Cash and cash equivalents 9,674,100 4,879,400
Investments in debt securities 6,828,800 3,948,400
Restricted cash 100,000
Rents receivable 276,600 379,000
Escrow deposits 908,400 552,400
Other assets (primarily loan acquisition costs,
net of accumulated amortization of $759,800 and
$919,100, respectively) 164,500 356,000
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$ 50,432,100 $ 70,105,700
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LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgage loans payable $ 21,542,800 $ 43,773,700
Front-End Fees Loan payable to Affiliate 13,434,400 13,434,400
Distributions payable 7,171,300
Accounts payable and accrued expenses 892,200 1,435,200
Due to Affiliates 17,300 5,000
Security deposits 186,100 231,800
Other liabilities 199,000
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43,244,100 59,079,100
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Partners' capital:
General Partner (deficit) (1,151,400) (1,664,600)
Limited Partners (1,000,000 Units issued, 949,843
Units outstanding) 8,339,400 12,691,200
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7,188,000 11,026,600
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$ 50,432,100 $ 70,105,700
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</TABLE>
STATEMENTS OF PARTNERS' CAPITAL
For the nine months ended September 30, 1998 (Unaudited)
and the year ended December 31, 1997
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Partners' (deficit) capital,
January 1,
1997 $(1,675,000) $ 11,661,900 $ 9,986,900
Net income for the year ended
December 31, 1997 10,400 1,029,300 1,039,700
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Partners' (deficit) capital, December
31, 1997 (1,664,600) 12,691,200 11,026,600
Net income for the nine months ended
September 30, 1998 513,200 8,946,000 9,459,200
Distributions for the nine months
ended September 30, 1999 (13,297,800) (13,297,800)
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Partners' (deficit) capital,
September 30, 1998 $(1,151,400) $ 8,339,400 $ 7,188,000
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</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATEMENTS OF INCOME AND EXPENSES
For the quarters ended September 30, 1998 and 1997
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Income:
Rental $1,538,500 $2,993,700
Interest 250,000 120,100
Gain on sale of Property 1,622,900
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3,411,400 3,113,800
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Expenses:
Interest:
Affiliates 262,200 262,800
Nonaffiliates 410,800 817,900
Depreciation and amortization 281,400 607,000
Property operating:
Affiliates 71,200 129,300
Nonaffiliates 140,500 321,800
Real estate taxes 94,800 487,700
Insurance--Affiliate 11,500 25,000
Repairs and maintenance 126,400 360,300
General and administrative:
Affiliates 9,400 9,300
Nonaffiliates 22,000 32,300
Additional expense of sale of property 1,300 4,500
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1,431,500 3,057,900
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Net income $1,979,900 $ 55,900
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Net income allocated to General Partner $ 438,400 $ 500
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Net income allocated to Limited Partners $1,541,500 $ 55,400
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Net income allocated to Limited Partners per Unit
(949,843 Units outstanding) $ 1.62 $ 0.06
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</TABLE>
STATEMENTS OF INCOME AND EXPENSES
For the nine months ended September 30, 1998 and 1997
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Income:
Rental $ 6,425,300 $ 9,218,600
Interest 577,700 325,200
Gain on sales of property 8,565,500 760,300
- --------------------------------------------------------------------------
15,568,500 10,304,100
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Expenses:
Interest:
Affiliates 783,000 774,400
Nonaffiliates 1,687,100 2,568,300
Depreciation and amortization 936,200 1,828,100
Property operating:
Affiliates 239,000 397,300
Nonaffiliates 711,300 1,138,300
Real estate taxes 937,300 1,504,000
Insurance--Affiliate 49,300 77,700
Repairs and maintenance 650,100 1,202,300
General and administrative:
Affiliates 26,900 24,600
Nonaffiliates 89,100 128,200
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6,109,300 9,643,200
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Net income $ 9,459,200 $ 660,900
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Net income allocated to General Partner $ 513,200 $ 6,600
- --------------------------------------------------------------------------
Net income allocated to Limited Partners $ 8,946,000 $ 654,300
- --------------------------------------------------------------------------
Net income allocated to Limited Partners per Unit
(949,843 Units outstanding) $ 9.42 $ 0.69
- --------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1998 and 1997
(Unaudited)
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,459,200 $ 660,900
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 936,200 1,828,100
Gain on sales of property (8,565,500) (760,300)
Changes in assets and liabilities:
Decrease in rents receivable 102,400 245,200
Decrease in other assets 139,300 114,900
(Decrease) in accounts payable and accrued
expenses (543,000) (136,700)
Increase (decrease) in due to Affiliates 12,300 (118,100)
(Decrease) in other liabilities (199,000) (144,500)
- ------------------------------------------------------------------------------
Net cash provided by operating activities 1,341,900 1,689,500
- ------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of property 35,234,300 4,648,500
Payments for capital and tenant improvements (242,000) (279,400)
(Increase) in investments in debt securities, net (2,880,400) (972,700)
(Increase) in escrow deposits (356,000) (636,500)
Decrease in restricted cash 100,000
- ------------------------------------------------------------------------------
Net cash provided by investing activities 31,855,900 2,759,900
- ------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments on mortgage loans payable (451,900) (762,200)
Repayments of mortgage loans payable (21,779,000) (3,819,700)
Distributions to Partners (6,126,500)
(Decrease) increase in security deposits (45,700) 8,500
- ------------------------------------------------------------------------------
Net cash (used for) financing activities (28,403,100) (4,573,400)
- ------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 4,794,700 (124,000)
Cash and cash equivalents at the beginning of the
period 4,879,400 6,900,600
- ------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 9,674,100 $ 6,776,600
- ------------------------------------------------------------------------------
Supplemental information:
Interest paid to Affiliate during the period $ 783,000 $ 861,900
- ------------------------------------------------------------------------------
Interest paid to nonaffiliates during the period $ 1,847,300 $ 2,705,700
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DEFINITION OF SPECIAL TERMS:
Capitalized terms used in this report have the same meaning as those terms have
in the Partnership's Registration Statement filed with the Securities and
Exchange Commission on Form S-11. Definitions of these terms are contained in
Article III of the First Amended and Restated Agreement of Limited Partnership,
which is included in the Registration Statement and incorporated herein by
reference.
ACCOUNTING POLICIES:
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). The Partnership utilizes the accrual
method of accounting. Under this method, revenues are recorded when earned and
expenses are recorded when incurred. The Partnership recognizes rental income
that is contingent upon tenants' achieving specified targets only to the extent
that such targets are achieved.
Preparation of the Partnership's financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The financial information included in these financial statements is unaudited;
however, in management's opinion, all adjustments (consisting of only normal,
recurring accruals) necessary for a fair presentation of the results of
operations for the periods included have been made. Results of operations for
the quarter and nine months ended September 30, 1998, are not necessarily
indicative of the operating results for the year ending December 31, 1998.
The financial statements include the Partnership's 50% interest in two joint
ventures with Affiliated partnerships, which were formed for the purpose of
each acquiring a 100% interest in certain real property. These joint ventures
are operated under the common control of the General Partner. Accordingly, the
Partnership's pro rata share of the joint ventures' revenues, expenses, assets,
liabilities and Partners' (deficit) capital is included in the financial
statements.
Commercial rental properties are recorded at cost, net of any provisions for
value impairment, and depreciated (exclusive of amounts allocated to land) on
the straight-line method over their estimated useful lives. Lease acquisition
fees are recorded at cost and amortized on the straight-line method over the
life of each respective lease. Repair and maintenance costs are expensed as
incurred; expenditures for improvements are capitalized and depreciated on the
straight-line method over the estimated life of such improvements.
The Partnership evaluates its commercial rental properties for impairment when
conditions exist which may indicate that it is probable that the sum of
expected future cash flows (undiscounted) from a property is less than its
carrying basis. Upon determination that an impairment has occurred, the
carrying basis in the rental property is reduced to its estimated fair value.
Management was not aware of any indicator that would result in a significant
impairment loss during the periods reported.
Loan acquisition costs are amortized over the term of the mortgage loan made in
connection with the acquisition of Partnership properties or refinancing of
Partnership loans. When a property is disposed of or a loan is refinanced, the
related loan acquisition costs and accumulated amortization are removed from
the respective accounts and any unamortized balance is expensed.
Property sales are recorded when title transfers and sufficient consideration
has been received by the Partnership. Upon disposition, the related costs and
accumulated depreciation and amortization are removed from the respective
accounts. Any gains or losses are recognized in accordance with GAAP.
Cash equivalents are considered all highly liquid investments with a maturity
of three months or less when purchased.
Investments in debt securities are comprised of corporate debt securities and
are classified as held-to-maturity. These investments are carried at their
amortized cost basis in the financial statements, which approximated fair
market value. All of these securities had a maturity of less than one year when
purchased.
Certain reclassifications have been made to the previously reported 1997
statements in order to provide comparability with the 1998 statements. These
reclassifications had no effect on net income or Partners' capital (deficit).
Reference is made to the Partnership's annual report for the year ended
December 31, 1997, for a description of other accounting policies and
additional details of the Partnership's financial condition, results of
operations, changes in Partners' capital (deficit) and changes in cash balances
for the year then ended. The details provided in the notes thereto have not
changed except as a result of normal transactions in the interim or as
otherwise disclosed herein.
2. RELATED PARTY TRANSACTIONS:
In accordance with the Partnership Agreement, as compensation for services
rendered in managing the affairs of the Partnership, the General Partner is
entitled to receive subsequent to November 22, 1988, the Termination of the
Offering, a Portfolio Management Fee, payable quarterly, which is an amount
equal to the lesser of (i) 0.5% of the gross value of the Partnership's assets
(not reduced by indebtedness collateralized by such assets), all as estimated
by the General Partner in its reasonable discretion, plus, to the extent the
Portfolio Management Fee paid in any prior year was less than 0.5% of the gross
value of the Partnership's assets in such prior year, the amount of such
deficit, or (ii) an amount equal to the remainder obtained by subtracting the
aggregate amount previously paid to the General Partner as Portfolio Management
Fees during such fiscal year, from an amount equal to 10% of the Partnership's
aggregate Cash Flow (as defined in the Partnership Agreement) (computed prior
to the deduction for Portfolio Management Fees) for such fiscal year. For the
quarter and nine months ended September 30, 1998, in conjunction with the
suspension of distributions of Cash Flow (as defined in the Partnership
Agreement) to Limited Partners, the General Partner was not paid a Portfolio
Management Fee.
In accordance with the Partnership Agreement, Net Profits and Net Losses
(exclusive of Net Profits and Net Losses from a Major Capital Event) are
allocated 1% to the General Partner and 99% to the Limited Partners as a group.
Net Losses from a Major Capital Event are allocated: first, prior to giving
effect to any distributions of Sale or Refinancing Proceeds from the
transaction, to the General Partner and Limited Partners with positive balances
in their Capital Accounts, in proportion to and to the extent of such positive
balances; and second, the balance, if any, 1% to the General Partner and 99% to
the Limited Partners as a group. Net Profits from a Major Capital Event are
allocated: first, prior to giving effect to any distributions of Sale or
Refinancing Proceeds from the transaction, Net Profit in the amount of the
Minimum Gain (as defined in the Partnership Agreement) attributable to the
property that is the subject of such Major Capital Event is allocated to the
General Partner and Limited Partners with negative balances in their Capital
Accounts, pro rata in proportion to such respective negative balances; second,
to the General Partner and each Limited Partner in proportion to and to the
extent of such amounts, if any, equal to the amount of Sale or Refinancing
Proceeds to be distributed to each such General Partner or Limited Partner with
respect to such Major Capital Event; and third, the balance, if any, 20% to the
General Partner and 80% to the Limited Partners as a group. Notwithstanding
anything to the contrary, there shall be allocated to the General Partner not
less than 1% of all items of Partnership income, gain, loss, deduction and
credit during the existence of the Partnership. For the quarter and nine months
ended September 30,
6
<PAGE>
1998, the General Partner was allocated a Net Profit of $438,400 and $513,200,
respectively, which included gains of $434,800 and $504,300, respectively, from
the sales of Partnership properties.
Fees and reimbursements paid and (receivable)/payable by the Partnership to
Affiliates during the quarter and nine months ended September 30, 1998 were as
follows:
<TABLE>
<CAPTION>
Paid (Receivable)
Quarter Nine Months Payable
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Property management and leasing fees $ 27,500 $ 187,300 $(12,300)
Interest expense on Front-End Fees Loan
(Note 3) 262,200 783,000 None
Reimbursement of property insurance
premiums, at cost 26,200 49,300 None
Legal 27,000 100,800 25,000
Reimbursement of expenses, at cost:
--Accounting 2,600 13,900 2,700
--Investor communication 2,900 6,400 1,900
- --------------------------------------------------------------------------
$348,400 $1,140,700 $ 17,300
- --------------------------------------------------------------------------
</TABLE>
Manufactured Home Communities, Inc. ("MHC"), a real estate investment trust,
which is an Affiliate of the General Partner and in the business of owning and
operating mobil home communities, is obligated to the Partnership under a lease
of office space at Prentice Plaza. During the quarter and nine months ended
September 30, 1998, MHC paid $26,200 and $55,900, respectively, in rents and
reimbursements of expenses. The Partnership owns a 50% joint venture interest
in these amounts. During the nine months ended September 30, 1998, the
Partnership and MHC reached an agreement extending their lease until May 31,
2003 and increasing their space by approximately 50%. The per square foot rent
paid by MHC is comparable to that paid by other tenants at Prentice Plaza.
On-site property management for the Partnership's properties is provided by
Affiliates of the General Partner and a third-party management company for a
fee equal to 3% of gross rents received by the properties. The Affiliates and
third-party management company are entitled to leasing fees equal to 3% of
gross rents received, reduced by leasing fees, if any, paid to other leasing
agents.
3. FRONT-END FEES LOAN PAYABLE TO AFFILIATE:
The Partnership borrowed from an Affiliate of the General Partner an amount
needed for the payment of securities sales commissions, Offering and
Organizational Expenses and other Front-End Fees, other than Acquisition Fees.
Repayment of the principal amount of the Front-End Fees Loan is subordinated to
payment to the Limited Partners of 100% of their Original Capital Contribution
from Sale or Refinancing Proceeds (as defined in the Partnership Agreement).
Interest on the outstanding balance of this loan is due and payable monthly at
a rate no greater than the cost of funds obtained by the Affiliate from
unaffiliated lenders.
As of September 30, 1998, the Partnership had drawn $13,434,400 under the
Front-End Fees Loan agreement. The interest rate paid on the Front-End Fees
Loan is subject to change in accordance with the loan agreement. The weighted
average interest rate for the quarter and nine months ended September 30, 1998
was 7.69%. As of September 30, 1998, the interest rate was 7.63%.
Pursuant to a modification of this loan agreement, the Partnership has the
option to defer payment of interest on this loan for a 69-month period
beginning April 1, 1993. In addition, any interest payments made by the
Partnership from April 1, 1993 through December 31, 1998 may be borrowed from
the Affiliate. All deferred and subsequently borrowed amounts (including
accrued interest thereon) shall be due and payable on January 1, 1999, and
shall not be subordinated to payment of original Capital Contributions to
Limited Partners. As of September 30, 1998, the Partnership had not exercised
its option to defer the payment of interest on this loan.
4. MORTGAGE LOANS PAYABLE:
Mortgage loans payable at September 30, 1998 and December 31, 1997 consisted of
the following loans, which are non-recourse to nor guaranteed by the
Partnership:
<TABLE>
<CAPTION>
Partnership's Share of Average
Property Pledged Principal Balance at Interest Maturity
as Collateral 9/30/98 12/31/97 Rate (a) Date
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Deerfield Mall 16,777,500 17,196,600 7.60% 3/1/2001
Prentice Plaza (50%) 4,765,300 4,798,100 7.43% 12/19/2000
Meidinger Tower (b) $21,779,000 (b) (b)
- -----------------------------------------------------------------
$21,542,800 $43,773,700
- -----------------------------------------------------------------
</TABLE>
(a) The average interest rate represents an average for the nine months ended
September 30, 1998. Interest rate on Prentice Plaza's loan is subject to
change in accordance with the provisions of the loan agreement. As of
September 30, 1998, the interest rate on the loan collateralized by
Prentice Plaza was 7.25%.
(b) The Partnership, repaid the mortgage loan collateralized by Meidinger Tower
with a portion of the proceeds generated from its sale. For further
information regarding the sale, see Note 5.
For additional information regarding the mortgage loans payable, see notes to
the financial statements in the Partnership's Annual Report for the year ended
December 31, 1997.
5. PROPERTY SALES:
On April 1, 1998, the Partnership consummated the sale of Meidinger Tower for a
sale price of $28,450,000. Net Proceeds from this transaction amounted to
$6,175,300, which was net of actual and estimated closing expenses and the
repayment of the mortgage loan collateralized by the property. The Partnership
recorded a gain of $6,942,600 for the nine months ended September 30, 1998 and
distributed $6,126,500 or $6.45 per Unit on August 31, 1998 to Limited Partners
of record as of April 1, 1998.
On August 6, 1998, a joint venture in which the Partnership owns a 50%
interest, consummated the sale of 1800 Sherman Office Building for a sale price
of $15,050,000. The Partnership's share of net proceeds from this transaction
was approximately $7,280,000, which is net of actual and estimated closing
expenses. The Partnership recorded a gain of $1,622,900 for the quarter ended
September 30, 1998 and will distribute $7,171,300 or $7.55 per Unit on November
30, 1998 to Limited Partners of record as of August 6, 1998 from this
transaction. In accordance with the contract to sell the property, the joint
venture placed $500,000 of the proceeds from this sale in an escrow for a nine-
month period. The funds placed into escrow are intended to cover potential
claims asserted by the purchaser arising from the representations and
warranties made by the joint venture.
7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CAPITAL INCOME AND GROWTH FUND - SERIES XII
By: FIRST CAPITAL FINANCIAL CORPORATION
GENERAL PARTNER
Date: November 13, 1998 By: /s/ DOUGLAS CROCKER II
----------------- -----------------------
DOUGLAS CROCKER II
President and Chief Executive Officer
Date: November 13, 1998 By: /s/ NORMAN M. FIELD
----------------- ------------------
NORMAN M. FIELD
Vice President - Finance and Treasurer
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K:
- -----------------------------------------
(a) Exhibits: None
(b) Reports on Form 8-K:
A report was filed on August 21, 1998 on Form 8-K reporting the sale
of 1800 Sherman.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,674,100
<SECURITIES> 6,828,800
<RECEIVABLES> 276,600
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,779,500
<PP&E> 43,621,100
<DEPRECIATION> 11,041,400
<TOTAL-ASSETS> 50,432,100
<CURRENT-LIABILITIES> 8,266,900
<BONDS> 34,977,200
0
0
<COMMON> 0
<OTHER-SE> 7,188,000
<TOTAL-LIABILITY-AND-EQUITY> 50,432,100
<SALES> 0
<TOTAL-REVENUES> 15,568,500
<CGS> 0
<TOTAL-COSTS> 2,587,000
<OTHER-EXPENSES> 116,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,470,100
<INCOME-PRETAX> 9,459,200
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,459,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,459,200
<EPS-PRIMARY> 9.42
<EPS-DILUTED> 9.42
</TABLE>
