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 June 30, 1996
------------------------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ___________________
Commission File Number: 0-15538
--------------------------------------------------
First Capital Income Properties, LTD.--Series XI
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Illinois 36-3364279
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two North Riverside Plaza, Suite 950, Chicago, Illinois 60606-2607
- ------------------------------------------------------ --------------
(Address of principal executive offices) (Zip Code)
(312) 207-0020
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(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 September 12, 1985,
included in the Partnership's Registration Statement on Form S-11, is
incorporated herein by reference in Part I of this report.
BALANCE SHEETS
(All dollars rounded to nearest 00s)
June 30,
1996 December 31,
(Unaudited) 1995
- ------------------------------------------------------------------------------
ASSETS
Investment in commercial rental properties:
Land $ 8,948,500 $ 8,948,500
Buildings and improvements 56,379,300 56,326,700
- ------------------------------------------------------------------------------
65,327,800 65,275,200
Accumulated depreciation and amortization (19,333,100) (18,551,100)
- ------------------------------------------------------------------------------
Total investment properties, net of accumulated
depreciation and amortization 45,994,700 46,724,100
Cash and cash equivalents 1,708,000 1,331,600
Restricted escrow deposit 79,700
Rents receivable 449,800 626,800
Other assets (net of accumulated amortization on
loan acquisition costs of $982,700 and $938,300,
respectively) 220,800 561,400
- ------------------------------------------------------------------------------
$48,373,300 $ 49,323,600
- ------------------------------------------------------------------------------
LIABILITIES AND PARTNERS' (DEFICIT)
Liabilities:
Mortgage loans payable $ 40,624,600 $ 41,189,600
Front-End Fees loan payable to Affiliate 8,295,200 8,295,200
Accounts payable and accrued expenses 1,380,500 1,300,400
Due to Affiliates 422,300 114,700
Security deposits 224,000 200,700
Other liabilities 316,800 735,100
- ------------------------------------------------------------------------------
51,263,400 51,835,700
- ------------------------------------------------------------------------------
Partners' (deficit):
General Partner (deficit) (2,890,100) (2,512,100)
Limited Partners (57,621 Units issued and
outstanding) 0 0
- ------------------------------------------------------------------------------
(2,890,100) (2,512,100)
- ------------------------------------------------------------------------------
$48,373,300 $ 49,323,600
- ------------------------------------------------------------------------------
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
For the six months ended June 30, 1996 (Unaudited)
and the year ended December 31, 1995
(All dollars rounded to nearest 00s)
General Limited
Partner Partners Total
- -----------------------------------------------------------------------------
Partners' (deficit) capital,
January 1, 1995 $ (288,900) $5,330,200 $ 5,041,300
Net (loss) for the year ended
December 31, 1995 (2,223,200) (5,330,200) (7,553,400)
- -----------------------------------------------------------------------------
Partner's (deficit), December 31, 1995 (2,512,100) 0 (2,512,100)
Net (loss) for the six months ended
June 30, 1996 (378,000) (378,000)
- -----------------------------------------------------------------------------
Partner's (deficit), June 30, 1996 $(2,890,100) $ 0 $(2,890,100)
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
2
STATEMENTS OF INCOME AND EXPENSES
For the quarters ended June 30, 1996 and 1995
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
1996 1995
- --------------------------------------------------------------------------
Income:
Rental $2,646,400 $2,671,100
Interest 16,600 16,600
- --------------------------------------------------------------------------
2,663,000 2,687,700
- --------------------------------------------------------------------------
Expenses:
Interest:
Affiliate 154,900 169,400
Nonaffiliates 846,900 934,700
Depreciation and amortization 418,300 581,300
Property operating:
Affiliates 148,100 146,800
Nonaffiliates 476,800 491,000
Real estate taxes 412,900 336,400
Insurance--Affiliate 37,400 20,700
Repairs and maintenance 324,900 315,900
General and administrative:
Affiliates 9,200 7,100
Nonaffiliates 37,600 60,500
- --------------------------------------------------------------------------
2,867,000 3,063,800
- --------------------------------------------------------------------------
Net (loss) $ (204,000) $ (376,100)
- --------------------------------------------------------------------------
Net (loss) allocated to General Partner $ (204,000) $ (3,800)
- --------------------------------------------------------------------------
Net (loss) allocated to Limited Partners $ 0 $ (372,300)
- --------------------------------------------------------------------------
Net (loss) allocated to Limited Partners per Unit
(57,621 Units outstanding) $ 0.00 $ (6.46)
- --------------------------------------------------------------------------
STATEMENTS OF INCOME AND EXPENSES
For the six months ended June 30, 1996 and 1995
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
1996 1995
- --------------------------------------------------------------------------
Income:
Rental $5,312,500 $5,286,500
Interest 30,800 30,100
- --------------------------------------------------------------------------
5,343,300 5,316,600
- --------------------------------------------------------------------------
Expenses:
Interest:
Affiliate 311,300 337,100
Nonaffiliates 1,716,000 1,862,600
Depreciation and amortization 826,400 1,156,800
Property operating:
Affiliates 282,600 285,600
Nonaffiliates 1,051,400 1,042,700
Real estate taxes 717,400 620,000
Insurance--Affiliate 73,100 57,600
Repairs and maintenance 631,000 618,300
General and administrative:
Affiliates 17,300 15,100
Nonaffiliates 94,800 108,600
- --------------------------------------------------------------------------
5,721,300 6,104,400
- --------------------------------------------------------------------------
Net (loss) $ (378,000) $ (787,800)
- --------------------------------------------------------------------------
Net (loss) allocated to General Partner $ (378,000) $ (7,900)
- --------------------------------------------------------------------------
Net (loss) allocated to Limited Partners $ 0 $ (779,900)
- --------------------------------------------------------------------------
Net (loss) allocated to Limited Partners per Unit
(57,621 Units outstanding) $ 0.00 $ (13.53)
- --------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1996 and 1995
(Unaudited)
(All dollars rounded to nearest 00s)
1996 1995
- ---------------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) $ (378,000) $ (787,800)
Adjustments to reconcile net (loss) to net cash
provided by operating activities:
Depreciation and amortization 826,400 1,156,800
Changes in assets and liabilities:
Decrease in rents receivable 177,000 26,900
Decrease in other assets 311,300 267,000
Increase (decrease) in accounts payable and accrued
expenses 80,100 (276,500)
(Decrease) increase in due to Affiliates (60,600) 14,200
(Decrease) increase in other liabilities (118,300) 200
- ---------------------------------------------------------------------------------
Net cash provided by operating activities 837,900 400,800
- ---------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for capital and tenant improvements (352,600) (1,023,600)
Maturity of restricted certificate of deposit 75,000
Release of restricted escrow deposit 79,700 32,600
- ---------------------------------------------------------------------------------
Net cash (used for) investing activities (272,900) (916,000)
- ---------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from mortgage loan payable 800,000
Interest deferred on Front-End Fees loan payable to
Affiliate 368,200
Principal payments on mortgage loans payable (565,000) (595,700)
Payment of loan acquisition and extension fees (15,100) (32,900)
Increase in security deposits 23,300 13,000
- ---------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (188,600) 184,400
- ---------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 376,400 (330,800)
Cash and cash equivalents at the beginning of the period 1,331,600 1,612,600
- ---------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $1,708,000 $1,281,800
- ---------------------------------------------------------------------------------
Supplemental information:
Interest paid to Affiliate during the period $ 0 $ 329,500
- ---------------------------------------------------------------------------------
Interest paid to nonaffiliates during the period $1,726,300 $1,863,000
- ---------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
3
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
June 30, 1996
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 Certificate and 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"). Under this method of accounting,
revenues are recorded when earned and expenses are recorded when incurred.
Preparation of the Partnership's financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The financial 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 six months ended June 30, 1996 are not necessarily indicative
of the operating results for the year ending December 31, 1996.
The financial statements include the Partnership's 50% interest in three joint
ventures with Affiliated partnerships. Two of these joint ventures were formed
for the purpose of each acquiring a 100% interest in certain real property and
one of these joint ventures was formed for the purpose of acquiring a preferred
majority 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 ventures' revenues, expenses, assets, liabilities and
Partners' capital is included in the financial statements.
The financial statements also include the Partnership's 70% undivided interest
in a joint venture with an unaffiliated third party. The joint venture owns a
100% interest in the Burlington Office Center I, II and III. This joint venture
is operated under the control of the General Partner. Accordingly, the
Partnership has included 100% of the venture's revenues, expenses, assets,
liabilities and partners' capital in the financial statements.
Commercial rental properties held for investment are recorded at cost, net of
any provisions for value impairment, and depreciated (exclusive of amounts, if
any, allocated to land and value impairments) on the straight-line method over
their estimated useful lives. Upon classifying a commercial rental property as
held for disposition, no further depreciation or amortization of such property
is provided for in the financial statements. Lease acquisition fees are
recorded at cost and amortized over the life of the lease. Repair and
maintenance costs are expensed as incurred; expenditures for improvements are
capitalized and depreciated over the estimated life of the improvements.
During the first quarter of 1996, the Partnership adopted Financial Accounting
Standards Board Statement No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (the "Standard"). The
Standard established guidance for determining if the value of defined assets
are impaired, and if so, how impairment losses should be measured and reported
in the financial statements. The Standard also addressed the accounting for
long-lived assets that are expected to be disposed of. The adoption of the
Standard did not have a material effect on the Partnership's financial
statements.
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.
Cash equivalents are considered all highly liquid investments with an original
maturity of three months or less when purchased.
Certain reclassifications have been made to the previously reported 1995
statements in order to provide comparability with the 1996 statements. These
reclassifications had no effect on net (loss) or Partners' (deficit).
Reference is made to the Partnership's annual report for the year ended
December 31, 1995 for a description of other accounting policies and additional
details of the Partnership's financial condition, results of operations,
changes in Partners' capital 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, Net Profits and Net Losses
(exclusive of Net Profits and Net Losses from the sale, disposition or
provision for value impairment of Partnership properties) shall be allocated 1%
to the General Partner and 99% to the Limited Partners. Net Profits from the
sale or disposition of a Partnership property are allocated: first, prior to
giving effect to any distributions of Sale or Refinancing Proceeds from the
transaction, to the General Partner and Limited Partners with negative balances
in their Capital Accounts, pro rata in proportion to such respective negative
balances, to the extent of the total of such negative balances; second, to each
Limited Partner in an amount, if any, necessary to make the positive balance in
its Capital Account equal to the Sale or Refinancing Proceeds to be distributed
to such Limited Partner with respect to the sale or disposition of such
property; third, to the General Partner in an amount, if any, necessary to make
the positive balance in its Capital Account equal to the Sale or Refinancing
Proceeds to be distributed to the General Partner with respect to the sale or
disposition of such property; and fourth, the balance, if any, 25% to the
General Partner and 75% to the Limited Partners. Net Losses from the sale,
disposition or provision for value impairment of Partnership properties are
allocated: first, after giving effect to any distributions of Sale or
Refinancing Proceeds from the transaction, to the General Partner and Limited
Partners with positive balances in their Capital Accounts, pro rata in
proportion to such respective positive balances, to the extent of the total
amount of such positive balances; and second, the balance, if any, 1% to the
General Partner and 99% to the Limited Partners. Notwithstanding anything to
the contrary, there shall be allocated to the General Partner not less than 1%
of all items of Partnership income, gain, loss, deduction and credit during the
existence of the Partnership. For the quarter and six months ended June 30,
1996, the General Partner was allocated 100% of the Net (Losses) of $(204,000)
and $(378,000), respectively, in order to preclude the Limited Partners'
capital accounts from being reduced to an amount less than zero.
Fees and reimbursements paid and payable by the Partnership to Affiliates
during the quarter and six months ended June 30, 1996 were as follows:
Paid
-------------------
Quarter Six Months Payable
- ------------------------------------------------------------------------------
Property management and leasing fees $ 68,700 $250,500 $ 49,300
Interest expense on Front- End Fees loan (Note
3) None None 368,200
Reimbursement of property insurance premiums, at
cost 73,100 73,100 None
Reimbursement of expenses, at cost:
--Accounting 7,900 19,300 4,300
--Investor communication 1,300 3,000 500
--Legal 28,400 50,400 None
- ------------------------------------------------------------------------------
$179,400 $396,300 $422,300
- ------------------------------------------------------------------------------
ANTEC Corporation ("ANTEC"), which is in the business of designing,
engineering, manufacturing and distributing cable television products, and
approximately 30% owned by Anixter International Inc. (formerly known as Itel
Corporation), an Affiliate of the General Partner, is obligated to the
Partnership under a lease of office space at Prentice Plaza. During the quarter
and six months ended June 30, 1996, ANTEC paid $116,100 and $272,100,
respectively, in rent. The Partnership owns a 50% joint venture interest in
these rents. The per square foot rent paid by ANTEC is comparable to that paid
by other tenants at Prentice Plaza.
4
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
On-site property management for certain of the Partnership's properties is
provided by independent real estate management companies for fees ranging from
3% to 4% of gross rents received by the properties. In addition, Affiliates of
the General Partner provide on-site property management, leasing and
supervisory services for fees based upon various percentage rates of gross
rents for the properties. These fees range from 1% to 6% based upon the terms
of the individual management agreements.
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 June 30, 1996, the Partnership had drawn $8,295,200 under the Front-End
Fees loan agreement. The interest rate 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 six months ended June 30, 1996 was 7.50%. As of June
30, 1996, the interest rate was 7.41%.
Pursuant to a modification of this loan agreement, the Partnership has the
option to defer payment of interest on this loan, for a 72-month period
beginning January 1, 1993. In addition, any interest payments paid by the
Partnership from January 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. Beginning with the interest payment due on January 1, 1996,
the Partnership has elected to defer payment of interest. At June 30, 1996,
the amount of interest deferred pursuant to this modification was $368,200.
4. MORTGAGE LOANS PAYABLE:
Mortgage loans payable at June 30, 1996 and December 31, 1995 consisted of the
following loans which are non-recourse to or not guaranteed by the Partnership
unless otherwise disclosed:
Partnership's Share of
Principal Balance at Average
-------------------------- Interest Maturity
Property Pledged as Collateral 6/30/96 12/31/95 Rate Date
- --------------------------------------------------------------------------------
Marquette Mall and $ 2,202,200(a) $ 2,247,600 7.75% 7/1/2002
Office Building 1,073,900(a) 1,135,600 7.75% 7/1/2002
9,170,000(b) 9,350,000 8%(c) 9/30/1997
Burlington I, II and
III Office Center 10,871,800 10,926,700 9.875% 5/1/1997
Regency Park
Shopping Center (50%) 7,776,400 7,917,100 (d) (d)
Prentice Plaza (50%) 4,856,600 4,875,000 7.91%(c) 12/19/2000
Sentry Park West
Office Campus (50%)(e) 4,673,700 4,737,600 7.97%(c) 9/30/1996
- --------------------------------------------------------------------------------
$40,624,600 $41,189,600
- --------------------------------------------------------------------------------
(a) As of March 1, 1996, the two senior mortgage loans collateralized by
Marquette Mall and Marquette Office Building, respectively, were amended.
The terms of the amendment to the mortgage loan collateralized by
Marquette Mall provided that during the period beginning March 1, 1996
through February 28, 1998 accrued interest only shall be paid and that on
March 1, 1998 the original terms of the mortgage loan will become
effective. The terms of the amendment to the mortgage loan collateralized
by Marquette Office Building provided that during the period beginning
March 1, 1996 through February 28, 1998 monthly installments of principal
in the amount of $8,333 plus accrued interest shall be paid and that on
March 1, 1998 the original terms of the mortgage loan will become
effective.
(b) On March 29, 1996, an amendment to the agreement dated December 29, 1994
was executed which modified and amended the junior mortgage loan
collateralized by Marquette Mall and Office Building ("Marquette"). Terms
of the amendment included: 1) a reduction in the loan commitment amount
from $9,770,000 to $9,350,000; 2) a change from quarterly principal
amortization payments of $125,000 on the first day of each quarter
beginning January 1, 1996 and increasing to $150,000 on July 1, 1996 to
monthly principal amortization payments of $30,000; 3) a reduction in the
variable interest rate from 30-day LIBOR plus 300 basis points to 30-day
LIBOR plus 250 basis points; 4) an assignment to the lender of a portion
of the net sale proceeds received by the Partnership from the joint
venture which owns Sentry Park West Office Campus ("Sentry West"), in
which the Partnership has a 50% interest, on the sale of Sentry West (see
Note 5) to reduce the outstanding principal balance on the junior mortgage
loan and 5) an option to extend the maturity date of the loan to September
30, 1998 for a .5% extension fee, with a change in the interest rate to
30-day LIBOR plus 275 basis points and an increase in the monthly
principal amortization payments to $50,000. The March 29, 1996 amendment
was retroactive to January 1, 1996. Terms of the existing agreement
include a maturity date of September 30, 1997 and a prohibition on
distributions to Partners of the Partnership until the loan is fully
repaid. The loan is guaranteed by the Partnership.
(c) This average interest rate represents an average for the six months ended
June 30, 1996. Interest rates are subject to change in accordance with the
provisions of the loan agreements. As of June 30, 1996, interest rates on
the loans collateralized by Marquette, Prentice Plaza and Sentry West were
7.94%, 7.19% and 7.94%, respectively.
(d) The joint venture which owns Regency Park Shopping Center ("Regency
Park"), in which the Partnership has a 50% interest with Affiliated
partnerships, is in default under the terms of its mortgage loan which
matured on January 1, 1996. The General Partner is finalizing negotiations
with the lender to modify the terms of this mortgage loan. As of the date
of this report, the General Partner and the lender have substantially
agreed to the following, which would be retroactive to January 1, 1996: 1)
an extension of the maturity date to December 31, 1997; 2) monthly
principal and interest payments based on a 23-year amortization schedule
with a per annum interest rate of 7.5%; and 3) net property cash flow (as
defined in the proposed modification agreement), if any, after deducting
scheduled principal and interest payments, approved capital and tenant
improvements and leasing commissions, will be required to be deposited
into a non-interest bearing reserve account maintained by the lender to be
used for capital and tenant improvements, leasing commissions and
operating deficits of Regency Park. This agreement has not yet been
executed, and there can be no assurance that an agreement will be
finalized. The General Partner believes that a modification agreement will
be finalized incorporating the above provisions. Since January 1, 1996,
the joint venture has made sufficient remittances to the lender to comply
with the terms of the above described modification.
(e) This loan is guaranteed by the Partnership and an Affiliated partnership
and restricts the payment of distributions to Partners.
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, 1995.
5. ASSET HELD FOR DISPOSITION:
In March 1996, the joint venture which owns Sentry West entered into an
agreement to sell Sentry West. The Partnership's share of the sale price is
$5,825,000. The closing of this transaction, expected to take place in the
third quarter of 1996, is subject to the satisfaction of certain conditions
and contingencies and, accordingly, may or may not be consummated. The
Partnership's share of the proceeds from this sale, net of the Partnership's
share of the repayment of the mortgage loan collateralized by this property,
will be utilized to reduce the outstanding principal balance on the junior
mortgage loan collateralized by Marquette. The carrying basis, net of
accumulated depreciation and amortization, of Sentry West on the Partnership's
Balance Sheet as of June 30, 1996 was $4,781,400, which does not exceed the
estimated fair value, less costs to sell. Net income for Sentry West, included
in the Partnership's Statements of Income and Expenses, for the quarter and
six months ended June 30, 1996 was $102,700 and $169,700, respectively. Net
(loss) for Sentry West, included in the Partnership's Statements of Income and
Expenses, for the quarter and six months ended June 30, 1995 was $(78,400) and
$(196,600), respectively.
5
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, 1995 for a discussion of the Partnership's business.
OPERATIONS
The table below is a recap of the Partnership's share of certain operating
results of each of its remaining properties for the quarters and six months
ended June 30, 1996 and 1995. The discussion following the table should be read
in conjunction with the financial statements and notes thereto appearing in
this report.
Comparative Operating Results (a)
For the Quarters For the Six Months
Ended Ended
6/30/96 6/30/95 6/30/96 6/30/95
- -------------------------------------------------------------------------
MARQUETTE MALL AND OFFICE BUILDING
Rental revenues $911,200 $1,079,500 $1,929,200 $2,014,200
- -------------------------------------------------------------------------
Property net (loss) income $(58,300) $ 29,000 $ 6,000 $ (12,600)
- -------------------------------------------------------------------------
Average occupancy 82% 82% 82% 82%
- -------------------------------------------------------------------------
BURLINGTON OFFICE CENTER I, II AND III
- -------------------------------------------------------------------------
Rental revenues $666,700 $ 707,700 $1,333,800 $1,465,200
- -------------------------------------------------------------------------
Property net (loss) income $(44,200) $ 34,600 $ (81,200) $ 65,900
- -------------------------------------------------------------------------
Average occupancy 78% 78% 78% 80%
- -------------------------------------------------------------------------
SENTRY PARK WEST OFFICE CAMPUS (50%)
Rental revenues $386,000 $ 344,600 $ 758,100 $ 663,700
- -------------------------------------------------------------------------
Property net income (loss) $102,700 $ (78,400) $ 169,700 $ (196,600)
- -------------------------------------------------------------------------
Average occupancy 87% 86% 87% 86%
- -------------------------------------------------------------------------
PRENTICE PLAZA (50%)
Rental revenues $381,000 $ 242,400 $ 691,000 $ 548,700
- -------------------------------------------------------------------------
Property net (loss) $(17,700) $ (88,500) $ (57,800) $ (109,100)
- -------------------------------------------------------------------------
Average occupancy 99% 97% 99% 97%
- -------------------------------------------------------------------------
REGENCY PARK SHOPPING CENTER (50%)
Rental revenues $301,500 $ 296,900 $ 600,400 $ 593,100
- -------------------------------------------------------------------------
Property net income (loss) $ 10,900 $ (37,500) $ 400 $ (75,300)
- -------------------------------------------------------------------------
Average occupancy 88% 88% 88% 88%
- -------------------------------------------------------------------------
(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.
Unless otherwise disclosed, discussions of fluctuations between 1996 and 1995
refer to both the quarters and six months ended June 30, 1996 and 1995.
Net (loss) for the quarter and six months ended June 30, 1996 decreased by
$172,100 and $409,800, respectively, when compared to the quarter and six
months ended June 30, 1995. The decreases in net (loss) were primarily due to
improved operating results totaling $300,300 and $493,300, respectively, at
Sentry Park West Office Campus ("Sentry West"), Regency Park Shopping Center
("Regency Park") and Prentice Plaza. Decreases in interest expense of $14,500
and $25,800, respectively, on the Partnership's Front-End Fees loan, due to a
decrease in the variable interest rate, and a decrease in general and
administrative expenses of $20,800 and $11,600, respectively, primarily due to
lower data processing costs also contributed to the decrease in net (loss).
Partially offsetting the decreases in net (loss) were diminished operating
results of $78,800 and $147,100, respectively, at Burlington Office Center I,
II and III ("Burlington"). Operating results at Marquette Mall and Office
Building ("Marquette") diminished $87,300 for the quarters under comparison and
improved $18,600 for the six month periods under comparison.
Rental revenues decreased by $24,700 or 0.9%, for the quarter ended June 30,
1996 when compared to the quarter ended June 30, 1995 and increased by $26,000
or 0.5%, for the six months ended June 30, 1996 when compared to the six months
ended June 30, 1995. The changes in rental revenues were primarily due to: 1)
increases at Prentice Plaza, primarily due to increases in tenant expense
reimbursements; 2) increases at Sentry West, primarily as a result of increases
in the average base rental and occupancy rates; 3) decreases at Marquette,
primarily due to lower tenant expense reimbursements and 4) decreases at
Burlington, primarily due to lower base rental rates and the receipt in 1995 of
$60,000 as consideration for the early termination of a tenant's lease.
Depreciation and amortization expense decreased by $163,000 and $330,400, for
the quarter and six months under comparison, respectively. The decreases were
primarily due to the fact that effective January 1, 1996, the Partnership
ceased the periodic depreciation and amortization expense for depreciable and
amortizable assets of Sentry West in connection with classifying the property
as held for disposition. In addition, provisions for value impairment recorded
during the year ended December 31, 1995 reduced the depreciable basis of
Marquette, Burlington and Regency Park.
Interest expense on the Partnership's mortgage loans decreased by $87,800 and
$146,600 for the quarter and six months ended June 30, 1996, respectively, when
compared to the quarter and six months ended June 30, 1995. The decreases were
primarily due to: 1) a reduced interest rate on the mortgage loan
collateralized by Regency Park 2) lower average interest rates on the
Partnership's variable rate mortgage loans and 3) lower average outstanding
principal balances on all of the Partnership's mortgage loans except Prentice
Plaza.
Real estate tax expense increased by $76,500 and $97,400 respectively for the
quarterly and six month periods under comparison. The increases were primarily
due to a projected increase in the tax rate at Marquette as well as a projected
increase in the assessed valuation of Prentice Plaza for real
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
estate tax purposes. Partially offsetting the increase for the six months was a
decrease in real estate tax expense at Burlington due to refunds received in
1996 for the tax years 1994 and 1995.
Repairs and maintenance, property operating and insurance expenses remained
relatively stable for the quarter and six months ended June 30, 1996 when
compared to the quarter and six months ended June 30, 1995.
To increase and/or maintain occupancy levels at the Partnership's properties,
the General Partner, through its Affiliated asset and property management
groups, continues to take the following actions: 1) implementation of marketing
programs, including hiring of third-party leasing agents or providing on-site
leasing personnel, advertising, direct mail campaigns and development of
building brochures; 2) early renewal of existing tenant leases and addressing
any expansion needs these tenants may have; 3) promotion of local broker events
and networking with local brokers; 4) networking with national level retailers;
5) cold-calling other businesses and tenants in the market area; and 6)
providing rental concessions or competitively pricing rental rates depending on
market conditions.
LIQUIDITY AND CAPITAL RESOURCES
One of the Partnership's objectives is to dispose of its properties when market
conditions allow for the achievement of the maximum possible sales price. In
the interim, the Partnership continues to manage and maintain its remaining
properties. Cash Flow (as defined in the Partnership Agreement) is generally
not equal to net income or cash flows as defined 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 defined by GAAP.
The following table includes a reconciliation of Cash Flow (as defined in the
Partnership Agreement) to cash flows provided by operating activities as
defined by GAAP. Such amounts are not indicative of actual distributions to
Partners and should not necessarily be considered as an alternative to the
results disclosed in the Statements of Income and Expenses and Statements of
Cash Flows.
Comparative Cash
Flow Results For
the Six Months
Ended
6/30/96 6/30/95
- -----------------------------------------------------------------------------
Cash Flow (Deficit) (as defined in the Partnership
Agreement) $ (36,900) $ 72,700
Items of reconciliation:
Scheduled principal payments on mortgage loans payable 485,300 296,300
Decrease in current assets 488,300 293,900
(Decrease) in current liabilities (98,800) (262,100)
- -----------------------------------------------------------------------------
Net cash provided by operating activities $ 837,900 $ 400,800
- -----------------------------------------------------------------------------
Net cash (used for) investing activities $(272,900) $(916,000)
- -----------------------------------------------------------------------------
Net cash (used for) provided by financing activities $(188,600) $ 184,400
- -----------------------------------------------------------------------------
The (decrease) in Cash Flow (Deficit) (as defined in the Partnership Agreement)
of $(109,600) for the six months ended June 30, 1996 when compared to the six
months ended June 30, 1995 was primarily due to an increase in the scheduled
principal payments made on the Partnership's amortizing mortgage loans,
partially offset by the improvement in operating results, exclusive of
depreciation and amortization expense, as previously discussed.
The net increase in the Partnership's cash for the six months ended June 30,
1996 was primarily the result of net cash provided by operating activities
exceeding principal payments on mortgage loans payable and payments for
capital, tenant improvement and leasing costs. The liquid assets of the
Partnership as of June 30, 1996 were comprised of amounts held for working
capital purposes.
The increase in net cash provided by operating activities of $437,100 was
primarily due to increases in the net cash provided by operating activities at
Marquette, Regency Park and Sentry West. The increase was partially offset by
decreases in the net cash provided by operating activities at Burlington and
Prentice Plaza.
The decrease in net cash used for investing activities of $643,100 was
primarily due to a decrease in 1996 in the cash used for capital, tenant
improvement and leasing costs. The Partnership maintains working capital
reserves to pay for capital expenditures such as building and tenant
improvements and leasing costs. During the six months ended June 30, 1996, the
Partnership spent $352,600 for capital, tenant improvement and leasing costs
and has projected to spend approximately $975,000 during the remainder of 1996.
Included in the amount spent by the Partnership in 1996 is $300,000 related to
the refurbishment and modernization of one of the major department stores at
Marquette. Included in the remaining 1996 projected amount are capital, tenant
improvement and leasing costs of approximately: 1) $445,000 for Burlington; 2)
$220,000 for Marquette; 3) $130,000 for Sentry West; 4) $115,000 for Regency
Park and 5) $65,000 for Prentice Plaza. Actual amounts expended in 1996 may
vary depending on a number of factors including actual leasing activity,
results of property operations, liquidity considerations and other market
conditions throughout the year. As of June 30, 1996 the Partnership has accrued
$300,000 as an additional liability, which also relates to the refurbishment
and modernization of the major department store at Marquette and is payable in
February 1997. 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.
Net cash provided by (used for) financing activities changed from $184,400 for
the six months ended June 30, 1995 to $(188,600) for the six months ended June
30, 1996. The change was primarily due to $800,000 in proceeds, net of loan
fees, received in 1995 on the junior mortgage loan collateralized by Marquette.
The net change was partially offset by the deferral of interest payments on the
Partnership's Front-End Fees loan (see Note 3 of Notes to Financial Statements
for additional information) and a net decrease in principal payments in 1996 on
mortgage loans payable.
Pursuant to a modification of the Partnership's Front-End Fees loan agreement,
the Partnership has the option to defer
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
payment of interest on this loan, for a 72-month period beginning January 1,
1993. In addition, any interest payments paid by the Partnership from January
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. Beginning with
the interest payment due on January 1, 1996, the Partnership has elected to
defer payment of interest.
In March 1996, the joint venture which owns Sentry West entered into a contract
to sell Sentry West. The Partnership's share of the sale price is $5,825,000.
If the sale is not consummated by September 30, 1996, the loan's maturity date,
the General Partner will pursue an extension or refinancing of the loan. There
can be no assurance that a sale, extension or refinancing will be completed by
September 30, 1996.
As of March 1, 1996, the two senior mortgage loans collateralized by Marquette
Mall and Marquette Office Building, individually, were amended. The terms of
the amendment to the mortgage loan collateralized by Marquette Mall provided
that during the period beginning March 1, 1996 through February 28, 1998
accrued interest only shall be paid and that on March 1, 1998 the original
terms of the mortgage loan will become effective. The terms of the amendment to
the mortgage loan collateralized by Marquette Office Building provided that
during the period beginning March 1, 1996 through February 28, 1998 monthly
installments of principal in the amount of $8,333 plus accrued interest shall
be paid and that on March 1, 1998 the original terms of the mortgage loan will
become effective.
On March 29, 1996, the Partnership executed an amendment which modified and
amended the junior mortgage loan collateralized by Marquette. Terms of the
amendment included: 1) a reduction in the loan commitment amount from
$9,770,000 to $9,350,000; 2) a change from quarterly principal amortization
payments of $125,000 on the first day of each quarter beginning January 1, 1996
and increasing to $150,000 on July 1, 1996 to monthly principal amortization
payments of $30,000; 3) a reduction in the variable interest rate from 30-day
LIBOR plus 300 basis points to 30-day LIBOR plus 250 basis points; 4) an
assignment to the lender of the net sale proceeds on the sale of Sentry West
(see Note 5 of Notes to financial statements) to reduce the outstanding
principal balance on the junior mortgage loan and 5) an option to extend the
maturity date of the loan to September 30, 1998 for a .5% extension fee, with a
change in the interest rate to 30-day LIBOR plus 275 basis points and an
increase in the monthly principal amortization payments to $50,000. The March
1996 amendment is retroactive to January 1, 1996. Terms of the existing loan
include a prohibition on distributions to Limited Partners and a guarantee by
the Partnership.
The joint venture which owns Regency Park, in which the Partnership has a 50%
interest with Affiliated partnerships, is in default under the terms of its
mortgage loan which matured on January 1, 1996. The General Partner is
finalizing negotiations with the lender to modify the terms of this mortgage
loan. As of the date of this report, the General Partner and the lender have
substantially agreed to the following, which would be retroactive to January 1,
1996: 1) an extension of the maturity date to December 31, 1997; 2) monthly
principal and interest payments based on a 23-year amortization schedule with a
per annum interest rate of 7.5%; and 3) net property cash flow (as defined in
the proposed modification agreement), if any, after deducting scheduled
principal and interest payments, approved capital and tenant improvements and
leasing commissions, will be required to be deposited into a non-interest
bearing reserve account maintained by the lender to be used for capital and
tenant improvements, leasing commissions and operating deficits of Regency
Park. This agreement has not yet been executed, and there can be no assurance
that an agreement will be finalized. The General Partner believes that a
modification agreement will be finalized incorporating the above provisions.
Since January 1, 1996, the joint venture has made sufficient remittances to the
lender to comply with the terms of the above described modification.
The recourse junior mortgage loan collateralized by Marquette and the mortgage
loan collateralized by Burlington mature in 1997, exclusive of the option to
extend the maturity date of the junior mortgage loan mentioned above. The
Partnership's ability to satisfy these maturities is dependent upon the
successful sale or refinancing of these properties by their respective loan
maturity dates.
As of June 30, 1996, 72 of the 235 tenants at the Partnership's properties have
leases totaling 201,726 square feet that expire during 1997. Total base rental
revenues budgeted to be collected from these 72 tenants for the year ending
December 31, 1996 are $2,044,400. Of this amount, $562,900 relates to two
tenants at Burlington. Notwithstanding the market rental rates that may be in
effect at the time these leases mature, the Partnership faces a significant
amount of uncertainty with respect to the occupancy at its properties in 1997
and possibly beyond. The General Partner and its Affiliated management
companies intend to address the possible renewal of these leases well in
advance of their scheduled maturities in an attempt to maintain occupancy
levels and rental revenues of the Partnership's portfolio.
The Partnership has significant financial obligations during the remainder of
1996 and beyond. As disclosed in the Partnership's annual report for the year
ended December 31, 1995, terms of the mortgage loans collateralized by certain
of the Partnership's properties have substantial principal payment
requirements. Two of the loans, collateralized by Sentry West and Regency Park,
whose June 30, 1996 principal balances totaled $12,450,100, have matured or
will mature during 1996. As described above, in March 1996, the Partnership
entered into an agreement to sell Sentry West and is in negotiations with the
lender for an extension of the maturity date for the defaulted Regency Park
loan. In addition, the Partnership anticipates incurring substantial capital,
tenant improvement and leasing costs during the remainder of 1996. Net cash
provided by operating activities may not be sufficient to meet the above debt
service and capital expenditure requirements for the year ending December 31,
1996. As a result of these issues, together with the need to generate
sufficient working capital to potentially retenant properties with leases
expiring in 1997 and any restrictions that currently exist or may result from
any refinancings, loan extensions or modifications, the General Partner
believes that it is in the best interest of the Partnership to retain all cash
available. Accordingly, distributions to Partners continue to be suspended. The
General Partner continues to review other sources of cash available to the
Partnership, which includes the sale or refinancing of the Partnership's
properties. No assurance can be given as to the timing or successful completion
of any future transactions. The General Partner
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
currently believes that the amount of the Partnership's existing cash reserves,
combined with any additional net proceeds to be received from sales or
refinancings of any properties, as well as the option to defer payments of
interest on the Front-End Fees loan (see Note 3 of Notes to financial
statements) are sufficient to cover planned expenditures for 1996. Since there
can be no assurance that the sale or refinancing of Sentry West will occur
prior to the maturity of its loan or that the Partnership will successfully
complete any other transactions, including the extension of the mortgage loan
collateralized by Regency Park, the Partnership may have inadequate liquidity
to meet its mortgage loan obligations which could result in the foreclosure of
either property. The General Partner believes that such events would not affect
the Partnership's ability to continue business operations.
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. Accordingly, there can be no assurance
as to the amounts and/or availability of cash for future distributions to
Partners.
9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the quarter ended June
30, 1996.
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 PROPERTIES, LTD.-SERIES XI
BY: FIRST CAPITAL FINANCIAL CORPORATION
GENERAL PARTNER
Date: August 14, 1996 By: /s/ DOUGLAS CROCKER II
--------------- -------------------------------------
DOUGLAS CROCKER II
President and Chief Executive Officer
Date: August 14, 1996 By: /s/ NORMAN M. FIELD
--------------- -------------------------------------
NORMAN M. FIELD
Vice President-Finance and Treasurer