ITEM 1. BUSINESS - ------- --------
The registrant, First Capital Income Properties, Ltd. - Series XI (the "Partnership"), is a limited partnership organized in 1985 under the Uniform Limited Partnership Act of the State of Illinois. The Partnership sold 57,621 Limited Partnership Assignee Units (the "Units") to the public from September 1985 to March 1987 pursuant to a Registration Statement on Form S-11 filed with the Securities and Exchange Commission (Registration Statement No. 2-98749). Capitalized terms used in this report have the same meaning as those terms have in the Partnership's Registration Statement.
The business of the Partnership is to invest primarily in existing commercial income-producing real estate, such as shopping centers, warehouses and office buildings, and, to a lesser extent, in other types of commercial, income- producing real estate. From May 1986 to September 1989, the Partnership: 1) made one real property investment; 2) purchased 50% interests in four joint ventures which were each formed with Affiliated partnerships for the purpose of acquiring a 100% interest in certain real property; 3) purchased 50% interests in four separate joint ventures which were each formed with Affiliated partnerships for the purpose of acquiring a preferred majority interest in certain real property and 4) purchased a 70% preferred majority undivided interest in a joint venture with an unaffiliated third party that was formed for the purpose of acquiring certain real property. All of these joint ventures, prior to dissolution, are operated under the common control of First Capital Financial Corporation (the "General Partner"). Through December 31, 1996, the Partnership, with its respective joint venture partner, has dissolved one joint venture with a 50% interest in real property and the four joint ventures with 50% preferred majority interests in real property as a result of the sales of the real properties. In addition, the Partnership sold one 50% joint venture interest with an Affiliated partnership to that Affiliated partnership.
Property management services for certain of the Partnership's real estate investments are provided by independent real estate management companies for fees calculated as a percentage of gross rents received from the properties. In addition, Affiliates of the General Partner provide property management and supervisory services for fees calculated as a percentage of gross rents received from each of the Partnership's properties.
The real estate business is highly competitive. The results of operations of the Partnership will depend upon the availability of suitable tenants, real estate market conditions and general economic conditions which may impact the success of these tenants. Properties owned by the Partnership frequently compete for tenants with similar properties owned by others.
As of March 1, 1997, there were 34 employees at the Partnership's properties for on-site property maintenance and administration.
ITEM 2.

ITEM 2. PROPERTIES (a)(b) - ------- -----------------
As of December 31, 1996, the Partnership owned directly or through a joint venture, the following four properties, which were owned in fee simple and were encumbered by mortgages. For complete details of the material terms of the encumbrances, refer to Note 5 of the Notes to Financial Statements.
a) For a discussion of significant operating results and major capital expenditures planned for the Partnership's properties refer to Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
b) For federal income tax purposes, the Partnership depreciates the portion of the acquisition costs of its properties allocable to real property (exclusive of land), and all improvements thereafter, over useful lives ranging from 19 years to 40 years, utilizing either the Accelerated Cost Recovery System ("ACRS") or straight-line method. The Partnership's portion of real estate taxes for Marquette Mall and Office Building ("Marquette"), Burlington Office Center I, II and III ("Burlington"), Prentice Plaza and Regency Park Shopping Center ("Regency") was $588,200, $434,000, $143,000 and $134,700, respectively, for the year ended December 31, 1996. In the opinion of the General Partner, the Partnership's properties are adequately insured and serviced by all necessary utilities.
c) Represents the total number of tenants as well as the number of tenants, in parenthesis, that individually occupy more than 10% of the net leasable square footage of the property.
d) The Partnership owns 70% preferred majority undivided interest in the joint venture which owns this property.
ITEM 2. PROPERTIES (Continued) - ------- ----------
The following table presents each of the Partnership's properties' occupancy rates as of December 31 for each of the last five years:
The amounts in the following table represent each of the Partnership's properties' average annual rental rate per square foot for each of the last five years ended December 31 and were computed by dividing each property's base rental revenues by its average occupied square footage:
ITEM 2. PROPERTIES (Continued) - ------- ----------
The following table summarizes the principal provisions of the leases for each of the tenants which occupy ten percent or more of the rentable square footage at each of the Partnership's properties:
a) The Partnership's share of per annum base rents for each of the tenants listed above for each of the years between 1997 and the final twelve months for each of the above leases is no lesser or greater than the amounts listed in the above table.
b) As of the date of this report the tenant has not exercised their option to renew.
ITEM 2. PROPERTIES (Continued) - ------- ----------
c) Space is sublet from Publix, who in turn sublet from Supervalue Inc. Pursuant to the lease, Supervalue Inc. is lessee. In addition, Books-a- Million, a retail book store, has sublet a portion of the Rhodes Furniture space through an agreement with Rhodes Furniture.
The amounts in the following table represent the Partnership's portion of income from leases in the year of expiration (assuming no lease renewals) through the year ended December 31, 2006.
a) Represents the amount of base rents to be collected each year on expiring leases.
b) Represents the amount of base rents to be collected each year on expiring leases as a percentage of the Partnership's portion of the total base rents to be collected on leases in effect as of December 31, 1996.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS - ------- -----------------
(a & b) The Partnership and its properties were not a party to, nor the subject of, any material pending legal proceedings, nor were any such proceedings terminated during the quarter ended December 31, 1996. Ordinary routine litigation incidental to the business which is not deemed material was pursued during the quarter ended December 31, 1996.
ITEM 4.

ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED SECURITY HOLDER MATTERS ----------------------------------------------------------------------
There has not been, nor is there expected to be, a public market for Units.
As of March 1, 1996, there were 4,950 Holders of Units.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
(a) Excludes deferred interest.
The following table includes a reconciliation of Cash Flow (as defined in the Partnership Agreement) to cash flow provided by operating activities as determined by generally accepted accounting principles ("GAAP"):
(a) Cash Flow is defined in the Partnership Agreement as Partnership revenues earned from operations (excluding tenant deposits and proceeds from the sale, disposition or financing of any Partnership properties or the refinancing of any Partnership indebtedness), minus all expenses incurred (including Operating Expenses, payments of principal (other than balloon payments of principal out of Offering proceeds) and interest on any Partnership indebtedness, and any reserves of revenues from operations deemed reasonably necessary by the General Partner), except depreciation and amortization expenses and capital expenditures and lease acquisition expenditures.
The above selected financial data should be read in conjunction with the financial statements and the related notes appearing on pages A-1 through A-9 in this report and the supplemental schedule on pages A-10 and A-11.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The ordinary business of the Partnership is expected to pass through its life cycle in three phases: (i) the Offering of Units and investment in properties; (ii) the operation of properties and (iii) the sale or other disposition of properties.
The Partnership commenced the Offering of Units on September 12, 1985 and began operations on December 3, 1985 after reaching the required minimum subscription level. On March 31, 1987, the Offering was Terminated upon the sale of 57,621 Units. From May 1986 to September 1989, the Partnership: 1) made one real property investment; 2) purchased 50% interests in four joint ventures which were each formed with Affiliated partnerships for the purpose of acquiring a 100% interest in certain real property; 3) purchased 50% interests in four separate joint ventures which were each formed with Affiliated partnerships for the purpose of acquiring a preferred majority interest in certain real property and 4) purchased a 70% preferred majority undivided interest in a joint venture with an unaffiliated third party that was formed for the purpose of acquiring certain real property.
One of the Partnership's objectives is to dispose of its properties when market conditions allow for the achievement of the maximum possible sales price. In 1993, the Partnership, in addition to being in the operation of properties phase, entered the disposition phase of its life cycle. During the disposition phase of the Partnership's life cycle, comparisons of operating results are complicated due to the timing and effect of property sales and dispositions. Components of the Partnership's operating results are generally expected to decline as real property interests are sold or disposed of since the Partnership no longer realizes income and incurs expenses from such real property interests. Through December 31, 1996 the Partnership, with its respective joint venture partner, has dissolved one joint venture with a 50% interest in real property and four joint ventures with 50% preferred majority interests in real property as a result of the sales of the real properties. In addition, the Partnership sold one 50% joint venture interest with an Affiliated partnership to that Affiliated partnership.
As disclosed in the Partnership's Annual Report for the year ended December 31, 1995, the Partnership was faced with significant financial obligations during 1996, including the maturity of two of its mortgage loans payable. In addition, future operating results were expected to be affected by industry issues of its tenants as well as unique matters related to certain of its individual properties. During 1996, the General Partner was successful in selling one of the two properties whose mortgage debt was maturing during 1996 and was able to extend the other maturing loan's maturity date to December 31, 1997. In addition, the Partnership has been able to maintain or increase occupancy levels and improve operating results at its properties. The Partnership is again faced with significant financial issues during 1997. In addition to market issues affecting its tenants, the Partnership's properties are at risk for potentially high tenant turnover, two mortgage loans mature in 1997 with no extension provision and substantial expenditures for capital and tenant improvements are projected.
OPERATIONS The table below is a recap of certain operating results of each of the Partnership's properties for the years ended December 31, 1996, 1995 and 1994. The discussion following the table should be read in conjunction with the Financial Statements and Notes thereto appearing in this report.
(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) Property net (loss) excludes (losses) from provisions for value impairment which were included in the Statements of Income and Expenses for the years ended December 31, 1995 and 1994 (see Note 10 of Notes to Financial Statements for additional information). (c) The joint venture which owned Sentry Park West Office Campus ("Sentry West"), in which the Partnership had a 50% interest, sold Sentry West on August 28, 1996. Property net income excludes a gain on sale of property of $816,100 which was recorded for the year ended December 31, 1996. The
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
large variance between 1996 income and 1995 (loss) is due to the property being classified as "Held for Disposition" during 1996, which precluded the recording of depreciation. For further information, see Note 10 of Notes to Financial Statements. (d) These properties were sold during 1994. The gains/losses realized on the sales of these properties are excluded from property net income (loss). For further information see Note 9 of Notes to the Financial Statements.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31, Net results for the Partnership changed from a (loss) of $(7,553,400) for the year ended December 31, 1995 to income of $241,900 for the year ended December 31, 1996. The change was primarily the result of provisions for value impairment totaling $5,600,000 recorded for the year ended December 31, 1995 and the gain of $816,100 recorded on the sale of Sentry West for the year ended December 31, 1996.
Net (loss), exclusive of the provisions for value impairment, gain on the sale of Sentry West and operations of Sentry West, improved by $783,100. The improvement was primarily due to improved operating results at all of the Partnership's properties with the most significant increases coming at Marquette Mall and Office Building ("Marquette"), Prentice Plaza and Regency Park Shopping Center ("Regency").
The following comparative discussion includes the results from the Partnership's four remaining property investments.
Rental revenues increased by $393,800 or 4.4% for the year ended December 31, 1996 when compared to the year ended December 31, 1995. The increase was primarily due to an increase in base rental income at Burlington Office Center I, II and III ("Burlington") which was the result of the increase in the average occupancy rate. Also contributing to the increase was increased tenant expense reimbursements and base rents at Prentice Plaza. Partially offsetting the increase was the 1996 absence at Prentice Plaza of a lease settlement.
Interest expense on the Partnership's mortgage loans decreased by $322,600 for the year ended December 31, 1996 when compared to the year ended December 31, 1995. The decrease was primarily due to a reduced interest rate on the mortgage loan collateralized by Regency and the lower average outstanding principal balance on the mortgage loans collateralizing Marquette and Regency. Marquette's outstanding principal balance was reduced by the application of the net sale proceeds from the sale of Sentry West.
Depreciation and amortization expense decreased by $147,900 for the years under comparison. The decrease was primarily due to the effects of provisions for value impairment recorded during the year ended December 31, 1995 which reduced the depreciable bases of Marquette, Burlington and Regency. In addition, the periodic depreciation and amortization expense for certain assets for which the depreciable and amortizable lives expired during 1996 exceeded the periodic depreciation and amortization expense for depreciable and amortizable assets placed in service during 1996.
Real estate tax expense increased by $138,300 for the year ended December 31, 1996 when compared to the year ended December 31, 1995. The increase was primarily due to a projected increase in the tax rate at Marquette. The increase was partially offset by the receipt in 1996 of a refund at Prentice Plaza which was the culmination of a successful appeal of the 1989 through 1994 tax years.
Property operating expenses decreased by $70,700 for the years under comparison. The decrease was primarily due to reduced professional fees and utility costs at Marquette, partially offset by an increase in professional fees and administrative salaries at Burlington, which was the result of the significant increase in occupancy.
Repairs and maintenance increased by $49,100 for the year ended December 31, 1996 when compared to the year ended December 31, 1995. The increase was primarily due to increases in janitorial expenses and the maintenance of the energy plant at Marquette. In addition, the increase was due to increases in janitorial and HVAC costs at Burlington. Partially offsetting the increase was a decrease in janitorial salaries at Marquette.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER 31, Net (loss) for the Partnership decreased from $(10,580,500) for the year ended December 31, 1994 to $(7,553,400) for the year ended December 31, 1995. The effects of the sales of certain Partnership properties during 1994 and provisions for value impairment recognized in 1994 and 1995 had a significant impact on the comparison of net (loss) for the year ended December 31, 1995 when compared to the year ended December 31, 1994. The Partnership recorded provisions for value impairment of $5,600,000 during 1995. During 1994, the Partnership recorded provisions for value impairment of $10,000,000 and sold the three remaining office buildings at Sentry East as well as Park Central. Properties sold during 1994 accounted for net income (including operating results and the net gain on sales of properties) of $160,700. For further information, see Notes 9 and 10 of Notes to Financial Statements.
Excluding the effects on net income of the properties sold and provisions for value impairment, net (loss) for the year ended December 31, 1995 decreased by $78,300 when compared to the year ended December 31, 1994. The decrease in net loss was primarily due to improved operating results at Regency, Marquette, Sentry West and Prentice Plaza as well as lower general and administrative expenses primarily due to lower fees for professional and data processing services. Partially offsetting the decrease in net loss was diminished operating results at Burlington and an increase in interest expense on the Partnership's Front-End Fees loan due to an increase in the variable interest rate and an increase in printing and mailing costs.
For purposes of the following comparative discussion, the operating results of Park Central and Sentry East have been excluded.
Rental revenues increased by $130,900 or 1% for the year ended December 31, 1995 when compared to the year ended December 31, 1994. The increase was primarily due to: 1) increases in the average occupancy rate at Sentry West, Regency and Prentice Plaza; 2) an increase in percentage rental income at Marquette resulting from higher tenant sales which determine the amount of percentage rents to be paid to the Partnership; 3) an increase in tenant expense reimbursements at Regency as a result of the increase in the average occupancy rate as well as the receipt in 1995 of tenant expense reimbursements related to 1994 and 4) an increase in tenant expense reimbursements at Sentry West
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
primarily as a result of the increase in the average occupancy rate. Partially offsetting the 1995 increase in rental revenues was: 1) lower rental revenues at Burlington due to a decrease in occupancy as a result of a major tenant exercising a cancellation clause in its lease and downsizing its leasable square footage from 19,700 square feet to 2,500 square feet, a decrease of 10% of the total leasable square footage of the property; 2) the receipt of lease termination fees in 1994 from two tenants at Marquette; 3) lower tenant expense reimbursements as a result of a refund to tenants in 1995 of previously billed 1994 expense reimbursements at Marquette and Prentice Plaza as well as additional 1993 expense reimbursements received in 1994 at Marquette and 4) lower percentage rental income at Regency.
Depreciation and amortization expense decreased by $188,100 for the years under comparison. The decrease was primarily due to the reduction in expense as a result of the effects of provisions for value impairment recorded for several Partnership properties for the year ended December 31, 1994. In addition, the periodic depreciation and amortization expense for certain assets for which the depreciable and amortizable lives expired during 1995 exceeded the period depreciation and amortization expense for depreciable and amortizable assets placed in service during 1995.
Real estate tax expense decreased by $82,900 for the year ended December 31, 1995 when compared to 1994. The decrease was primarily due to a decrease at Marquette as a result of an overestimate of the 1994 tax liability paid in 1995 as well as a decrease in the 1995 projected liability payable in 1996 and a lower expense at Burlington as a result of the Partnership's successful protest in 1993 which resulted in reduced billings in subsequent periods. Partially offsetting the decrease was an increase in real estate tax expense at Prentice Plaza as a result of an increase in the assessed valuation of the property for real estate tax purposes.
Interest expense on the Partnership's mortgage loans increased by $256,100 for the year ended December 31, 1995 when compared to the year ended December 31, 1994. The increase was primarily due to increases in the principal balance and variable interest rate on the junior mortgage loan collateralized by Marquette as well as an increase in the variable interest rate on the mortgage loan collateralized by Sentry West.
Property operating expense increased by $42,300 for the year ended December 31, 1995 when compared to the year ended December 31, 1994. The increase was primarily due to: 1) increases in property management fees at Prentice Plaza, Sentry West and Regency as a result of the increases in rental revenues which is a factor in determining the amount of such fees; 2) an increase in advertising and promotional fees, security costs and training and development costs at Marquette; 3) an increase in professional service fees at Prentice Plaza, Burlington, Sentry West and Regency and 4) increased utility costs at Sentry West. Partially offsetting the increase in property operating expense was: 1) lower utility costs at Burlington and Marquette; 2) lower professional service fees as well as management and leasing fees at Marquette and 3) lower advertising and promotional fees at Regency.
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.
The rate of inflation has remained relatively stable during the years under comparison and has had a minimal impact on the operating results of the Partnership. The nature of various tenant lease clauses protects the Partnership, to some extent, from increases in the rate of inflation. Certain of the lease clauses provide for the following: (1) annual rent increases based on the Consumer Price Index or graduated rental increases; (2) percentage rentals at shopping centers, for which the Partnership receives as additional rent a percentage of a tenant's sales over predetermined amounts and (3) total or partial tenant reimbursement of property operating expenses (e.g., common area maintenance, real estate taxes, etc.).
LIQUIDITY AND CAPITAL RESOURCES One of the Partnership's objectives is to dispose of its properties when market conditions allow for the achievement of the maximum possible sales price. In the interim, the Partnership continues to manage and maintain its properties. Cash Flow (as defined in the Partnership Agreement) is generally not equal to Partnership net income (loss) or cash flows as defined by GAAP, since certain items are treated differently under the Partnership Agreement than under GAAP. The General Partner 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/(loss) or cash flows as defined by GAAP. The second table in Selected Financial Data includes a reconciliation of Cash Flow (as defined in the Partnership Agreement) to cash flows provided by operating activities as determined by GAAP. Such amounts are not indicative of actual distributions to Partners and should not necessarily be considered as an alternative to the results disclosed in the Statements of Income and Expenses and Statements of Cash Flows.
The increase in Cash Flow (as defined in the Partnership Agreement) of $393,900 for the year ended December 31, 1996 when compared to the year ended December 31, 1995 was primarily due to the change in net income, as previously discussed, exclusive of depreciation, amortization, provisions for value impairment and the gain on the sale of property. Partially offsetting the increase was an increase in regularly scheduled principal payments made on the Partnership's mortgage loans.
The increase of $41,300 in the Partnership's cash position for the year ended December 31, 1996 was primarily the result of net cash provided by operating activities exceeding payments for capital and tenant improvements, leasing costs and principal amortization. The liquid assets of the Partnership as of December 31, 1996 were comprised of amounts held for working capital purposes.
Net cash provided by operating activities increased by $874,100 for the year ended December 31, 1996 when
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
compared to the year ended December 31, 1995. The increase was primarily the result of the increase in net income, as previously discussed, along with the timing of the liquidation of current assets at Burlington and the payment of certain operating expenses at Regency.
Net cash (used for) provided by investing activities changed from $(1,227,500) for the year ended December 31, 1995 to $4,810,400 for the year ended December 31, 1996. The change was primarily due to proceeds received in 1996 from the sale of Sentry West and a decrease in 1996 in the cash used for capital and tenant improvements 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 year ended December 31, 1996, the Partnership spent $875,900 for building and tenant improvements and leasing costs and has budgeted to spend approximately $1,465,000 during 1997. 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 1997 budgeted amount are capital and tenant improvements and leasing costs of approximately $650,000 at Burlington and $535,000 at Marquette. As of December 31, 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, which was paid by the Partnership 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.
On August 28, 1996, the joint venture which owned Sentry West, in which the Partnership had a 50% interest, consummated the sale of Sentry West for a price of $11,650,000. The Partnership's share of the proceeds from this transaction, net of closing prorations, selling expenses and the repayment of the mortgage loan collateralized by Sentry West was approximately $894,500. Pursuant to an amended agreement with the junior mortgage lender for Marquette, which was also the mortgage lender for Sentry West, the Partnership's entire share of the net proceeds from this sale was used to paydown the principal balance of the junior mortgage loan collateralized by Marquette.
Net cash provided by (used for) financing activities changed from $712,600 for the year ended December 31, 1995 to $(5,877,100) for the year ended December 31, 1996. The change was primarily due to the repayment of the Sentry West mortgage loan and the paydown of the Marquette loan, both in conjunction with the sale of Sentry West (see Notes 5 and 9 of Notes to Financial Statements) and the absence of net proceeds received in 1995 on the refinanced mortgage loans collateralized by Marquette and Prentice Plaza. Partially offsetting the change was the 1996 deferral of interest payments on the Partnership's Front- End Fees loan, which the Partnership elected to begin deferring starting with the January 1, 1996 interest payment.
Pursuant to a modification of the Partnership's Front-End Fees loan agreement with an Affiliate of the General Partner, 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 this 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 March 1, 1996, the two senior mortgage loans collateralized by Marquette Mall and Office Building 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, effective January 1, 1996. 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 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 9 of Notes to Financial Statements) to reduce the outstanding principal balance on the junior mortgage loan; 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 and 6) to the extent that proceeds from the sale of Sentry West utilized to reduce this loan exceeded $700,000, a deferral of the monthly principal amortization payments. Terms of the existing loan include a prohibition on distributions to Limited Partners and a guarantee of repayment by the Partnership. As a result of a principal paydown of $894,500 from the proceeds from the sale of Sentry West, the Partnership is not obligated to pay the $30,000 monthly principal for a period of six months, beginning September 1, 1996.
In August 1996, the joint venture which owns Regency, in which the Partnership owns a 50% interest with Affiliated partnerships, executed an agreement with the mortgage lender to modify the terms of its mortgage loan. Significant terms of this agreement, which are retroactive to January 1, 1996, include: 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 agreement), if any, after deducting scheduled principal and interest payments, approved capital and tenant improvements and leasing commissions, is 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.
As of December 31, 1996, 26 of the 33 tenants at Prentice Plaza and 28 of the 40 tenants at Burlington, have leases
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONCLUDED)
totaling 233,019 square feet, that expire in the next three years. The Partnership's share of total base rental revenues projected to be collected from these tenants for the year ending December 31, 1997 is $2,279,400. Notwithstanding the market rental rates that may be in effect at the time that these leases mature, the Partnership faces a significant amount of uncertainty with respect to the occupancy at its properties during 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 and rental revenues at its properties.
The Partnership has significant financial obligations during the year ending December 31, 1997. As disclosed in Note 5 of Notes to Financial Statements, payments due on the mortgage loans collateralized by the Partnership's properties are substantial. The mortgage loan collateralized by Burlington matures in 1997. While the General partner is currently negotiating to refinance the mortgage note, there can be no assurance that such efforts will be successful. Failure to secure a replacement mortgage could result in the current lender foreclosing on the property through default of the terms of the mortgage note. Also maturing in 1997 is the mortgage loan collateralized by Regency. The General Partner is currently attempting to sell the property. There can be no assurance that the General Partner will succeed in this effort. Failure to sell the property could result in the loss of the property through foreclosure. In connection with the potential replacement of tenants together with ongoing required maintenance of the Partnership's properties, the Partnership anticipates incurring substantial capital, tenant improvement and leasing costs during 1997. Net cash provided by operating activities will not be sufficient to meet the above debt and capital expenditure requirements for the year ending December 31, 1997. As a result of this issue together with the restriction on distributions to Limited Partners in the junior loan collateralized by Marquette, 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. For the year ended December 31, 1996, Cash Flow (as defined in the Partnership Agreement) of $152,200 was retained to supplement working capital reserves. The General Partner continues to review other sources of cash available to the Partnership, which includes the sale of Regency and sale or refinancing of the Partnership's other properties. There can be no assurance as to the timing or successful completion of any future transactions, including the refinancing of Burlington and sale of Regency. The Partnership may have inadequate liquidity to meet its mortgage loan obligations, which could result in the foreclosure of one or Burlington and Regency. 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 substantially less than such Limited Partners' original Capital Investment.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------- --------------------------------------------------------------- RESULTS OF OPERATIONS (Continued) ---------------------
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- -------------------------------------------
The response to this item is submitted as a separate section of this report. See page A-1 "Index of Financial Statements, Schedule and Exhibits."
ITEM 9.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------- --------------------------------------------------
(a) DIRECTORS ---------
The Partnership has no directors. First Capital Financial Corporation ("FCFC") is the General Partner. The Directors of FCFC, as of March 28, 1997, are shown in the table below. Directors serve for one year or until their successors are elected. The next annual meeting of FCFC will be held in June 1997.
Name Office ---- ------
Samuel Zell.......................................Chairman of the Board Douglas Crocker II................................Director Sheli Z. Rosenberg................................Director
Samuel Zell, 55, has been a Director of the General Partner since 1983 (Chairman of the Board since December 1985) and is Chairman of the Board of Equity Financial and Management Company ("EFMC") and Equity Group Investments, Inc. ("EGI"), and is a trustee and beneficiary of a general partner of Equity Holdings Limited, an Illinois Limited Partnership, a privately owned investment partnership. He is also Chairman of the Board of Directors of Anixter International Inc., American Classic Voyages Co. and Manufactured Home Communities Inc. ("MHC"). He is Chairman of the Board of Trustees of Equity Residential Properties Trust. He is a Director of Chart House Enterprises, Inc., Ramco Energy plc, TeleTech Holdings Inc., Quality Food Centers, Inc. ("QFC") and Sealy Corporation. He is Chairman of the Board of Directors and Chief Executive Officer of Capsure Holdings Corp. and Co-Chairman of the Board of Revco D.S., Inc.
Douglas Crocker II, 56, has been President and Chief Executive Officer since December 1992 and a Director since January 1993 of the General Partner. Mr. Crocker has been an Executive Vice President of EFMC since November 1992. Mr. Crocker has been President, Chief Executive Officer and trustee of Equity Residential Properties Trust since March 31, 1993. He was President of Republic Savings Bank, F.S.B. ("Republic") from 1989 to June 1992 at which time the Resolution Trust Company took control of Republic. Mr. Crocker is a member of the Board of Directors of Horizon Group, Inc.
Sheli Z. Rosenberg, 55, was President and Chief Executive Officer of the General Partner from December 1990 to December 1992 and has been a Director of the General Partner since September 1983; was Executive Vice President and General Counsel for EFMC from October 1980 to November 1994; has been President and Chief Executive Officer of EFMC and EGI since November 1994; has been a Director of Great American Management and Investment Inc. ("Great American") since June 1984 and is a Director of various subsidiaries of Great American. She is also a Director of Anixter International Inc., Capsure Holdings Corp., American Classic Voyages Co., Jacor Communications, Inc., Revco D.S., Inc., Sealy Corporation, QFC and MHC. She is also a trustee of Equity Residential Properties Trust. Ms. Rosenberg is a Principal of Rosenberg & Liebentritt, P.C., counsel to the Partnership, the General Partner and certain of their Affiliates. She had been Vice President of First Capital Benefit Administrators, Inc. ("Benefit Administrators") since July 22, 1987 until its liquidation in November 1995. Benefit Administrators filed for protection under the Federal bankruptcy laws on January 3, 1995.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT--Continued - -------- -------------------------------------------------------------
(b,c & e) EXECUTIVE OFFICERS ------------------
The Partnership does not have any executive officers. The executive officers of the General Partner as of March 28, 1997 are shown in the table. All officers are elected to serve for one year or until their successors are elected and qualified.
Name Office ---- ------
Douglas Crocker II....................President and Chief Executive Officer Gus J. Athas..........................Senior Vice President Norman M. Field.......................Vice President - Finance and Treasurer
PRESIDENT AND CEO - See Table of Directors above.
Gus J. Athas, 60, has been Senior Vice President of the General Partner since March 1995. Mr. Athas has served as Senior Vice President, General Counsel and Assistant Secretary of Great American since March 1995. Mr. Athas has served as Senior Vice President, General Counsel and Secretary of Falcon Building Products, Inc. since March 1994 and served as Vice President and Secretary from January 1994 to March 1994. Mr. Athas served as Senior Vice President, General Counsel and Secretary of Eagle Industries, Inc. ("Eagle") since May 1993. From September 1992 to May 1993, Mr. Athas was Vice President, General Counsel and Secretary of Eagle. From November 1987 to September 1992, Mr. Athas served as Vice President, General Counsel and Assistant Secretary of Eagle.
Norman M. Field, 48, has been Vice President of Finance and Treasurer of the General Partner since February 1984, and also served as Vice President and Treasurer of Great American from July 1983 until March 1995. Mr. Field had been Treasurer of Benefit Administrators since July 22, 1987 until its liquidation in November 1995. Benefit Administrators filed for protection under the Federal bankruptcy laws on January 3, 1995. He was Chief Financial Officer of Equality Specialties, Inc. ("Equality"), a subsidiary of Great American, from August 1994 to April 1995. Equality was sold in April 1995.
(d) FAMILY RELATIONSHIPS --------------------
There are no family relationships among any of the foregoing directors and officers.
(f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS ----------------------------------------
With the exception of the bankruptcy matter disclosed under Items 10 (a), (b), (c) and (e), there are no involvements in certain legal proceedings among any of the foregoing directors and officers.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION - -------------------------------
(a,b,c & d) As stated in Item 10, the Partnership has no officers or directors. Neither the General Partner, nor any director or officer of the General Partner, received any direct remuneration from the Partnership during the year ended December 31, 1996. However, the General Partner and its Affiliates do compensate its directors and officers. For additional information see Item 13 (a) Certain Relationships and Related Transactions.
(e) None.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- --------------------------------------------------------------
(a) As of March 1, 1997, no person of record owned or was known by the Partnership to own beneficially more than 5% of the Partnership's 57,621 Units then outstanding.
(b) The Partnership has no directors or executive officers. As of March 1, 1997, the executive officers and directors of the General Partner, as a group, did not own any Units.
(c) None.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ----------------------------------------------
(a) Affiliates of the General Partner, provide leasing, property management and supervisory services to the Partnership. Compensation to the General Partner, its Affiliates and all other parties for property management services may not exceed the lesser of the compensation customarily charged in arm's-length transactions in the same geographic area and for a comparable property or 6% of the gross receipts from the property being managed where the General Partner or Affiliate provides leasing, re-leasing and leasing related services, or 3% of gross receipts where the General Partner or Affiliate does not perform leasing, re-leasing and leasing related services and, in that event, may pay an unaffiliated party for leasing services to the Partnership in an amount not to exceed the compensation customarily charged in arm's-length transactions by persons rendering similar services as an ongoing public entity in the same geographic location for a comparable property. During the year ended December 31, 1996, these Affiliates were entitled to leasing fees and property management and supervisory fees of $506,800. In addition, other Affiliates of the General Partner were entitled to fees and compensation of $172,300 for insurance, personnel and other services. As of December 31, 1996, $55,000 of the these fees and reimbursements due to Affiliates were unpaid. Services provided by Affiliates are on terms which are fair, reasonable and no less favorable to the Partnership than reasonably could be obtained from unaffiliated persons.
For the year ended December 31, 1996 an Affiliate of the General Partner was entitled to interest on the Partnership's Front-End Fees loan in the amount of $626,700. In accordance with the Partnership Agreement, neither the General Partner nor its Affiliates shall lend money to the Partnership with interest rates and other finance charges and fees in excess of the lesser of the amounts that are charged by unrelated lending institutions on comparable loans for the same purpose in the same locality or 2% above the prime rate of interest charged by Chase Manhattan Bank.
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 72-month period beginning January 1, 1993. All deferred amounts (including accrued interest thereon) shall be due and payable on January 1, 1999, and shall not be subordinated to repayment to the Limited Partners of their original Capital Contributions. Beginning with the interest payment due on January 1, 1996, the
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued) - -------- ----------------------------------------------
Partnership elected to defer payment of interest. As of December 31, 1996, $683,600 of deferred interest was due to an Affiliate.
In accordance with the Partnership Agreement, Net Profits and Net Losses (exclusive of Net Profits and Net Losses from the sale, disposition or provision for value impairment of Partnership properties) shall be allocated 1% to the General Partner and 99% to the Limited Partners. Net Profits from the sale or disposition of a Partnership property are allocated: first, prior to giving effect to any distributions of Sale or Refinancing Proceeds from the transaction, to the General Partner and Limited Partners with negative balances in their Capital Accounts, pro rata in proportion to such respective negative balances, to the extent of the total of such negative balances; second, to each Limited Partner in an amount, if any, necessary to make the positive balance in its Capital Account equal to the Sale or Refinancing Proceeds to be distributed to such Limited Partner with respect to the sale or disposition of such property; third, to the General Partner in an amount, if any, necessary to make the positive balance in its Capital Account equal to the Sale or Refinancing Proceeds to be distributed to the General Partner with respect to the sale or disposition of such property; and fourth, the balance, if any, 25% to the General Partner and 75% to the Limited Partners. Net Losses from the sale, disposition or provision for value impairment of Partnership properties are allocated: first, after giving effect to any distributions of Sale or Refinancing Proceeds from the transaction, to the General Partner and Limited Partners with positive balances in their Capital Accounts, pro rata in proportion to such respective positive balances, to the extent of the total amount of such positive balances; and second, the balance, if any, 1% to the General Partner and 99% to the Limited Partners. Notwithstanding anything to the contrary, there shall be allocated to the General Partner not less than 1% of all items of Partnership income, gain, loss, deduction and credit during the existence of the Partnership. For the year ended December 31, 1996, the General Partner was allocated Net Profits of $241,900 which included a gain on the sale of property of $816,100.
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 year ended December 31, 1996, the Partnership's share of ANTEC's rent was $293,400. The per square foot rent paid by ANTEC is comparable to that paid by other tenants at Prentice Plaza.
Manufactured Homes Communities Inc. ("MHC") a real estate investment trust which is in the business of owning and operating mobil home communities, an Affiliate of the General Partner, is obligated to the Partnership under a lease of office space at Prentice Plaza. During the year ended December 31, 1996, the Partnership's share of MHC's rent was $29,800. The per square foot rent paid by MHC is comparable to that paid by other tenants at Prentice Plaza.
(b) Rosenberg & Liebentritt, P.C. ("Rosenberg"), serves as legal counsel to the Partnership, the General Partner and certain of their Affiliates. Sheli Z. Rosenberg, President and Chief Executive Officer of the General Partner from December 1990 to December 1992 and a director of the General Partner since December 1983, is a Principal of Rosenberg. For the year ended December 31, 1996, Rosenberg was entitled to $132,000 for legal fees from the Partnership. As of December 31, 1996, $7,000 was due to Rosenberg. Compensation for these services are on terms which are fair, reasonable and no less favorable to the Partnership than reasonably could be obtained from unaffiliated parties.
(c) No management person is indebted to the Partnership.
(d) None.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------- ----------------------------------------------------------------
(a,c & d) See Index of Financial Statements, Schedule and Exhibits on page A-1 of Form 10-K.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the quarter ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST CAPITAL INCOME PROPERTIES, LTD. - SERIES XI
BY: FIRST CAPITAL FINANCIAL CORPORATION GENERAL PARTNER
Dated: March 28, 1997 By: /s/ DOUGLAS CROCKER II -------------- -------------------------------------------- DOUGLAS CROCKER II President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
INDEX OF FINANCIAL STATEMENTS, SCHEDULE AND EXHIBITS
FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT
All other schedules have been omitted as inapplicable, or for the reason that the required information is shown in the financial statements or notes thereto.
EXHIBITS FILED AS PART OF THIS REPORT
EXHIBITS (3 & 4) First Amended and Restated Certificate and Agreement of Limited Partnership as set forth on pages A-1 through A-34 of the Partnership's definitive Prospectus dated September 12, 1985; Registration Statement No. 2- 98749, filed pursuant to Rule 424 (b), is incorporated herein by reference.
EXHIBIT (10) Material Contracts - ------------
Lease agreement for a tenant at Burlington Office Park I, II & III, one of the Partnership's most significant properties. The revenues from this lease for 1997, exceed 10% of Burlington's 1997 budgeted rental revenues.
Real Estate Sale Agreement for the sale of the Partnership's investment in Sentry Park West Office Campus filed as an exhibit to the Partnership's Report on Form 8-K dated August 28, 1996 is incorporated herein by reference
EXHIBIT (13) Annual Report to Security Holders - ------------
The 1995 Annual Report to Limited Partners is being sent under separate cover, not as a filed document and not via EDGAR, for the information of the Commission.
EXHIBIT (27) Financial Data Schedule - ------------
A-1
REPORT OF INDEPENDENT AUDITORS
Partners First Capital Income Properties, Ltd. - Series XI Chicago, Illinois
We have audited the accompanying balance sheets of First Capital Income Properties, Ltd. - Series XI as of December 31, 1996 and 1995, and the related statements of income and expenses, partners' capital and cash flows for each of the three years in the period ended December 31, 1996, and the financial statement schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of First Capital Income Properties, Ltd. - Series XI at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Chicago, Illinois March 14, 1997
A-2
FIRST CAPITAL INCOME PROPERTIES, LTD.--SERIES XI BALANCE SHEETS December 31, 1996 and 1995 (All dollars rounded to nearest 00s)
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT) For the years ended December 31, 1996, 1995 and 1994 (All dollars rounded to nearest 00s)
The accompanying notes are an integral part of the financial statements.
FIRST CAPITAL INCOME PROPERTIES, LTD.--SERIES XI STATEMENTS OF INCOME AND EXPENSES For the years ended December 31, 1996, 1995 and 1994 (All dollars rounded to nearest 00s except per Unit amounts)
STATEMENTS OF CASH FLOWS For the years ended December 31, 1996, 1995 and 1994 (All dollars rounded to nearest 00s)
The accompanying notes are an integral part of the financial statements.
A-4
FIRST CAPITAL INCOME PROPERTIES, LTD.--SERIES XI NOTES TO FINANCIAL STATEMENTS December 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DEFINITION OF SPECIAL TERMS: Capitalized terms used in this report have the same meaning as those terms have in the Partnership's Registration Statement filed with the Securities and Exchange Commission on Form S-11. Definitions of these terms are contained in Article III of the First Amended and Restated Certificate and Agreement of Limited Partnership, which is included in the Registration Statement and incorporated herein by reference.
ORGANIZATION: The Partnership was formed on May 24, 1985, by the filing of a Certificate and Agreement of Limited Partnership with the Recorder of Deeds of Cook County, Illinois, and commenced the Offering of Units on September 12, 1985. The Certificate and Agreement, as amended and restated, authorized the sale to the public of 50,000 Units (with the General Partner's option to increase to 100,000 Units) and not less than 1,400 Units pursuant to the Prospectus. On December 3, 1985, the required minimum subscription level was reached and the Partnership's operations commenced. The General Partner exercised its option to increase the Offering to 100,000 Units and the Partnership Agreement was subsequently amended to extend the Offering until March 31, 1987, through which date 57,621 Units had been sold. The Partnership was formed to invest primarily in existing, improved, income-producing commercial real estate.
The Partnership Agreement provides that the Partnership will be dissolved on or before December 31, 2015. The Limited Partners, by a majority vote, may dissolve the Partnership at any time.
ACCOUNTING POLICIES: The financial statements have been prepared in accordance with 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 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 joint 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 ("Burlington"). This joint venture is operated under the control of the General Partner. The Partnership has included 100% of the venture's revenues, expenses, assets, liabilities and Partner's capital in the financial statements.
The Partnership is not liable for federal income taxes as the Partners recognize their proportionate share of the Partnership income or loss in their income tax returns; therefore, no provision for income taxes is made in the financial statements of the Partnership. In addition, it is not practicable for the Partnership to determine the aggregate tax bases of the individual Partners; therefore, the disclosure of the differences between the tax bases and the reported assets and liabilities of the Partnership would not be meaningful.
Commercial rental properties held for investment are recorded at cost, net of any provisions for value impairment, and depreciated (exclusive of amounts allocated to land) on the straight-line method over their estimated useful lives. Upon classifying a commercial rental property as held for disposition, no further depreciation or amortization of such property is provided for in the financial statements. Lease acquisition fees are recorded at cost and amortized over the life of each respective lease. Repair and maintenance expenditures are expensed as incurred; expenditures for improvements are capitalized and depreciated over the estimated life of such improvements.
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 is impaired, and if so, how impairment losses should be measured and reported in the financial statements. Management is not aware of any indicator that would result in any significant impairment loss. The Standard also addressed the accounting for long-lived assets that are expected to be disposed of. Evaluation of the potential impairment of the value of the Partnership's assets is performed on an individual property basis.
Loan acquisition costs are amortized over the term of the mortgage loan made in connection with the acquisition of Partnership properties or refinancing of Partnership loans. When a property is disposed of or a loan is refinanced, the related loan acquisition costs and accumulated amortization are removed from the respective accounts and any unamortized balance is charged to expense.
Property sales are recorded when title transfers and sufficient consideration has been received by the Partnership. Upon disposition, the related costs and accumulated depreciation and amortization are removed from the respective accounts. Any gain on sale is recognized in accordance with GAAP.
Cash equivalents are considered all highly liquid investments with a maturity of three months or less when purchased.
A-5
FIRST CAPITAL INCOME PROPERTIES, LTD.--SERIES XI
The Partnership's financial statements include financial instruments, including receivables, trade liabilities and mortgage debt. The Partnership considers the disclosure of the fair value of its mortgage debt to be impracticable due to the general illiquid nature of the real estate financing market and an inability to obtain comparable financing on certain properties. The fair value of all other financial instruments, including cash and cash equivalents, was not materially different from their carrying value at December 31, 1996 and 1995.
Certain reclassifications have been made to the previously reported 1995 and 1994 statements in order to provide comparability with the 1996 statements. These reclassifications had no effect on net income (loss) or Partners' capital (deficit).
2. RELATED PARTY TRANSACTIONS:
In accordance with the Partnership Agreement, Net Profits and Net Losses (exclusive of Net Profits and Net Losses from the sale, disposition or provision for value impairment of Partnership properties) shall be allocated 1% to the General Partner and 99% to the Limited Partners. Net Profits from the sale or disposition of a Partnership property are allocated: first, prior to giving effect to any distributions of Sale or Refinancing Proceeds from the transaction, to the General Partner and Limited Partners with negative balances in their Capital Accounts, pro rata in proportion to such respective negative balances, to the extent of the total of such negative balances; second, to each Limited Partner in an amount, if any, necessary to make the positive balance in its Capital Account equal to the Sale or Refinancing Proceeds to be distributed to such Limited Partner with respect to the sale or disposition of such property; third, to the General Partner in an amount, if any, necessary to make the positive balance in its Capital Account equal to the Sale or Refinancing Proceeds to be distributed to the General Partner with respect to the sale or disposition of such property; and fourth, the balance, if any, 25% to the General Partner and 75% to the Limited Partners. Net Losses from the sale, disposition or provision for value impairment of Partnership properties are allocated: first, after giving effect to any distributions of Sale or Refinancing Proceeds from the transaction, to the General Partner and Limited Partners with positive balances in their Capital Accounts, pro rata in proportion to such respective positive balances, to the extent of the total amount of such positive balances; and second, the balance, if any, 1% to the General Partner and 99% to the Limited Partners. Notwithstanding anything to the contrary, there shall be allocated to the General Partner not less than 1% of all items of Partnership income, gain, loss, deduction and credit during the existence of the Partnership. For the year ended December 31, 1996, the General Partner was allocated Net Profits of $241,900 which included Net Profits from sale of property of $816,100. For the year ended December 31, 1995, the General Partner was allocated a Net (Loss) of $(2,223,200), which included a (loss) from provisions for value impairment of $(2,203,700). For the year December 31, 1994, the General Partner was allocated a Net (Loss) of $(105,800), which included a Net Profit from the sale of a Partnership property of $2,900, a Net (Loss) from the sale of Partnership properties of $(1,000) and (loss) from provisions for value impairment of $(87,200). The allocations to the General Partner and Limited Partners for the years ended December 31, 1996 and 1995 are computed on a basis that is different than in prior periods. Allocations of losses to Limited Partners were limited to an amount that would result in Limited Partners capital amounting to not less than zero.
Fees and reimbursements paid and payable by the Partnership to Affiliates were as follows:
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 years ended December 31, 1996, 1995 and 1994, the Partnership's share of ANTEC's rent was $293,400, $189,100 and $194,100 (which excludes $93,200 in reimbursements from ANTEC for tenant improvements), respectively. The per square foot rent paid by ANTEC is comparable to that paid by other tenants at Prentice Plaza.
Manufactured Home Communities, Inc. ("MHC"), a real estate investment trust, which is in the business of owning and operating mobil home communities, an Affiliate of the General Partner, is obligated to the Partnership under a lease of office space at Prentice Plaza. During the years ended December 31, 1996, 1995 and 1994, the Partnership's share of MHC's rent was $29,800, $22,100 and $9,900, respectively. The per square foot rent paid by MHC is comparable to that paid by other tenants at Prentice Plaza.
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.
A-6
FIRST CAPITAL INCOME PROPERTIES, LTD.--SERIES XI
3. FRONT-END FEES LOAN PAYABLE TO AFFILIATE:
The Partnership originally 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 December 31, 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 year ended December 31, 1996 was 7.43%. As of December 31, 1996, the interest rate was 7.56%.
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 elected to defer payment of interest. During the year ended December 31, 1996, this loan was transferred to another Affiliate of the General Partner. As of December 31, 1996, the amount of interest deferred pursuant to this modification was $683,600.
4. RESTRICTED ESCROW DEPOSITS:
Restricted escrow deposits at December 31, 1995 included $159,400, of which the Partnership's share was 50%, being held by the mortgage holder of Regency in a non-interest bearing escrow account as collateral for its mortgage loan. In connection with a 1996 modification of the loan, the balance in this escrow account was applied to the principal balance of the loan, effective January 1, 1996.
5. MORTGAGE LOANS PAYABLE:
Mortgage loans payable at December 31, 1996 and 1995 consisted of the following loans which are non-recourse unless otherwise noted:
(a) The average interest rate represents an average for the year ended December 31, 1996. Interest rates are subject to change in accordance with the provisions of the loan agreements on Marquette's junior mortgage loan and Prentice Plaza's mortgage loan. As of December 31, 1996, interest rates on the Marquette junior mortgage and the Prentice Plaza loan were 8.03% and 7.50%, respectively. (b) Represents level monthly principal and interest payments, paid in arrears, except as otherwise noted. (c) This repayment will require either sale or refinancing of the respective property. (d) As of March 1, 1996, the two senior mortgage loans collateralized by Marquette Mall and Office Building, individually, were amended. The terms of the amendment to the mortgage loan collaterialized 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 collaterialized 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. (e) On March 29, 1996, the Partnership executed an amendment to the agreement which modified and amended the junior mortgage loan collaterialized by Marquette. Significant 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 owned Sentry Park West Office Campus ("Sentry West"), in which the Partnership has a 50% interest, on the sale of Sentry West to reduce the outstanding principal balance on the junior mortgage loan; 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 and 6) to the extent that proceeds from the sale of Sentry West utilized to reduce this loan exceed $700,000, a deferral of the monthly principal amortization payments. Terms of the existing agreement include a maturity date of September 30, 1997, a prohibition on distributions to Partners of the Partnership and a guarantee of repayment by the Partnership. As a result of a principal paydown of $894,500 from the
A-7
FIRST CAPITAL INCOME PROPERTIES, LTD.--SERIES XI proceeds from the sale of Sentry West, the Partnership is not obligated to pay the $30,000 monthly principal for a period of six months, beginning September 1, 1996. (f) In August 1996, the joint venture which owns Regency, in which the Partnership has a 50% interest with Affiliated partnerships, executed an agreement (the "Extension") with the mortgage lender to modify the terms of this mortgage loan. Significant terms of the Extension, which are retroactive to January 1, 1996, include: 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 Extension), if any, after deducting scheduled principal and interest payments, approved capital and tenant improvements and leasing commissions, is 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. In connection with the execution of the extension, the $79,700 which was being held by the lender as collateral, referred to in Note 4, was utilized by the lender to reduce the principal balance of the mortgage effective January 1, 1996. (g) In addition to monthly interest, monthly principal payments are $3,070 starting February 1, 1996 and increasing to $3,343, $3,638, $3,960 and $4,305 on January 1 of each subsequent year from 1997 through 2000, respectively. (h) This property was sold and the mortgage loan was fully repaid on August 28, 1996 (see Note 9 for additional information).
Principal amortization of mortgage loans payable for each of the next five years and thereafter as of December 31, 1996 was as follows:
6. FUTURE MINIMUM RENTS:
The Partnership's share of future minimum rental income due on noncancelable leases as of December 31, 1996 was as follows:
The Partnership is subject to the usual business risks associated with the collection of the above-scheduled rentals. In addition to the amounts scheduled above, the Partnership expects to receive rental revenue from (i) operating expense and real estate tax reimbursements, (ii) parking income and (iii) percentage rents. Percentage rents earned for the years ended December 31, 1996, 1995 and 1994 were $245,100, $239,500 and $189,500, respectively.
7. INCOME TAX:
The Partnership utilized the accrual basis of accounting for both income tax reporting and financial statement purposes. Financial statement results will differ from income tax results due to the use of differing depreciation lives and methods, the recognition of rents received in advance as taxable income and the Partnership's provisions for value impairment. The net effect of these accounting differences for the year ended December 31, 1996 was that the results for income tax reporting purposes was a loss of $5,966,200 and the net income for financial statement purposes was $241,900. The aggregate cost of commercial rental properties for federal income tax purposes at December 31, 1996 was $67,809,500.
8. DISTRIBUTIONS:
Commencing with the quarter ended September 30, 1990, cash distributions to Limited Partners were suspended and no further distributions will be made until such time as the Partnership's cash position is increased to a level that is expected to be sufficient to meet all of the anticipated capital expenditures, debt repayments, including the loan agreements restricting distributions (see Note 5), and other working capital requirements.
9. PROPERTY SALES:
On August 28, 1996, the joint venture which owned Sentry West consummated the sale of Sentry West for a price of $11,650,000. The Partnership's 50% share of the proceeds from this transaction, which was net of closing prorations, selling expenses and the repayment of the mortgage loan for Sentry West was approximately $894,500. Pursuant to a letter agreement with the junior mortgage lender for Marquette, the Partnership's entire share of the net proceeds from this sale was used to paydown the principal balance of the junior mortgage loan collateralized by Marquette. The net gain reported by the Partnership for financial statement purposes was $816,100. For income tax reporting purposes the Partnership will report a net (loss) of $(4,758,200) for the year ended December 31, 1996 in connection with this sale. Provisions for value impairment during prior periods reported cumulatively amounted to $5,000,000.
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FIRST CAPITAL INCOME PROPERTIES, LTD.--SERIES XI
On June 29, 1994, the joint ventures which owned Park Central Office Park I, II and III ("Park Central"), located in Greenville, South Carolina, in which the Partnership had 50% interests, sold Park Central for a sale price of $7,250,000. The outstanding indebtedness on Park Central I and II of $7,000,000 was satisfied at closing. The joint ventures incurred selling expenses of $143,700. The joint ventures received net Sale Proceeds of $106,300, of which the Partnership's share was $53,200. The (loss) reported by the Partnership for financial statement purposes was $(4,654,100) of which a total of $(4,550,000) was previously recorded as part of the provisions for value impairment in 1992 and 1993.
On April 22, 1994, the joint venture which owned Sentry East, located in Blue Bell, Pennsylvania, in which the Partnership had a 50% interest, sold one of the remaining three office buildings situated in this office campus for a sale price of $1,198,500. The joint venture incurred selling expenses of $95,600. The joint venture received net Sale Proceeds of $1,102,900, of which the Partnership's share was $551,500. The (loss) reported by the Partnership for financial statement purposes was $(280,700) and was previously recorded as part of the provisions for value impairment in 1992.
On December 29, 1994, the joint venture which owned Sentry East sold the remaining two office buildings situated in this office campus for a sale price of $1,286,300. The joint venture incurred selling expenses of $99,900. The joint venture received net Sale Proceeds of $1,186,400, of which the Partnership's share was $593,200. The gain reported by the Partnership for financial statement purposes was $292,500 which represented a partial recovery of the (loss) from provisions for value impairment recorded in 1992.
All of the above sales were all-cash transactions, with no further involvement on the part of the Partnership.
10. PROVISIONS FOR VALUE IMPAIRMENT:
Due to the depressed economic environment in the retail industry, regional factors affecting the Partnership's retail and office properties and other matters relating specifically to certain of the Partnership's properties, there was uncertainty as to the Partnership's ability to recover the net carrying basis of certain of its properties during the remaining estimated holding periods. Accordingly, it was deemed appropriate to reduce the bases of such properties in the Partnership's financial statements during the years ended December 31, 1995 and 1994. The provisions for value impairment were considered non-cash events for the purposes of the Statements of Cash Flows and were not utilized in the determination of Cash Flow (as defined in the Partnership Agreement). The following is a summary of the provisions for value impairment reported by the Partnership for the years ended December 31, 1995 and 1994. There were no provisions recorded for the year ended December 31, 1996.
11. ASSET HELD FOR DISPOSITION:
During 1996, the Partnership modified the terms of the mortgage loan secured by Regency. Among other provisions, the modification provides for a maturity date of December 31, 1997. The Partnership is marketing Regency for sale and expects to complete a sale prior to December 31, 1997. Accordingly, the Partnership began classifying Regency as "Held for Disposition" as of December 31, 1996. The Partnership's carrying basis, net of accumulated depreciation and amortization, of Regency on the Balance sheet effective December 31, 1996 was $7,751,600 and does not exceed the estimated fair value, less costs to sell. The Partnership's share of net income (loss) (exclusive of provisions for value impairment) from Regency included in the Statements of Income and Expenses for the years ended December 31, 1996, 1995 and 1994 was $21,100, $(140,300) and $(326,200), respectively.
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FIRST CAPITAL INCOME PROPERTIES, LTD. - SERIES XI
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1996
See accompanying notes on the following page.
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FIRST CAPITAL INCOME PROPERTIES, LTD. - SERIES XI
NOTES TO SCHEDULE III
Note 1. Consists of legal fees, appraisal fees, title costs and other related professional fees. Note 2. The following is a reconciliation of activity in columns E and F:
Note 3. The aggregate cost for federal income tax purposes as of December 31, 1996 was $67,809,500.
Note 4. Included provisions for value impairment. See Note 10 of Notes to Financial Statements for additional information.
Note 5. Estimated useful life in years for building.
Note 6. Estimated useful life in years for improvements.
Note 7. Burlington Office Center I was completed in 1983, Burlington Office Center II was completed in 1985 and Burlington Office Center III was completed in 1989. Burlington Office Center I and II were purchased in September 1988 and Burlington Office Center III was purchased in September 1989.
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