10-Q 1 d10q.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-1004 ----------------- FORM 10-Q ----------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended September 30, 2002 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 700, 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)

STATEMENTS OF PARTNERS' CAPITAL For the nine months ended September 30, 2002 (Unaudited) and the year ended December 31, 2001 (All dollars rounded to nearest 00s)

4 The accompanying notes are an integral part of the financial statements STATEMENTS OF INCOME AND EXPENSES For the quarters ended September 30, 2002 and 2001 (Unaudited) (All dollars rounded to nearest 00s except per Unit amounts)

STATEMENTS OF INCOME AND EXPENSES For the nine months ended September 30, 2002 and 2001 (Unaudited) (All dollars rounded to nearest 00s except per Unit amounts)

STATEMENTS OF CASH FLOWS For the nine months ended September 30, 2002 and 2001 (Unaudited) (All dollars rounded to nearest 00s)

5 The accompanying notes are an integral part of the financial statements NOTES TO FINANCIAL STATEMENTS (Unaudited) September 30, 2002 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 accounting principles generally accepted in the United States ("GAAP"). The Partnership utilizes the accrual method of accounting. Under this method, revenues are recorded when earned and expenses are recorded when incurred. The Partnership recognizes rental income, which is contingent upon tenants' achieving specified targets only to the extent that such targets are attained. Preparation of the Partnership's financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial information included in these financial statements is unaudited; however, in management's opinion, all adjustments (consisting of only normal, recurring accruals) necessary for a fair presentation of the results of operations for the periods included have been made. Results of operations for the quarter and nine months ended September 30, 2002 are not necessarily indicative of the operating results for the year ending December 31, 2002. The Partnership has one reportable segment as the Partnership is in the disposition phase of its life cycle, wherein it is seeking to liquidate its remaining operating asset. Management's focus, therefore, is to prepare its asset for sale and find a purchaser for the remaining asset when market conditions warrant such an action. Commercial rental property held for investment is recorded at cost, net of any provisions for value impairment, and depreciated (exclusive of amounts allocated to land) on the straight-line method over its estimated useful life. 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 on the straight-line method over the life of each respective lease. Repair and maintenance costs are expensed as incurred; expenditures for improvements are capitalized and depreciated on the straight-line method over the estimated life of such improvements. The Partnership evaluates its commercial rental property for impairment when conditions exist which may indicate that it is probable that the sum of expected future cash flows (undiscounted) from a property is less than its carrying basis. Upon determination that an impairment has occurred, the carrying basis in the rental property is reduced to its estimated fair value. Management was not aware of any indicator that would result in a significant impairment loss during the periods reported. Loan acquisition costs are amortized over the term of the mortgage loan made in connection with the acquisition of Partnership properties or refinancing of Partnership loans. When a property is disposed of or a loan is refinanced, the related loan acquisition costs and accumulated amortization are removed from the respective accounts and any unamortized balance is expensed. Cash equivalents are considered all highly liquid investments with a maturity of three months or less when purchased. Reference is made to the Partnership's Annual Report for the year ended December 31, 2001, for a description of other accounting policies and additional details of the Partnership's financial condition, results of operations, changes in Partners' (deficit) 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 nine months ended September 30, 2002 the General Partner was allocated Net Profits of $1,500 and $2,800, respectively. For the quarter and nine months ended September 30, 2001, the General Partner was allocated Net Profits of $2,200 and $6,400, respectively. 6 Fees and reimbursements paid and payable by the Partnership to Affiliates during the quarter and nine months ended September 30, 2002 were as follows:

3. Front-End Fees Loan payable to Affiliate: The Partnership borrowed $8,295,200 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 (the "Subordination") to payment to the Limited Partners of 100% of their Original Capital Contribution from Sale or Refinancing Proceeds (as defined in the Partnership Agreement). In the event that the Front-End Fees loan is not repaid, such amount will be written off to Partners' Capital. Pursuant to a modification of this loan agreement, beginning January 1, 1996, the Partnership elected to defer payment of interest of the Front-End Fees Loan. During the year ended December 31, 1999, the Affiliate of the General Partner elected to waive the Partnership's obligation for all outstanding deferred interest on this loan and charge no interest in the future. 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, 2001 for a discussion of the Partnership's business. Statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations, which are not historical facts, may be forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward statements, which speak only as of the date hereof. One of the Partnership's objectives is to dispose of its properties when market conditions allow for the achievement of the maximum possible sales price. The Partnership, in addition to being in the operation of properties phase, is in the disposition phase of its life cycle. During the disposition phase of the Partnership's life cycle, comparisons of operating results are complicated due to the timing and effect of property sales and dispositions. Components of the Partnership's operating results are 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. Operations The table below is a recap of the Partnership's share of Marquette Mall and Office Building ("Marquette") for the quarters and nine months ended September 30, 2002 and 2001. 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 not directly related to individual property operating results such as interest income and general and administrative expenses or are related to properties disposed of by the Partnership prior to the periods under comparison. Net income for the Partnership decreased by $72,400 and $359,700 for the quarter and nine months ended September 30, 2002 when compared to the quarter and nine months ended September 30, 2001, respectively. The decreases were primarily due to the decline in operating results at Marquette. In addition the decreases were due to a decrease in interest earned on the Partnership's short-term investments, which was due to a decrease in the rates earned on those investments. The following comparative discussion includes only the operating results of Marquette. Rental revenues decreased by $100,700 or 10.9% and $268,100 or 9.6% for the quarter and nine months ended September 30, 2002 when compared to the quarter and nine months ended September 30, 2001, respectively. The decreases were primarily due to a decrease in base rental income and specialty leasing revenue. While the occupancy at Marquette has remained relatively stable the leases that have been signed to replace vacating tenants have not been on as favorable terms as the previous leases. Interest expense on the Partnership's mortgage loans decreased by $4,700 and $23,500 for the quarter and September months ended September 30, 2002 when compared to the quarter and nine months ended September 30, 2001, respectively. The decreases were due to the 2001 repayment of the mortgage loan collateralized by Marquette Mall. Property operating expenses decreased by $44,900 and $63,900 for the quarter and nine months ended September 30, 2002 when compared to the quarter and nine months ended September 30, 2001, respectively. The decreases were primarily due to decreases in utility costs and management fees, which was due to the decline in rental income. Real estate tax expense decreased by $72,700 and $67,400 for the quarter and nine months ended September 30, 2002 when compared to the quarter and nine months ended September 30, 2001 respectively. The decrease was primarily due to the receipt of refunds for prior tax years. Insurance expense increased by $18,800 and $25,800 for the quarter and nine months ended September 30, 2002 when compared to the quarter and nine-months ended September 30, 2001 respectively. The increases were due to an increase in property and liability insurance costs. Repair and maintenance expenses increased by $28,400 and $27,600 for the quarter and nine months ended September 30, 2002 when compared to the quarter and nine months ended September 30, 2001, respectively. The increases were primarily due to an increase in repairs to the interior and exterior of Marquette. To increase and/or maintain occupancy levels at the Partnership's remaining property, the General Partner, through its asset and property management groups, continues to take the following actions: 1) implementation of marketing programs, including hiring of third-party leasing agents or providing on-site leasing personnel, advertising, direct mail campaigns and development of property brochures; 2) early renewal of existing tenants' leases and addressing any expansion needs these tenants may have; 3) promotion of local broker events and networking with local brokers; 4) networking with national level retailers; 5) cold-calling other businesses and tenants in the market area and 6) providing rental concessions or competitively pricing rental rates depending on market conditions. Liquidity and Capital Resources One of the Partnership's objectives is to dispose of its property when market conditions allow for the achievement of the maximum possible sales price. In the interim, the Partnership continues to manage and maintain its property. Notwithstanding the Partnership's intention relative to property sales, another primary objective of the Partnership is to provide cash distributions to Partners from Partnership operations. To the extent cumulative cash distributions exceed net income, such excess distributions will be treated as a return of capital. Cash Flow (as defined in the Partnership Agreement) is generally not equal to net income or cash flows as determined by accounting principles generally accepted in the United States ("GAAP"), since certain items are treated differently under the Partnership Agreement than under GAAP. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--continued Management believes that to facilitate a clear understanding of the Partnership's operations, an analysis of Cash Flow (as defined in the Partnership Agreement) should be examined in conjunction with an analysis of net income or cash flows as determined by GAAP. The following table includes a reconciliation of Cash Flow (as defined in the Partnership Agreement) to cash flow provided by operating activities as determined by GAAP. Such amounts are not indicative of actual distributions to Partners and should not be considered as an alternative to the results disclosed in the Statements of Income and Expenses and Statements of Cash Flow.

Cash Flow (as defined in the Partnership Agreement) increased by $21,200 for the nine months ended September 30, 2002 when compared to the nine months ended September 30, 2001. The increase was primarily the result of the decrease in principal payments on the Partnership's mortgage loan obligation. The increase was partially offset by the decline in the Partnership's operations, exclusive of deprecation and amortization. The net increase in the Partnership's cash position of $13,300 for the nine months ended September 30, 2002 was due to net cash provided by operating activities exceeding cash distributed to Limited Partners and payments for capital and tenant improvements. Liquid assets of the Partnership as of September 30, 2002 were comprised of amounts held for working capital purposes. The decrease in net cash provided by operating activities of $260,600 for the comparable nine-month periods was primarily due to the decrease in net income, as previously discussed. Net cash used for investing activities decreased by $307,000 for the nine months ended September 30, 2002 when compared to the nine months ended September 30, 2001. The decrease was due to a decrease in expenditures for capital and tenant improvements. The Partnership maintains working capital reserves to pay for capital expenditures such as building and tenant improvements and leasing costs. During the nine months ended September 30, 2002, the Partnership spent $404,400 for capital and tenant improvements and leasing costs and has projected to spend approximately $175,000 during the remainder of 2002. Actual amounts expended may vary depending on a number of factors including actual leasing activity, results of property operations and other market conditions throughout the year. The General Partner believes that these improvements and leasing costs are necessary in order to increase and/or maintain occupancy levels in a very competitive market, maximize rental rates charged to new and renewing tenants and to prepare the remaining property for eventual disposition. The Partnership has no financial instruments for which there are significant risks. Net cash used for financing activities decreased by $566,700 for the nine months ended September 30, 2002 when compared to the nine months ended September 30, 2001. The decrease was primarily due to a decrease in principal payments on the Partnership's mortgage obligation, which was repaid in full during 2001. Pursuant to a modification of the Partnership's Front-End Fees loan agreement, the Affiliate of the General Partner has elected to waive the Partnership's obligation for all deferred interest on this loan and charge no interest in the future. Distributions to Limited Partners for the quarter ended September 30, 2002 were declared in the amount of $230,500 or $4.00 per Unit. Cash distributions are made 60 days after the last day of each fiscal quarter. The amount of future distributions to Limited Partners will ultimately be dependent upon the performance of Marquette as well as the General Partner's determination of the amount of cash necessary to supplement working capital reserves to meet future liquidity requirements of the Partnership. Accordingly, there can be no assurance as to the amounts of cash for future distributions to Limited Partners. 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 Contribution. Item 4. Controls and Procedures Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, First Capital Financial, L.L.C. ("FCF"), the general partner of the Partnership, carried out an evaluation, under supervision and with the participation of FCF's management, including FCF's President and Chief Executive Officer and FCF's Vice President - Finance, of the effectiveness of the design and operation of the Partnership disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the President and Chief Executive Officer and the Vice President - Finance concluded that the Partnership disclosure controls and procedures are effective in timely alerting them to material information relating to the Partnership. There have been no significant changes to the internal controls of the Partnership or in other sectors that could significantly affect the internal controls subsequent to the completion of this evaluation. 3 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits: 99.1: Certification Of Periodic Financial Report Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, 18 U.S.C. Section 1350 (b) Reports on Form 8-K: There were no reports filed on Form 8-K during the quarter ended September 30, 2002. 8 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 LLC GENERAL PARTNER Date: November 13, 2002 By: /S/ DOUGLAS CROCKER II ---------------------------------- DOUGLAS CROCKER II President and Chief Executive Officer Date: November 13, 2002 By: /S/ PHILIP G. TINKLER ---------------------------------- PHILIP G. TINKLER Vice President--Finance and Treasurer 9 FORM OF SECTION 302 CERTIFICATION I, Douglas Crocker, President and Chief Executive Officer of First Capital Financial, L.L.C., the general partner of First Capital Income Properties, Ltd. Series--XI, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Capital Income Properties, Ltd. Series--XI; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /S/ DOUGLAS CROCKER -------------------------------------- DOUGLAS CROCKER President and Chief Executive Officer 10 FORM OF SECTION 302 CERTIFICATION I, Philip Tinkler, Vice President - Finance and Treasurer of First Capital Financial, L.L.C., the general partner of First Capital Income Properties, Ltd. Series--XI, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Capital Income Properties, Ltd. Series--XI; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /S/ PHILIP TINKLER -------------------------------------- PHILIP TINKLER Vice President--Finance and Treasurer 11 CASH FLOW STATEMENTS (1) For the quarter and nine months ended September 30, 2002 (Unaudited) (All dollars rounded to nearest 00s)

(1) Cash Flow is as defined in the Partnership Agreement. (2) Represents principal payments funded from operations on the Partnership mortgage loans. 12

FIRST CAPITAL INCOME PROPERTIES LTD SERIES XI 10-Q