-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, abd3Tw6+Hz+uwzkkJ0WSbQ7+hKHiZ2VJ/OaNJ28xkWW21qDOnEQ/fGua/tmmtHaG JOK+nf2YTFLTVgUifi25ag== 0000950109-94-001536.txt : 19940817 0000950109-94-001536.hdr.sgml : 19940817 ACCESSION NUMBER: 0000950109-94-001536 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL INCOME REALTY TRUST CENTRAL INDEX KEY: 0000277577 STANDARD INDUSTRIAL CLASSIFICATION: 6798 IRS NUMBER: 942537061 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-09211 FILM NUMBER: 94544177 BUSINESS ADDRESS: STREET 1: 10670 N CENTRAL EXPRWY STREET 2: STE 300 CITY: DALLAS STATE: TX ZIP: 75231 BUSINESS PHONE: 2146924700 MAIL ADDRESS: STREET 1: 10670 N. CENTRAL EXPRWY STREET 2: STE 300 CITY: DALLAS STATE: TX ZIP: 75231 FORMER COMPANY: FORMER CONFORMED NAME: CONSOLIDATED CAPITAL INCOME TRUST DATE OF NAME CHANGE: 19890726 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1994 ------------- Commission File Number 0-9211 ------ NATIONAL INCOME REALTY TRUST ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) California 94-2537061 - - ------------------------------- ---------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 3878 Oak Lawn, Suite 300, Dallas, TX 75219 ---------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (214) 522-9910 --------------------------------- (Registrant's Telephone Number, Including Area Code) 10670 North Central Expressway, Suite 300, Dallas, TX 75231 -------------------------------------------------------------- (Former Address) 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 --- --- Shares of Beneficial Interest, no par value 2,996,616 - - ------------------------------ ------------------------------- (Class) (Outstanding at August 8, 1994) 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - - ----------------------------- The accompanying Consolidated Financial Statements have not been audited by independent certified public accountants, but in the opinion of the management of National Income Realty Trust (the "Trust"), all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of consolidated results of operations, consolidated financial position and consolidated cash flows at the dates and for the periods indicated, have been included. NATIONAL INCOME REALTY TRUST CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1994 1993 ------------ ------------ Assets (dollars in thousands) ------ Notes and interest receivable Performing........................... $ 15,964 $ 15,990 Nonperforming, nonaccruing........... 3,219 3,404 ------------ ------------ 19,183 19,394 Real estate held for sale, net of accumulated depreciation ($2,518 in 1994 and $2,293 in 1993)............. 18,279 18,496 Less - allowance for estimated losses. (11,106) (11,106) ------------ ------------ 26,356 26,784 Real estate held for investment, net of accumulated depreciation ($35,779 in 1994 and $33,535 in 1993)......... 158,059 154,748 Investments in partnerships........... 11,148 11,804 Cash and cash equivalents............. 1,581 1,060 Investment in marketable equity securities of affiliate.............. 567 702 Other assets.......................... 5,874 4,388 ------------ ------------ $ 203,585 $ 199,486 ============ ============ Liabilities and Shareholders' Equity ------------------------------------ Liabilities Notes, debentures and interest payable $ 121,642 $ 114,351 Other liabilities..................... 6,486 6,961 ------------ ------------ 128,128 121,312 Commitments and contingencies......... Shareholders' equity Shares of Beneficial Interest, no par value; authorized shares, unlimited; issued and outstanding, 3,000,116 shares in 1994 and 3,126,116 shares in 1993.............................. 9,009 9,387 Paid-in capital....................... 273,322 274,515 Accumulated distributions in excess of accumulated earnings.............. (207,261) (206,180) Unrealized gains on marketable equity securities........................... 387 452 ------------ ------------ 75,457 78,174 ------------ ------------ $ 203,585 $ 199,486 ============ ============
The accompanying notes are an integral part of these Consolidated Financial Statements. 2 NATIONAL INCOME REALTY TRUST CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------------- ------------------------ 1994 1993 1994 1993 ---------- ----------- ---------- ---------- (dollars in thousands, except per share) Revenue Rentals.......................... $ 9,596 $ 8,649 $ 18,739 $ 16,791 Interest......................... 340 321 699 737 Equity in income (losses) of partnerships..................... (93) 28 (8) - ---------- ---------- ---------- ---------- 9,843 8,998 19,430 17,528 Expenses Property operations.............. 5,434 4,756 10,725 9,710 Interest......................... 2,689 2,594 5,218 5,350 Depreciation..................... 1,288 1,187 2,469 2,280 Advisory fee to affiliate........ 317 384 786 775 General and administrative....... 569 575 920 828 ---------- ---------- ---------- ---------- 10,297 9,496 20,118 18,943 ---------- ---------- ---------- ---------- (Loss) from operations............. (454) (498) (688) (1,415) Gain on sale of real estate........ 385 945 385 945 Gain on sale of investments........ 141 - 141 - ---------- ---------- ---------- ---------- Net income (loss).................. $ 72 $ 447 $ (162) $ (470) ========== ========== ========== ========== Earnings per share (Loss) from operations........... $ (.15) $ (.17) $ (.22) $ (.47) Gain on sale of real estate...... .12 .32 .12 .31 Gain on sale of investments...... .05 - .05 - ---------- ---------- ---------- ---------- Net income (loss).................. $ .02 $ .15 $ (.05) $ (.16) ========== ========== ========== ========== Weighted average shares of beneficial interest used in computing earnings per share..... 3,027,851 2,956,682 3,060,719 3,016,419 ========== ========== ========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. 3 NATIONAL INCOME REALTY TRUST CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Accumulated Unrealized Shares of Beneficial Distributions Gains on Interest in Excess of Marketable ---------------------- Paid-in Accumulated Equity Shareholders' Shares Amount Capital Earnings Securities Equity --------- ------ ------- ------------- ---------- ------------- (dollars in thousands) Balance, January 1, 1994.... 3,126,116 $ 9,387 $274,515 $ (206,180) $ 452 $ 78,174 Repurchase of shares of beneficial interest................... (126,000) (378) (1,193) - - (1,571) Cash Distributions.......... - - - (919) - (919) Unrealized gains on marketable equity securities................. - - - - 76 76 Realized gains on sale of marketable equity securities................. - - - - (141) (141) Net loss.................... - - - (162) - (162) --------- ------- -------- ----------- --------- ---------- Balance, June 30, 1994...... 3,000,116 $ 9,009 $273,322 $ (207,261) $ 387 $ 75,457 ========= ======= ======== =========== ========= ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. 4 NATIONAL INCOME REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, ------------------------ 1994 1993 -------- -------- (dollars in thousands) Cash Flows from Operating Activities Rentals collected.............................................. $ 18,381 $ 16,672 Interest collected............................................. 652 690 Interest paid.................................................. (4,783) (4,140) Payments for property operations.................................................... (11,188) (10,693) General and administrative expenses paid................................................. (863) (860) Advisory fee paid to affiliate..................................................... (384) - Payments for deferred borrowing costs.......................... (493) (289) Advisory fee paid to prior advisor............................. (469) (793) Other.......................................................... - (98) -------- -------- Net cash provided by operating activities.................... 853 489 Cash Flows from Investing Activities Acquisition of real estate..................................... (975) - Real estate improvements....................................... (857) (1,863) Proceeds from sale of real estate.............................. - 360 Fundings of notes receivable................................... (207) - Collections on notes receivable................................ 462 1,650 Distribution from a partnership's investing activities......... 852 86 Distributions (contributions) to partnerships.................. 181 (202) Proceeds from sale of marketable equity securities............. 210 - -------- -------- Net cash provided by (used in) investing activities................................................. (334) 31 Cash Flows from Financing Activities Borrowings from financial institutions......................... 12,600 2,198 Payments of mortgage notes payable............................. (9,358) (2,434) Repurchase of shares of beneficial interest.................... (1,571) (1,377) Distributions to shareholders.................................. (919) - Cash collateral deposited...................................... (750) - -------- -------- Net cash provided by (used in) financing activities................................................. 2 (1,613) -------- -------- Net increase (decrease) in cash and cash equivalents............. 521 (1,093) Cash and cash equivalents, beginning of period................... 1,060 1,750 -------- -------- Cash and cash equivalents, end of period......................... $ 1,581 $ 657 ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 5 NATIONAL INCOME REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Six Months Ended June 30, ----------------------- 1994 1993 -------- -------- (dollars in thousands) Reconciliation of net loss to net cash provided by operating activities Net (loss).............................................. $ (162) $ (470) Adjustments to reconcile net loss to net cash provided by operating activities Gain on sale of real estate........................... (385) (945) Gain on sale of marketable equity securities.......... (141) - Depreciation and amortization......................... 2,469 2,280 (Increase) in interest receivable..................... (47) (36) (Increase) in other assets............................ (518) (251) (Decrease) in other liabilities....................... (696) (1,104) Equity in losses of partnerships...................... 8 - Increase in interest payable.......................... 325 1,015 ------- ------- Net cash provided by operating activities........................................ $ 853 $ 489 ======= ======= Noncash investing and financing activities Carrying value of real estate acquired through foreclosure (in satisfaction of notes receivable with a carrying value of $5,465).................... $ - $10,082 Note payable from acquisition of real estate............ 3,711 6,651
The accompanying notes are an integral part of these Consolidated Financial Statements. 6 NATIONAL INCOME REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION - - ------------------------------ The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the six month period ended June 30, 1994 are not necessarily indicative of the results that may be expected for the year ending December 31, 1994. Dollar amounts in tables are in thousands. For further information, refer to the Consolidated Financial Statements and Notes thereto included in the Trust's Annual Report on Form 10-K for the year ended December 31, 1993 ("1993 Form 10-K"). NOTE 2. INVESTMENTS IN MARKETABLE SECURITIES - - --------------------------------------------- In December 1990, the Trust's Board of Trustees, based on the recommendation of its Related Party Transaction Committee, authorized the purchase of up to $1.0 million of the shares of beneficial interest of Continental Mortgage and Equity Trust ("CMET") through negotiated or open market transactions. Two Trustees of the Trust, Mr. Willie K. Davis and Mr. Dan L. Johnston, are also trustees of CMET. At December 31, 1993, the Trust owned 54,500 shares of beneficial interest of CMET which it had purchased through open market transactions at a total cost to the Trust of $250,000. In June 1994, the Trust sold 15,000 shares of beneficial interest of CMET for $210,000 through open market transactions, reducing the total remaining shares held by the Trust to 39,500 with a market value of $567,000 at June 30, 1994. As a result, the Trust recorded a $141,000 gain on sale of investments in the second quarter of 1994. NOTE 3. INVESTMENTS IN PARTNERSHIPS - - ------------------------------------ The Trust and CMET are partners in Income Special Associates ("ISA"), a joint venture partnership in which the Trust has a 40% interest in earnings, losses and distributions. ISA in turn owns a 100% interest in Adams Properties Associates ("APA"), which owns 33 industrial warehouses. On May 11, 1994, APA sold a warehouse located in Dallas, Texas for $4.4 million. APA received $2.1 million in cash, of which the Trust's equity share was $852,000, after the payoff of an existing first mortgage with a principal balance of $1.8 million. APA recognized a gain of $962,000 on the sale, of which the Trust's equity share was $385,000. In connection with the sale, a sales commission of $26,100 was paid to Tarragon Realty Advisors, Inc. ("Tarragon"), the Trust's advisor. William S. Friedman, the President and a Trustee of the Trust serves as Director and Chief Executive Officer of Tarragon. Tarragon is owned by Lucy N. Friedman, Mr. Friedman's wife, and John A. Doyle, who serves as Director, President and Chief Operating Officer of Tarragon and Trustee and Executive Vice President of the Trust. Mr. Friedman's family owns approximately 30% of the outstanding shares of the Trust. [This space intentionally left blank.] 7 NATIONAL INCOME REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. NOTES AND INTEREST RECEIVABLE - - -------------------------------------- In February 1994, the borrower on one of the Trust's second lien mortgage notes receivable with an outstanding principal balance of $297,000 at June 30, 1994, became nonperforming with respect to the first lienholder. The Trust, through negotiations with both the borrower and the first lienholder, intends to accept a deed in lieu of foreclosure on the collateral property, an apartment complex in Los Angeles, California. The Trust does not anticipate incurring a loss on this foreclosure; however, if future negotiations are unsuccessful and no final agreement is reached, the first lienholder could exercise its remedies under its first lien. If the first lienholder forecloses on the property, the Trust will incur a loss on the foreclosure equal to the carrying value of the mortgage note receivable. On February 25, 1994, the Trust obtained a judgment against three individual guarantors of a nonperforming first mortgage loan, with a carrying value of $1.0 million at June 30, 1994, secured by the Casa Bonita Apartments in Paris, Texas. The $2.4 million judgment, which represents the outstanding principal and accrued interest balance, accrues interest at 18% per annum until paid in full. The Trust continues to negotiate with the borrower on payment terms of the note. If a final agreement is not reached and the collateral property is foreclosed, the Trust will not incur a loss as the note has been previously fully reserved. On March 4, 1994, the United States Bankruptcy Court confirmed the borrowers' plan of reorganization affecting the Alder Creek mortgage note receivable, secured by 55 acres of developed land located near Sacramento, California. The approved plan calls for principal payments on the note balance as the collateral parcels are sold. The note accrues interest at 24% per annum and requires interest payments ranging from 9% per annum to 24% per annum depending on certain prepayment options, and matures June 1, 1999. On January 26, 1994, approximately 6 acres of the collateral property was sold for $252,000, reducing the carrying value of the note receivable to $649,000 at June 30, 1994. In connection with the sale, the Trust accepted a five year note in the principal amount of $207,000 which is secured by the sold land, contains similar interest terms as stated above and matures in February 1999. The Trust does not anticipate incurring a loss on this note as the estimated value of the collateral property is in excess of the total debt on the collateral property. At June 30, 1994, four of the Trust's junior mortgages were classified as nonperforming, as more fully described below. A nonperforming junior mortgage note with a carrying value of $256,000 at June 30, 1994 is secured by a retirement center in Tucson, Arizona. The borrower on this note, Eldercare Housing Foundation ("Eldercare"), is currently in bankruptcy. The Trust does not anticipate incurring losses on this note in excess of previously established reserves. Ted P. Stokely, a former Trustee of the Trust, was employed as a real estate consultant for Eldercare from April 1992 to December 1993. 8 NATIONAL INCOME REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. NOTES AND INTEREST RECEIVABLE (Continued) - - -------------------------------------- The three remaining nonperforming junior mortgage notes have an aggregate principal balance of $1.3 million and were acquired in a package of similar loans in 1991. All three loans are secured by shopping centers net leased to a major national tenant. The Trust is currently negotiating a settlement of these loans with the owners. The Trust expects that such settlement will not result in any loss in excess of previously established reserves. NOTE 5. REAL ESTATE - - -------------------- As disclosed in the Trust's 1993 Form 10-K, in January 1993, the Trust was forced to shut down the Lake Highlands Apartments as a result of a change in zoning of the property. The Trust does not expect to be able to operate the property as an apartment complex in the future. Based on the land value under the current zoning, the Trust does not anticipate incurring a loss in excess of previously established reserves. Also as disclosed in the Trust's 1993 Form 10-K, in 1993, the State of Wisconsin commenced eminent domain proceedings to acquire the Pepperkorn Building, located in Manitowoc, Wisconsin, for highway development. The State of Wisconsin's initial offer was $175,000, which is being appealed by the Trust. There is no assurance that the Trust's appeal will be successful or of the amount, if any, of additional compensation that it may receive. However, based on the information presently available, the Trust does not anticipate incurring any losses in excess of previously established reserves. On March 28, 1994, the Trust paid $300,000 in cash to exercise its option to acquire, through a transfer of general partner interests and stock of limited partners, certain limited partnerships which own three residential properties comprising 600 apartment units in Lakeland, Florida; Lexington, Kentucky and Oklahoma City, Oklahoma. The properties are subject to existing first mortgage liens totaling $11.6 million. On May 16, 1994, the Trust submitted proposals to reinstate the mortgages secured by these properties through contributions from the Trust of approximately $1.1 million and the application of current escrow balances totaling $275,000. In addition, the Trust has requested that the interest rates be reduced to 8% per annum and seeks the approval of the Department of Housing and Urban Development ("HUD") for the transfer of physical assets on the three properties with the approval expected during September 1994. On March 30, 1994, the Trust purchased the Summit on the Lake Apartments located in Fort Worth, Texas. The Trust paid $675,000 in cash, subject to the existing first mortgage of $3.7 million. The mortgage accrues interest at 7.5% per annum and matures September 2007. In connection with the acquisition, the Trust paid $176,000 of real estate brokerage and acquisition commissions, based upon the $4.4 million purchase price of the property, to Tarragon. NOTE 6. NOTES PAYABLE - - ---------------------- On July 6, 1994, the Trust finalized negotiations to extend and modify the $1.6 million first mortgage secured by the Palm Court Apartments located in Miami, Florida. The modified loan bears interest at 8% per annum, calls for monthly interest payments and quarterly principal reductions of $50,000 beginning July 1994 through maturity on July 1, 1995. 9 NATIONAL INCOME REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 6. NOTES PAYABLE (Continued) - - ---------------------- During 1994, the Trust has obtained first mortgage financing on three Trust properties totaling $12.6 million, as more fully discussed below. The Trust received net cash of $4.5 million after the payoff of $7.9 million in existing debt ($3.9 million of which matured in 1994). The remainder of the financing proceeds were used to fund escrows for replacements and repairs and to pay closing costs associated with the refinancing. The Trust paid mortgage brokerage and equity refinancing fees of $90,300 to Basic Capital Management ("BCM"), the Trust's advisor until March 31, 1994, based upon the new mortgage financing of $12.6 million. Bay West Apartments in Bradenton, Florida secures a $5.1 million nonrecourse mortgage which matures January 2019. This mortgage initially bears interest at 8.89% per annum and calls for monthly principal and interest payments of $42,416. Interest, after the first ten years of the loan, is based on the United States Treasury Rate and the monthly principal and interest payment will be calculated in a constant amount to amortize the unpaid balance over the remaining term of the loan. Carlyle Towers Apartments in Southfield, Michigan secures a $4.5 million nonrecourse mortgage loan which bears interest at the London Interbank Offering Rate ("LIBOR") plus 3.25% and matures March 13, 1999. This mortgage loan calls for monthly payments equal to the greater of interest due or $33,750, and requires the principal balance be reduced by no less than $175,000 each year. Woodcreek Apartments, located in Denver, Colorado, secures a $3.0 million nonrecourse mortgage note which bears interest at the LIBOR rate plus 3.25% and matures March 22, 1999. This loan also calls for monthly payments equal to the greater of interest due or $22,500, and requires the principal balance be reduced by no less than $50,000 each year. The Trust has also extended two first mortgage loans totaling $1.6 million during the first six months of 1994. The $590,000 first mortgage loan secured by the Flannery House Apartments in Baton Rouge, Louisiana, was extended one year to March 31, 1995 and the interest rate was reduced from 11% per annum to 8.75% per annum. Also, in February 1994, the $1.0 million first mortgage loan secured by the Mountain View Shopping Center was extended six months to September 1, 1994 and all other terms remained constant. On March 23, 1994, the Trust paid in full the first mortgage principal balance and all accrued interest of $143,000 secured by the Stewart Square Shopping Center in Las Vegas, Nevada. In connection with the restructured mortgage note payable secured by the Century Centre II Office Building, the Trust deposited $750,000 in cash with the lender as additional collateral on the first mortgage. The Trust has since pledged one of its properties held for sale, Stewart Square Shopping Center, as substitute collateral. The cash collateral funds were returned to the Trust in July 1994. NOTE 7. COMMITMENTS AND CONTINGENCIES - - -------------------------------------- Olive Litigation. In February 1990, the Trust, together with CMET, Income Opportunity Realty Trust ("IORT") and Transcontinental Realty Investors, Inc. ("TCI"), three real estate entities with, at the time, the same officers, directors or trustees and advisor as the Trust, entered into a settlement of a class and derivative action entitled 10 NATIONAL INCOME REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 7. COMMITMENTS AND CONTINGENCIES (Continued) - - -------------------------------------- Olive et al. v. National Income Realty Trust et al., relating to the operation and management of each of the entities. On April 23, 1990, the court granted final approval of the terms of the settlement. By agreeing to settle these actions, the defendants, including the Trust, did not and do not admit any liability whatsoever. In February and April 1993, evidentiary hearings were held concerning allegations by the plaintiffs that the terms of the settlement had been breached by the Trust, CMET, IORT, and TCI. No determination on the matters was made by the court due to settlement discussions entered into among the parties. On May 4, 1994, the parties entered into a Modification of Stipulation of Settlement dated April 27, 1994 (the "Modification") which settles the claims asserted by the plaintiffs and modifies certain provisions of the April 1990 settlement. The Modification is subject to shareholder notice and final court approval. The Modification, among other things, provides for the addition of three new unaffiliated members to the Trust's Board of Trustees and sets forth new, highly restrictive requirements for the approval of any transactions with affiliates over the next five years. In addition, Basic Capital Management, Inc., the Trust's former advisor, Gene E. Phillips and William S. Friedman have agreed to pay a total of $1.2 million to the Trust, CMET, IORT and TCI. The Trust's share of this payment will be approximately $201,600. Under the Modification, the Trust, CMET, IORT, TCI and their shareholders will release the defendants from any claims relating to the plaintiffs' allegations. The Trust, CMET, IORT, and TCI have also agreed to waive any demand requirement for the plaintiffs to pursue claims on behalf of each of them against certain unaffiliated persons or entities. The Modification also requires that the shares of the Trust held by Messrs. Phillips, Friedman or their affiliates shall be (i) voted in favor of the reelection of all current Board members that stand for reelection during the two calendar years following the effective date of the Modification and (ii) voted in favor of all new Board members appointed pursuant to the terms of the Modification that stand for reelection during the three calendar years following the effective date of the Modification. The Modification also terminates a number of the provisions of the Stipulation of Settlement, including the requirement that the Trust, CMET, IORT and TCI maintain a Related Party Transaction Committee and a Litigation Committee of their respective Boards. Following approval and implementation of the Modification, the Court will retain jurisdiction to enforce the Modification. [This space intentionally left blank.] 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - - ------------------------------------------------------------------------ RESULTS OF OPERATIONS --------------------- Introduction - - ------------ National Income Realty Trust (the "Trust") invests in real estate through acquisitions, leases and partnerships, and in mortgages secured by real estate. The Trust was organized on October 31, 1978 and commenced operations on March 27, 1979. Liquidity and Capital Resources - - ------------------------------- Cash and cash equivalents aggregated $1.6 million at June 30, 1994, compared with $1.1 million at December 31, 1993. The principal reasons for this increase in cash are discussed in the following papagraphs. The Trust's principal sources of cash have been and will continue to be property operations, proceeds from property sales, the collection of mortgage notes receivable and borrowings. The Trust expects that funds from such sources will be sufficient to meet the Trust's various cash needs, including, but not limited to debt service obligations, property maintenance and improvements and shareholder distributions. The Trust's cash flow from property operations (rentals collected less payments for property operating expenses) increased from $6.0 million for the six months ended June 30, 1993 to $7.2 million for the six months ended June 30, 1994. This increase is primarily attributable to the two apartment complexes acquired through foreclosure in March of 1993 and the addition of the Summit on the Lake Apartments, which were purchased in March 1994. In March 1994, the Trust paid $300,000 in cash to exercise its option to acquire, through a transfer of general partner interests and stock of limited partners, certain limited partnerships which own three residential properties. The Trust anticipates the transfer of physical assets during September 1994. Also in March 1994, the Trust purchased the Summit on the Lake Apartments located in Fort Worth, Texas. The Trust paid $675,000 in cash, subject to the existing first mortgage of $3.7 million. The Trust has made $857,000 of improvements to its properties during the six months ended June 30, 1994, and anticipates an additional $2.0 million will be made during the remainder of 1994. The Trust and Continental Mortgage and Equity Trust ("CMET") are Partners in Income Special Associates ("ISA"), a joint venture partnership in which the Trust has a 40% interest in earnings, losses and distributions. ISA in turn owns a 100% interest in Adams Properties Associates ("APA"), which owns 33 industrial warehouses. In May 1994, APA sold a warehouse for $4.4 million. APA received $2.1 million in cash, of which the Trust's equity share was $852,000. During 1994, the Trust obtained first mortgage financing on three Trust properties totaling $12.6 million, receiving net cash proceeds of $4.5 million after the payoff of $7.9 million in existing debt ($3.9 of which matured in 1994). The remainder of the financing proceeds were used to fund escrows for replacements and repairs and to pay closing costs associated with the refinancing. The Trust intends to increase its emphasis on obtaining financing or refinancing of its properties. However, there is no assurance that the Trust will continue to be successful in its efforts in this regard. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - - ------------------------------------------------------------------------ RESULTS OF OPERATIONS (Continued) --------------------- Liquidity and Capital Resources (Continued) - - ------------------------------- During the six months ended June 30, 1994, the Trust repurchased 126,000 of its shares of beneficial interest at a cost to the Trust of $1.6 million, pursuant to a repurchase program originally announced by the Trust on December 5, 1989. In July 1994, the Trust purchased an additional 3,500 shares at a cost to the Trust of $44,000. The Trust's Board of Trustees authorized the Trust to repurchase a total of 1,026,667 shares under such repurchase program, of which 1,023,369 shares have been purchased as of July 31, 1994. On May 19, 1994, the Trust's Board of Trustee's approved an authorization for the Trust to repurchase 300,000 additional shares of beneficial interest through open market or negotiated transactions. In connection with the restructured mortgage note payable secured by the Century Centre II Office Building, the Trust deposited $750,000 in cash with the lender as additional collateral on the first mortgage. The Trust has since pledged one of its properties held for sale, Stewart Square Shopping Center, as substitute collateral. The cash collateral funds were returned to the Trust in July 1994. In June 1994, the Trust sold 15,000 shares of beneficial interest of CMET receiving $210,000. At June 30, 1994, the Trust owned 39,500 shares of beneficial interest of CMET, which had a market value at that date of $567,000. Two Trustees of the Trust, Mr. Willie K. Davis and Mr. Dan L. Johnston, are also Trustees of CMET. Based on the performance of the Trust's properties, on July 1, 1993, the Trust's Board of Trustees approved the resumption of regular quarterly distributions to shareholders. The Trust paid distributions totaling $919,000 or $.32 per share during the first half of 1994. Results of Operations - - --------------------- For the three and six months ended June 30, 1994, the Trust had net income of $72,000 and a net loss of $162,000, respectively, compared with net income of $447,000 and a net loss of $470,000 for the three and six months ended June 30, 1993. The primary factors contributing to these changes are discussed in the following paragraphs. Net rental income (rental income less property operating expenses) increased from $3.9 million and $7.1 million for the three and six months ended June 30, 1993 to $4.2 million and $8.0 million for the three and six months ended June 30, 1994. Of these increases, $325,000 and $932,000 are due to the two apartment complexes acquired through foreclosure in March 1993 and the acquisition of the Summit on the Lake Apartments in March 1994. The remaining increase is primarily due to higher rental rates and increased occupancy levels achieved during 1994. Interest expense increased from $2.6 million and decreased from $5.4 million for the three and six month periods ended June 30, 1993 to $2.7 million and $5.2 million for the three and six month periods ended June 30, 1994. For the three and six month periods ended June 30, 1994, interest expense increased $220,000 and $398,000, respectively, due to the Lakepointe Apartments acquired through foreclosure in March 1993 and the acquisition of the Summit on the Lake Apartments in March 1994. These increases are slightly offset for the three month period ended June 30, 1994 as compared to the same period in 1993, and more than offset for the six month period ended June 30, 1994 as compared to the same period in 1993, by the reduction in the interest rate 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - - ------------------------------------------------------------------------ RESULTS OF OPERATIONS (Continued) --------------------- Results of Operations (Continued) - - --------------------- on the first mortgage secured by the Century Centre II Office Building and the purchase of the second mortgage at a significant discount in 1993. This decrease is also due to the reduction in the variable interest rate on the note payable secured by the Pinecrest Apartments. Depreciation expense increased from $1.2 million and $2.3 million for the three and six months ended June 30, 1993 to $1.3 million and $2.5 million for the three and six months ended June 30, 1994. These increases are attributable to the two properties acquired through foreclosure in March 1993 as well as the depreciation of additional improvements of $1.8 million made to the Trust properties subsequent to June 30, 1993. For the three and six months ended June 30, 1994, the Trust reported gains on sales of real estate of $385,000 related to sale of the warehouse by APA. In addition, the Trust recognized a gain on sale of investments of $141,000 related to the sale of the 15,000 shares of beneficial interest of CMET. The Trust's management, on a quarterly basis, reviews the carrying value of the Trust's mortgage loans, properties held for investment and properties held for sale. Generally accepted accounting principles require that the carrying value of an investment cannot exceed its cost or its estimated net realizable value. In those instances in which estimates of net realizable value of the Trust's properties are less than the carrying value thereof at the time of evaluation, a provision for loss is recorded by a charge against operations. The estimate of net realizable value of the mortgage loans is based on management's review and evaluation of the collateral properties securing the mortgage loans. The review generally includes selective property inspections, a review of the property's current rents compared to market rents, a review of the property's expenses, a review of maintenance requirements, discussions with the manager of the property and a review of the surrounding area. Future quarterly reviews could cause the Trust's management to adjust current estimates of net realizable value. Income Tax Aspects - - ------------------ As more fully discussed in the Trust's 1993 Form 10-K, the Trust has elected and, in the opinion of the Trust's management, qualified to be taxed as a Real Estate Investment Trust ("REIT") as defined under Sections 856 through 860 of the Internal Revenue Code of 1986, and as such, will not be taxed for federal income tax purposes on that portion of its taxable income which is distributed to shareholders, provided that at least 95% of its REIT taxable income is distributed. Environmental Matters - - --------------------- Under various federal, state and local environmental laws, ordinances and regulations, the Trust may be potentially liable for removal or remediation costs, as well as certain other potential costs relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery from the Trust for personal injury associated with such materials. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - - ------------------------------------------------------------------------ RESULTS OF OPERATIONS (Continued) --------------------- Environmental Matters (Continued) - - --------------------- The Trust's management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on the Trust's business, assets or results of operations. Recent Accounting Pronouncements - - -------------------------------- The Financial Accounting Standards Board ("FASB") has recently issued Statement of Financial Accounting Standards ("SFAS") No. 114 - "Accounting by Creditors for Impairment of a Loan", which amends SFAS No. 5 - "Accounting for Contingencies" and SFAS No. 15 - "Accounting by Debtors and Creditors for Troubled Debt Restructurings." The statement requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. SFAS No. 114 is effective for fiscal years beginning after December 15, 1994. The Trust's management has not fully evaluated the effects of implementing this statement, but expects that they will not be material as the statement is applicable to debt restructurings after the earlier of the effective date of the statement or the Trust's adoption of the statement. The FASB has also recently issued SFAS No. 115 - "Accounting for Certain Investments in Debt and Equity Securities", which supersedes SFAS No. 12 - "Accounting for Certain Marketable Securities", and requires that certain marketable debt and equity securities be reported at fair value, with unrealized gains and losses either included in earnings or reported as a separate component of shareholder's equity. The Trust adopted SFAS No. 115 effective December 31, 1993, and recorded a $76,000 unrealized gain included in shareholders equity for the six months ended June 30, 1994. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - - -------------------------- See NOTE 5. "COMMITMENTS AND CONTINGENCIES" of Notes to the Consolidated Financial Statements in Part I for information relating to legal proceedings. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - - ----------------------------------------- (a) Exhibits: None. (b) Reports on Form 8-K. During the quarter for which this Report is filed, one current Report on form 8-K was filed on May 26, 1994, which was amended by Form 8-K/A filed June 3, 1994, with respect to an event occurring on May 19, 1994 reported under Item 4, "CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT". 15 SIGNATURE PAGE 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. NATIONAL INCOME REALTY TRUST Date: August 15, 1994 By:/s/William S. Friedman ---------------- --------------------------------- William S. Friedman President, Chief Executive Officer and Trustee Date: August 15, 1994 By:/s/Ivan Roth ---------------- --------------------------------- Ivan Roth Treasurer and Chief Financial Officer Date: August 15, 1994 By:/s/ Katie Jackson ---------------- --------------------------------- Katie Jackson Vice President and Chief Accounting Officer 16 -----END PRIVACY-ENHANCED MESSAGE-----