-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R6UCxGm/htQwCfCypJ/mozE/j+IzGt1S0ZWfMxv4pC4GU6jvrByxJ2f4VWOkrOKV 70ad2BaY2Otr6WN6h8rr5A== 0000950134-97-002165.txt : 19970326 0000950134-97-002165.hdr.sgml : 19970326 ACCESSION NUMBER: 0000950134-97-002165 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL REALTY L P CENTRAL INDEX KEY: 0000819671 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE OPERATORS (NO DEVELOPERS) & LESSORS [6510] IRS NUMBER: 752163175 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09648 FILM NUMBER: 97562727 BUSINESS ADDRESS: STREET 1: 10670 N CENTRAL EXPRWY STREET 2: SUITE 300 CITY: DALLAS STATE: TX ZIP: 75231 BUSINESS PHONE: 2146924700 MAIL ADDRESS: STREET 1: 10670 N CENTRAL EXPRWY STREET 2: SUITE 300 CITY: DALLAS STATE: TX ZIP: 75231 10-K405 1 FORM 10-K405 FOR FISCAL YEAR END DECEMBER 31, 1996 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1996 Commission File Number 1-9648 NATIONAL REALTY, L.P. ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Delaware 75-2163175 - ------------------------------- ------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 10670 North Central Expressway, Suite 300, Dallas, Texas 75231 - -------------------------------------------------------- -------- (Address of Principal Executive Offices) (Zip Code) (214) 692-4700 (Registrant's Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - --------------------------------- ------------------------- Units of Limited Partner Interest American Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: NONE 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 at least the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 14, 1997, the Registrant had 6,330,085 units of limited partner interest outstanding. Of the total units outstanding, 2,598,641 were held by other than those who may be deemed to be affiliates, for an aggregate value of $33,457,503 based on the last trade as reported on the American Stock Exchange on March 14, 1997. The basis of this calculation does not constitute a determination by the Registrant that all of such persons or entities are affiliates of the Registrant as defined in Rule 405 of the Securities Act of 1933, as amended. Documents Incorporated by Reference: NONE 1 2 INDEX TO ANNUAL REPORT ON FORM 10-K
Page ---- PART I Item 1. Business ............................................... 3 Item 2. Properties ............................................. 8 Item 3. Legal Proceedings ...................................... 19 Item 4. Submission of Matters to a Vote of Security Holders .... 23 PART II Item 5. Market for Registrant's Units of Limited Partner Interest and Related Security Holder Matters ........ 23 Item 6. Selected Financial Data ................................ 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ................. 27 Item 8. Financial Statements and Supplementary Data ............ 38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................. 72 PART III Item 10. General Partner of the Registrant and Executive Officers of the Registrant's General Partner ........ 72 Item 11. Executive Compensation ................................. 77 Item 12. Security Ownership of Certain Beneficial Owners and Management .......................................... 80 Item 13. Certain Relationships and Related Transactions ......... 80 PART IV Item 14. Exhibits, Consolidated Financial Statements, Schedules and Reports on Form 8-K ................... 83 Signature Page .................................................. 86
2 3 PART I ITEM 1. BUSINESS General National Realty, L.P. ("National Realty" or the "Registrant") is a Delaware limited partnership formed on January 29, 1987, the business of which is primarily owning and operating through National Operating, L.P., also a Delaware limited partnership (the "Operating Partnership" or "NOLP"), a portfolio of real estate more fully described in ITEM 2. "PROPERTIES." Most of National Realty's properties were acquired in exchange transactions consummated on September 18, 1987, pursuant to which National Realty acquired all of the assets, and assumed all of the liabilities, of 35 public and private limited partnerships. The Operating Partnership was formed on February 27, 1987, to facilitate compliance with recording and filing requirements by holding title to and operating certain of the real estate and personal property then owned or thereafter acquired by National Realty. National Realty and the Operating Partnership operate as an economic unit and, unless the context otherwise requires, all references herein to the "Partnership" shall constitute references to National Realty and the Operating Partnership as a unit. National Realty is the sole limited partner of the Operating Partnership and owns a 99% beneficial interest in the Operating Partnership. Unless earlier dissolved, in accordance with the provisions of National Realty's First Amended and Restated Agreement of Limited Partnership, dated as of January 29, 1987, as amended by the Certificate of Amendment of Limited Partnership Agreement dated as of May 14, 1990 (together, the "Partnership Agreement"), the Partnership will terminate December 31, 2086. The general partner, and owner of 1% of the beneficial interest in each of National Realty and the Operating Partnership, is Syntek Asset Management, L.P. (the "General Partner" or "SAMLP"), a Delaware limited partnership. Gene E. Phillips is a general partner of SAMLP. Syntek Asset Management, Inc. ("SAMI") is the Managing General Partner of SAMLP. Mr. Phillips served as a director, Chairman of the Board and Chief Executive Officer of SAMI until May 15, 1996. Basic Capital Management, Inc. ("BCM") is the sole shareholder of SAMI. The limited partners of SAMLP are Mr. Phillips, William S. Friedman, a general partner of SAMLP until March 4, 1994, and American Realty Trust, Inc. ("ART"), a real estate investment company. Messrs. Phillips and Friedman served as directors and executive officers of ART until November 16, 1992, and December 31, 1992, respectively. As of March 14, 1997, the Partnership owned 195,732 shares of ART common stock, approximately 1.5% of the ART shares then outstanding. ART owns a 96% limited partner interest in SAMLP, the Partnership's General Partner. In August 1996, ART acquired Southmark Corporation's 19.2% limited partner interest in SAMLP. As of March 14, 1997, ART owned approximately 54.4% of National Realty's outstanding units of limited partner interest. See ITEM 12. "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." 3 4 ITEM 1. BUSINESS (Continued) General (Continued) In November 1992, the Partnership refinanced 52 of the apartment complexes in its real estate portfolio and the underlying debt of a wraparound mortgage note receivable with a financial institution. To facilitate such refinancing, the Operating Partnership transferred these assets to a Delaware limited partnership, Garden Capital, L.P. ("GCLP"). The Operating Partnership is the sole limited partner in GCLP with a 99.3% limited partnership interest. Garden Capital Management Incorporated ("GCMI"), a Nevada corporation, is the .7% managing general partner of GCLP. GCLP is the sole limited partner and 99% owner of 52 single asset limited partnerships which were formed for the purpose of acquiring, operating and holding title to the 52 apartment complexes transferred by the Operating Partnership. The transfer of the 52 apartment complexes and wraparound mortgage note receivable from the Operating Partnership to GCLP was effective November 25, 1992. See ITEM 2. "PROPERTIES". Each of the single asset limited partnerships has no significant assets other than an apartment complex encumbered by mortgage debt. Garden Capital Incorporated ("GCI"), a Nevada corporation, is the 1% managing general partner in each of the single asset limited partnerships. GCMI, as the managing general partner of GCLP, makes all decisions relating to the operation of GCLP, and GCI, as the managing general partner of the single asset limited partnerships, makes all decisions relating to the operation of the apartment complexes. GCMI received its .7% general partner interest in GCLP in exchange for a mortgage note receivable. National Realty subsequently purchased the mortgage note receivable for a $900,000 note payable. GCI received its 1% general partner interest in each of the single asset partnerships in exchange for agreeing to manage the apartment complex owned by each of the partnerships. Except as described below and under ITEM 3. "LEGAL PROCEEDINGS - Moorman Settlement," all decisions relating to the Partnership, including all decisions with respect to the acquisition, disposition, improvement, financing or refinancing of the Partnership's properties or other investments, are made by the Managing General Partner. All decisions, however, relating to the acquisition, disposition, improvement, financing or refinancing of GCLP's assets are made jointly by GCLP's managing general partner and the Partnership's Managing General Partner. BCM performs certain administrative functions for the Partnership, such as accounting services, mortgage servicing and portfolio review and analysis, on a cost reimbursement basis. BCM also performs loan placement services, leasing services and real estate brokerage and acquisition services, has performed property management services with respect to certain of the Partnership's properties, and may perform other services for the Partnership for fees and commissions. BCM is a company owned by a trust for the benefit of the children of Mr. Phillips. Mr. Phillips served as a director of BCM until December 22, 1989 and as Chief Executive Officer of BCM until September 1, 1992. 4 5 ITEM 1. BUSINESS (Continued) General (Continued) GCMI performs administrative services for GCLP, similar to those performed by BCM for the Partnership, also on a cost reimbursement basis. The common stock of GCI and GCMI is owned by John A. Doyle (20%), Richard A. Green (40%) and Henry W. Simon (40%). Since February 1, 1990, affiliates of the Managing General Partner have provided property management services for the Partnership's properties. Currently, Carmel Realty Services, Ltd. ("Carmel, Ltd.") provides such property management services for the Partnership's properties. See "Management and Operations," below. Effective November 25, 1992, Carmel Ltd. ceased providing property management services to the apartment complexes transferred to GCLP. Business Plan The Partnership's primary business and only industry segment is owning and operating a portfolio of real estate. Information regarding the Partnership's real estate portfolio is set forth in ITEM 2. "PROPERTIES - Real Estate" and Schedule III to the Consolidated Financial Statements, included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." In addition, the Partnership owns interests in mortgage loans primarily arising from the sale of Partnership properties which are secured by various apartment complexes and commercial properties, as set forth in ITEM 2. "PROPERTIES - Mortgage Loans" and Schedule IV to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." The objectives of the Partnership are to increase asset values and, to a lesser extent, to generate cash available for distribution to unitholders through aggressive management of the Partnership's real estate portfolio. The Partnership's primary emphasis, however, is on capital appreciation rather than current income. As discussed in ITEM 5. "MARKET FOR REGISTRANT'S UNITS OF LIMITED PARTNER INTEREST AND RELATED SECURITY HOLDER MATTERS," National Realty suspended cash distributions as of December 29, 1989. Pursuant to a plan (the "Settlement Plan") established under the terms of the May 1990 settlement of the Moorman class action litigation (the "Settlement Agreement"), the Partnership agreed to distribute to unitholders, during the pendency of the Settlement Plan, all of the Partnership's operating cash flow in excess of anticipated renovation costs, unless the Partnership's Oversight Committee approved alternative uses for such operating cash flow. On October 7, 1993, the Partnership announced a resumption of regular quarterly distributions at a rate of $.07 per unit. In the first quarter of 1996, the Partnership increased its regular quarterly distribution to $.10 per unit. In the first and second quarters of 1996, in addition to the regular quarterly distribution of $.10 per unit, the Partnership paid extra distributions of $.15 per unit and in the third quarter of 1996, the Partnership paid an extra distribution of $.40 per unit. The Partnership declared and paid total distributions of $1.10 per unit or a total of $7.0 million in 1996. 5 6 ITEM 1. BUSINESS (Continued) Business Plan (Continued) At the discretion of the Managing General Partner, the Partnership may, from time to time, sell properties or other assets, renovate or make improvements to properties, make additional investments or obtain additional or initial financing for its properties. The establishment, implementation and modification of the business objectives and policies of the Partnership are the responsibility of the Managing General Partner, and, in general, the limited partners have no voting rights with respect to such matters. With respect to the GCLP properties, such business objectives and policies are the responsibility of GCMI. The Partnership's primary business purpose is the ownership of improved, income-producing real estate, but the Partnership may also conduct any business that may lawfully be conducted under the Delaware Revised Uniform Limited Partnership Act. As long as the Settlement Plan is in effect, Oversight Committee approval is required for the Partnership to enter into any new line of business. See "Management and Operations" below. Management and Operations Since February 1, 1990, affiliates of the Managing General Partner have provided property management services to the Partnership. Currently, Carmel, Ltd. provides such property management services. Carmel, Ltd. subcontracts with other entities for the property-level management services to the Partnership. The general partner of Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (i) Syntek West, Inc. ("SWI") of which Mr. Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level management and leasing of twelve of the Partnership's commercial properties to Carmel Realty, Inc. ("Carmel Realty"), which is a company owned by SWI. Carmel Realty is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Carmel, Ltd. Effective November 25, 1992, Carmel, Ltd. ceased providing property management services for the apartment complexes transferred to GCLP. BCM performs administrative functions such as accounting services, mortgage servicing and portfolio review and analysis for the Partnership on a cost reimbursement basis. GCMI performs similar administrative functions for GCLP, also on a cost reimbursement basis. Affiliates of BCM also perform loan placement services, leasing services and real estate brokerage, and other services, for the Partnership for fees and commissions. Pending Withdrawal of General Partner As described in ITEM 3. "LEGAL PROCEEDINGS - Moorman Settlement," the Settlement Plan provided that, if certain aggressive, annually increasing Targets relating to the price of National Realty's units of limited partner interest and distributions to unitholders were not met 6 7 ITEM 1. BUSINESS (Continued) Pending Withdrawal of General Partner (Continued) for two successive years of the Settlement Plan or the fifth and final year of the Settlement Plan, the General Partner would be required to resign and the Partnership would be required to repurchase the General Partner's interest in the Partnership (the "Redeemable General Partner Interest") for its fair value, and to pay certain fees and other compensation, as provided in the Partnership Agreement and the Settlement Agreement. If Targets are not met for any two successive years of the Settlement Plan or for the final year of the Settlement Plan, SAMLP must withdraw as General Partner effective at the time a successor general partner is selected. The Settlement Plan terminates upon the withdrawal of SAMLP as General Partner and the due election and taking office of a successor. Withdrawal of SAMLP as General Partner pursuant to the Settlement Agreement would be subject to the provisions of the Partnership Agreement, including the right of unitholders to elect a successor general partner by majority vote. Upon the withdrawal or removal of the General Partner without the election of a successor, the Partnership would be dissolved. The Targets for the first and second anniversary dates were not met. Since the Targets were not met for two successive years, SAMLP expects to resign as General Partner effective upon the election and qualification of its successor. On July 8, 1992, SAMLP notified the Oversight Committee of the failure to meet the Target for two successive years. See ITEM 3. "LEGAL PROCEEDINGS - Moorman Settlement," for further information regarding the pending resignation of SAMLP as General Partner. Competition The real estate business is highly competitive and the Partnership competes with numerous entities engaged in real estate activities (including certain entities described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - - Certain Business Relationships,") some of which may have greater financial resources than the Partnership. The Partnership believes that success against such competition is dependent upon the geographic location of the property, the performance of the property managers in areas such as marketing, collection and the ability to control operating expenses, the amount of new construction in the area, and the maintenance and appearance of the property. Additional competitive factors with respect to commercial properties are the ease of access to the property, the adequacy of related facilities, such as parking, and sensitivity to market conditions in setting rent levels. With respect to apartments, competition is also based upon the design and mix of the units and the ability to provide a community atmosphere for the tenants. The Partnership believes that general economic circumstances and trends and the rate at which properties are renovated or new properties are developed in the vicinity of each of the Partnership's properties are also competitive factors. 7 8 ITEM 1. BUSINESS (Continued) Competition (Continued) As discussed in "Business Plan" above, the Partnership does not anticipate making material property acquisitions at the present time. However, to the extent that the Partnership seeks to sell any of its properties, the sales prices for such properties may be affected by competition from other real estate entities and financial institutions also attempting to sell their properties located in areas in which the Partnership's properties are located. As described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Certain Business Relationships," the executive officers of SAMI, the Managing General Partner of SAMLP, are also executive officers of certain other entities, each of which has business objectives similar to the Partnership's. These executive officers owe fiduciary duties to such other entities and the Partnership under applicable law. In addition, the Partnership also competes with other entities which are affiliates of BCM or for which BCM acts as advisor, and which may have investment objectives similar to the Partnership's and that may compete with the Partnership in purchasing, selling, leasing and financing real estate and real estate related investments. In resolving any potential conflicts of interest which may arise, BCM has informed the Partnership that it intends to continue to exercise its best judgment as to what is fair and reasonable under the circumstances in accordance with applicable law. Special Considerations Relating to Investments in Real Estate The Partnership is subject to all of the risks incident to the ownership of real estate and interests therein, many of which relate to the general illiquidity of real estate investments. These risks include, changes in general or local economic conditions, changes in interest rates and the availability of permanent mortgage financing which may render the sale or refinancing of a property difficult or unattractive and which may make debt service burdensome, changes in real estate and zoning laws, increases in real estate taxes, federal or local economic or rent controls, floods, earthquakes, hurricanes and other acts of God and other factors beyond the control of the Partnership. Also, the illiquidity of real estate investments may impair the ability of the Partnership to respond promptly to changing circumstances. The Partnership believes that such risks are partially mitigated by the diversification by geographic region and property type of the Partnership's real estate portfolio. ITEM 2. PROPERTIES The Partnership's principal offices are located at 10670 North Central Expressway, Suite 300, Dallas, Texas 75231. The Partnership believes that its offices are suitable and adequate for its present operations. Details of the Partnership's real estate and mortgage notes receivable portfolios at December 31, 1996, are set forth in Schedules III and IV, 8 9 ITEM 2. PROPERTIES (Continued) respectively, to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." The discussions set forth below under the headings "Real Estate" and "Mortgage Loans" provide certain summary information concerning the Partnership's real estate and mortgage notes receivable portfolios. The Partnership's real estate consists of properties purchased and properties obtained through foreclosure of mortgage notes. The discussion set forth below under the heading "Real Estate" provides certain summary information concerning the Partnership's real estate. The Partnership holds investments in 67 apartment complexes, seven office buildings and nine shopping centers in all geographic regions of the United States, except for the Northeast region, as shown more specifically in the table under "Real Estate" below. The Partnership holds mortgage notes receivable secured by real estate in the Pacific, Midwest, Mountain and Southwest regions of the United States, as shown more specifically in the table under "Mortgage Loans" below. At December 31, 1996, no single asset of the Partnership accounted for 10% or more of its total assets. At December 31, 1996, 80% of the Partnership's assets consisted of real estate and 5% consisted of mortgage notes and interest receivable. The remaining 15% of the Partnership's assets at December 31, 1996 consisted of cash, cash equivalents and other assets. The percentage of the Partnership's assets invested in any one category is subject to change and no assurance can be given that the composition of the Partnership's assets in the future will approximate the percentages listed above. [THIS SPACE INTENTIONALLY LEFT BLANK.] 9 10 ITEM 2. PROPERTIES (Continued) Geographic Regions The Partnership has divided the United States into the following six geographic regions. Northeast region comprised of the states of Connecticut, Delaware, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont, and the District of Columbia. The Partnership has no apartment complexes or commercial properties in this region. Southeast region comprised of the states of Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee and Virginia. This Partnership has 18 apartment complexes and 6 commercial properties in this region. Southwest region comprised of the states of Arizona, Arkansas, Louisiana, New Mexico, Oklahoma and Texas. The Partnership has 22 apartment complexes and 5 commercial properties in this region. Midwest region comprised of the states of Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, West Virginia and Wisconsin. The Partnership has 22 apartment complexes and 1 commercial property in this region. Mountain region comprised of the states of Colorado, Idaho, Montana, Nevada, Utah and Wyoming. The Partnership has 2 apartment complexes and 1 commercial property in this region. Pacific region comprised of the states of Alaska, California, Hawaii, Oregon and Washington. The Partnership has 3 apartment complexes and 3 commercial properties in this region. Real Estate At December 31, 1996, the Partnership owned 83 properties located in 22 states. These properties consisted of 67 apartment complexes comprising 16,848 units with a total Revaluation Equity (as defined in ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Current Value Reporting") of $297.6 million, seven office buildings with an aggregate of 495,594 square feet with a total Revaluation Equity of $18.0 million and nine shopping centers with an aggregate of 1.1 million square feet with a total Revaluation Equity of $30.3 million. All but five of the Partnership's properties are currently encumbered by mortgage debt. Generally, the ability to make debt service payments under a mortgage loan will be dependent upon the performance of the 10 11 ITEM 2. PROPERTIES (Continued) Real Estate (Continued) property, which is subject to the risks associated with real estate investments, many of which are beyond the control of the Partnership. In the event of default under one of these mortgages, with the exception of GCLP mortgage debt discussed below, the property securing such mortgage would be subject to foreclosure. Most of the Partnership's borrowings are subject to substantial "balloon" payments at maturity. The apartment complexes and the wraparound note receivable transferred to GCLP were refinanced under a ten-year blanket mortgage loan, evidenced by a single mortgage with an original principal balance of $223.0 million. A portion of the blanket mortgage debt was assigned to each apartment complex and the wraparound note receivable, and each is cross-defaulted and cross-collateralized. In the event of a default, the servicer is entitled to accelerate all or any portion of the principal amount of the loan and to exercise its remedies against any or all of the mortgaged properties and the wraparound note receivable. However, with respect to mortgaged properties located in certain states that impose a mortgage recording tax, the recovery on the related mortgage would be limited to 125% of the allocated loan amount. Additional detailed information with respect to individual Partnership properties and associated debt is set forth in Schedule III to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." The following table sets forth the percentages, by property type and geographic region, of the Partnership's real estate at December 31, 1996.
Commercial Region Apartments Properties - ------ ---------- ---------- Southeast .............................. 27.0% 31.9% Southwest .............................. 34.4 34.3 Midwest ................................ 31.7 18.8 Mountain ............................... 4.3 2.8 Pacific ................................ 2.6 12.2 ----- ----- 100.0% 100.0%
The foregoing table is based solely on the number of apartment units and amount of commercial square footage owned by the Partnership and does not reflect the value of the Partnership's investment in each geographic region. See Schedule III to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" for a more detailed description of the Partnership's real estate. [THIS SPACE INTENTIONALLY LEFT BLANK.] 11 12 ITEM 2. PROPERTIES (Continued) Real Estate (Continued) Set forth below are the Partnership's properties and the monthly rental rate for apartments and the average annual rental rate for commercial properties and occupancy thereof at December 31, 1996, 1995 and 1994:
Rent Per Units/ Square Foot Occupancy Property Location Square Footage 1996 1995 1994 1996 1995 1994 - ----------------- -------------- --------------- ------ ------ ------ ------ ------ ----- Apartments Alexandria.............. Decatur, GA 406 units/ 562,700 sq. ft. $ .44 $ .43 $ .41 92% 96% 92% Arlington Place......... Pasadena, TX 230 units/ 205,476 sq. ft. .62 .60 .60 91% 95% 88% Barcelona............... Tampa, FL 368 units/ 346,144 sq. ft. .49 .47 .49 93% 96% 85% Bavarian................ Middletown, OH 259 units/ 229,560 sq. ft. .62 .60 .59 96% 92% 95% Bent Tree............... Addison, TX 292 units/ 244,480 sq. ft. .66 .60 .56 97% 100% 99% Blackhawk............... Ft. Wayne, IN 209 units/ 190,520 sq. ft. .53 .53 .53 95% 94% 96% Bridgestone............. Friendswood, TX 76 units/ 65,519 sq. ft. .64 .62 .62 94% 97% 93% Brookview Gardens....... Smyrna, GA 156 units/ 155,600 sq. ft. .59 .54 .51 89% 94% 96% Candlelight Square...... Lenexa, KS 119 units/ 114,630 sq. ft. .55 .53 .51 97% 96% 92% Chalet I................ Topeka, KS 162 units/ 131,791 sq. ft. .61 .61 .61 96% 94% 87% Chalet II............... Topeka, KS 72 units/ 49,164 sq. ft. .67 .67 * 89% 97% * Chateau................. Bellevue, NE 115 units/ 99,220 sq. ft. .63 .60 .59 99% 97% 94% Club Mar................ Sarasota, FL 248 units/ 230,180 sq. ft. .59 .57 .59 91% 95% 92% Confederate Point....... Jacksonville, FL 206 units/ 277,860 sq. ft. .45 .44 .42 94% 98% 92% Country Place........... Round Rock, TX 152 units/ 119,808 sq. ft. .71 .68 .63 93% 95% 97% Covered Bridge.......... Gainesville, FL 176 units/ 171,416 sq. ft. .63 .60 .57 94% 100% 99% Creekwood............... College Park, GA 300 units/ 285,840 sq. ft. .48 .50 .49 91% 94% 87% Fair Oaks............... Euless, TX 208 units/ 166,432 sq. ft. .58 .55 .52 96% 98% 96% Four Seasons............ Denver, CO 384 units/ 254,900 sq. ft. .78 .77 .74 94% 93% 96% Fox Club................ Indianapolis, IN 336 units/ 317,600 sq. ft. .54 .54 .54 88% 91% 95% Foxwood................. Memphis, TN 220 units/ 212,000 sq. ft. .51 .49 .46 93% 95% 97% Hidden Valley........... Grand Rapids, MI 176 units/ 260,970 sq. ft. .52 .51 .49 93% 97% 96% Horizon East............ Dallas, TX 166 units/ 141,081 sq. ft. .52 .50 .48 92% 94% 93% Kimberly Woods.......... Tucson, AZ 279 units/ 249,678 sq. ft. .55 .54 .52 93% 94% 95% La Mirada............... Jacksonville, FL 320 units/ 341,400 sq. ft. .50 .47 .46 93% 98% 93% Lake Nora Arms.......... Indianapolis, IN 588 units/ 429,380 sq. ft. .63 .61 .60 91% 95% 94% Lakewood Park........... St. Petersburg, FL 240 units/ 279,720 sq. ft. .41 .40 .40 94% 91% 90% Lantern Ridge........... Richmond, VA 120 units/ 112,296 sq. ft. .51 .50 .49 95% 93% 98% Mallard Lake............ Greensboro, NC 336 units/ 295,560 sq. ft. .62 .59 .57 95% 97% 98% Manchester Commons...... Manchester, MO 280 units/ 331,820 sq. ft. .50 .49 .46 93% 95% 94%
12 13 ITEM 2. PROPERTIES (Continued) Real Estate (Continued)
Rent Per Units/ Square Foot Occupancy Property Location Square Footage 1996 1995 1994 1996 1995 1994 - ----------------- -------------- --------------- ------ ------ ------ ------ ------ ------ Apartments - Continued Mesa Court.............. Mesa, AZ 224 units/ 180,291 sq. ft. $ .66 $ .61 $ .57 90% 94% 94% Mesa Ridge.............. Mesa, AZ 256 units/ 206,045 sq. ft. .65 .61 .57 88% 92% 95% Nora Pines.............. Indianapolis, IN 254 units/ 254,676 sq. ft. .57 .55 .55 94% 97% 95% Oak Hollow.............. Austin, TX 409 units/ 290,072 sq. ft. .87 .81 .75 91% 97% 99% Oak Tree................ Grandview, MO 189 units/ 160,591 sq. ft. .54 .52 .52 94% 96% 95% Oakmont................. Monroe, LA 212 units/ 185,500 sq. ft. .48 .48 .48 94% 92% 93% Olde Towne.............. Middletown, OH 199 units/ 179,395 sq. ft. .57 .57 .57 92% 91% 94% Outrigger............... Tulsa, OK 343 units/ 327,190 sq. ft. .38 .36 .36 91% 92% 88% Pheasant Ridge.......... Bellevue, NE 264 units/ 243,960 sq. ft. .56 .51 .51 94% 97% 85% Pines................... Little Rock, AR 257 units/ 221,981 sq. ft. .41 .39 .37 93% 90% 88% Place One............... Tulsa, OK 407 units/ 302,263 sq. ft. .51 .49 .47 96% 96% 92% Quail Point............. Huntsville, AL 184 units/ 202,602 sq. ft. .42 .41 .41 96% 86% 90% Regency................. Lincoln, NE 106 units/ 111,700 sq. ft. .60 .56 .56 95% 88% 97% Regency Falls........... San Antonio, TX 546 units/ 348,692 sq. ft. .63 .63 .60 93% 93% 90% Rockborough............. Denver, CO 345 units/ 249,723 sq. ft. .70 .70 .67 92% 92% 96% Royal Oaks.............. Stone Mountain, GA 300 units/ 385,000 sq. ft. .45 .43 .41 94% 95% 90% Santa Fe................ Kansas City, MO 225 units/ 180,416 sq. ft. .53 .52 .51 91% 92% 90% Shadowood............... Addison, TX 184 units/ 134,616 sq. ft. .69 .66 .64 97% 97% 98% Sherwood Glen........... Urbandale, IA 180 units/ 143,745 sq. ft. .75 .74 .72 96% 93% 93% Skipper's Pond.......... Tampa, FL 260 units/ 233,760 sq. ft. .47 .46 .46 94% 93% 91% Stonebridge............. Florissant, MO 100 units/ 140,576 sq. ft. .43 .42 .42 98% 92% 92% Summerwind.............. Reseda, CA 172 units/ 114,711 sq. ft. .90 .97 .97 92% 91% 92% Sun Hollow.............. El Paso, TX 216 units/ 156,000 sq. ft. .64 .63 .63 90% 96% 92% Tanglewood.............. Arlington Heights, IL 838 units/ 612,816 sq. ft. .99 .96 .96 92% 95% 96% Timber Creek............ Omaha, NE 180 units/ 162,252 sq. ft. .64 .60 .59 98% 94% 91% Towne Oaks.............. Monroe, LA 152 units/ 153,488 sq. ft. .49 .49 .49 94% 95% 94% Villa Del Mar........... Wichita, KS 162 units/ 128,004 sq. ft. .58 .58 .57 94% 90% 89% Village Square.......... Stone Mountain, GA 310 units/ 403,900 sq. ft. .44 .41 .41 86% 84% 88% Villas.................. Plano, TX 208 units/ 156,632 sq. ft. .73 .70 .67 95% 95% 97% Whispering Pines........ Canoga Park, CA 102 units/ 61,671 sq. ft. 1.00 .98 .98 92% 93% 93% Whispering Pines........ Topeka, KS 320 units/ 299,264 sq. ft. .49 .49 .49 89% 90% 92% Windridge............... Austin, TX 408 units/ 281,778 sq. ft. .88 .85 .80 93% 95% 96%
13 14 ITEM 2. PROPERTIES (Continued) Real Estate (Continued)
Rent Per Units/ Square Foot Occupancy Property Location Square Footage 1996 1995 1994 1996 1995 1994 - ----------------- -------------- --------------- ------ ------ ------ ------ ------ ----- Apartments - Continued Windtree I & II......... Reseda, CA 159 units/ 109,062 sq. ft. $ .90 $ .90 $ .90 94% 91% 24% Wisperwood.............. Tampa, FL 212 units/ 199,920 sq. ft. .47 .46 .45 95% 91% 92% Woodlake................ Carrollton, TX 256 units/ 210,208 sq. ft. .68 .66 .63 99% 98% 99% Woodsong II............. Smyrna, GA 190 units/ 207,460 sq. ft. .54 .51 .46 85% 99% 97% Woodstock............... Dallas, TX 320 units/ 222,112 sq. ft. .56 .54 .51 95% 96% 94% Office Buildings 56 Expressway........... Oklahoma City, OK 54,649 sq. ft. 8.21 7.94 7.77 88% 93% 85% Executive Court......... Memphis, TN 41,840 sq. ft. 10.11 9.87 9.91 95% 92% 92% Fondren................. Houston, TX 47,808 sq. ft. 2.00 6.25 7.11 100% 100% 0% Marina Playa............ Santa Clara, CA 124,322 sq. ft. 19.54 18.11 17.00 99% 97% 95% Melrose Business Park... Oklahoma City, OK 124,200 sq. ft. 2.76 2.65 2.59 90% 97% 81% Toll Hill............... Dallas, TX 81,115 sq. ft. 11.64 10.99 11.04 89% 88% 91% University Square....... Anchorage, AK 22,260 sq. ft. 15.07 13.16 13.81 84% 90% 82% Shopping Centers Countryside Plaza....... Clearwater, FL 184,878 sq. ft. 5.00 3.37 3.36 16% 24% 83% Crestview............... Crestview, FL 80,679 sq. ft. 2.98 2.96 3.01 90% 90% 90% Cross County Mall....... Mattoon, IL 304,575 sq. ft. 4.90 4.86 4.39 90% 95% 87% Cullman................. Cullman, AL 92,466 sq. ft. 3.86 3.83 3.82 98% 100% 96% Harbor Plaza............ Aurora, CO 45,863 sq. ft. 8.73 8.42 7.82 97% 78% 87% Katella Plaza........... Orange, CA 52,169 sq. ft. 7.73 9.97 11.34 71% 71% 71% Regency Point........... Jacksonville, FL 67,410 sq. ft. 11.39 11.26 10.63 84% 81% 95% Southern Palms.......... Tempe, AZ 250,068 sq. ft. 7.83 7.73 7.45 87% 93% 84% Westwood................ Tallahassee, FL 149,855 sq. ft. 6.42 5.31 5.00 74% 59% 81%
- ------------ * Property was purchased in 1995. Occupancy presented here and throughout this ITEM 2. is without reference to whether leases in effect are at, below or above market rates. The Partnership owns a fee interest in each property except for the Katella and Westwood shopping centers located in Orange, California and Tallahassee, Florida, respectively, in each of which the Partnership owns a long-term leasehold interest. Such leasehold interests permit some potential for capital appreciation and marketability. The following table sets forth information at December 31, 1996, regarding the Partnership's properties, grouped by region and type of property, including number of properties, aggregate amount of leasable [THIS SPACE INTENTIONALLY LEFT BLANK.] 14 15 ITEM 2. PROPERTIES (Continued) Real Estate (Continued) square footage in the case of commercial properties, number of units and square footage in the case of apartments, approximate weighted average occupancy, and Revaluation Equity (dollars in thousands):
Region/ Units/ Revaluation Property Type Number Square Footage Occupancy Equity ------------- ------ -------------- --------- ----------- Southeast Apartments .......... 18 4,552 Units/ 88% $ 79,005 4.8 Million Sq.Ft Office Building ..... 1 41,840 Sq.Ft. 88% 2,059 Shopping Centers .... 5 475,288 Sq.Ft. 73% 16,048 Southwest Apartments .......... 22 5,801 Units/ 4.5 Million Sq.Ft 94% 107,657 Office Buildings .... 4 307,172 Sq.Ft. 93% 7,535 Shopping Center ..... 1 250,068 Sq.Ft. 89% 6,955 Mountain Apartments .......... 2 729 Units/ 504,623 Sq.Ft 93% 12,114 Shopping Center ..... 1 45,863 Sq.Ft. 86% 1,335 Pacific Apartments .......... 3 433 Units/ 285,955 Sq.Ft 92% 4,580 Office Buildings .... 2 146,582 Sq.Ft. 90% 8,374 Shopping Center ..... 1 52,169 Sq.Ft. 71% 621 Midwest Apartments .......... 22 5,333 Units/ 5.2 Million Sq.Ft 90% 94,295 Shopping Center ..... 1 304,575 Sq.Ft. 91% 5,312 -------- $345,890 ========
Revaluation Equity does not include any adjustments for the Redeemable General Partner Interest as discussed in ITEM 3. "LEGAL PROCEEDINGS - Moorman Settlement." The following discussion briefly describes the events that affected the Partnership's properties during 1996. The Partnership has a 75% general partner interest in Southern Palms Associates, which owns Southern Palms Shopping Center. In August 1992, Southern Palms Associates filed a voluntary petition in bankruptcy, seeking, among other things, to restructure the $9.3 million nonrecourse mortgage secured by the shopping center. In December 1993, an agreement was reached with the lender to modify the $9.3 million first mortgage, reducing the interest rate and extending the maturity date. Southern Palms Associates remains in bankruptcy in order to resolve certain partnership issues involving the 25% general partner. 15 16 ITEM 2. PROPERTIES (Continued) Real Estate (Continued) In March 1996, the Partnership refinanced the mortgage debt secured by the Whispering Pines Apartments in Canoga Park, California in the amount of $2.4 million. The Partnership received net cash of $37,000 after the payoff of $2.3 million in existing mortgage debt, which matured in December 1995, and related closing costs associated with the financing. The new mortgage bears interest at the rate of 7.5% per annum, requires monthly payments of principal and interest of $19,000 and matures in April 2001. The Partnership paid BCM a mortgage brokerage and equity refinancing fee of $24,000 based on the $2.4 million mortgage. In September 1996, the Partnership obtained mortgage financing for the previously unencumbered Harbor Plaza Shopping Center in Aurora, Colorado in the amount of $1.8 million. The Partnership received net cash of $1.6 million after payment of various closing costs associated with the financing. The mortgage bears interest at 9.41% per annum, requires monthly payments of principal and interest of $15,831 and matures in October 2006. The Partnership paid BCM a mortgage brokerage and equity refinancing fee of $18,000 based on the $1.8 million mortgage. In September 1994, the Partnership sold the Creekwood Apartments in College Park, Georgia, for $6.0 million. The Partnership accounted for the sale as a financing transaction, due to the Partnership having provided financing of the purchaser's down payment. In July 1996, the purchaser refinanced the existing mortgage debt in the amount of $4.7 million. The Partnership received $1.2 million in excess financing proceeds from the refinancing. The Partnership continues to account for the Creekwood Apartments as an owned property and the September 1994 sale and July 1996 refinancing as financing transactions of the Partnership, as the Partnership's down payment loan to the purchaser remains outstanding. As discussed below under "Mortgage Loans," in August 1996, the Partnership foreclosed on the note receivable secured by commercial condominiums in Granby, Colorado. The Partnership assigned nominal value to this asset. In December 1996, the Partnership sold the condominiums for $80,000 in cash, recognizing a gain of $61,000 on the sale. Mortgage Loans In addition to real estate, a portion of the Partnership's assets consists of mortgage notes receivable, principally those originating from the sale of Partnership properties and secured by income-producing properties. The Partnership's mortgage notes consist of first and wraparound mortgage loans. First Mortgage Loans. These loans generally provide for level periodic payments of principal and interest sufficient to substantially repay the loan prior to maturity, but may involve interest-only payments or moderate amortization of principal and a "balloon" principal payment at maturity. With respect to first mortgage loans, it is the Partnership's general policy to require that the borrower provide a mortgagee's title 16 17 ITEM 2. PROPERTIES (Continued) Mortgage Loans (Continued) policy or an acceptable legal opinion of title as to the validity and the priority of the mortgage lien over all other obligations, except liens arising from unpaid property taxes and other exceptions normally allowed by first mortgage lenders in the relevant area. Wraparound Mortgage Loans. A wraparound mortgage loan, sometimes called an all-inclusive loan, is a mortgage loan having an original principal amount equal to the outstanding balance under the prior existing mortgage loan(s) plus the amount actually advanced under the wraparound mortgage loan. Wraparound mortgage loans may provide for full, partial or no amortization of principal. Junior Mortgage Loans. Junior mortgage loans are loans secured by mortgages that are subordinate to one or more prior liens either on the fee or a leasehold interest in real estate. Recourse on such loans ordinarily includes the real estate on which the loan is made, other collateral and personal guarantees by the borrower. At December 31, 1996, the Partnership's mortgage notes had an aggregate face amount of $31.6 million and an aggregate net carrying value of $13.2 million, net of deferred gains ($15.8 million), discounts ($142,000) and allowance for estimated losses ($1.9 million). The following table sets forth the percentage (based on the outstanding mortgage note balance at December 31, 1996), by property type and geographic region, of the properties that serve as collateral for the three mortgage notes receivable in the Partnership's mortgage notes receivable portfolio at December 31, 1996 excluding the $3.0 million in mortgage notes secured by land as discussed below. See Schedule IV to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" for further details of the Partnership's mortgage notes receivable portfolio.
Commercial Region Apartments Properties Total - ------ ---------- ---------- ----- Mountain ..................... - % 18.2% 18.2% Pacific ...................... 62.2 - 62.2 Midwest ...................... - 19.6 19.6 ---- ----- ----- 62.2% 37.8% 100.0%
In February 1995, as a part of a lawsuit settlement with an insurance company, the Partnership, among other things, acquired from the insurance company a mortgage note secured by land in Granby, Colorado and a mortgage note secured by commercial condominiums also in Granby, Colorado. In August 1996, the Partnership completed foreclosure on the collateral properties securing the notes. As discussed above under "Real Estate," in August 1996, the Partnership sold the commercial condominiums. In June 1996, the Partnership funded a $1.5 million loan to JNC Enterprises, Ltd. ("JNC"), secured by a first mortgage on 67 acres of 17 18 ITEM 2. PROPERTIES (Continued) Mortgage Loans (Continued) unimproved land in Collin County, Texas and by a second mortgage on 182 acres of unimproved land in McKinney, Texas. The loan bears interest at 16.0% per annum and matures in June 1997. All principal and accrued but unpaid interest is due at maturity. In November 1996, the Partnership made a second loan to JNC in the amount of $2.0 million, $1.0 million of which was funded in November 1996, and the remaining $1.0 million was funded in December 1996. The loan is secured by a 73.7% limited partner interest in a partnership which owns 272 acres of undeveloped land in The Colony, Texas. The note bears interest at 16% per annum, requires monthly payments of interest only and matures in November 1997. This loan is cross-collateralized with the loan made to JNC in June 1996. In January 1997, the Partnership funded a $1.2 million loan to Bordeaux Investments Two, L.L.C. ("Bordeaux"). The loan is secured by (i) a 100% limited partnership interest in Bordeaux, which owns a shopping center in Oklahoma City, Oklahoma; (ii) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and (iii) the personal guarantees of the Bordeaux partners. The loan bears interest at 14.0% per annum, requires monthly payments of interest only at 12.0% per annum, with the deferred interest payable annually on December 15, 1997 and 1998, and matures in January 1999. The Partnership has the option to reduce the principal balance of the loan by $50,000 in exchange for 75% ownership of Bordeaux. In February 1997, the Partnership funded a third loan to JNC in the amount of $2.5 million. The loan is secured by a 70.87% limited partner interest in a limited partnership which owns 250 acres of undeveloped land in Fort Worth, Texas. The note bears interest at 12% per annum, requires quarterly payments of interest only and matures in October 1997. In January 1997, the note receivable secured by the Nellis Bonanza Shopping Center in Las Vegas, Nevada matured. The borrower did not make the required principal payment. Therefore, at December 31, 1996, the note balance has been classified as non-performing. The Partnership has instituted foreclosure proceedings and anticipates that it will not incur a loss on foreclosure as the estimated value of the collateral property exceeds the carrying value of the note. Investment in Marketable Equity Securities of ART At December 31, 1996, the Partnership owned 195,732 shares of common stock of ART, a real estate investment company, representing approximately 1.5% of ART's outstanding shares. Mr. Phillips, a general partner of SAMLP, the General Partner of the Partnership, served as Chairman of the Board and as a director of ART until November 16, 1992. The executive officers of the Managing General Partner are also executive officers of ART. See ITEM 12. "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." At December 31, 1996, the market value of the ART common stock owned by the Partnership was $1.3 million. 18 19 ITEM 2. PROPERTIES (Continued) Investment in Marketable Equity Securities of ART (Continued) ART owns a 96% limited partner interest in SAMLP. In addition, as of March 14, 1997, ART owned 3,441,169 of National Realty's units of limited partner interest, approximately 54.4% of the units then outstanding. ITEM 3. LEGAL PROCEEDINGS Moorman Settlement The Partnership is party to a Settlement Agreement, dated as of May 9, 1990, between plaintiffs Joseph B. Moorman, et al. and defendants Robert A. McNeil, National Realty, the Operating Partnership, SAMLP, Gene E. Phillips, William S. Friedman, and Shearson Lehman Hutton Inc., successor-in-interest to defendant E.F. Hutton & Company Inc., relating to the action entitled Moorman, et al. v. Southmark Corporation, et al. Such action was filed on September 2, 1987, in the Superior Court of the State of California, County of San Mateo. On May 9, 1990, the Partnership agreed to settle such action pursuant to the terms of a written agreement (the "Moorman Settlement Agreement"). On June 29, 1990, after a hearing as to its fairness, reasonableness and adequacy, the Moorman Settlement Agreement was granted final court approval. The Moorman Settlement Agreement is complex and the following summary is qualified in its entirety by reference to the text thereof, which was previously included as an exhibit to the Partnership's Form 10-Q for the quarter ended March 31, 1990, as filed with the Securities and Exchange Commission. The Moorman Settlement Agreement provides for a plan (the "Moorman Settlement Plan") consisting of, among other things, the following: (i) the appointment and operation of a committee (the "Oversight Committee") to oversee the implementation of the Moorman Settlement Plan, (ii) the appointment and operation of an audit committee having a majority of members unaffiliated with Messrs. Phillips and Friedman or SAMLP, (iii) the establishment of specified annually increasing targets described below (each a "Target") for each of the next five years through May 1995, relating to the price of the units of limited partner interest as decreased for certain distributions to unitholders, (iv) an agreement by SAMLP not to seek reimbursement of greater than $500,000 per year for Messrs. Phillips' and Friedman's salaries for serving as general partners of SAMLP, (Mr. Friedman resigned as general partner of SAMLP effective March 4, 1994) and a deferral of such payments until such time as a Target may be met, and, if SAMLP resigns as General Partner, a waiver of any compensation so deferred, (v) a deferral until such time as a Target may be met of certain future annual General Partner compensation payable, pursuant to the Partnership's governing documents, to SAMLP or its affiliates, and, if SAMLP resigns as General Partner, a waiver of any compensation so deferred, (vi) the required distribution to unitholders of all the Partnership's operating cash flow in excess of certain renovation costs, unless the Oversight Committee approves alternative uses for such operating cash flow, (vii) the issuance of Warrants to purchase an aggregate of up to 2,019,579 units (the "Warrants") to Class Members, (viii) the contribution by certain co-defendants of cash and notes 19 20 ITEM 3. LEGAL PROCEEDINGS (Continued) Moorman Settlement (Continued) payable to the Partnership aggregating $5.5 million (including $2.5 million contributed by SAMLP and its general partners over a four-year period), (ix) the amendment of the Partnership Agreement to reduce the vote required to remove the General Partner from a two-thirds vote to a majority vote of the units, (x) the Partnership's redemption of its unit purchase rights and an agreement not to adopt a similar rights plan without Oversight Committee approval and (xi) the Partnership's payment of certain settlement costs, including plaintiffs' attorneys' fees in the amount of $3.4 million. The Moorman Settlement Plan will remain in effect until SAMLP has resigned as General Partner and a successor general partner is elected and takes office, and the Warrants were exercisable for five years from the date of issuance and expired on February 14, 1997. Prior to their expiration a total of 1,631 warrants were exercised for the purchase of 1,226 units. SAMLP, on behalf of itself and its general partners, has made the payments of $2.5 million (including accrued interest), to the Partnership, as required by the Moorman Settlement Agreement. If Targets are not met for any two successive years of the Moorman Settlement Plan or for the final year of the Moorman Settlement Plan, SAMLP will be required to withdraw as General Partner effective at the time a successor general partner is elected. Upon, among other things, the withdrawal of SAMLP as General Partner and the due election and taking office of a successor, the Moorman Settlement Plan would terminate. The Targets for the first and second anniversary dates were not met. Since the Targets were not met for two successive years, the Moorman Settlement Agreement requires that SAMLP resign as General Partner, effective upon the election and qualification of its successor. On July 8, 1992, SAMLP notified the Oversight Committee of the failure to meet the Target for two successive years. Upon, among other things, the withdrawal of SAMLP as General Partner and the due election and taking office of a successor, the Moorman Settlement Plan will terminate. Withdrawal of SAMLP as General Partner pursuant to the Moorman Settlement Agreement requires unitholders to elect a successor general partner by majority vote. Upon the withdrawal or removal of the General Partner without the selection of a successor, the Partnership would be dissolved. The Moorman Settlement Agreement provides that between the date of the certification causing the General Partner's resignation and the date a successor general partner takes office, the resigning General Partner shall limit its activities, as General Partner, to the conduct of the business of the Partnership in the ordinary course, shall not, without consent of the Oversight Committee, purchase or sell any real estate or other assets of the Partnership not in progress on said date, shall cooperate in the election of a successor general partner and shall cooperate with its successor to facilitate a change in the office of 20 21 ITEM 3. LEGAL PROCEEDINGS (Continued) Moorman Settlement (Continued) General Partner of the Partnership. The resigning General Partner will continue to receive fees, expenses and distributions, if any, while the solicitation is prepared. The withdrawal of the General Partner would require the Partnership to acquire the General Partner's interest in the Partnership (the "Redeemable General Partner Interest") at its then fair value, and to pay certain fees and other compensation, as provided in the Partnership Agreement and the Moorman Settlement Agreement. Under the Moorman Settlement Agreement, payment for such Redeemable General Partner Interest, fees and other compensation may, at the Oversight Committee's option, be paid over a three year period pursuant to a secured promissory note bearing interest at the prime rate and containing commercially reasonable terms and collateral. Under the Moorman Settlement Plan, the purchase price for Redeemable General Partner Interest would be calculated, as of the time SAMLP withdraws as General Partner under the Partnership's governing documents. The Managing General Partner has calculated the Redeemable General Partner Interest at December 31, 1996 to be $42.0 million, and believes there has been no material change in such value since such date. The Partnership would be entitled to offset against any such payment the then outstanding principal balance ($4.2 million at December 31, 1996) plus all accrued but unpaid interest ($6.2 million at December 31, 1996) on the note receivable from SAMLP for its capital contribution to the Partnership. In the accompanying Consolidated Financial Statements, the Redeemable General Partner Interest is shown as a reduction of Partners' Equity. The note receivable from the General Partner has been offset against the Redeemable General Partner Interest. The Oversight Committee previously has informed the Partnership that it calculated the amount of such Redeemable General Partner Interest to be less than the amount calculated by the Managing General Partner. When SAMLP withdraws as General Partner of the Partnership, the value of the Redeemable General Partner Interest would depend on the fair value of the Partnership's assets at the time of calculation and there can be no assurance that the Redeemable General Partner Interest, fees and other compensation payable on any such withdrawal will not be substantially higher or lower than any current estimate or calculation. On January 27, 1995, National Realty, SAMLP, the Oversight Committee and William H. Elliott executed an Implementation Agreement which provides for the nomination of an entity controlled by Mr. Elliott as successor general partner and for the resolution of all related matters under the Moorman Settlement. On February 20, 1996, the parties to the Implementation Agreement executed an Amended and Restated Implementation Agreement. On September 23, 1996, the Supervising Judge entered an order granting tentative approval of the Amended and Restated Implementation Agreement and the form of notice to be sent to the original class members. However, the order reserved jurisdiction to determine other matters which must be resolved prior to final approval. Upon final approval by the Supervising Judge, the proposal to elect the successor general 21 22 ITEM 3. LEGAL PROCEEDINGS (Continued) Moorman Settlement (Continued) partner will be submitted to the unitholders of National Realty for a vote. In addition, the unitholders will vote upon amendments to the National Realty Partnership Agreement which relate to the proposed compensation of the successor general partner and other related matters. Provided that the successor general partner is elected pursuant to the terms of the Amended and Restated Implementation Agreement, SAMLP shall receive $12,471,500 from the Partnership. This amount represents a compromise settlement of the net amounts owed by the Partnership to SAMLP upon SAMLP's withdrawal as General Partner and any amounts which SAMLP and its affiliates may owe to the Partnership. This amount shall be paid to SAMLP pursuant to a promissory note in accordance with the terms set forth in the Amended and Restated Implementation Agreement. Upon approval by the unitholders, SAMLP shall withdraw as General Partner and the successor general partner shall take office. If the required approvals are obtained, it is anticipated that the successor general partner will be elected and take office during the third quarter of 1997. The Amended and Restated Implementation Agreement provides that SAMLP, and its affiliates owning units in the Partnership shall not vote to remove the successor general partner, except for removal with cause, for a period of 36 months from the date the successor general partner takes office. Upon the election and taking office of the successor general partner, the Moorman Settlement Plan and the Oversight Committee shall be terminated. If the successor general partner nominee is not elected, the existing Moorman Settlement shall remain in full force and effect and all of the provisions of the Amended and Restated Implementation Agreement shall be voided. On September 3, 1996, Joseph B. Moorman filed a Motion for Orders Compelling Enforcement of the Moorman Settlement Agreement, Appointment to a Receiver and Collateral Relief with the Superior Court of the State of California in and for the County of San Mateo. The motion alleged that the settling defendants had failed or refused to perform their obligations under the Moorman Settlement Agreement and had breached the Moorman Settlement Agreement. The motion also requested that SAMLP be removed as general partner and a receiver be appointed to manage the Partnership. The motion also requested that ART be ordered to deliver to the court all units which had been purchased by ART since August 7, 1991. A hearing was held on this motion on October 4, 1996. On January 2, 1997, the Supervising Judge entered an order denying the motion. On January 27, 1997, Joseph B. Moorman filed motions to (i) discharge the Oversight Committee and (ii) vacate the Court's orders and renewed his prior motions to compel enforcement of the Moorman Settlement Agreement, appoint a receiver over the Partnership, and for collateral relief against ART. Also on January 27, 1997, Robert A. McNeil filed motions to (i) be installed as receiver for the Partnership, (ii) vacate the Court's orders, and (iii) disband the Oversight Committee. A hearing on the motions to discharge or disband the Oversight Committee and to vacate the Court's orders was held on March 21, 1997, and the Supervising Judge ruled that neither Mr. NcNeil nor Mr. Moorman had standing to bring the motions. The Supervising Judge also set June 27, 1997 as the hearing date for final approval of the Amended and Restated Implementation Agreement. 22 23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. _________________________________ PART II ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNER INTEREST AND RELATED SECURITY HOLDER MATTERS National Realty's units of limited partner interest are traded on the American Stock Exchange ("AMEX") using the symbol "NLP." The following table sets forth high and low sale prices of National Realty's units of limited partner interest as reported by the AMEX:
QUARTER ENDED HIGH LOW - ------------------ ---------- -------- March 31, 1997 ................... $13 1/2 $ 12 7/8 (through March 14, 1997) March 31, 1996 ................... 11 1/2 10 1/8 June 30, 1996 .................... 10 3/4 9 7/8 September 30, 1996 ............... 12 7/8 10 5/8 December 31, 1996 ................ 13 1/4 12 1/8 March 31, 1995 ................... 10 7/16* 10 3/16* June 30, 1995 .................... 10 3/8 * 10 * September 30, 1995 ............... 10 1/8 * 10 * December 31, 1995 ................ 12 11/16* 10 1/16*
- ---------------- * Restated for the three for one forward unit split effected January 2, 1996. As of March 14, 1997, the closing price of National Realty's units of limited partner interest on the AMEX was $12.88 per unit. As of March 14, 1997, National Realty's units of limited partner interest were held by 5,942 holders of record. Pursuant to the Moorman Settlement Agreement, on February 14, 1992, the Partnership issued 2,692,773 warrants (the "Warrants") to purchase an aggregate of 2,019,579 of National Realty's units of limited partner 23 24 ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNER INTEREST AND RELATED SECURITY HOLDER MATTERS (Continued) interest subject to adjustment. Each Warrant initially entitled the holder thereof to purchase three quarters of one unit at the exercise price ($11.00 per Warrant). The initial exercise price was equal to $14.67 per unit and increased to $16.00 per unit on February 14, 1993, subject to adjustment. The Warrants were exercisable for five years from the date of issuance and expired on February 14, 1997. Prior to their expiration a total of 1,631 Warrants were exercised for the purchase of 1,226 units. Pursuant to the terms of the Moorman Settlement Agreement, the Partnership has agreed to distribute to unitholders all of the Partnership's operating cash flow in excess of certain renovation costs, unless the Oversight Committee approves alternative uses for such operating cash flow. In 1993, the Partnership resumed the payment of regular quarterly distributions. During 1996, the Partnership paid regular quarterly distributions of $.10 per unit. In each of the first and second quarters of 1996, in addition to the regular quarterly distribution, the Partnership paid an extra distribution of $.15 per unit and in the third quarter of 1996, the Partnership paid an extra distribution of $.40 per unit. The Partnership paid total distributions of $1.10 per unit or $7.0 million in 1996. The distributions paid by the Partnership in 1996 and 1995 were as follows:
Date Declared Record Date Payable Date Amount - ---------------- ---------------- ---------------- ------ March 1, 1996 March 15, 1996 March 31, 1996 $ .10 March 1, 1996 March 15, 1996 March 31, 1996 .15 June 3, 1996 June 14, 1996 June 28, 1996 .10 June 3, 1996 June 14, 1996 June 28, 1996 .15 July 23, 1996 August 5, 1996 August 12, 1996 .10 July 23, 1996 August 5, 1996 August 12, 1996 .40 December 2, 1996 December 13, 1996 December 31, 1996 .10 March 3, 1995 March 15, 1995 March 31, 1995 $ .07* May 23, 1995 June 15, 1995 June 30, 1995 .07* August 25, 1995 September 15, 1995 September 30, 1995 .07* November 30, 1995 December 15, 1995 January 2, 1996 .07* November 30, 1995 December 15, 1995 January 2, 1996 1.00*
- ----------------- * Restated for the three for one forward unit split effected January 2, 1996. In November 1987, the Board of Directors of the Managing General Partner approved the Partnership's purchase of up to 10% of National Realty's units of limited partner interest and on December 15, 1992, the Board of Directors of the Managing General Partner approved the repurchase of up to 300,000 additional units in open-market transactions. Through December 31, 1996, the Partnership had purchased a total of 402,960 units at an total cost of $5.1 million. The Partnership has not repurchased any additional units under such repurchase program since January 1993. 24 25 ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNER INTEREST AND RELATED SECURITY HOLDER MATTERS (Continued) In May 1996, the Partnership announced an offer to buy back its units of limited partner interest from unitholders owning 99 or fewer units. The Partnership paid a premium of $.50 per unit over the average closing price of its units as reported on the AMEX from May 10, 1996 through June 28, 1996, the expiration date of the offer. On July 12, 1996, the Partnership repurchased 77,725 units at a total cost of $841,000. The Partnership extended this repurchase offer through August 5, 1996. On August 16, 1996, the Partnership repurchased an additional 9,677 units at a total cost of $113,000. [THIS SPACE INTENTIONALLY LEFT BLANK.] 25 26 ITEM 6. SELECTED FINANCIAL DATA
For the Years Ended December 31, ----------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- (dollars in thousands, except per unit) EARNINGS DATA Revenues ................ $ 112,681 $ 110,892 $ 107,546 $ 103,044 $ 102,070 Expenses Interest ............. 33,759 34,956 34,145 34,699 35,982 Property operations 63,136 63,320 60,793 60,374 59,193 General and administrative .... 5,975 6,252 5,809 5,598 5,377 Depreciation and amortization ...... 10,247 10,268 10,034 10,168 10,503 Provision for losses . -- -- -- -- 1,972 ----------- ----------- ----------- ----------- ----------- Total expenses .... 113,117 114,796 110,781 110,839 113,027 ----------- ----------- ----------- ----------- ----------- (Loss) from operations .. (436) (3,904) (3,235) (7,795) (10,957) Gain on sale of real estate ............... 61 7,701 8,252 -- 375 Litigation settlement ........... -- -- -- -- 1,030 ----------- ----------- ----------- ----------- ----------- Income (loss) before extraordinary gain ... (375) 3,797 5,017 (7,795) (9,552) Extraordinary gain ...... -- -- -- 9,046 6,385 ----------- ----------- ----------- ----------- ----------- Net income (loss) ....... $ (375) $ 3,797 $ 5,017 $ 1,251 $ (3,167) =========== =========== =========== =========== =========== PER UNIT DATA Income (loss) before extraordinary gain ... $ (.06) $ .58 $ .77 $ (1.13) $ (1.33) Extraordinary gain ...... -- -- -- 1.31 .89 ----------- ----------- ----------- ----------- ----------- Net income (loss) ....... $ (.06) $ .58 $ .77 $ .18 $ (.44) =========== =========== =========== =========== =========== Distributions per unit ................. $ 1.10 $ 1.28 $ .44 $ .07 $ -- Weighted average units of limited partner interest used in computing earnings per unit ............. 6,387,270 6,418,104 6,418,572 6,747,990 7,045,434
26 27 ITEM 6. SELECTED FINANCIAL DATA (Continued)
December 31, ---------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (dollars in thousands) BALANCE SHEET DATA Real estate, net .... $224,764 $229,482 $241,535 $251,534 $251,059 Notes and interest receivable, net .. 13,279 10,246 11,532 11,469 12,694 Total assets ........ 281,333 292,930 290,140 296,045 303,059 Notes and interest payable .......... 325,921 326,500 326,775 335,200 333,642 Redeemable General Partner interest . 37,855 31,997 28,800 21,600 14,700 Partners' (deficit) . (112,946) (99,267) (91,823) (86,902) (81,150)
Units and per unit data have been restated for the three for one forward unit split, effected January 2, 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction National Realty, L.P. ("National Realty") is a Delaware limited partnership formed on January 29, 1987, the business of which consists primarily of owning and operating through National Operating, L.P., also a Delaware limited partnership (the "Operating Partnership"), a portfolio of real estate. Most of the Operating Partnership's properties were acquired in transactions consummated on September 18, 1987, pursuant to which National Realty acquired all of the assets, and assumed all of the liabilities, of 35 public and private limited partnerships. National Realty and the Operating Partnership operate as an economic unit and, unless the context otherwise requires, all references herein to the "Partnership" shall constitute references to National Realty and the Operating Partnership as a unit. In November 1992, the Operating Partnership, in conjunction with a refinancing of 52 of its apartment complexes and a wraparound note receivable, transferred such assets to Garden Capital, L.P. ("GCLP"), a Delaware limited partnership in which the Operating Partnership holds a 99.3% limited partner interest. See NOTE 7. "NOTES PAYABLE." Liquidity and Capital Resources The Managing General Partner has discretion in determining methods of obtaining funds for the Partnership's operations. The Partnership's governing documents place no limitation on the amount of leverage that the Partnership may incur either in the aggregate or with respect to any particular property or other investment. At December 31, 1996, the aggregate loan-to-value ratio of the Partnership's real estate portfolio, computed on the basis of the ratio of total property-related debt to aggregate appraised values, was 44.6% compared to 47.3% at December 31, 1995. 27 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) Cash and cash equivalents aggregated $5.9 million at December 31, 1996 as compared with $20.7 million at December 31, 1995. The Partnership's principal sources of cash have been and will continue to be from property operations and externally generated funds. Externally generated funds include borrowings, proceeds from the sale of the Partnership's properties and other assets and proceeds from the issuance of debt secured by the Partnership's properties or mortgage notes receivable. The Partnership expects that cash flow from property operations together with externally generated funds will be sufficient to meet the Partnership's various cash needs in 1997, including, but not limited to, the payment of distributions, debt service obligations coming due, including the "Pension Notes," and property maintenance and improvements, as more fully discussed in the paragraphs below. Currently, all but five of the Partnership's properties are encumbered by mortgage debt. In 1997, mortgage debt totaling $7.8 million comes due. Also maturing in September 1997 are the "Pension Notes" issued in conjunction with the formation of the Partnership. Such notes had a principal balance of $13.5 million at December 31, 1996. The Partnership intends to seek to refinance certain mortgages that mature in the next two years or where there is an interest rate advantage to the Partnership, and use excess refinancing proceeds for working capital purposes. During 1996, the Partnership received $8.1 million from mortgage refinancings secured by one commercial property and two apartment complexes, of which $5.2 million was used to payoff existing mortgage debt secured by the properties. In addition, the Partnership made scheduled principal paydowns on mortgage debt totaling $5.0 million. In June 1996, the Partnership funded a $1.5 million loan to JNC Enterprises, Ltd. ("JNC"), secured by a first mortgage on 67 acres of undeveloped land in Collin County, Texas and by a second lien on 182 acres of undeveloped land in McKinney, Texas. In November 1996, the Partnership made a second loan in the amount of $2.0 million to JNC, $1.0 million of which was funded in November 1996 and the remaining $1.0 million was funded in December 1996. This loan is secured by a 73.7% limited partner interest in a partnership that owns 272 acres of undeveloped land in The Colony, Texas. In February 1997, the Partnership funded a third loan to JNC in the amount of $2.5 million. This loan is secured by a 70.87% limited partner interest in a limited partnership which owns 250 acres of undeveloped land in Fort Worth, Texas. In January 1997, the Partnership funded a $1.2 million loan to Bordeaux Investments Two, L.L.C. ("Bordeaux"). The loan is secured by (i) a 100% limited partnership interest in Bordeaux, which owns a shopping center in Oklahoma City, Oklahoma; (ii) 100% of the stock of an entity that owns 6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and (iii) personal guarantees of the Bordeaux partners. 28 29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) In May 1996, the Partnership announced an offer to buy back its units of limited partner interest from unitholders owning 99 or fewer units. The Partnership paid a premium of $.50 per unit over the average closing price of its units as reported on the American Stock Exchange from May 10, 1996 through June 28, 1996, the expiration date of the offer. On July 12, 1996, the Partnership repurchased 77,725 units at a total cost of $841,000. The Partnership extended the repurchase offer through August 5, 1996. On August 16, 1996, the Partnership repurchased an additional 9,677 units at a total cost of $113,000. In November 1992, in conjunction with the transfer of the net assets of 52 apartment complexes and a wraparound note receivable to GCLP, such assets were refinanced under a $223.0 million blanket mortgage loan. The blanket mortgage loan requires that cash flow from the GCLP properties be used to fund various escrow and reserve accounts and limits the payment of distributions to the Partnership. During 1996, the Partnership received distributions from GCLP totaling $2.5 million compared to $2.9 million in 1995. A total of $2.8 million of escrow deposits, excluding tax and insurance escrows, are required to be funded by GCLP during 1997 in monthly installments. Such escrowed amounts are included in escrow deposits and other assets in the accompanying Consolidated Balance Sheets. GCLP's excess cash flow of approximately $7.2 million is expected to be remittable to the Partnership during 1997. In 1996, GCLP entered into negotiations to replace the credit enhancement escrow with a $18.5 million letter of credit. The negotiations were finalized in January 1997. The letter of credit provided by a financial institution in the amount of $18.5 million is for a term of not less than two years. The letter of credit may be drawn upon to pay operating shortfalls of GCLP's properties. The available amount under the letter of credit will be reduced by the amount of each draw on the letter of credit. The Partnership received net cash of $11.3 million from the released credit enhancement escrow, after the payment of various costs associated with the letter of credit. The Partnership has paid regular quarterly distributions since the fourth quarter of 1993. During 1996, the Partnership increased the amount of its regular quarterly distributions to $.10 per unit from $.07 per unit. In each of the first and second quarters of 1996, in addition to the regular quarterly distribution, the Partnership paid an extra distribution of $.15 per unit and in the third quarter of 1996, the Partnership paid an extra distribution of $.40 per unit. The Partnership paid total distributions of $1.10 per unit or $7.0 million in 1996. Rents collected increased from $107.9 million in 1995 to $109.2 million in 1996 due to the Partnership's continued success in increasing and maintaining higher rental rates during 1996 as compared to 1995. Rental rates at the Partnership's apartment complexes, which account for over 80% of the Partnership's properties, increased an average of 3.0% in 29 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) 1996 as compared to 1995 rental rates. At the Partnership's commercial properties rental rates increased an average of 1.2% as compared to 1995 rental rates. However, payments for property operating expenses increased from $64.8 million in 1995 to $65.5 million in 1996. This increase is primarily due to an increase in payments for property taxes. The Partnership's management reviews the carrying values of the Partnership's properties and mortgage notes receivable at least annually and whenever events or a change in circumstances indicate that impairment may exist. Impairment is considered to exist if, in the case of a property, the future cash flow from the property (undiscounted and without interest) is less than the carrying amount of the property. For notes receivable impairment is considered to exist if it is probable that all amounts due under the terms of the note will not be collected. In those instances where impairment is found to exist, a provision for loss is recorded by a charge against earnings. The Partnership's mortgage note receivable review includes an evaluation of the collateral property securing such note. The property 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, a review of the property's cash flow, discussions with the manager of the property and a review of properties in the surrounding area. As more fully discussed in NOTE 13. "COMMITMENTS AND CONTINGENCIES - Moorman Settlement," the Moorman litigation settlement agreement (the "Moorman Settlement Agreement") set forth certain aggressive, annually increasing targets relating to the price of the Partnership's units of limited partner interest which were not achieved, resulting in, among other things, the required withdrawal of the Partnership's General Partner upon election of a successor and the resulting required purchase of the Redeemable General Partner Interest, as defined below. The withdrawal of the General Partner requires the Partnership to acquire the General Partner's interest in the Partnership (the "Redeemable General Partner Interest") at its then fair value, and to pay certain fees and other compensation, as provided in the Partnership Agreement and the Moorman Settlement Agreement. The Moorman Settlement Agreement provides that any payment for such Redeemable General Partner Interest, fees and other compensation during the pendency of the Moorman Settlement Agreement may, at the option of the Oversight Committee (also established under the Moorman Settlement Agreement), be made over three years pursuant to a secured promissory note bearing interest at a financial institution's prime rate. The Managing General Partner has calculated the fair value of the Redeemable General Partner Interest at December 31, 1996 to be $42.0 million, and believes that there has been no material change in such value since that date. The Partnership would be entitled to offset against such payment the then outstanding principal balance of the note receivable ($4.2 million at December 31, 1996) plus all accrued and unpaid interest ($6.2 million at December 31, 1996) on the note receivable from the General Partner representing its 30 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) capital contribution to the Partnership. When Syntek Asset Management, L.P. ("SAMLP") withdraws as General Partner of the Partnership, the fair value of the Redeemable General Partner Interest would depend on the value of the Partnership's assets at the time of calculation and there can be no assurance that the Redeemable General Partner Interest, fees and other compensation payable on any such withdrawal will not be substantially higher or lower than any current estimate or calculation. In the accompanying Consolidated Financial Statements, the Redeemable General Partner Interest is shown as a reduction of Partners' Equity and the note receivable from the General Partner has been offset against the Redeemable General Partner Interest. On January 27, 1995, National Realty, SAMLP, the Oversight Committee and William H. Elliott executed an Implementation Agreement which provides for the nomination of an entity controlled by William H. Elliott as successor general partner and for the resolution of all related matters under the Moorman Settlement. On February 20, 1996, the parties to the Implementation Agreement executed an Amended and Restated Implementation Agreement. On September 23, 1996, the Supervising Judge entered an order granting tentative approval of the Amended and Restated Implementation Agreement and the form of notice to be sent to the original class members. However, the order reserved jurisdiction to determine other matters which must be resolved prior to final approval. Upon final approval by the Supervising Judge, the proposal to elect the successor general partner will be submitted to the unitholders of National Realty for a vote. In addition, the unitholders will vote upon amendments to the National Realty Partnership Agreement which relate to the proposed compensation of the successor general partner and other related matters. Provided that the successor general partner is elected pursuant to the terms of the Amended and Restated Implementation Agreement, SAMLP shall receive $12,471,500 from the Partnership. This amount represents a compromise settlement of the net amounts owed by the Partnership to SAMLP upon SAMLP's withdrawal as General Partner and any amounts which SAMLP and its affiliates may owe to the Partnership. This amount shall be paid to SAMLP pursuant to a promissory note in accordance with the terms set forth in the Amended and Restated Implementation Agreement. Upon approval by the unitholders, SAMLP shall resign as General Partner and the successor general partner shall take office. If the required approvals are obtained, National Realty anticipates that the successor general partner may be elected and take office during the third quarter of 1997. The Amended and Restated Implementation Agreement provides that SAMLP, and its affiliates owning units in National Realty, shall not vote to 31 32 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) remove the successor general partner, except for removal with cause, for a period of 36 months from the date the successor general partner takes office. Upon the election and taking office of the successor general partner, the Moorman Settlement Plan and the Oversight Committee shall terminate. If the successor general partner is not elected, the existing Moorman Settlement Agreement shall remain in full force and effect and all of the provisions of the Amended and Restated Implementation Agreement shall be voided. On September 3, 1996, Joseph B. Moorman filed a Motion for Orders Compelling Enforcement of the Moorman Settlement Agreement, Appointment to a Receiver and Collateral Relief with the Superior Court of the State of California in and for the County of San Mateo. The motion alleged that the settling defendants had failed or refused to perform their obligations under the Moorman Settlement Agreement and had breached the Moorman Settlement Agreement. The motion also requested that SAMLP be removed as general partner and a receiver be appointed to manage the Partnership. The motion also requested that American Realty Trust, Inc. ("ART") be ordered to deliver to the court all units which had been purchased by ART since August 7, 1991. A hearing was held on this motion on October 4, 1996. On January 2, 1997, the Supervising Judge entered an order denying the motion. On January 27, 1997, Joseph B. Moorman filed motions to (i) discharge the Oversight Committee and (ii) vacate the Court's orders and renewed his prior motions to compel enforcement of the Moorman Settlement Agreement, appoint a receiver over the Partnership, and for collateral relief against ART. Also on January 27, 1997, Robert A. McNeil filed motions to (i) be installed as receiver for the Partnership, (ii) vacate the Court's orders, and (iii) disband the Oversight Committee. A hearing on the motions to discharge or disband the Oversight Committee and to vacate the Court's orders was held on March 21, 1997, and the Supervising Judge ruled that neither Mr. McNeil nor Mr. Moorman had standing to bring the motions. The Supervising Judge also set June 27, 1997, as the hearing date for final approval of the Amendment and Restated Implementation Agreement. The outcome of this matter cannot presently be determined and the consolidated financial statements do not include any adjustments that might result from the outcome of this matter. In November 1987, the Board of Directors of the Managing General Partner approved the Partnership's repurchase of up to 10% of National Realty's units of limited partner interest and on December 15, 1992, the Board of Directors of the Managing General Partner approved the repurchase of up to 300,000 additional units in open-market transactions. Through December 31, 1996, the Partnership had purchased a total of 402,960 units at a total cost of $5.1 million. The Partnership has not purchased any additional units under such repurchase program since January 1993. 32 33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations 1996 COMPARED TO 1995. The Partnership reported a net loss of $375,000 for 1996 as compared to net income of $3.8 million for 1995. Included in the Partnership's 1995 net income are gains on the sale of real estate of $7.7 million. The primary factors affecting the Partnership's operating results are discussed in the following paragraphs. Rents increased to $109.4 million for 1996 from $108.0 million in 1995. This increase is primarily due to increased rental rates at the Partnership's apartments and commercial properties. Rental rates at the Partnership's apartment complexes, which represent over 80% of the Partnership's properties, increased an average of 3.0% in 1996 as compared to 1995 rental rates. Rental rates at the Partnership's commercial properties increased an average of 1.2% in 1996 as compared to 1995 rental rates. Rents are expected to continue to increase in 1997. Interest income increased from $2.9 million in 1995 to $3.3 million in 1996. This increase is primarily attributable to the notes funded in June and November 1996, as well as increased short-term investment income primarily from the credit enhancement escrow account. Interest income is expected to decrease in 1997 due to notes maturing and release of the credit enhancement escrow account as discussed in "Liquidity and Capital Resources," above. These decreases will be offset in part by interest earned on loans funded in 1997. Interest expense decreased from $35.0 million in 1995 to $33.8 million in 1996. This decrease is due primarily to the sale of two apartment complexes in 1995, as well as a decrease in the variable interest rate on the mortgage debt secured by several apartment complexes and the variable rate portion of the blanket mortgage secured by the GCLP properties. Interest expense is expected to continue to decrease in 1997 due to the anticipated payoff of the pension notes at maturity. Depreciation and amortization, property taxes and insurance, utilities, property-level payroll costs, repairs and maintenance, other property operation expenses and property management fees for 1996 approximated those for 1995. General and administrative expenses decreased from $6.3 million in 1995 to $6.0 million in 1996. This decrease is primarily due to a decrease in cost reimbursements to Basic Capital Management, Inc. ("BCM"). This decrease is partially offset by an increase in legal fees related to the Moorman litigation. See NOTE 7. "LEGAL PROCEEDINGS." In 1996, the Partnership recognized a gain on the sale of real estate of $61,000 on the sale of commercial condominiums in Colorado, compared to gains on sale of real estate in 1995 totaling $7.7 million from the sale of the Harbour Pointe and Vineyards Apartments. See NOTE 3. REAL ESTATE AND DEPRECIATION." 33 34 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) 1995 COMPARED TO 1994. The Partnership reported net income of $3.8 million for 1995 as compared to net income of $5.0 million for 1994. Contributing to the Partnership's 1995 net income was a gain on sale of real estate of $7.7 million compared to a gain on real estate of $8.3 million in 1994. See NOTE 3. "REAL ESTATE AND DEPRECIATION." Rents increased from $105.0 million in 1994 to $108.0 million in 1995. This increase is primarily attributable to a 3.2% increase in average rental rates combined with a 1.8% increase in average occupancy rates at the Partnership's apartment complexes. In addition, an increase of $280,000 is attributable to the acquisition of the Chalet II Apartments in March 1995. These increases are partially offset by a decrease of $2.3 million due to the sale of the Brandywine and Raintree Apartments in October 1994. Interest income increased from $2.4 million in 1994 to $2.9 million in 1995. Of this increase, $265,000 is due to interest earned on the Partnership's credit enhancement escrow deposit, which increased $3.3 million from December 31, 1994 to December 31, 1995. An additional $211,000 is attributable to interest earned on a $5.1 million note receivable, in which a senior participation previously sold by the Partnership was returned in July 1995. See NOTE 4. "NOTES RECEIVABLE." Interest expense increased from $34.1 million in 1994 to $35.0 million in 1995. Of this increase, $331,000 is due to an increase in interest expense on the variable rate portion of the blanket mortgage secured by the GCLP properties. An additional increase of $1.0 million is due to mortgage debt which was refinanced in 1994 and 1995 and $89,000 is due to the acquisition of the Chalet II Apartments in March 1995. These increases are offset by a decrease of $713,000 due to the sale of Brandywine and Raintree Apartments in October 1994. Repairs and maintenance expense increased from $21.9 million in 1994 to $23.9 million in 1995. This increase is attributable to the Partnership's effort to obtain higher rental rates, which increased an average of 3.2% in 1995, and to sustain occupancy levels in 1995. In addition, 1995 repairs and maintenance expenses include fire and storm damage repairs made in 1995. Property taxes and insurance, utilities, property-level payroll costs, other property operation expenses and property management fees for 1995 approximated those of 1994. General and administrative expenses increased from $5.8 million in 1994 to $6.3 million in 1995. This increase is primarily attributable to an increase in legal and consulting fees related to the Moorman litigation of $429,000 and an increase in the Partnership's overhead reimbursements to BCM. In 1995, the Partnership recognized gains on the sale of real estate totaling $7.7 million on the sale of the Harbour Pointe and Vineyards 34 35 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) Apartments, compared to gains on sale of real estate in 1994 totaling $8.3 million on the sale of the Brandywine and Raintree Apartments. See NOTE 3. "REAL ESTATE AND DEPRECIATION." Environmental Matters Under various federal, state and local environmental laws, ordinances and regulations, the Partnership 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 Partnership for personal injury associated with such materials. The Managing General Partner is not aware of any environmental liability relating to the above matters that would have a material adverse effect on the Partnership's business, assets or results of operations. Impact of Inflation The effects of inflation on the Partnership's operations are not quantifiable. Revenues from property operations fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect the sales values of the Partnership's properties and, correspondingly, the ultimate gains to be realized by the Partnership from property sales. Inflation also has an effect on the Partnership's earnings from short-term investments, and on its interest income and interest expense to the extent that such income and expense depend on floating interest rates. Current Value Reporting The Partnership believes that the historical cost basis financial statements prepared in accordance with generally accepted accounting principles are not representative of the economic value of the Partnership's real estate assets because most of the properties have appreciated in value over their historical cost basis. Nevertheless, generally accepted accounting principles require periodic depreciation charges. In conjunction with the exchange transaction, by which the Partnership was formed, the Partnership retained independent appraisers to estimate the Current Appraised Value of the Partnership's properties as of March 31, 1987, based in part upon certain financial, lease and other information provided by the general partners of the exchange transaction partnerships. The Current Appraised Value of the Partnership's properties at March 31, 1987 was $758.0 million, and Revaluation Equity 35 36 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Current Value Reporting was $410.0 million at such date. Revaluation Equity is defined as the difference between the appraised value of the Partnership's real estate, adjusted to reflect the Partnership's estimate of disposition costs, and the face amount of the mortgage notes payable and accrued interest, if any, encumbering such real estate. The Current Appraised Value of the Partnership's properties at December 31, 1995, was $654.1 million, and Revaluation Equity was $310.0 million at such date. In 1996, the Partnership retained an independent appraiser to determine the Current Appraised Value of the Partnership's properties as of December 31, 1996, in a manner consistent with the methodology used to determine Current Appraised Value as of December 31, 1995 and March 31, 1987. The Current Appraised Value of the Partnership's properties at December 31, 1996 was $691.5 million and Revaluation Equity was $345.9 million at such date. Taxes National Realty is a publicly traded limited partnership and, for federal income tax purposes, all income or loss generated by the Partnership is included in the income tax returns of the individual partners. In December 1987, Congress passed legislation requiring certain publicly traded partnerships to be taxed as corporations. National Realty qualifies for "grandfather" treatment and will be treated as a partnership until at least 1997, unless the Partnership adds a substantial new line of business, which would require approval of the Oversight Committee, and will continue to be so treated thereafter if 90% or more of its gross income consists of qualifying income from real estate activities. As presently operated, the Partnership meets these requirements. Under Internal Revenue Service guidelines generally applicable to publicly traded partnerships and thus to the Partnership, a limited partner's use of his or her share of partnership losses is subject to special limitations. Recent Accounting Pronouncement In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of". The statement requires that long-lived assets be considered impaired "...if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset." If impairment exists, an impairment loss shall be recognized, by a charge against earnings, equal to "...the amount by which the carrying amount of the asset exceeds the fair value of the asset." If impairment of a long-lived asset is recognized, the carrying amount of the asset shall be reduced by the amount of the impairment, shall be accounted for as the asset's "new cost" and such new cost shall be depreciated over the asset's remaining useful life. 36 37 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Recent Accounting Pronouncement SFAS No. 121 further requires that long-lived assets held for sale "...be reported at the lower of carrying amount or fair value less cost to sell." If a reduction in a held for sale asset's carrying amount to fair value less cost to sell is required, a provision for loss shall be recognized by a charge against earnings. Subsequent revisions, either upward or downward, to a held for sale asset's fair value less cost to sell shall be recorded as an adjustment to the asset's carrying amount, but not in excess of the asset's carrying amount when originally classified as held for sale. A corresponding charge or credit to earnings is to be recognized. Long-lived assets held for sale are not to be depreciated. The Partnership adopted SFAS No. 121 effective January 1, 1996. The adoption of SFAS No. 121 had no effect on the Partnership's depreciation or reported net loss for 1996. [THIS SPACE INTENTIONALLY LEFT BLANK.] 37 38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Certified Public Accountants ........................ 39 Consolidated Balance Sheets - December 31, 1996 and 1995 ............................................ 40 Consolidated Statements of Operations - Years Ended December 31, 1996, 1995 and 1994 ......................... 41 Consolidated Statements of in Partners' Equity (Deficit) - Years Ended December 31, 1996, 1995 and 1994 ......................... 42 Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994 ......................... 43 Notes to Consolidated Financial Statements ................................ 45 Schedule III - Real Estate and Accumulated Depreciation ................... 65 Schedule IV - Mortgage Loans on Real Estate .............................. 70
All other schedules are omitted because they are not required, are not applicable or the information required is included in the Consolidated Financial Statements or the notes thereto. 38 39 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Partners National Realty, L.P. We have audited the accompanying consolidated balance sheets of National Realty, L.P., a limited partnership, as of December 31, 1996 and 1995, and the related consolidated statements of operations, partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1996. We have also audited the schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Partnership's Managing General Partner. Our responsibility is to express an opinion on these financial statements and schedules 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 and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits provide a reasonable basis for our opinion. As described in Note 13. "COMMITMENTS AND CONTINGENCIES - Moorman Settlement," the Moorman Settlement requires the Partnership to purchase the Redeemable General Partner Interest upon the election of a successor general partner. Although the parties have reached an agreement on the amount to be paid and the terms of payment, the agreement has not received final approval of the Supervising Judge or the unitholders. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Realty, L.P. 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 schedules present fairly, in all material respects, the information set forth therein. BDO Seidman, LLP Dallas, Texas March 14, 1997 39 40 NATIONAL REALTY, L.P. CONSOLIDATED BALANCE SHEETS
December 31, ---------------------- 1996 1995 --------- --------- Assets (dollars in thousands) Real estate held for investment Land .................................... $ 51,342 $ 51,342 Buildings and improvements .............. 396,626 391,097 --------- --------- 447,968 442,439 Less - Accumulated depreciation ......... (223,204) (212,957) --------- --------- 224,764 229,482 Notes and interest receivable, net of deferred gains ($15,787 in 1996 and 1995) ................................... 15,189 12,156 Less - allowance for estimated losses ... (1,910) (1,910) --------- --------- 13,279 10,246 Cash and cash equivalents .................. 5,872 20,699 Accounts receivable ........................ 2,040 1,220 Prepaid expenses ........................... 1,663 1,253 Escrow deposits and other assets ........... 18,496 14,930 Marketable equity securities of affiliate (at market) ............................. 1,272 722 Deferred financing costs ................... 13,947 14,378 --------- --------- $ 281,333 $ 292,930 ========= ========= Liabilities and Partners' Equity (Deficit) Liabilities Notes and interest payable .............. $ 325,921 $ 326,500 Pension notes and related interest payable, net ......................... 13,478 12,034 Accrued property taxes .................. 6,928 6,792 Tenant security deposits ................ 3,040 2,908 Accounts payable and other liabilities (including $85 in 1996 and $272 in 1995 to affiliates) .................. 7,057 11,966 --------- --------- 356,424 360,200 Commitments and contingencies Redeemable General Partner Interest ........ 37,855 31,997 Partners' equity (deficit) General Partner ......................... 2,649 2,656 Limited Partners (6,328,303 units in 1996 and 6,417,981 units in 1995) .... (74,568) (66,204) Unrealized gain on marketable equity securities ........................... 1,003 453 --------- --------- (70,916) (63,095) Redeemable General Partner Interest ........ (42,030) (36,172) --------- --------- (112,946) (99,267) --------- --------- $ 281,333 $ 292,930 ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 40 41 NATIONAL REALTY, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, ----------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (dollars in thousands, except per unit) Revenues Rents ................................ $ 109,384 $ 108,017 $ 105,014 Interest ............................. 3,297 2,875 2,430 Other ................................ -- -- 102 ----------- ----------- ----------- 112,681 110,892 107,546 Expenses Interest ............................. 33,759 34,956 34,145 Depreciation ......................... 10,247 10,268 10,034 Property taxes & insurance ........... 12,511 12,196 11,976 Utilities ............................ 11,712 11,498 11,750 Repairs and maintenance .............. 23,726 23,875 21,896 Property-level payroll costs ......... 6,338 6,545 6,252 Other property operation expenses .... 4,160 4,563 4,401 Property management fees (including $811 in 1996, $674 in 1995 and $619 in 1994 to affiliates) ............ 4,689 4,643 4,518 General and administrative (including $3,329 in 1996, $3,907 in 1995 and $3,596 in 1994 to affiliates) ..... 5,975 6,252 5,809 ----------- ----------- ----------- 113,117 114,796 110,781 ----------- ----------- ----------- (Loss) from operations .................. (436) (3,904) (3,235) Gain on sale of real estate ............. 61 7,701 8,252 ----------- ----------- ----------- Net income (loss) ....................... $ (375) $ 3,797 $ 5,017 =========== =========== =========== Earnings per unit Net income (loss) ....................... $ (.06) $ .58 $ .77 =========== =========== =========== Weighted average units of limited partner interest used in computing earnings per unit .................... 6,387,270 6,418,104 6,418,572 =========== =========== ===========
The accompanying notes are an integral part of these Consolidated Financial Statements. 41 42 NATIONAL REALTY, L.P. CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
Unrealized Gain on Redeemable Marketable General Partners' General Limited Equity Partner Equity Partner Partners Securities Interest (Deficit) --------- --------- --------- --------- --------- (dollars in thousands) Balance at January 1, 1994 ....... $ 2,480 $ (63,931) $ 324 $ (25,775) $ (86,902) Adjustment to Redeemable General Partner Interest ...... -- -- -- (7,200) (7,200) Unrealized gain on marketable equity securities of affiliate ..................... -- -- 43 -- 43 Distributions ($.44 per unit) .... -- (2,781) -- -- (2,781) Net income ....................... 100 4,917 -- -- 5,017 --------- --------- --------- --------- --------- Balance at December 31, 1994 ..... 2,580 (61,795) 367 (32,975) (91,823) Adjustment to Redeemable General Partner Interest ...... -- -- -- (3,197) (3,197) Unrealized gain on marketable equity securities of affiliate ..................... -- -- 86 -- 86 Distributions ($1.28 per unit) ... -- (8,130) -- -- (8,130) Net income ....................... 76 3,721 -- -- 3,797 --------- --------- --------- --------- --------- Balance at December 31, 1995 ..... 2,656 (66,204) 453 (36,172) (99,267) Adjustment to Redeemable General Partner Interest ...... -- -- -- (5,858) (5,858) Repurchase of units of limited partner interest .............. -- (954) -- -- (954) Distributions ($1.10 per unit) ... -- (7,042) -- -- (7,042) Unrealized gain on marketable equity securities of affiliate -- -- 550 -- 550 Net (loss) ....................... (7) (368) -- -- (375) --------- --------- --------- --------- --------- Balance, December 31, 1996 ....... $ 2,649 $ (74,568) $ 1,003 $ (42,030) $(112,946) ========= ========= ========= ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 42 43 NATIONAL REALTY, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, ---------------------------------- 1996 1995 1994 --------- --------- --------- (dollars in thousands) Cash Flows From Operating Activities Rents collected ........................... $ 109,230 $ 107,935 $ 105,415 Interest collected ........................ 3,098 2,754 2,354 Interest paid ............................. (29,238) (30,737) (30,673) Payments for property operations (including $811 in 1996, $674 in 1995 and $619 in 1994 to affiliates) .. (65,505) (64,803) (63,407) General and administrative expenses paid (including $3,329 in 1996, $3,907 in 1995 and $3,596 in 1994 to affiliates) ......................... (5,892) (6,556) (5,894) Other ..................................... -- -- 14 --------- --------- --------- Net cash provided by operating activities .......................... 11,693 8,593 7,809 Cash Flows From Investing Activities Sales of real estate ...................... 61 6,947 4,544 Real estate improvements .................. (5,529) (4,105) (5,411) Acquisition of real estate ................ -- (1,663) -- Acquisition and settlement of notes receivable ............................. -- (1,207) -- Collections on notes receivable ........... 500 3,700 639 Funding of notes receivable ............... (3,500) -- -- --------- --------- --------- Net cash provided by (used in) investing activities ................ (8,468) 3,672 (228) Cash Flows From Financing Activities Borrowings from financial institutions .... 8,116 40,808 9,986 Payments from (to) affiliates, net ........ (191) 3,558 (4,648) Payments of mortgage notes payable ........ (10,159) (37,242) (9,701) Deferred financing costs (including $89 in 1996 and $423 in 1995 to affiliate) ............................. (1,459) (627) (727) Repurchase of units of limited partner interest ....................... (954) -- -- Distributions to unitholders .............. (13,405) (1,811) (2,781) --------- --------- --------- Net cash provided by (used in) financing activities ................ (18,052) 4,686 (7,871) --------- --------- --------- Net increase (decrease) in cash and cash equivalents ............................... (14,827) 16,951 (290) Cash and cash equivalents at beginning of year ...................................... 20,699 3,748 4,038 --------- --------- --------- Cash and cash equivalents at end of year ..... $ 5,872 $ 20,699 $ 3,748 ========= ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 43 44 NATIONAL REALTY, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31, -------------------------------- 1996 1995 1994 -------- -------- -------- (dollars in thousands) Reconciliation of net income (loss) to net cash provided by operating activities Net income (loss) .......................... $ (375) $ 3,797 $ 5,017 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization ........ 10,465 10,254 9,972 Gain on sale of real estate .......... (61) (7,701) (8,252) Amortization of deferred financing costs ............................. 2,222 2,425 2,315 Increase in interest payable ......... 1,854 1,763 1,146 Increase in other liabilities ........ 1,146 876 749 (Increase) decrease in interest receivable ........................ 13 76 (14) (Increase) in other assets ........... (3,571) (2,897) (3,124) -------- -------- -------- Net cash provided by operating activities ........................ $ 11,693 $ 8,593 $ 7,809 ======== ======== ======== Schedule of noncash investing activities Notes payable assumed by buyer upon sale of properties ...................... $ -- $ 8,165 $ -- Unrealized gain on marketable equity securities of affiliate ................. 550 86 43
The accompanying notes are an integral part of these Consolidated Financial Statements. 44 45 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accompanying Consolidated Financial Statements of National Realty, L.P. and consolidated subsidiaries and partnerships (the "Partnership") have been prepared in conformity with generally accepted accounting principles, the most significant of which are described in NOTE 2. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES." These, along with the remainder of the Notes to Consolidated Financial Statements, are an integral part of the Consolidated Financial Statements. The data presented in the Notes to Consolidated Financial Statements are as of December 31 of each year or for the year then ended, unless otherwise indicated. Dollar amounts in tables are in thousands, except per unit amounts. Certain balances for 1995 and 1994 have been reclassified to conform to the 1996 presentation. Units and per unit data have been restated for the three for one forward unit split effected January 2, 1996. NOTE 1. ORGANIZATION General. National Realty, L.P. ("National Realty") is a Delaware limited partnership which commenced operations on September 18, 1987 when it acquired through National Operating, L.P. (the "Operating Partnership" or "NOLP") all of the assets, and assumed all of the liabilities, of 35 public and private limited partnerships. National Realty is the sole limited partner of the Operating Partnership and owns 99% of the beneficial interest in the Operating Partnership. The general partner of, and owner of 1% of the beneficial interest in each of, National Realty and the Operating Partnership is Syntek Asset Management, L.P. (the "General Partner" or "SAMLP"). Gene E. Phillips is a general partner of SAMLP with a .95% general partner interest. Syntek Asset Management, Inc. ("SAMI") is the managing general partner of SAMLP, with a .10% general partner interest in SAMLP. SAMI, of which Mr. Phillips served as a director, Chairman of the Board and Chief Executive Officer until May 15, 1996, is a company owned by Basic Capital Management, Inc. ("BCM"). American Realty Trust, Inc. ("ART"), a publicly held real estate investment company of which Mr. Phillips served as Chairman of the Board and director until November 16, 1992, owns a 96% limited partner interest in SAMLP. Mr. Phillips and William S. Friedman own the remaining 2.95% limited partner interest in SAMLP. Mr. Friedman was a general partner of SAMLP until March 4, 1994. SAMI, as Managing General Partner of SAMLP, manages the affairs of the Partnership. The executive officers of SAMI also serve as executive officers of BCM. BCM is a company owned by a trust for the benefit of the children of Mr. Phillips. Messrs. Phillips and Friedman served as directors of BCM until December 22, 1989 and as officers of BCM until September 1, 1992 and May 1, 1993, respectively. In November 1992, the Partnership refinanced 52 of its apartment complexes and a wraparound mortgage note receivable with a financial institution. To facilitate the refinancing, the Operating Partnership transferred those assets to Garden Capital, L.P. ("GCLP"), a Delaware 45 46 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. ORGANIZATION (Continued) limited partnership. The Operating Partnership is the sole limited partner with a 99.3% limited partner interest in GCLP. The Operating Partnership received its limited partner interest in exchange for the transfer of the net assets of the 52 apartment complexes and the wraparound mortgage note receivable to GCLP. Garden Capital Management Incorporated ("GCMI"), a Nevada corporation, is the .7% managing general partner of GCLP. GCLP transferred the acquired net apartment assets, in exchange for a 99% limited partner interest in each of 52 single asset limited partnerships which were formed for the purpose of operating, refinancing and holding title to the apartment complexes. The transfer of the 52 apartment complexes and the wraparound mortgage note receivable were effective November 25, 1992. Each of the single asset limited partnerships has no significant assets other than an apartment complex encumbered by mortgage debt. Garden Capital Incorporated ("GCI"), a Nevada corporation, is the 1% managing general partner in each of the single asset limited partnerships. Except as described under NOTE 13. "COMMITMENTS AND CONTINGENCIES - Moorman Settlement," all decisions relating to the Partnership, including all decisions with respect to the acquisition, disposition, improvement, financing or refinancing of the Partnership's properties or other investments, are made by the Managing General Partner. However, all decisions with respect to the acquisition, disposition, improvement, financing or refinancing of the GCLP properties are made by GCMI or GCI as managing general partner of GCLP or the single asset partnerships, respectively. BCM, SAMI's corporate parent, performs certain administrative functions for the Partnership, such as accounting services, mortgage servicing and portfolio review and analysis, on a cost reimbursement basis. Since February 1, 1990 BCM or affiliates of BCM have provided property management services for the Partnership. Currently, Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of BCM, performs such property management services for the Partnership. BCM or affiliates of BCM also perform loan placement services, leasing services and real estate brokerage and acquisition services and other services for the Partnership for fees and commissions. See NOTE 10. "GENERAL PARTNER FEES AND COMPENSATION." GCMI performs administrative functions, similar to those performed for the Partnership by BCM, for GCLP on a cost reimbursement basis. The common stock of GCI and GCMI is owned by John A. Doyle (20%), Richard A. Green (40%) and Henry W. Simon (40%). Participation in net income, net loss and distributions. The limited partners of National Realty have a 99% interest and the General Partner has 1% interest in the net income or net loss and distributions of National Realty. National Realty has a 99% and the General Partner has a 1% interest in the net income or net loss of the Operating Partner- 46 47 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. ORGANIZATION (Continued) ship. The 1% General Partner interest in each of National Realty and the Operating Partnership is equal to a 1.99% interest on a combined basis. The Operating Partnership has a 99.3% limited partner interest and GCMI has a .7% general partner interest in the net income or net loss and distributions of GCLP. GCLP has a 99% interest and GCI has a 1% interest in the net income or net loss and distributions of the 52 single asset partnerships that hold title to the apartment complexes. GCMI's .7% general partner interest in GCLP and GCI's 1% general partner interest in the single asset partnerships is equal to a 1.68% interest on a combined basis. For tax purposes limited partners are allocated their proportionate share of net income or net loss commencing with the calendar month subsequent to their entry into the Partnership. During the pendency of the Moorman Settlement Plan (as defined in NOTE 13. "COMMITMENTS AND CONTINGENCIES - Moorman Settlement"), the General Partner's base compensation, equal to 10% of the distributions to unitholders from the Partnership's cash from operations, is waived. General Partner's capital contribution. In return for its 1% interest in National Realty, the General Partner was required to make aggregate capital contributions to the Partnership in an amount equal to 1.01% of the total initial capital contributions to the Partnership. The General Partner contributed $500,000 in cash with the remaining contribution evidenced by a promissory note bearing interest at the rate of 10% per annum compounded semi-annually payable on the earlier of September 18, 2007, liquidation of the Partnership or termination of the General Partner's interest in the Partnership. The principal balance of such promissory note was $4.2 million at December 31, 1996 and 1995. In the accompanying Consolidated Balance Sheets, the note receivable from the General Partner is offset against the Redeemable General Partner Interest as described in NOTE 13. "COMMITMENTS AND CONTINGENCIES - Moorman Settlement." The General Partner received its 1% interest in the Operating Partnership in exchange for its agreement to serve as general partner of the Operating Partnership. If National Realty issues additional units of limited partner interest, the General Partner is entitled to maintain its aggregate 1% interest in each of National Realty and the Operating Partnership without payment of additional consideration. GCMI received its .7% general partner interest in GCLP in exchange for a mortgage note receivable. National Realty subsequently purchased the mortgage note receivable for a $900,000 note payable. GCI received its 1% general partner interest in the single asset partnerships in exchange for agreeing to manage the apartment complexes owned by each of the partnerships. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation. The Consolidated Financial Statements include the accounts of National Realty, the Operating Partnership, GCLP and 47 48 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) consolidated entities. All significant intercompany balances and transactions have been eliminated. Minority interests (which are not significant) are included in other liabilities. Accounting estimates. In the preparation of the Partnership's Consolidated Financial Statements in conformity with generally accepted accounting principles it was necessary for the Managing General Partner 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 Consolidated Financial Statements and the reported amounts of revenues and expenses for the year then ended. Actual results could differ from these estimates. Revenue recognition on the sale of real estate. Sales of real estate are recognized when and to the extent permitted by Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No. 66"). Until the requirements of SFAS No. 66 for full profit recognition have been met, transactions are accounted for using either the deposit, the installment, the cost recovery or the financing method, whichever is appropriate. Real Estate Held for Investment and Depreciation. Real estate held for investment is carried at cost. Statement of Financial Accounting Standards No. 121 ("SAFS No. 121") requires that a property be considered impaired, if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property. If impairment exists, an impairment loss is recognized, by a charge against earnings, equal to the amount by which the carrying amount of the property exceeds the fair value of the property. If impairment of a property is recognized, the carrying amount of the property is reduced by the amount of the impairment, and a new cost for the property is established. Such new cost is depreciated over the property's remaining useful life. Depreciation is provided by the straight-line method over estimated useful lives, which range from 7 to 40 years. Real Estate Held for Sale. Foreclosed real estate is initially recorded at new cost, defined as the lower of original cost or fair value minus estimated costs of sale. SFAS No. 121 also requires that properties held for sale be reported at the lower of carrying amount or fair value less costs of sale. If a reduction in a held for sale property's carrying amount to fair value less costs of sale is required, a provision for loss shall be recognized by a charge against earnings. Subsequent revisions, either upward or downward, to a held for sale property's estimated fair value less costs of sale is recorded as an adjustment to the property's carrying amount, but not in excess of the property's carrying amount when originally classified as held for sale. A corresponding charge against or credit to earnings is recognized. Properties held for sale are not to be depreciated. 48 49 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for estimated losses. A valuation allowance is provided for estimated losses on notes receivable considered to be impaired. Impairment is considered to exist when it is probable that all amounts due under the terms of the note will not be collected. Valuation allowances are provided for estimated losses on notes receivable to the extent that the Partnership's investment in the note exceeds the Partnership's estimate of net realizable value of the collateral securing such note, or fair value of the collateral if foreclosure is probable. Interest recognition on notes receivable. It is the Partnership's policy to cease recognizing interest income on notes receivable that have been delinquent for 60 days or more. In addition, accrued but unpaid interest income is only recognized to the extent that the net realizable value of underlying collateral exceeds the carrying value of the receivable. Deferred financing costs. Deferred financing costs, which include bank, legal, appraisal and consulting fees, are capitalized and amortized on the interest-rate method over the term of the related loans. Present value discounts. The Partnership provides for present value discounts on notes receivable or payable that have interest rates that differ substantially from prevailing market rates and amortizes such discounts by the interest method over the lives of the related notes. The factors considered in determining a market rate for receivables include the borrower's credit standing, nature of the collateral and payment terms of the note. Marketable equity securities of affiliate. Marketable equity securities are considered to be available-for-sale and are carried at fair value, defined as period end closing market value. Net unrealized holding gains are reported as a separate component of partners' equity until realized. Fair value of financial instruments. The Partnership used the following assumptions in estimating the fair value of its notes receivable, marketable equity securities and notes payable. For performing notes receivable, the fair value was estimated by discounting future cash flows using current interest rates for similar loans. For nonperforming notes receivable, the estimated fair value of the Partnership's interest in the collateral property was used. For marketable equity securities, fair value was the year end closing market price of each security. For notes payable, the fair value was estimated using current rates for mortgages with similar terms and maturities, which, at December 31, 1996 and 1995, approximated carrying value. Cash equivalents. For purposes of the Consolidated Statements of Cash Flows, the Partnership considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. 49 50 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Earnings per unit. Income (loss) per unit of limited partner interest is computed based upon the weighted average number of units outstanding during each year. Accordingly, net income (loss) per unit is derived by dividing 98.01% of the Partnership's net income by 6,387,270, 6,418,104 and 6,418,572 units for 1996, 1995 and 1994, respectively. NOTE 3. REAL ESTATE AND DEPRECIATION In 1991, the General Partner of the Partnership selected a group of assets which it offered for sale in accordance with the terms of the Moorman Settlement Agreement classifying those properties as held for sale. The Partnership, among others, has entered into an agreement which provides for the nomination of a successor general partner and for the resolution of all matters under the Moorman Settlement Agreement. In contemplation of the election of such successor general partner and termination of the Moorman Settlement Plan, the Partnership classified all of the Partnership's properties as held for investment at December 31, 1995. See NOTE 13. "COMMITMENTS AND CONTINGENCIES - Moorman Settlement." In March 1995, the Partnership purchased the Chalet II Apartments, a 72 unit apartment complex in Topeka, Kansas, for $1.6 million. The Partnership paid $439,000 in cash and obtained new mortgage financing of $1.2 million. The mortgage bears interest at a variable rate, (10% per annum, at December 31, 1996), requires monthly payments of principal and interest, currently $12,000, and matures in March 2002. In December 1995, the Partnership sold the Harbour Pointe Apartments in Miami, Florida for $5.2 million. The Partnership received $2.1 million in cash after the payoff of $3.0 million in existing mortgage debt and the payment of various closing costs associated with the sale. The Partnership recognized a gain of $2.8 million on the sale. Also in December 1995, the Partnership sold the Vineyards Apartments in Broadview Heights, Ohio for $10.7 million. The Partnership received net cash of $2.4 million after the payoff of $8.2 million in existing mortgage debt and the payment of various closing costs associated with the sale. The Partnership recognized a gain of $4.9 million on the sale. In October 1994, the Partnership sold the Brandywine and Raintree Apartments, both located in Meridian Township, Michigan, to a single buyer for a total of $14.8 million. The Partnership received net cash of $4.5 million after the payoff of $9.4 million in existing mortgage debt, the payment of $82,000 in prepayment penalties and various closing costs associated with the sale. The Partnership recognized gains totaling $8.3 million on the sale. 50 51 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4. NOTES RECEIVABLE Notes and interest receivable consisted of the following:
1996 1995 ------------------- ------------------- Estimated Estimated Fair Book Fair Book Value Value Value Value -------- -------- -------- -------- Notes receivable Performing ........... $ 26,189 $ 25,950 $ 28,216 $ 28,050 Nonperforming ........ 5,108 5,100 -- -- -------- -------- -------- -------- $ 31,297 31,050 $ 28,216 28,050 ======== ======== ======== Interest receivable ..... 68 80 Unamortized (discounts).. (142) (187) Deferred gains .......... (15,787) (15,787) -------- -------- $ 15,189 $ 12,156 ======== ========
The Partnership does not recognize interest income on nonperforming notes receivable. For 1994, unrecognized interest income on nonperforming notes totaled $372,000. All notes were performing in 1996 and 1995. Notes receivable mature from 1997 through 2002 with interest rates ranging from 9.0% to 16.0% with a weighted average interest rate of 11.1%. Discounts were based on interest rates at the time of origination. Notes receivable are nonrecourse and are generally collateralized by real estate. The majority of the notes receivable require monthly payments of interest only with "balloon" principal payments at the end of their respective terms. Deferred gains result from property sales where the buyer has either made an inadequate down payment or has not met the continuing investment test of SFAS No. 66. See NOTE 2. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Revenue Recognition on the Sale of Real Estate." Effective December 1993, the Partnership ceased accruing interest income in excess of the "pay rate" (cash received) on the note receivable secured by the Warner Creek Apartments in Woodland Hills, California, as the carrying value of the note receivable approximates the net realizable value of the collateral securing such note. Unrecognized interest income was $541,000, $524,000 and $466,000 in 1996, 1995 and 1994, respectively. In June 1996, the Partnership funded a $1.5 million loan to JNC Enterprises, Ltd. ("JNC"), secured by a first mortgage on 67 acres of unimproved land in Collin County, Texas and by a second mortgage on 182 acres of unimproved land in McKinney, Texas. The loan bears interest at 16.0% per annum and matures in June 1997. All principal and accrued but unpaid interest is due at maturity. 51 52 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4. NOTES RECEIVABLE (Continued) In November 1996, the Partnership made a second loan to JNC in the amount of $2.0 million, $1.0 million of which was funded in November 1996 and the remaining $1.0 million was funded in December 1996. The loan is secured by a 73.7% limited partner interest in a partnership which owns 272 acres of undeveloped land in The Colony, Texas. The note bears interest at 16% per annum, requires monthly payments of interest only and matures in November 1997. This loan is cross-collateralized with the loan made to JNC in June 1996. In February 1995, as part of a lawsuit settlement with an insurance company, the Partnership, among other things, acquired from the insurance company a mortgage note secured by land in Granby, Colorado and a mortgage note secured by commercial condominiums also in Granby, Colorado. In August 1996, the Partnership completed foreclosure on the collateral properties securing the notes. Also in August 1996, the Partnership sold the commercial condominiums for $80,000 in cash. The Partnership received net cash of $61,000 after payment of related closing costs. The Partnership recognized a gain of $61,000 on the sale having assigned nominal value to the condominiums. In October 1995, the Partnership accepted a $3.7 million discounted payoff of three wraparound mortgage notes secured by the Hurstbourne Business Park in Louisville, Kentucky. The Partnership received $1.5 million in cash after the payoff of $2.2 million in underlying mortgage debt. No loss was recorded as the discounted note payoff was equal to the Partnership's net carrying value of the loans. NOTE 5. ALLOWANCE FOR ESTIMATED LOSSES The allowance for estimated losses was as follows:
1996 1995 1994 ------ ------ ------ Balance December 31,...... $1,910 $1,910 $1,910 ====== ====== ======
NOTE 6. INVESTMENTS IN MARKETABLE EQUITY SECURITIES OF AFFILIATE The Partnership owns 195,732 shares of the common stock of ART, a publicly held real estate investment company, which the Partnership acquired in open market purchases in 1990 at an adjusted cost of $269,000. The Partnership considers the ART common stock to be available-for-sale and the shares are therefore carried at fair value (period end market value). The market value of the ART common stock was $1.3 million at December 31, 1996 and $722,000 at December 31, 1995. See NOTE 1. "ORGANIZATION." NOTE 7. NOTES PAYABLE Notes payable at December 31, 1996 and 1995 are collateralized by land, buildings and improvements and are generally nonrecourse to the partnership. The GCLP mortgage debt, as discussed below, is cross- 52 53 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 7. NOTES PAYABLE (Continued) collateralized and cross-defaulted among the apartment complexes and wraparound note receivable that serve as collateral for such debt. The notes payable outstanding at December 31, 1996 bear interest at stated rates ranging from 5.0% to 11.5% with a weighted average rate of 8.6% and such notes have maturities or call dates ranging from one to 27 years. In March 1996, the Partnership refinanced the mortgage debt secured by the Whispering Pines Apartments in Canoga Park, California in the amount of $2.4 million. The Partnership received net cash of $37,000 after the payoff of $2.3 million in existing mortgage debt, which had matured in December 1995, and related closing costs associated with the financing. The new mortgage bears interest at the rate of 7.5% per annum, requires monthly payments of principal and interest of $19,000 and matures in April 2001. In April 1996, the mortgage debt secured by the Club Mar Apartments in Sarasota, Florida was voluntarily placed into default to facilitate a request for debt relief under the Housing and Urban Development ("HUD") Partial Payment of Claim program. The request was necessitated due to the negative impact of road improvements in front of the property which have been ongoing since January 1995. The Partnership expects a modification of the mortgage to be completed in the second quarter of 1997. In September 1994, the Partnership sold the Creekwood Apartments in College Park, Georgia, for $6.0 million. The Partnership has accounted for the sale as a financing transaction, due to the Partnership having provided financing of the purchaser's down payment. In July 1996, the purchaser refinanced the existing mortgage debt in the amount of $4.7 million. The Partnership received $1.2 million in excess financing proceeds from the refinancing, after the payoff of the existing mortgage debt and the funding of various closing costs associated with the loan. The Partnership continues to account for the Creekwood Apartments as an owned property and the September 1994 sale and July 1996 refinancing as financing transactions of the Partnership, as the Partnership's down payment loan to the purchaser remains outstanding. In September 1996, the Partnership obtained mortgage financing for the previously unencumbered Harbor Plaza Shopping Center in Aurora, Colorado in the amount of $1.8 million. The Partnership received net cash of $1.6 million after payment of various closing costs associated with the financing. The mortgage bears interest at 9.41% per annum, requires monthly payments of principal and interest of $15,831 and matures in October 2006. The Partnership holds a wraparound mortgage note receivable secured by a shopping center in Las Vegas, Nevada. The underlying note payable has 53 54 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 7. NOTES PAYABLE (Continued) matured. The lender has not issued a notice of default or demand for payment. The mortgage payments continue to be made in accordance with the terms of the matured note. In 1995, the Partnership refinanced the mortgage debt secured by the Mallard Lake Apartments in Greensboro, North Carolina in the amount of $8.2 million, the Four Seasons Apartments in Denver, Colorado in the amount of $9.9 million, the Nora Pines Apartments in Indianapolis, Indiana in the amount of $6.2 million, the Covered Bridge Apartments in Gainesville, Florida in the amount of $4.7 million, the Marina Playa Office Building in Santa Clara, California in the amount of $8.3 million and the Timbercreek Apartments in Omaha, Nebraska in the amount of $5.0 million. The Partnership received net cash of $10.7 million after the payoff of $27.8 million in existing mortgage debt including $315,000 in prepayment penalties. The remainder of the refinancing proceeds were used to fund escrows for replacements and repairs and to pay various closing costs associated with the refinancings. The new mortgages bear interest at rates ranging from 7.75% to 8.75% per annum, require monthly payments of principal and interest and mature from June 2005 to January 2006. In November 1992, the Partnership transferred the net assets of 52 apartment complexes and a wraparound note receivable to GCLP, which then refinanced such assets with a financial institution through the issuance of a $223.0 million blanket mortgage. GCLP used the refinancing proceeds to pay off the mortgage debt of the 52 properties and the wraparound note receivable. In conjunction with the refinancing, four escrow accounts were established and GCLP made an initial deposit totaling $3.8 million from the refinancing proceeds. The recurring replacement escrow required monthly deposits of $232,000 to be used for capital repairs, replacements and improvements. The capital replacement escrow required monthly deposits which totaled $1.7 million in 1994. No capital replacement escrow deposits were required in 1995 or 1996. The credit enhancement escrow required monthly deposits (totaling $3.5 million in 1996, $3.3 million in 1995 and $3.0 million in each of 1993 and 1994). In 1996, GCLP entered into negotiations to replace the credit enhancement escrow with a $18.5 million letter of credit. The negotiations were finalized in January 1997. The letter of credit provided by a financial institution in the amount of $18.5 million is for a term of not less than two years. The letter of credit may be drawn upon to pay operating shortfalls of GCLP's properties. The available amount under the letter of credit will be reduced by the amount of each draw on the letter of credit. The Partnership received net cash of $11.3 million from the released credit enhancement escrow, after the payment of various costs associated with the letter of credit. A tax and insurance escrow was also established which requires monthly payments based on projections of real estate taxes and insurance. 54 55 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 7. NOTES PAYABLE (Continued) Under the blanket mortgage, GCLP is prohibited from further encumbering, financing or selling any of the fifty-two properties or the wraparound note receivable for a five year period ending November 22, 1997. At such time, GCLP may retire the blanket mortgage in whole or part, with some restrictions. Scheduled notes payable principal payments (including pension notes) are due as follows: 1997 .................................................. $ 21,320 1998 .................................................. 14,274 1999 .................................................. 28,997 2000 .................................................. 6,399 2001 .................................................. 10,831 Thereafter ............................................ 255,207 -------- $337,028
======== NOTE 8. PENSION NOTES In connection with its formation, the Partnership issued $4.7 million of 8% subordinated Pension Notes to certain investors in exchange for their interest in the net assets of certain of the "rolled-up" partnerships. The Pension Notes are issued under an Indenture between the Partnership and Bank of America Texas as successor Trustee. The Pension Notes are unsecured, subordinated obligations of the Partnership and bear interest at the rate of 8% compounded annually. Principal and interest are to be paid upon maturity on September 18, 1997 or earlier redemption. At December 31, 1996, such redemption amount was $13.5 million, including accrued but unpaid interest. The Pension Notes are redeemable at the option of the Partnership at any time, in whole or in part, at 100% of the principal amount plus accrued and unpaid interest to the date of redemption. The Pension Notes are also subject to mandatory redemption if the Partnership's current value net worth (as defined in such Indenture) on the last day of each of any two consecutive fiscal quarters is less than 175% of the aggregate redemption price of Pension Notes then outstanding. The 8% stated interest rate on the Pension Notes is different than the assumed market rate at the time of issuance. Such discount is being amortized over the term of the Pension Notes using the interest method. Interest expense of $1,444,000, $1,289,000 and $1,151,000 was recognized on the Pension Notes in 1996, 1995 and 1994, respectively. NOTE 9. WARRANTS Pursuant to the Moorman Settlement Agreement, on February 14, 1992 the Partnership issued warrants to purchase an aggregate of 2,019,579 of its units of limited partner interest subject to adjustment. Each warrant initially entitled the holder thereof to purchase three quarters of one 55 56 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 9. WARRANTS (Continued) unit at the exercise price ($11.00 per warrant). The initial exercise price was equal to $14.67 per unit and increased to $16.00 per unit on February 14, 1993, subject to adjustment. The warrants were exercisable for five years from the date of issuance and expired on February 14, 1997. Prior to their expiration a total of 1,631 warrants were exercised for the purchase of 1,226 units. See NOTE 13. "COMMITMENTS AND CONTINGENCIES - Moorman Settlement." NOTE 10. GENERAL PARTNER FEES AND COMPENSATION General. Gene E. Phillips is a general partner of SAMLP, the Partnership's General Partner. Mr. Phillips served as a director, Chairman of the Board and Chief Executive Officer of SAMI, the Partnership's Managing General Partner until May 15, 1996. Mr. Phillips and the executive officers of SAMI also serve as officers or directors of various other real estate entities. These entities may have the same objectives and may be engaged in activities similar to those of the Partnership. Property Management Fees. As compensation for providing property management services to the Partnership's properties, as provided in the Partnership Agreement, the General Partner or an affiliate of the General Partner is to receive a reasonable property management fee. Currently, Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of the General Partner, provides such property management services for a fee of 5% of the monthly gross rents collected on the properties under its management. Carmel, Ltd. subcontracts with other entities for the property-level management services to the Partnership at various rates. The general partner of Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (i) Syntek West, Inc. ("SWI"), of which Mr. Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level management and leasing of twelve of the Partnership's commercial properties to Carmel Realty, Inc. ("Carmel Realty") which is a company owned by SWI. Carmel Realty is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Carmel, Ltd. Carmel, Ltd. does not perform property management services for GCLP. Leasing Commissions. As compensation for providing leasing and rent-up services for a Partnership property, as provided in the Partnership Agreement, the General Partner or an affiliate of the General Partner shall be paid a reasonable leasing commission. Reimbursement of Administrative Expenses. To the extent that officers or employees of the general partners or any of their affiliates participate in the operation or administration of the Partnership or GCLP, the general partners and their affiliates are to be reimbursed under the partnership agreements for salaries, travel, rent, deprecia- 56 57 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. GENERAL PARTNER FEES AND COMPENSATION (Continued) tion, utilities and general overhead items incurred and properly allocable to such services. Such amounts are included in General and Administrative expense in the accompanying Consolidated Statements of Operations. General Partner Compensation. As base compensation for providing administrative and management services under the Partnership Agreement, the General Partner is entitled to receive from the Partnership, an annual partnership management fee equal to 10% of distributions made in each calendar year of Cash from Operations, as defined in the Partnership Agreement, for the calendar year, payable within 90 days after the end of that calendar year. As additional incentive compensation, the General Partner is entitled to receive in each calendar year an amount equal to 1% of the Average Unit Market Price, as defined in the Partnership Agreement, for that calendar year. Provided, however, that no incentive compensation is payable unless distributions of Cash from Operations exceed 6% of the Exchange Value of the original assets, also as defined in the Partnership Agreement. The General Partner has waived its base compensation during the pendency of the Moorman Settlement Agreement. Real Estate Brokerage Commissions. The General Partner or an affiliate of the General Partner may, pursuant to the Partnership Agreement, charge a reasonable real estate brokerage commission, payable at the time the Partnership acquires title to, or beneficial ownership in, an acquired property. Upon the sale of any Property by the Partnership, the General Partner or an affiliate of the General Partner may, pursuant to the Partnership Agreement, charge a reasonable real estate brokerage commission, payable at the time the Partnership transfers title to the property. In each case, such commissions are payable only if the General Partner or such affiliate actually performed brokerage services. Incentive Disposition Fee. Under the Partnership Agreement, the General Partner or an affiliate of the General Partner is paid a fee equal to 10% of the amount, if any, by which the Gross Sales Price, as defined in the Partnership Agreement, of any property sold by the Partnership exceeds 110% of the Adjusted Cost, also as defined in the Partnership Agreement, of such property. Acquisition Fees. As compensation under the Partnership Agreement for services rendered in structuring and negotiating the acquisition by the Partnership of any property, other than an Initial Property, as defined in the Partnership Agreement, the General Partner or an affiliate of the General Partner is paid a fee in an amount equal to 1% of the Original Cost, also as defined in the Partnership Agreement, of such property. Fees For Additional Services. Under the Partnership Agreement the General Partner or an affiliate of the General Partner may provide services other than those set out above for the Partnership in return for reasonable compensation. 57 58 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. GENERAL PARTNER FEES AND COMPENSATION (Continued) Fees and cost reimbursement to SAMLP, the General Partner of the Partnership, and its affiliates:
1996 1995 1994 ------ ------ ------ Property and construction management fees* ........................ $ 744 $ 700 $ 725 Loan placement fees ........................ 89 423 30 Real estate commissions .................... -- 576 444 Leasing commissions ........................ 67 73 102 Reimbursement of administrative expenses ................................ 2,610 3,232 2,868 ------ ------ ------ $3,510 $5,004 $4,169 ====== ====== ======
- ---------------------- * Net of property management fees paid to subcontractors, other than Carmel Realty. Cost reimbursements to GCMI, the general partner of GCLP:
1996 1995 1994 ---- ---- ---- Reimbursement of administrative expenses ................................ $719 $675 $728 ==== ==== ====
NOTE 11. RENTS UNDER OPERATING LEASES The Partnership's operations include the leasing of commercial properties (office buildings and shopping centers). The leases thereon expire at various dates through 2013. The following is a schedule of minimum future rents on non-cancelable operating leases as of December 31, 1996: 1997 .................................................. $ 9,599 1998 .................................................. 7,276 1999 .................................................. 5,837 2000 .................................................. 4,380 2001 .................................................. 4,363 Thereafter ............................................ 14,383 ------- $45,838 =======
NOTE 12. INCOME TAXES The Partnership's partners include their share of partnership income or loss in their respective tax returns and, accordingly, no income taxes have been provided in the accompanying Consolidated Statements of Operations. In December 1987, Congress passed legislation requiring certain publicly traded partnerships to be taxed as corporations. National Realty qualifies for "grandfather" treatment and will be treated as a partnership for federal tax purposes until at least 1997, unless the Partnership adds a substantial new line of business, which would require approval of the Oversight Committee (see NOTE 13. "COMMITMENTS AND 58 59 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 12. INCOME TAXES (Continued) CONTINGENCIES - Moorman Settlement") and will continue to be so treated thereafter if 90% or more of its gross income consists of qualifying income from real estate activities. As presently operated, the Partnership meets this qualification. Under the legislation, Partnership losses are suspended for limited partners and carried forward to offset future income or gain from the Partnership's operations or gain upon a limited partner's disposition of all units held. Any remaining income will be taxed as portfolio income. NOTE 13. COMMITMENTS AND CONTINGENCIES Moorman Settlement The Partnership is party to a settlement agreement, dated as of May 9, 1990, between plaintiffs Joseph B. Moorman, et al. and defendants Robert A. McNeil, National Realty, the Operating Partnership, SAMLP, Gene E. Phillips, William S. Friedman, and Shearson Lehman Hutton Inc., successor-in-interest to defendant E.F. Hutton & Company Inc., relating to the action entitled Moorman, et al. v. Southmark Corporation, et al. Such action was filed on September 2, 1987, in the Superior Court of the State of California, County of San Mateo. On May 9, 1990, the Partnership agreed to settle such action pursuant to the terms of a written agreement (the "Moorman Settlement Agreement"). On June 29, 1990, after a hearing as to its fairness, reasonableness and adequacy, the Moorman Settlement Agreement was granted final court approval. The Moorman Settlement Agreement is complex and the following summary is qualified in its entirety by reference to the text thereof, which was previously included as an exhibit to the Partnership's Form 10-Q for the quarter ended March 31, 1990, as filed with the Securities and Exchange Commission. The Moorman Settlement Agreement provides for a plan (the "Moorman Settlement Plan") consisting of, among other things, the following: (i) the appointment and operation of a committee (the "Oversight Committee"), to oversee the implementation of the Moorman Settlement Plan, (ii) the appointment and operation of an audit committee having a majority of members unaffiliated with Messrs. Phillips and Friedman or SAMLP, (iii) the establishment of specified annually increasing targets described below (each a "Target") for each of the next five years through May 1995, relating to the price of the units of limited partner interest as decreased for certain distributions to unitholders, (iv) an agreement by SAMLP not to seek reimbursement of greater than $500,000 per year for Messrs. Phillips' and Friedman's salaries for serving as general partners of SAMLP, (Mr. Friedman resigned as general partner of SAMLP effective March 4, 1994) and a deferral of such payments until such time as a Target may be met, and, if SAMLP resigns as General Partner, a waiver of any compensation so deferred, (v) a deferral until such time as a Target may be met of certain future annual General Partner compensation payable, pursuant to the Partnership's governing documents, to SAMLP or its affiliates, and, 59 60 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued) Moorman Settlement (Continued) if SAMLP resigns as General Partner, a waiver of any compensation so deferred, (vi) the required distribution to unitholders of all the Partnership's operating cash flow in excess of certain renovation costs, unless the Oversight Committee approves alternative uses for such operating cash flow, (vii) the issuance of Warrants to purchase an aggregate of up to 2,019,579 units (the "Warrants") to Class Members, (viii) the contribution by certain co-defendants of cash and notes payable to the Partnership aggregating $5.5 million (including $2.5 million to be contributed by SAMLP and its general partners over a four-year period), (ix) the amendment of the Partnership Agreement to reduce the vote required to remove the General Partner from a two-thirds vote to a majority vote of the units, (x) the Partnership's redemption of its unit purchase rights and an agreement not to adopt a similar rights plan without Oversight Committee approval and (xi) the Partnership's payment of certain settlement costs, including plaintiffs' attorneys' fees in the amount of $3.4 million. The Moorman Settlement Plan will remain in effect until SAMLP has resigned as General Partner and a successor general partner is elected and takes office, and the Warrants remained exercisable for five years from the date of issuance and expired on February 14, 1997. Prior to their expiration a total of 1,631 Warrants were exercised for the purchase of 1,226 units. SAMLP, on behalf of itself and its general partners, has made the payments of $2.5 million (including accrued interest), to the Partnership, as required by the Moorman Settlement Agreement. If Targets are not met for any two successive years of the Moorman Settlement Plan or for the final year of the Moorman Settlement Plan, SAMLP will be required to withdraw as General Partner effective at the time a successor general partner is elected. Upon, among other things, the withdrawal of SAMLP as General Partner and the due election and taking office of a successor, the Moorman Settlement Plan would terminate. The Targets for the first and second anniversary dates were not met. Since the Targets were not met for two successive years, the Moorman Settlement Agreement requires that SAMLP resign as General Partner, effective upon the election and qualification of its successor. On July 8, 1992, SAMLP notified the Oversight Committee of the failure to meet the Target for two successive years. Upon, among other things, the withdrawal of SAMLP as General Partner and the due election and taking office of a successor, the Moorman Settlement Plan will terminate. Withdrawal of SAMLP as General Partner pursuant to the Moorman Settlement Agreement requires unitholders to elect a successor general partner by majority vote. Upon the withdrawal or removal of the General Partner without the selection of a successor, the Partnership would be dissolved. 60 61 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued) Moorman Settlement (Continued) The Moorman Settlement Agreement provides that between the date of the certification causing the General Partner's resignation and the date a successor general partner takes office, the resigning General Partner shall limit its activities, as General Partner, to the conduct of the business of the Partnership in the ordinary course, shall not, without consent of the Oversight Committee, purchase or sell any real estate or other assets of the Partnership not in progress on said date, shall cooperate in the election of a successor general partner and shall cooperate with its successor to facilitate a change in the office of General Partner of the Partnership. The resigning General Partner will continue to receive fees, expenses and distributions, if any, while the solicitation is prepared. The withdrawal of the General Partner would require the Partnership to acquire the General Partner's interest in the Partnership (the "Redeemable General Partner Interest") at its then fair value, and to pay certain fees and other compensation, as provided in the Partnership Agreement and the Moorman Settlement Agreement. Under the Moorman Settlement Agreement, payment for such Redeemable General Partner Interest, fees and other compensation may, at the Oversight Committee's option, be paid over a three year period pursuant to a secured promissory note bearing interest at the prime rate and containing commercially reasonable terms and collateral. Under the Moorman Settlement Plan, the purchase price for Redeemable General Partner Interest would be calculated, as of the time SAMLP withdraws as General Partner under the Partnership's governing documents. The Managing General Partner has calculated the Redeemable General Partner Interest at December 31, 1996 to be $42.0 million, and believes there has been no material change in such value since such date. The Partnership would be entitled to offset against any such payment the then outstanding principal balance ($4.2 million at December 31, 1996) plus all accrued but unpaid interest ($6.2 million at December 31, 1996) on the note receivable from SAMLP described in NOTE 1. "ORGANIZATION." In the accompanying Consolidated Financial Statements, the Redeemable General Partner Interest is shown as a reduction of Partners' Equity. The note receivable from the General Partner has been offset against the Redeemable General Partner Interest. The Oversight Committee previously has informed the Partnership that it calculated the amount of such Redeemable General Partner Interest to be less than the amount calculated by the Managing General Partner. When SAMLP withdraws as General Partner of the Partnership, the value of the Redeemable General Partner Interest would depend on the fair value of the Partnership's assets at the time of calculation and there can be no assurance that the Redeemable General Partner Interest, fees and other compensation payable on any such withdrawal will not be substantially higher or lower than any current estimate or calculation. On January 27, 1995, National Realty, SAMLP, the Oversight Committee and William H. Elliott executed an Implementation Agreement which provides 61 62 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued) Moorman Settlement (Continued) for the nomination of an entity controlled by Mr. Elliott as successor general partner and for the resolution of all related matters under the Moorman Settlement. On February 20, 1996, the parties to the Implementation Agreement executed an Amended and Restated Implementation Agreement. On September 23, 1996, the Supervising Judge entered an order granting tentative approval of the Amended and Restated Implementation Agreement and the form of notice to be sent to the original class members. However, the order reserved jurisdiction to determine other matters which must be resolved prior to final approval. Upon final approval by the Supervising Judge, the proposal to elect the successor general partner will be submitted to the unitholders of National Realty for a vote. In addition, the unitholders will vote upon amendments to the National Realty Partnership Agreement which relate to the proposed compensation of the successor general partner and other related matters. Provided that the successor general partner is elected pursuant to the terms of the Amended and Restated Implementation Agreement, SAMLP shall receive $12,471,500 from the Partnership. This amount represents a compromise settlement of the net amounts owed by the Partnership to SAMLP upon SAMLP's withdrawal as General Partner and any amounts which SAMLP and its affiliates may owe to the Partnership. This amount shall be paid to SAMLP pursuant to a promissory note in accordance with the terms set forth in the Amended and Restated Implementation Agreement. Upon approval by the unitholders, SAMLP shall resign as General Partner and the successor general partner shall take office. If the required approvals are obtained, National Realty anticipates that the successor general partner may be elected and take office during the third quarter of 1997. The Amended and Restated Implementation Agreement provides that SAMLP, and its affiliates owning units in National Realty, shall not vote to remove the successor general partner, except for removal with cause, for a period of 36 months from the date the successor general partner takes office. Upon the election and taking office of the successor general partner, the Moorman Settlement Plan and the Oversight Committee shall terminate. If the successor general partner nominee is not elected, the existing Moorman Settlement Agreement shall remain in full force and effect and all of the provisions of the Amended and Restated Implementation Agreement shall be voided. On September 3, 1996, Joseph B. Moorman filed a Motion for Orders Compelling Enforcement of the Moorman Settlement Agreement, Appointment to a Receiver and Collateral Relief with the Superior Court of the State 62 63 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued) Moorman Settlement (Continued) of California in and for the County of San Mateo. The motion alleged that the settling defendants had failed or refused to perform their obligations under the Moorman Settlement Agreement and had breached the Moorman Settlement Agreement. The motion also requested that SAMLP be removed as general partner and a receiver be appointed to manage the Partnership. The motion also requested that ART be ordered to deliver to the court all units which had been purchased by ART since August 7, 1991. A hearing was held on this motion on October 4, 1996. On January 2, 1997, the Supervising Judge entered an order denying the motion. On January 27, 1997, Joseph B. Moorman filed motions to (i) discharge the Oversight Committee and (ii) vacate the Court's orders and renewed his prior motions to compel enforcement of the Moorman Settlement Agreement, appoint a receiver over the Partnership, and for collateral relief against ART. Also on January 27, 1997, Robert A. McNeil filed motions to (i) be installed as receiver for the Partnership, (ii) vacate the Court's orders, and (iii) disband the Oversight Committee. A hearing on the motions to discharge or disband the Oversight Committee and to vacate the Court's orders was held on March 21, 1997, and the Supervising Judge ruled that neither Mr. McNeil nor Mr. Moorman had standing to bring the motions. The Supervising Judge also set June 27, 1997 as the hearing date for final approval of the Amended and Restate Implementation Agreement. Other Litigation The Partnership is also involved in various other lawsuits arising in the ordinary course of business. In the opinion of the Managing General Partner, the outcome of these lawsuits will not have a material effect on the Partnership's financial condition, results of operations or liquidity. NOTE 14. QUARTERLY DATA The following is a tabulation of the Partnership's quarterly results of operations for the years 1996 and 1995.
Three Months Ended --------------------------------------------- March 31 June 30 September 30 December 31 -------- -------- ------------ ----------- 1996 Revenues ........................... $ 27,760 $ 27,935 $ 28,476 $ 28,510 Expenses ........................... 28,228 28,313 29,149 27,427 -------- -------- -------- -------- Income (loss) from operations ...... (468) (378) (673) 1,083 Gain on sale of real estate ........ -- -- -- 61 -------- -------- -------- -------- Net income (loss) .................. $ (468) $ (378) $ (673) $ 1,144 ======== ======== ======== ======== Earnings per unit Net income (loss) .................. $ (.07) $ (.06) $ (.10) $ .18 ======== ======== ======== ========
63 64 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 14. QUARTERLY DATA (Continued) During the fourth quarter of 1996, the Partnership sold three commercial condominiums for a gain of $61,000. See NOTE 3. "REAL ESTATE AND DEPRECIATION." Also during the fourth quarter of 1996, the Partnership received $670,000 in insurance reimbursements which reduced repair and maintenance expenses.
Three Months Ended -------------------------------------------- 1995 March 31 June 30 September 30 December 31 - ---- -------- -------- ----------- ----------- Revenues ....................... $ 26,913 $ 27,542 $ 28,118 $ 28,319 Expenses ....................... 28,117 28,919 29,157 28,603 -------- -------- -------- -------- (loss) from operations ......... (1,204) (1,377) (1,039) (284) Gain on sale of real estate .... -- -- -- 7,701 -------- -------- -------- -------- Net income (loss) .............. $ (1,204) $ (1,377) $ (1,039) $ 7,417 ======== ======== ======== ======== Earnings per unit Net income (loss) .............. $ (.18) $ (.21) $ (.16) $ 1.13 ======== ======== ======== ========
In fourth quarter 1995, the Partnership sold two of its apartment complexes for an aggregate gain of $7.7 million. See "NOTE 3. REAL ESTATE AND DEPRECIATION." NOTE 15. SUBSEQUENT EVENTS In January 1997, the Partnership funded a $1.2 million loan to Bordeaux Investments Two, L.L.C. ("Bordeaux"). The loan is secured by (i) a 100% limited partnership interest in Bordeaux, which owns a shopping center in Oklahoma City, Oklahoma; (ii) 100% of the stock of Bordeaux Investments One, Inc., which owns approximately 6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and (iii) the personal guarantees of the Bordeaux partners. The loan bears interest at 14.0% per annum, requires monthly payments of interest only at 12.0% per annum, with the deferred interest payable annually on December 15, 1997 and 1998, and matures in January 1999. The Partnership has the option to reduce the principal balance of the loan by $50,000 in exchange for 75% ownership of Bordeaux. In February 1997, the Partnership funded a third loan to JNC in the amount of $2.5 million. The loan is secured by a 70.87% limited partner interest in a limited partnership which owns 250 acres of undeveloped land in Fort Worth, Texas. The note bears interest at 12% per annum, requires quarterly payments of interest only and matures in October 1997. See NOTE 4. "NOTES RECEIVABLE." In January 1997, the note receivable secured by the Nellis Bonanza Shopping Center in Las Vegas, Nevada matured. The borrower did not make the required principal payment. Therefore at December 31, 1996, the note has been classified as non-performing. The Partnership has instituted foreclosure proceedings and anticipates that it will not incur a loss on foreclosure as the estimated value of the collateral property exceeds the carrying value of the note. 64 65 SCHEDULE III NATIONAL REALTY, L.P. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996
Initial Cost to Partnership Gross Amount Carried at Close of Period (1) ---------------------------------- ----------------------------------------------------- Cost Capitalized Subsequent to Building Acquisition Building and Improve- -------------------- and Improve- Description Encumbrances Land ments Improvements Other Land ments Total ----------- ------------ ---- ------------ ------------ ----- ---- ------------ ----- (dollars in thousands) APARTMENTS Alexandria ......... $ 6,489 $ 612 $ 6,778 $ 1,194 $ -- $ 612 $ 7,972 $ 8,584 Decatur, GA Arlington Place .... 2,720 330 3,275 672 -- 330 3,947 4,277 Pasadena, TX Barcelona .......... 4,049 1,400 5,600 272 -- 1,400 5,872 7,272 Tampa, FL Bavarian ........... 6,811 547 5,528 185 -- 547 5,713 6,260 Middletown, OH Bent Tree .......... 4,781 1,047 7,036 635 -- 1,047 7,671 8,718 Addison, TX Blackhawk .......... 3,471 253 4,081 238 -- 253 4,319 4,572 Ft. Wayne, IN Bridgestone ........ 1,356 169 1,780 169 -- 169 1,949 2,118 Friendswood, TX Brookview Gardens .. 2,921 385 2,085 242 -- 385 2,327 2,712 Smyrna, GA Candlelight Square . 1,926 148 1,928 169 -- 145 2,100 2,245 Lenexa, KS Chalet I ........... 2,942 260 2,994 65 -- 260 3,059 3,319 Topeka, KS ...... Chalet II .......... 1,163 440 1,322 -- -- 440 1,322 1,762 Topeka, KS Chateau ............ 1,913 130 1,723 104 -- 130 1,827 1,957 Bellevue, NE Club Mar ........... 5,976 1,248 4,993 235 -- 1,248 5,228 6,476 Sarasota, FL Confederate Point .. 4,109 246 3,736 609 -- 246 4,345 4,591 Jacksonville, FL, Country Place ...... 1,990 246 3,268 49 -- 246 3,317 3,563 Round Rock, TX Covered Bridge ..... 4,653 219 3,425 106 -- 219 3,531 3,750 Gainesville, FL Creekwood .......... 4,641 489 1,955 786 -- 489 2,741 3,230 College Park, GA Fair Oaks .......... 2,992 470 2,661 160 -- 470 2,821 3,291 Euless, TX Four Seasons ....... 9,754 1,264 8,447 757 -- 1,264 9,204 10,468 Denver, CO Fox Club ........... 6,530 902 7,294 819 -- 902 8,113 9,015 Indianapolis, IN Foxwood ............ 3,428 218 3,188 400 -- 218 3,588 3,806 Memphis, TN Hidden Valley ...... 4,189 274 3,636 289 -- 261 3,938 4,199 Grand Rapids, MI Horizon East ....... 1,477 592 2,628 469 -- 592 3,097 3,689 Dallas, TX Life on Which Date Depreciation of in Latest Con- Statement Accumulated struct- Date of Operation Depreciation tion Acquired is Computed ------------ ------- -------- ------------ (dollars in thousands) APARTMENTS Alexandria ......... $ 5,151 1973 09/77 7 - 40 years Decatur, GA Arlington Place .... 2,728 1973 11/76 7 - 40 years Pasadena, TX Barcelona .......... 963 1971 09/90 7 - 40 years Tampa, FL Bavarian ........... 2,677 1972 01/84 7 - 40 years Middletown, OH Bent Tree .......... 4,130 1980 06/80 7 - 40 years Addison, TX Blackhawk .......... 2,800 1972 12/78 7 - 40 years Ft. Wayne, IN Bridgestone ........ 1,027 1979 06/82 7 - 40 years Friendswood, TX Brookview Gardens .. 1,630 1964 12/77 7 - 40 years Smyrna, GA Candlelight Square . 1,318 1971 11/77 7 - 40 years Lenexa, KS Chalet I ........... 1,628 1964/ 04/82 7 - 40 years Topeka, KS 74/78 Chalet II .......... 58 1986 03/95 7 - 40 years Topeka, KS Chateau ............ 988 1968 02/81 7 - 40 years Bellevue, NE Club Mar ........... 449 1973 07/93 7 - 40 years Sarasota, FL Confederate Point .. 2,762 1969 05/79 7 - 40 years Jacksonville, FL, Country Place ...... 1,712 1980 07/82 7 - 40 years Round Rock, TX Covered Bridge ..... 2,798 1972 10/79 7 - 40 years Gainesville, FL Creekwood .......... 759 1973 04/90 7 - 40 years College Park, GA Fair Oaks .......... 588 1978 07/89 7 - 40 years Euless, TX Four Seasons ....... 3,809 1970 07/84 7 - 40 years Denver, CO Fox Club ........... 3,796 1972 11/83 7 - 40 years Indianapolis, IN Foxwood ............ 2,312 1974 08/79 7 - 40 years Memphis, TN Hidden Valley ...... 2,147 1973 07/81 7 - 40 years Grand Rapids, MI Horizon East ....... 2,082 1972 05/78 7 - 40 years Dallas, TX
65 66 SCHEDULE III NATIONAL REALTY, L.P. (Continued) REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996
Initial Cost to Partnership Gross Amount Carried at Close of Period (1) ---------------------------------- ----------------------------------------------------- Cost Capitalized Subsequent to Building Acquisition Building and Improve- -------------------- and Improve- Description Encumbrances Land ments Improvements Other Land ments Total ----------- ------------ ---- ------------ ------------ ----- ---- ------------ ----- (dollars in thousands) APARTMENTS - Continued Kimberly Woods ......... $ 3,192 $ 571 $ 3,802 $ 974 $ -- $ 571 $ 4,776 $ 5,347 Tucson, AZ La Mirada .............. 5,474 392 5,454 1,278 -- 392 6,732 7,124 Jacksonville, FL Lake Nora Arms ......... 9,901 737 10,774 759 -- 737 11,533 12,270 Indianapolis, IN Lakewood Park .......... 3,031 800 3,200 68 -- 800 3,268 4,068 St. Petersburg, FL Lantern Ridge .......... 1,481 130 1,721 40 -- 177 1,714 1,891 Richmond, VA Mallard Lake ........... 8,054 534 7,099 768 -- 534 7,867 8,401 Greensboro, NC Manchester Commons ..... 4,913 635 4,654 851 -- 635 5,505 6,140 Manchester, MO Mesa Court ............. 1,745 492 1,968 146 -- 492 2,114 2,606 Mesa, AZ Mesa Ridge ............. 2,332 955 3,820 237 -- 955 4,057 5,012 Mesa, AZ Nora Pines ............. 6,059 221 3,872 352 -- 221 4,224 4,445 Indianapolis, IN Oak Hollow ............. 7,469 745 6,118 747 -- 745 6,865 7,610 Austin, TX Oakmont ................ 2,869 251 1,423 62 (100) 251 1,385 1,636 Monroe, LA Oak Tree ............... 2,192 304 3,543 246 -- 304 3,789 4,093 Grandview, MO Olde Towne ............. 3,603 209 3,272 308 -- 209 3,580 3,789 Middletown, OH Outrigger .............. 3,130 683 4,871 647 -- 683 5,518 6,201 Tulsa, OK Pheasant Ridge ......... 4,595 231 4,682 852 -- 231 5,534 5,765 Bellevue, NE Pines .................. 2,632 278 3,490 243 -- 278 3,733 4,011 Little Rock, AR Place One .............. 5,072 784 5,186 796 -- 784 5,982 6,766 Tulsa, OK Quail Point ............ 2,158 184 2,716 249 -- 184 2,965 3,149 Huntsville, AL Regency ................ 2,483 304 1,865 159 -- 304 2,024 2,328 Lincoln, NE Regency Falls .......... 2,617 888 7,261 1,471 (100)(3) 888 8,632 9,520 San Antonio, TX Rockborough ............ 5,817 702 4,495 861 -- 702 5,356 6,058 Denver, CO Royal Oaks ............. 2,719 738 5,348 956 -- 738 6,304 7,042 Stone Mountain, GA Life on Which Date Depreciation of in Latest Con- Statement Accumulated struct- Date of Operation Depreciation tion Acquired is Computed ------------ ------- -------- ------------ (dollars in thousands) APARTMENTS - Continued Kimberly Woods ......... $ 3,284 1973 12/77 7 - 40 years Tucson, AZ La Mirada .............. 4,215 1971 01/79 7 - 40 years Jacksonville, FL Lake Nora Arms ......... 7,410 1973 06/78 7 - 40 years Indianapolis, IN Lakewood Park .......... 492 1976 12/90 7 - 40 years St. Petersburg, FL Lantern Ridge .......... 1,398 1974 03/79 7 - 40 years Richmond, VA Mallard Lake ........... 4,717 1974 05/79 7 - 40 years Greensboro, NC Manchester Commons ..... 3,604 1972 06/78 7 - 40 years Manchester, MO Mesa Court ............. 372 1972 05/90 7 - 40 years Mesa, AZ Mesa Ridge ............. 724 1972 05/90 7 - 40 years Mesa, AZ Nora Pines ............. 2,735 1970 05/78 7 - 40 years Indianapolis, IN Oak Hollow ............. 4,389 1974 05/78 7 - 40 years Austin, TX Oakmont ................ 281 1974 06/89 7 - 40 years Monroe, LA Oak Tree ............... 1,736 1968 03/82 7 - 40 years Grandview, MO Olde Towne ............. 2,025 1968 03/81 7 - 40 years Middletown, OH Outrigger .............. 3,579 1974 11/77 7 - 40 years Tulsa, OK Pheasant Ridge ......... 3,141 1974 10/78 7 - 40 years Bellevue, NE Pines .................. 2,335 1977 11/77 7 - 40 years Little Rock, AR Place One .............. 4,287 1970 04/77 7 - 40 years Tulsa, OK Quail Point ............ 2,068 1960 08/75 7 - 40 years Huntsville, AL Regency ................ 1,016 1973 05/82 7 - 40 years Lincoln, NE Regency Falls .......... 5,750 1974 11/78 7 - 40 years San Antonio, TX Rockborough ............ 3,340 1973 01/78 7 - 40 years Denver, CO Royal Oaks ............. 4,191 1973 12/77 7 - 40 years Stone Mountain, GA
66 67 SCHEDULE III NATIONAL REALTY, L.P. (Continued) REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996
Initial Cost to Partnership Gross Amount Carried at Close of Period (1) ---------------------------------- ----------------------------------------------------- Cost Capitalized Subsequent to Building Acquisition Building and Improve- -------------------- and Improve- Description Encumbrances Land ments Improvements Other Land ments Total ----------- ------------ ---- ------------ ------------ ----- ---- ------------ ----- (dollars in thousands) APARTMENTS - Continued Santa Fe ................. $ 2,815 $ 529 $ 5,351 $ 214 $ -- $ 529 $ 5,565 $ 6,094 Kansas City, MO Shadowood ................ 3,690 477 3,208 207 -- 477 3,415 3,892 Addison, TX Sherwood Glen ............ 3,915 352 2,550 518 -- 352 3,068 3,420 Urbandale, IA Skipper's Pond ........... 2,662 360 3,123 128 -- 339 3,272 3,611 Tampa, FL Stonebridge .............. 1,735 193 2,076 212 -- 193 2,288 2,481 Florissant, MO Summerwind ............... 5,145 493 2,990 138 -- 493 3,128 3,621 Reseda, CA Sun Hollow ............... 3,889 385 4,159 65 -- 385 4,224 4,609 El Paso, TX Tanglewood ............... 17,206 5,682 18,340 3,578 -- 5,682 21,918 27,600 Arlington Heights, IL Timber Creek ............. 4,938 154 2,327 604 -- 154 2,931 3,085 Omaha, NE Towne Oaks ............... 2,687 188 3,576 170 -- 188 3,746 3,934 Monroe, LA Villa Del Mar ............ 2,541 387 3,134 96 -- 387 3,230 3,617 Wichita, KS Village Square ........... 2,039 769 5,566 1,235 -- 769 6,801 7,570 Stone Mountain, GA Villas ................... 3,336 516 3,948 595 -- 516 4,543 5,059 Plano, TX Whispering Pines ......... 2,371 311 1,255 163 -- 311 1,418 1,729 Canoga Park, CA Whispering Pines ......... 4,949 228 4,330 622 -- 228 4,952 5,180 Topeka, KS Windridge ................ 7,352 711 5,812 1,624 -- 711 7,436 8,147 Austin, TX Windtree I & II .......... 5,159 460 2,739 181 -- 460 2,920 3,380 Reseda, CA Wisperwood ............... 2,167 237 1,964 393 -- 258 2,336 2,594 Tampa, FL Woodlake ................. 4,394 585 5,848 1,016 -- 585 6,864 7,449 Carrollton, TX Woodsong II .............. 1,411 322 3,705 199 -- 322 3,904 4,226 Smyrna, GA Woodstock ................ 3,122 888 5,193 395 -- 888 5,588 6,476 Dallas, TX OFFICE BUILDINGS 56 Expressway ............ -- 406 3,976 557 (2,386)(3) 406 2,147 2,553 Oklahoma City, OK Life on Which Date Depreciation of in Latest Con- Statement Accumulated struct- Date of Operation Depreciation tion Acquired is Computed ------------ ------- -------- ------------ (dollars in thousands) Santa Fe ................. $ 2,742 1964/ 04/83 7 - 40 years Kansas City, MO 67 Shadowood ................ 2,020 1976 02/79 7 - 40 years Addison, TX Sherwood Glen ............ 2,156 1970 12/77 7 - 40 years Urbandale, IA Skipper's Pond ........... 2,297 1971 07/76 7 - 40 years Tampa, FL Stonebridge .............. 1,452 1975 10/77 7 - 40 years Florissant, MO Summerwind ............... 2,312 1976 02/77 7 - 40 years Reseda, CA Sun Hollow ............... 2,423 1977 09/79 7 - 40 years El Paso, TX Tanglewood ............... 13,966 1974 03/78 7 - 40 years Arlington Heights, IL Timber Creek ............. 1,977 1974 10/78 7 - 40 years Omaha, NE Towne Oaks ............... 1,932 1974 07/82 7 - 40 years Monroe, LA Villa Del Mar ............ 1,739 1971 10/81 7 - 40 years Wichita, KS Village Square ........... 4,362 1973 12/77 7 - 40 years Stone Mountain, GA Villas ................... 2,591 1977 04/79 7 - 40 years Plano, TX Whispering Pines ......... 122 1977 12/93 7 - 40 years Canoga Park, CA Whispering Pines ......... 3,198 1972 02/78 7 - 40 years Topeka, KS Windridge ................ 5,008 1974 09/78 7 - 40 years Austin, TX Windtree I & II .......... 2,070 1976 11/76 7 - 40 years Reseda, CA Wisperwood ............... 1,664 1975 07/76 7 - 40 years Tampa, FL Woodlake ................. 3,755 1979 08/78 7 - 40 years Carrollton, TX Woodsong II .............. 3,087 1975 08/80 7 - 40 years Smyrna, GA Woodstock ................ 3,273 1977 12/78 7 - 40 years Dallas, TX OFFICE BUILDINGS 56 Expressway ............ 1,907 1981 03/82 7 - 40 years Oklahoma City, OK
67 68 SCHEDULE III (Continued) NATIONAL REALTY, L.P. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996
Initial Cost to Partnership Gross Amount Carried at Close of Period (1) ---------------------------------- ----------------------------------------------------- Cost Capitalized Subsequent to Building Acquisition Building and Improve- -------------------- and Improve- Description Encumbrances Land ments Improvements Other Land ments Total ----------- ------------ ---- ------------ ------------ ----- ---- ------------ ----- (dollars in thousands) OFFICE BUILDINGS - Continued Executive Court ............... $ -- $ 271 $ 2,099 $ 672 $ -- $ 271 $ 2,771 $ 3,042 Memphis, TN Fondren ....................... -- 366 5,100 154 (3,421)(3) 366 1,833 2,199 Houston, TX Marina Playa .................. 8,205 1,237 4,339 5,017 -- 1,237 9,356 10,593 Santa Clara, CA Melrose Business Park ......... -- 367 2,674 149 (1,000)(3) 367 1,823 2,190 Oklahoma City, OK Toll Hill ..................... 2,398 1,230 3,722 1,692 (1,098)(3) 1,230 4,316 5,546 Dallas, TX University Square ............. -- 562 3,276 183 (1,875)(3) 562 1,584 2,146 Anchorage, AK SHOPPING CENTERS Countryside Plaza ............. 2,014 843 3,179 715 -- 843 3,894 4,737 Clearwater, FL Crestview ..................... 708 239 1,512 108 -- 239 1,620 1,859 Crestview, FL Cross County Mall ............. 7,473 608 6,468 5,878 -- 608 12,346 12,954 Mattoon, IL Cullman ....................... 728 400 1,830 132 -- 400 1,962 2,362 Cullman, AL Harbor Plaza .................. 1,822 817 2,587 380 -- 821 2,963 3,784 Aurora, CO Katella Plaza ................. 1,644 -- 2,844 504 -- -- 3,348 3,348 Orange, CA Regency Point ................. 2,442 647 5,156 2,263 -- 1,792 6,274 8,066 Jacksonville, FL Southern Palms ................ 8,815 4,226 17,757 1,630 -- 4,285 19,328 23,613 Tempe, AZ Westwood ...................... 779 -- 5,424 632 -- -- 6,056 6,056 -------- -------- -------- -------- -------- -------- -------- -------- Tallahassee, FL $308,370(2) $ 50,103 $353,132 $ 54,713 $ (9,980) $ 51,342 $396,626 $447,968 ======== ======== ======== ======== ======== ======== ======== ======== Life on Which Date Depreciation of in Latest Con- Statement Accumulated struct- Date of Operation Depreciation tion Acquired is Computed ------------ ------- -------- ------------ (dollars in thousands) OFFICE BUILDINGS - Continued Executive Court ............... $ 1,445 1980 09/82 7 - 40 years Memphis, TN Fondren ....................... 1,539 1982 07/83 7 - 40 years Houston, TX Marina Playa .................. 5,485 1972 12/76 7 - 40 years Santa Clara, CA Melrose Business Park ......... 1,252 1980 03/82 7 - 40 years Oklahoma City, OK Toll Hill ..................... 2,568 1979 06/79 7 - 40 years Dallas, TX University Square ............. 1,371 1981 12/81 7 - 40 years Anchorage, AK SHOPPING CENTERS Countryside Plaza ............. 1,790 1978 05/85 7 - 40 years Clearwater, FL Crestview ..................... 970 1979 05/78 7 - 40 years Crestview, FL Cross County Mall ............. 6,539 1971 08/79 7 - 40 years Mattoon, IL Cullman ....................... 1,120 1979 02/79 7 - 40 years Cullman, AL Harbor Plaza .................. 1,619 1979 09/81 7 - 40 years Aurora, CO Katella Plaza ................. 2,039 1971 12/80 7 - 40 years Orange, CA Regency Point ................. 2,255 1982 06/84 7 - 40 years Jacksonville, FL Southern Palms ................ 9,203 1981 03/83 7 - 40 years Tempe, AZ Westwood ...................... 2,555 1980 10/83 7 - 40 years -------- Tallahassee, FL $223,204 ========
(1) The aggregate cost for financial statement purposes approximates that for federal tax purposes. (2) Does not include discounts and mortgages payable totaling $15,181 on real estate which has been sold but for which the Partnership remains liable on the underlying mortgage note. (3) Write-down of property to estimated net realizable value. 68 69 SCHEDULE III (Continued) NATIONAL REALTY, L.P. REAL ESTATE AND ACCUMULATED DEPRECIATION
1996 1995 1994 --------- --------- --------- (dollars in thousands) Reconciliation of Real Estate Balance at January 1 ............. $ 442,439 $ 451,572 $ 457,654 Acquisitions and improvements 5,529 5,705 5,411 Sales ........................ -- (14,838) (11,493) --------- --------- --------- Balance at December 31, .......... $ 447,968 $ 442,439 $ 451,572 ========= ========= ========= Reconciliation of Accumulated Depreciation Balance at January 1, ............ $ 212,957 $ 210,037 $ 206,120 Depreciation ................. 10,247 10,268 10,034 Sales ........................ -- (7,348) (6,117) --------- --------- --------- Balance at December 31, ........... $ 223,204 $ 212,957 $ 210,037 ========= ========= =========
69 70 SCHEDULE IV NATIONAL REALTY, L.P. MORTGAGE LOANS ON REAL ESTATE December 31, 1996
Final Interest Maturity Description Rate Date Periodic Payment Terms - ------------------- -------- -------- ----------------------------------------------- FIRST MORTGAGE LOAN JNC Enterprises, Ltd...... 16.00% 06/97 All principal and interest is due at maturity. Secured by 67 acres of unimproved land in Collin County, TX and by a second mortgage on 182 acres of unimproved land in McKinney, TX WRAPAROUND MORTGAGE LOANS Nellis ................... 9.50% 01/97 Monthly interest only. Secured by shopping center in Las Vegas, NV Warner Creek ............. 9.50% 11/02 Monthly interest only at pay rates ranging from Secured by apartments 6.9% to 10.5%. Prepayment with 30 days notice, in Woodland Hills, CA penalty of 3.00%. Bridgeview ............... 9.00% 02/00 Monthly interest only. May prepay up to 25% Secured by shopping to of the wrap equity upon 60 days written notice center in La Crosse, WI 9.50% without penalty. OTHER JNC Enterprises, Ltd. .... 16.00% 11/97 Monthly interest only. Secured by a 73.7% limited partner interest in a partnership which owns 272 acres of undeveloped land in The Colony, TX Interest receivable ...... Deferred gains ........... Allowance for estimated losses ................. Carrying Amount Principal Amount of of Mortgage Net Loans Subject to Prior Face Amount of unamortized Delinquent Principal Description Liens of Mortgage discount or Interest - --------------------------- ------- ----------- --------------- -------------------- (dollars in thousands) FIRST MORTGAGE LOAN JNC Enterprises, Ltd. ... $ -- $ 1,500 $ 1,000 $ -- Secured by 67 acres of unimproved land in Collin County, TX and by a second mortgage on 182 acres of unimproved land in McKinney, TX WRAPAROUND MORTGAGE LOANS Nellis .................. 1,191 5,100 5,100 -- Secured by shopping center in Las Vegas, NV Warner Creek ............ 11,518 17,503 17,450 -- Secured by apartments in Woodland Hills, CA Bridgeview .............. 2,472 5,500 5,358 -- Secured by shopping center in La Crosse, WI OTHER JNC Enterprises, Ltd. ... -- 2,000 2,000 -- Secured by a 73.7% limited partner interest in a partnership which owns 272 acres of undeveloped land in The Colony, TX -------- -------- -------- -------- $ 15,181 $ 31,603 30,908 $ -- ======== ======== ======== Interest receivable ..... 68 Deferred gains .......... (15,787) Allowance for estimated losses ................ (1,910) -------- $ 13,279 ========
70 71 SCHEDULE IV (Continued) NATIONAL REALTY, L.P. MORTGAGE LOANS ON REAL ESTATE
1996 1995 1994 -------- -------- -------- (dollars in thousands) Balance at January 1, ............. $ 27,863 $ 29,525 $ 29,476 Additions Amortization of discount ...... 45 45 73 Acquisition and settlement of notes receivable ....... -- 2,268 -- Funding of notes receivable ... 3,500 -- -- Deductions Collection of principal ....... (500) (3,975) (24) -------- -------- -------- Balance at December 31, ........... $ 30,908 $ 27,863 $ 29,525 ======== ======== ========
71 72 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. _________________________________ PART III ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER As partnerships, neither National Realty, L.P. ("National Realty" or the "Registrant") nor National Operating, L.P. (the "Operating Partnership" or "NOLP") (collectively the "Partnership") has officers or directors. The General Partner of the Partnership is Syntek Asset Management, L.P. ("SAMLP"), whose general partners are Gene E. Phillips and Syntek Asset Management, Inc. ("SAMI"). SAMI serves as Managing General Partner. Mr. Phillips is associated with a number of entities which have business objectives that are similar in certain respects to those of the Partnership. The Managing General Partner manages the day-to-day affairs of the Partnership which includes all decisions with respect to the acquisition, disposition, improvement, financing or refinancing of the Partnership's properties, subject to the limitations of the Moorman Settlement Agreement. See ITEM 3. "LEGAL PROCEEDINGS - Moorman Settlement." In addition, SAMI's corporate parent, Basic Capital Management, Inc. ("BCM"), performs certain administrative functions and other services for the Partnership for cost reimbursements and fees as described in ITEM 1. "BUSINESS - Management and Operations." The individual general partner of SAMLP and the executive officers of SAMI are listed below, together with their ages, terms of service, their principal occupations, business experience, and directorships with other companies during the last five years or more. [THIS SPACE INTENTIONALLY LEFT BLANK.] 72 73 ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued) GENE E. PHILLIPS: Age 59, General Partner (since 1987) of SAMLP; and Chairman of the Board, Director and Chief Executive Officer (March 1989 to May 1996) of SAMI, the Managing General Partner of SAMLP and a company owned by BCM. Director and Secretary (since 1982), Chief Executive Officer (since September 1992), President (since July 1994) and the sole shareholder of Syntek West, Inc. ("SWI"); Chairman of the Board (since 1978) and President (since July 1994) of Restaurant Properties, Inc., formerly Hungry Bull, Inc.; Limited Partner (since January 1991) of Carmel Realty Services, Ltd. ("Carmel, Ltd."); Chief Executive Officer (February 1989 to September 1992) and Chairman of the Board and Director (February 1989 to December 1989) of BCM; Director and President (November 1989 to September 1992) of Carmel Realty Services, Inc. ("CRSI"); Chairman of the Board (1984 to November 1992), Director (1981 to November 1992), Chief Executive Officer (1982 to July 1991) and President (February 1989 to July 1991) of American Realty Trust, Inc. ("ART"); and Trustee or Director (January 1989 to December 1992) of Transcontinental Realty Investors, Inc. ("TCI"), Vinland Property Trust ("VPT"), National Income Realty Trust ("NIRT"), Continental Mortgage and Equity Trust ("CMET") and Income Opportunity Realty Investors, Inc. ("IORI"). RANDALL M. PAULSON: Age 50, President and Director (since August 1995) and Executive Vice President (January 1995 to August 1995) of SAMI. President (since August 1995) and Executive Vice President (January 1995 to August 1995) of CMET, IORI and TCI and (October 1994 to August 1995) of BCM; Executive Vice President (since January 1995) of ART; Vice President (1993 to 1994) of GSSW, LP, a joint venture of Great Southern Life and Southwestern Life; Vice President (1990 to 1993) of Property Company of America Realty, Inc.; President (1990) of Paulson Realty Group; President (1983 to 1989) of Johnstown Management Company; and Vice President (1979 to 1982) of Lexton-Ancira. BRUCE A. ENDENDYK: Age 48, Executive Vice President (since January 1995) of SAMI. President (since January 1995) of Carmel Realty, Inc.("Carmel Realty"); Executive Vice President (since January 1995) of BCM, ART, CMET, IORI and TCI; Management Consultant (November 1990 to December 1994); Executive Vice President (January 1989 to November 1990) of Southmark Corporation ("Southmark"); President and Chief Executive Officer (March 1988 to January 1989) of Southmark Equities Corporation; and Vice President/Resident Manager (December 1975 to March 1988) of Coldwell Banker Commercial/Real Estate Services in Houston, Texas. 73 74 ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued) THOMAS A. HOLLAND: Age 54, Executive Vice President and Chief Financial Officer (since August 1995) and Senior Vice President and Chief Accounting Officer (July 1990 to August 1995) of SAMI. Executive Vice President and Chief Financial Officer (since August 1995), Secretary (since February 1997) and Senior Vice President (July 1990 to August 1995) of CMET, IORI and TCI; Executive Vice President and Chief Financial Officer (since August 1995) and Senior Vice President and Chief Accounting Officer (July 1990 to August 1995) of BCM and ART; Senior Vice President and Chief Accounting Officer (July 1990 to February 1994) of NIRT and VPT; Vice President and Controller (December 1986 to June 1990) of Southmark; Vice President-Finance (January 1986 to December 1986) of Diamond Shamrock Chemical Company; Assistant Controller (May 1976 to January 1986) of Maxus Energy Corporation (formerly Diamond Shamrock Corporation); Trustee (August 1989 to June 1990) of Arlington Realty Investors; and Certified Public Accountant (since 1970). Compliance with Section 16(a) of the Securities Exchange Act of 1934 Under the securities laws of the United States, the directors and executive officers of the Partnership's Managing General Partner, and any persons holding more than 10% of the Partnership's units of limited partner interest are required to report their ownership of the Partnership's units and any changes in that ownership to the Securities and Exchange Commission (the "Commission"). Specific due dates for these reports have been established and the Partnership is required to report any failure to file by these dates during 1996. All of these filing requirements were satisfied by the directors and executive officers of the Partnership's Managing General Partner and 10% holders. In making these statements, the Partnership has relied on the written representations of the directors and executive officers of the Partnership's Managing General Partner and its ten percent holders and copies of the reports that they have filed with the Commission. Administrative Agent. BCM, of which Mr. Phillips served as Chief Executive Officer until September 1, 1992, and of which Mr. Paulson serves as President, performs certain administrative functions such as accounting services, mortgage servicing and real estate portfolio review and analysis for the Partnership on a cost reimbursement basis. Affiliates of BCM perform property management, loan placement,leasing and real estate brokerage and acquisition services, and may perform other services, for the Partnership for fees and commissions. BCM's principal business activity is the providing of advisory services for real estate companies. See ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." 74 75 ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued) The directors and principal officers of BCM are set forth below. MICKEY N. PHILLIPS: Director RYAN T. PHILLIPS: Director RANDALL M. PAULSON: President MARK W. BRANIGAN: Executive Vice President - Residential Asset Management BRUCE A. ENDENDYK: Executive Vice President THOMAS A. HOLLAND: Executive Vice President and Chief Financial Officer COOPER B. STUART: Executive Vice President CLIFFORD C. TOWNS, JR.: Executive Vice President - Finance DAN S. ALLRED: Senior Vice President - Land Development LYNN W. HUMPHRIES: Senior Vice President - Commercial Asset Management ROBERT A. WALDMAN: Senior Vice President, Secretary and General Counsel DREW D. POTERA: Vice President, Treasurer and Securities Manager
Mickey N. Phillips is Gene E. Phillips' brother and Ryan T. Phillips is Gene E. Phillips' son. Oversight Committee. As more fully described under ITEM 3. "LEGAL PROCEEDINGS - - Moorman Settlement," the Partnership is a party to the Moorman Settlement Agreement that, among other things, established an Oversight Committee which will exist only until termination of the Moorman Settlement Plan. The current members of the Oversight Committee are Kenneth R. Kelly, Ronald T. Baker and Joseph S. Radovsky. Mr. Kelly is the current Chairman and Secretary of the Oversight Committee. Unanimous consent of the Oversight Committee is required, during the term of the Moorman Settlement Plan, for the Partnership to adopt a new unit purchase rights plan, or for SAMLP, on behalf of the Partnership, to enter into or modify any transaction (other than certain transactions expressly permitted by the Partnership Agreement) with an affiliate (as defined below) of the Partnership, SAMLP, or Mr. Phillips or William S. Friedman, a general partner of SAMLP until March 4, 1994. Majority consent of the Oversight Committee is required, during the term of the Moorman Settlement Plan, for SAMLP, on behalf of the Partnership, to purchase securities of other issuers other than certain money market 75 76 ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued) instruments and mortgages in the ordinary course of the Partnership's business, or to enter any new line of business. For purposes of the Moorman Settlement Agreement, an "Affiliate" of the Partnership, SAMLP, or Messrs. Phillips and Friedman (each, a "Specified Party") is any person or entity that (i) directly or indirectly through one or more intermediaries controls or is controlled by or is under common control with the Specified Party, (ii) owns or controls 10% or more of the outstanding voting securities of the Specified Party, or (iii) is an officer or director of, general partner in, or serves in a similar capacity to the Specified Party or of which the Specified Party is an officer, director, or general partner or with respect to which the Specified Party serves in a similar capacity. On July 8, 1992, SAMLP notified the Oversight Committee of the failure to meet the Targets (as defined in ITEM 3. "LEGAL PROCEEDINGS - Moorman Settlement") for two successive years. The Moorman Settlement Agreement provides that between the date of the certification causing the General Partner's resignation and the date a successor general partner takes office, the resigning General Partner shall limit its activities, as General Partner, to the conduct of the business of the Partnership in the ordinary course, shall not, without consent of the Oversight Committee, purchase or sell any real property or other assets of the Partnership not in progress on said date, shall cooperate in the election of a successor general partner and shall cooperate with its successor to facilitate a change in the office of General Partner of the Partnership. The resigning General Partner will continue to receive fees, expenses and distributions, if any, while the solicitation is prepared. See ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." Pursuant to the Moorman Settlement Agreement, the Partnership pays each member of the Oversight Committee $50,000 per year. The Partnership's obligation to pay such compensation ceased May 9, 1995. However, the Supervising Judge entered an order on May 19, 1995, providing that the obligation to pay such compensation shall continue until the Moorman Settlement Plan has been terminated and the Oversight Committee has been dissolved. The Partnership also pays the salary of an Oversight Committee employee, and reimburses certain of the Oversight Committee's expenses including legal fees. The principal occupations and relevant affiliations of the Oversight Committee members, as furnished to the Partnership by such members, are as follows: KENNETH R. KELLY: Age 50, member (since July 1990), Chairman (since January 1995) and Secretary (since July 1990) of the Oversight Committee. Attorney in private practice in Auburn, California. Mr. Kelly has been involved in the real estate investment business throughout the United States for the past twenty years. Mr. Kelly is a member of the State Bar of California. 76 77 ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued) RONALD T. BAKER: Age 49, member (since July 1990) and Chairman (July 1990 to January 1995) of the Oversight Committee. President of INVENEX (formerly known as Partnership Securities Exchange, Inc.) ("INVENEX") , a company engaged in the manufacture of motorcycle accessories. INVENEX was one of the initial plaintiffs in the Moorman action discussed in ITEM 3. "LEGAL PROCEEDINGS - Moorman Settlement." Mr. Baker filed for bankruptcy protection on April 1, 1996. JOSEPH S. RADOVSKY: Age 53, member (since July 1992) of the Oversight Committee. Partner with Greene, Radovsky, Maloney & Share, L.L.P., a law firm in San Francisco, California. Fairness Committee. National Realty's Fairness Committee periodically reviewed certain transactions between the Partnership and its affiliates. The Partnership Agreement requires Fairness Committee approval of the interest rate to be paid on loans from the General Partner or its affiliates, the terms of any property sales to or purchases from the General Partner or its affiliates, the purchase of securities from the General Partner or its affiliates and, upon any withdrawal of the General Partner, the purchase price of the General Partner's interest in the Partnership and in the fees and other compensation to be paid under the Partnership Agreement. The Partnership Agreement provides that the Fairness Committee shall consist of two or more natural persons, none of whom shall be affiliates (as defined in the Partnership Agreement) of the General Partner except as directors of the Managing General Partner. The Fairness Committee consisted of two members until February 1995, when Raymond V. J. Schrag resigned. The remaining member of the Fairness Committee, Willie K. Davis, resigned in August 1995. Audit Committee. National Realty's Audit Committee, which reviews certain matters relating to the Partnership's auditors and annual and quarterly financial statements, was established effective August 3, 1990, pursuant to the Moorman Settlement Agreement. The chairman and only member of the Audit Committee is Harry J. Reidler, an attorney in private practice in Englewood, New Jersey. Mr. Reidler has performed legal services for the Partnership. ITEM 11. EXECUTIVE COMPENSATION Neither National Realty nor the Operating Partnership has any employees, payroll or benefit plans and pays no salary or other cash compensation directly to any person other than (i) $50,000 per year to each member of 77 78 ITEM 11. EXECUTIVE COMPENSATION (Continued) the Oversight Committee plus $48,000 per year to an analyst engaged by the Oversight Committee, (ii) $4,000 per year to each member of the Fairness and Audit Committees and (iii) fees and expense reimbursements in accordance with the Partnership Agreement to the General Partner or its affiliates for services provided to the Partnership. See ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." SAMI has no employees, payroll or benefit plans and pays no compensation to its officers or directors. The Moorman Settlement Agreement provides that effective May 1, 1990 the Partnership's future reimbursement of any salaries which may be paid to Messrs. Phillips and Friedman shall be limited to an aggregate of $500,000 per year, for any such reimbursement of salaries to be deferred until such time as a Target, as defined in the Moorman Settlement Agreement, may be met and, if SAMLP resigns as General Partner during the pendency of the Moorman Settlement Plan, for the waiver of any reimbursement of salary so deferred. Accordingly, no reimbursement for the salaries of Messrs. Phillips and Friedman was charged to or paid by the Partnership in the period January 1, 1991 through December 31, 1996. Mr. Friedman resigned as a general partner of SAMLP on March 4, 1994. Mr. Phillips may indirectly benefit from other payments made by the Partnership to certain related parties. Mr. Reidler received $4,000 in 1996 for serving on the Partnership's Audit Committee. Messrs. Kelly, Baker and Radovsky each received $50,000 in 1996 for serving on the Oversight Committee. See ITEM 10. "GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER." [THIS SPACE INTENTIONALLY LEFT BLANK.] 78 79 ITEM 11. EXECUTIVE COMPENSATION (Continued) Performance Graph The following performance graph compares the cumulative total unitholder return on the Partnership's units of limited partner interest with the Dow Jones Market Index ("DJ Market Index") and the Dow Jones Real Estate Index ("DJ Real Estate Index"). The comparison assumes that $100 was invested on December 31, 1991 in the Partnership's units of limited partner interest and in each of the indices and further assumes the reinvestment of all distributions. Past performance is not necessarily an indicator of future performance.
1991 1992 1993 1994 1995 1996 THE PARTNERSHIP 100 168 212 270 335 424 DJ EQUITY MARKET INDEX 100 109 119 120 166 206 DJ REAL ESTATE INDEX 100 90 106 100 124 166
79 80 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners. The following table sets forth the ownership of National Realty's units of limited partner interest, both beneficially and of record, both individually and in the aggregate, for those persons known by National Realty to be beneficial owners of more than 5% of its units of limited partner interest, as of the close of business on March 14, 1997.
Amount and Nature Name and Address of of Beneficial Percent of Beneficial Owner Ownership Class (1) - --------------------------- ----------------- ---------- American Realty Trust, Inc. 3,441,169 54.4% 10670 N. Central Expressway Suite 300 Dallas, Texas 75231
- ---------------------------- (1) Percentage is based upon 6,330,085 units of limited partner interest outstanding at March 14, 1997. Security Ownership of Management. The following table sets forth the ownership of National Realty's units of limited partner interest, both beneficially and of record, both individually and in the aggregate, by SAMLP, the general partners of SAMLP, and the executive officers and directors of SAMI, as of the close of business on March 14, 1997.
Percent of Name of Beneficial Owner Number of Units Units (1) - ----------------------------- --------------------- ---------- SAMLP, the general 3,731,444 (2) 58.9% partners of SAMLP, and the executive officers and directors of SAMI as a group (4 individuals)
- ----------------------- (1) Percentage is based upon 6,330,085 units of limited partner interest outstanding as of March 14, 1997. (2) Includes 3,441,169 units owned by ART and 290,275 units owned by BCM, of which the general partners of SAMLP and the directors and executive officers of SAMI, ART and BCM may be deemed to be the beneficial owners by virtue of their positions as general partners of SAMLP and executive officers of SAMI, ART and BCM. SAMLP's general partners and the directors and executive officers of SAMI, ART and BCM disclaim beneficial ownership of such units. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Business Relationships National Realty is the sole limited partner of the Operating Partnership and owns 99% of the beneficial interest in the Operating Partnership. SAMLP is the general partner of, and owner of a 1% beneficial interest 80 81 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued) Certain Business Relationships (Continued) in, each of National Realty and the Operating Partnership. Southmark Asset Management, Inc., a wholly-owned subsidiary of Southmark, was the managing general partner of SAMLP until January 17, 1989, when it transferred its 96% limited partnership interest to ART, a real estate investment company of which Messrs. Phillips and Friedman served as officers and directors until November 16, 1992 and December 31, 1992, respectively. As a result, Messrs. Phillips and Friedman became the sole general partners of SAMLP, and each owned 2% of the beneficial interest in SAMLP. On July 18, 1989, Messrs. Phillips and Friedman each assigned .05% of their general partner interest in SAMLP to SAMI, a company of which Mr. Phillips served as a director, Chairman of the Board and Chief Executive Officer until May 15, 1996, and of which BCM is the sole shareholder. On March 4, 1994, Mr. Friedman resigned as a general partner of SAMLP. As a result, Mr. Phillips and SAMI are the general partners of SAMLP, with 1.95% and .10%, respectively, of the beneficial interest in SAMLP. Mr. Friedman's 1.95% interest in SAMLP is now a limited partner interest. SAMI was appointed Managing General Partner of SAMLP on June 18, 1990. Bruce A. Endendyk, Executive Vice President of SAMI, was Executive Vice President from January 1989 to November 1990 of Southmark and President and Chief Executive Officer of Southmark Equities Corporation from March 1988 to January 1989. Thomas A. Holland, Executive Vice President and Chief Financial Officer of SAMI, was Vice President and Controller of Southmark from December 1986 to June 1990. Since February 1, 1990, affiliates of the General Partner have provided property management services to the Partnership. Currently, Carmel, Ltd. provides property management services for a fee of 5% of the monthly gross rents collected on the properties under its management. Carmel, Ltd. subcontracts with other entities for the property-level management services to the Partnership at various rates. The general partner of Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (i) SWI, of which Mr. Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of Mr. Phillips' children. BCM is a company which is owned by a trust for the benefit of the children of Mr. Phillips. BCM performs certain administrative and other functions for the Partnership. See ITEM 1. "BUSINESS - Management and Operations" and ITEM 11. "EXECUTIVE COMPENSATION." Messrs. Paulson, Endendyk and Holland serve as executive officers of BCM. Mr. Phillips served as a director until December 1989 and Chief Executive Officer until September 1, 1992, of BCM. Messrs. Paulson, Endendyk and Holland serve as executive officers of CMET, IORI, TCI and ART. BCM serves as advisor to CMET, IORI, TCI and ART. Mr. Kelly, who serves as Chairman and Secretary of the Oversight Committee, has provided professional services to the Partnership. 81 82 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued) Related Party Transactions The Partnership has engaged in business transactions with certain related parties and may continue to do so, subject to unanimous approval of the Oversight Committee during the term of the Moorman Settlement Plan as discussed under ITEM 10. "GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER - Oversight Committee." The Partnership believes that all of the related party transactions were at least as advantageous to the Partnership as could have been obtained from unrelated third parties. The Partnership has paid and pays cost reimbursements, property management fees or other cash compensation to the General Partner and its affiliates and other related parties as described in ITEM 11. "EXECUTIVE COMPENSATION" and ITEM 1. "BUSINESS - Management and Operations." BCM, an affiliate of the General Partner, performs certain administrative functions for the Partnership on a cost reimbursement basis. The Fairness Committee has approved the formula for computing the Partnership's proportionate share of certain of BCM's reimbursable costs. GCMI performs administrative functions, similar to those performed for the Partnership by BCM, for GCLP on a cost reimbursement basis. Since February 1, 1990, affiliates of the General Partner have provided property management services to the Partnership. Currently, Carmel, Ltd., provides such property management services. Carmel, Ltd. subcontracts with other entities for the property-level management services to the Partnership. Carmel, Ltd. subcontracts the property-level management and leasing of twelve of the Partnership's commercial properties to Carmel Realty, which is a company owned by SWI. Carmel Realty is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Carmel, Ltd. Carmel, Ltd. does not perform property management services to the properties of GCLP. Carmel, Ltd. and Carmel Realty also perform similar services for ART, CMET, IORI and TCI. See NOTE 10. "GENERAL PARTNER FEES AND COMPENSATION" included in Notes to Consolidated Financial Statements at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA," for a summary of fees paid and costs reimbursed by the Partnership. The Partnership's Fairness Committee periodically reviewed certain transactions between the Partnership and its affiliates. See ITEM 1. "BUSINESS - Management and Operations." The Fairness Committee approved the terms of the Partnership's contracts and terms for services and reimbursements with affiliates. Messrs. Schrag and Davis, the members of the Fairness Committee, resigned from the committee in February and August 1995, respectively. The Partnership's Oversight Committee must approve certain types of transactions between the Partnership and SAMLP or its affiliates, as defined in the Moorman Settlement Agreement. See ITEM 3. "LEGAL PROCEEDINGS - Moorman Settlement." 82 83 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued) Indebtedness of Management In return for its 1% interest in National Realty, the General Partner was required to make aggregate capital contributions to National Realty in an amount equal to 1.01% of the total initial capital contributions to the Partnership. The General Partner contributed $500,000 cash with the remaining portion evidenced by a promissory note in the principal amount of $4.2 million, bearing interest at the rate of 10% per annum compounded semi-annually and payable on the earlier of September 18, 2007, liquidation of the Partnership or a termination of the General Partner's interest in the Partnership. As of December 31, 1996, no payments had been received on such note. At December 31, 1996, accrued and unpaid interest on the note totaled $6.2 million. _____________________________ PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: 1. Consolidated Financial Statements Report of Independent Certified Public Accountants Consolidated Balance Sheets - December 31, 1996 and 1995 Consolidated Statements of Operations - Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Changes in Partners' Equity (Deficit) - Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements 2. Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation Schedule IV - Mortgage Loans on Real Estate All other schedules are omitted because they are not applicable or because the required information is shown in the Consolidated Financial Statements or the Notes thereto. 83 84 ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K (Continued) 3. Exhibits The following documents are filed as Exhibits to this Report:
Exhibit Number Description - ------- ------------------------------------------------------------- 3.0 National Realty, L.P. Amended and Restated Certificate of Limited Partnership, dated March 4, 1987 (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement No. 33- 16215 on Form S-4). 3.1 National Realty, L.P. First Amended and Restated Agreement of Limited Partnership, dated as of January 29, 1987 (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement No. 33-16215 on Form S-4). 3.2 Certificate of Amendment of Limited Partnership Agreement of National Realty, L.P. dated as of May 14, 1990 (incorporated by reference to Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990). 4.0 Indenture, dated as of September 18, 1987, by and between National Realty, L.P. and Mellon Bank, N.A. (incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement No. 33-16215 on Form S-4). 4.1 Amendment No. 1, dated as of December 28, 1987, to Trust Indenture between National Realty, L.P. and Mellon Bank, N.A. (incorporated by reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988). 4.2 Form of Warrant Agreement between National Realty, L.P. and American Stock Transfer and Trust Company, as Warrant Agent (incorporated by reference to Exhibit 4.5 to the Registrant's Registration Statement No. 33-38352 on Form S-11) 10.0 Loan Agreement dated as of November 24, 1992 by and among First Commonwealth Realty Credit Corporation as Lender, and Garden Kimberly Woods L.P. et. al., as Borrower. (incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). 11.0 Computation of Earnings Per Unit, filed herewith. 21.0 Subsidiaries of the Registrant, filed herewith. 27.0 Financial Data Schedule, filed herewith.
84 85 ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K (Continued)
Exhibit Number Description - ------- ------------------------------------------------------------- 99.0 Agreement of Limited Partnership of National Operating, L.P. (incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement No. 33-16215 on Form S-4). 99.1 Limited Partnership Agreement of Garden Capital, L.P. between Garden Capital Management Incorporated and National Operating, L.P. (incorporated by reference to Exhibit 28.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). 99.2 Settlement Agreement, dated as of May 9, 1990, relating to the action entitled Moorman et. al v. Southmark Corporation et al. (incorporated by reference to Exhibit 5.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990). 99.3 Amended and Restated Implementation Agreement, dated February 20, 1996, among National Realty, L.P., Syntek Asset Management, L.P., National Realty, L.P. Oversight Committee and William H. Elliott (incorporated by reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K, dated February 27, 1996).
(b) Reports on Form 8-K None. 85 86 NATIONAL REALTY, L.P. Signature Page 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. NATIONAL REALTY, L.P. By its General Partner: SYNTEK ASSET MANAGEMENT, L.P. By its General Partners: SYNTEK ASSET MANAGEMENT, INC. By: /s/ Randall M. Paulson ------------------------------------------- Randall M. Paulson Director and President /s/ Gene E. Phillips ------------------------------------------- Gene E. Phillips General Partner of Syntek Asset Management, L.P. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Syntek Asset Management, L.P., as General Partner of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- SYNTEK ASSET MANAGEMENT, INC. Managing General Partner of Syntek Asset Management, L.P. By: /s/ Randall M. Paulson March 25, 1997 ----------------------------- Randall M. Paulson Director and President /s/ Gene E. Phillips General Partner of March 25, 1997 - ------------------------------- Gene E. Phillips Syntek Asset Management, L.P. 86 87 NATIONAL REALTY, L.P. EXHIBITS TO ANNUAL REPORT ON FORM 10-K For the Year Ended December 31, 1996
Exhibit Number Description ------- ----------------- 11.0 Computation of Earnings Per Unit. 21.0 Subsidiaries of the Registrant. 27.0 Financial Data Schedule
87 EX-11 2 COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11.0 NATIONAL REALTY, L.P. COMPUTATION OF EARNINGS PER UNIT
For the Years Ended December 31, -------------------------------- 1996 1995 1994 (dollars in thousands, except per unit) Income (loss) before extraordinary gain $ (375) $ 3,797 $ 5,017 Less - General Partners' 1.99% interest (7) 76 100 ----------- ----------- ----------- Income (loss) allocable to Limited Partners $ (368) $ 3,721 $ 4,917 =========== =========== =========== Earnings per unit Net income (loss) $ (.06) $ .58 $ .77 =========== =========== =========== Weighted average units of limited partner interest used in computing earnings per unit 6,387,270 6,418,104 6,418,572 =========== =========== ===========
EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.0 SUBSIDIARIES OF THE REGISTRANT 1. National Operating, L.P., a Delaware limited partnership. 2. Covered Bridge NLP, Inc.; Four Seasons NLP, Inc.; Mallard Subsidiary Corporation; Marina Playa NLP, Inc.; Nora Pines NLP, Inc.; SM Subsidiary Corp., Timbercreek NLP, Inc., all of which are Nevada corporations, wholly-owned by National Operating, L.P. 3. Regency National Associates, Inc., a Texas corporation, wholly-owned by National Operating, L.P. 4. National Subsidiary Corp., a Florida corporation, wholly-owned by National Realty, L.P. 5. Bavarian Woods National Associates, an Ohio general partnership; Brookview National Associates, a Georgia general partnership; Chalet II Associates, a Kansas general partnership; NLP Covered Bridge National Associates, a Texas limited partnership; Four Seasons National Associates, a Texas limited partnership; Granada National Associates, a Nebraska general partnership; King Village National Associates, an Alabama general partnership; Mallard Diversified, L.P., a Illinois limited partnership; NLP Harbor Plaza National Associates, L.P., a Texas limited partnership; NLP Marina Playa National Associates, L.P., a Texas limited partnership; Nora Pines National Associates, an Indiana general partnership; Regency National Associates, a Nebraska general partnership; Sherwood Glen National Associates, an Iowa general partnership; NLP Timber Creek National Associates, a Nebraska general partnership; The Vineyards National Associates, an Ohio general partnership; Country Associates, L.P., a Texas general partnership; Southern Palms Associates, an Arizona general partnership; Shoreview Towers Associates II, a Florida limited partnership; Cross County National Associates, L.P., an Illinois limited partnership; Pines Whisper Limited Partnership, a California limited partnership. 6. Garden Capital, L.P., a Delaware limited partnership. National Operating, L.P. is the sole limited partner. EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 JAN-01-1995 DEC-31-1995 5,872 1,272 15,189 1,910 0 0 447,968 223,204 281,333 0 339,399 0 0 0 (112,940) 281,333 0 109,384 0 63,136 10,247 0 33,759 (375) 0 (375) 0 0 0 (375) (.06) (.06)
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