-----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, MRBHjrSXSrxmAF0GtTU6LhsoVS6S70wD5nclcvrQi0Xlz/BfBn/fNDRJON80YRm1 hCVUCuUm2qPIWQC3tBqrQg== 0000950134-98-002406.txt : 19980327 0000950134-98-002406.hdr.sgml : 19980327 ACCESSION NUMBER: 0000950134-98-002406 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 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: SEC FILE NUMBER: 001-09648 FILM NUMBER: 98573495 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-K FOR YEAR ENDED DECEMBER 31, 1997 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, 1997 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 6, 1998, the Registrant had 6,323,437 units of limited partner interest outstanding. Of the total units outstanding, 2,584,493 were held by other than those who may be deemed to be affiliates, for an aggregate value of $52,336,000 based on the last trade as reported on the American Stock Exchange on March 6, 1998. 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......................................... 9 Item 3. Legal Proceedings.................................. 22 Item 4. Submission of Matters to a Vote of Security Holders 27 PART II Item 5. Market for Registrant's Units of Limited Partner Interest and Related Security Holder Matters.... 27 Item 6. Selected Financial Data............................ 29 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 30 Item 8. Financial Statements and Supplementary Data........ 40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 78 PART III Item 10. General Partner of the Registrant and Executive Officers of the Registrant's General Partner.... 78 Item 11. Executive Compensation............................. 84 Item 12. Security Ownership of Certain Beneficial Owners and Management...................................... 87 Item 13. Certain Relationships and Related Transactions..... 87 PART IV Item 14. Exhibits, Consolidated Financial Statements, Schedules and Reports on Form 8-K............... 90 Signature Page...................................................... 93
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 6, 1998, 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. As of March 6, 1998, 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 51 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, real estate brokerage and has performed property acquisition and 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 Gene E. 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 and financing real estate through mortgage loans. 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 that were either funded by the Partnership or that arose from the sale of Partnership properties which are secured by various apartment complexes, commercial properties, land and partnership interests in income producing 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 and mortgage notes receivable portfolios. The Partnership intends to increase its lending activity to take advantage of favorable interest rate spreads or profit participation opportunities. The Partnership cannot, however, fund loans out of its operating cash flow without the approval of the Oversight Committee (defined in ITEM 3. "LEGAL PROCEEDINGS - Moorman Settlement"). The Partnership's primary emphasis, however, remains 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 Oversight Committee approved alternative uses for such operating cash flow. In the fourth quarter of 1993, the Partnership resumed the payment of regular quarterly distributions. In each quarter of 1997, the Partnership declared a regular quarterly distribution of $.10 per 5 6 ITEM 1. BUSINESS (Continued) Business Plan (Continued) unit. In the fourth quarter of 1997, in addition to the regular quarterly distribution, the Partnership declared a special distribution of $1.50 per unit. The Partnership declared total distributions of $1.90 per unit or a total of $12.0 million in 1997. 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) First Equity Properties, Inc. ("First Equity"), which is 50% owned by BCM, (ii) Gene E. Phillips and (iii) a trust for the benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level management and leasing of nine of the Partnership's commercial properties to Carmel Realty, Inc. ("Carmel Realty"), which is a company owned by First Equity. 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. 6 7 ITEM 1. BUSINESS (Continued) 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 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 7 8 ITEM 1. BUSINESS (Continued) Competition (Continued) 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. 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 well as aggressive buyers attempting to penetrate or dominate a particular market. 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. 8 9 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, 1997, are set forth in Schedules III and IV, 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 66 apartment complexes, five office buildings and eight 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, 1997, no single asset of the Partnership accounted for 10% or more of its total assets. At December 31, 1997, 75% of the Partnership's assets consisted of real estate and 9% consisted of mortgage notes and interest receivable. The remaining 16% of the Partnership's assets at December 31, 1997 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 17 apartment complexes and 5 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 3 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, 1997, the Partnership owned 79 properties located in 22 states. These properties consisted of 66 apartment complexes comprising 16,538 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 $320.5 million, five office buildings with an aggregate of 367,271 square feet with a total Revaluation Equity of $8.0 million and eight shopping centers with an aggregate of 1.1 million square feet with a total Revaluation Equity of $37.0 million. All of the Partnership's properties are encumbered by mortgage debt. Generally, the ability to make debt service payments under a mortgage loan will be dependent upon the performance of the 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 10 11 ITEM 2. PROPERTIES (Continued) Real Estate (Continued) 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, 1997.
Commercial Region Apartments Properties ------ ---------- ---------- Southeast.................... 27.0% 35.4% Southwest.................... 34.4 28.3 Midwest...................... 31.7 20.1 Mountain..................... 4.3 3.1 Pacific...................... 2.6 13.1 ------ ------ 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, 1997, 1996 and 1995:
Rent Per Square Foot Occupancy % Units/ ------------------------ -------------------------- Property Location Square Footage 1997 1996 1995 1997 1996 1995 - ----------------- -------------- --------------- ----- ------ ------ ------ ------ ----- Apartments - ---------- Alexandria.......... Decatur, GA 406 units/ 562,700 sq. ft. $ .44 $ .44 $ .43 96 92 96 Arlington Place..... Pasadena, TX 230 units/ 205,476 sq. ft. .63 .62 .60 95 91 95 Barcelona........... Tampa, FL 368 units/ 346,144 sq. ft. .50 .49 .47 94 93 96 Bavarian............ Middletown, OH 259 units/ 229,560 sq. ft. .63 .62 .60 92 96 92 Bent Tree........... Addison, TX 292 units/ 244,480 sq. ft. .70 .66 .60 96 97 100 Blackhawk........... Ft. Wayne, IN 209 units 190,520 sq. ft. .54 .53 .53 96 95 94 Bridgestone......... Friendswood, TX 76 units/ 65,519 sq. ft. .64 .64 .62 99 94 97 Brookview Gardens... Smyrna, GA 156 units/ 155,600 sq. ft. .63 .59 .54 92 89 94 Candlelight Square.. Lenexa, KS 119 units/ 114,630 sq. ft. .58 .55 .53 94 97 96 Chalet I............ Topeka, KS 162 units/ 131,791 sq. ft. .62 .61 .61 96 96 94 Chalet II........... Topeka, KS 72 units/ 49,164 sq. ft. .68 .67 .67 93 89 97 Chateau............. Bellevue, NE 115 units/ 99,220 sq. ft. .69 .63 .60 95 99 97 Club Mar............ Sarasota, FL 248 units/ 230,180 sq. ft. .61 .59 .57 99 91 95 Confederate Point... Jacksonville, FL 206 units/ 277,860 sq. ft. .46 .45 .44 91 94 98 Country Place....... Round Rock, TX 152 units/ 119,808 sq. ft. .71 .71 .68 88 93 95 Covered Bridge...... Gainesville, FL 176 units/ 171,416 sq. ft. .64 .63 .60 98 94 100 Creekwood........... College Park, GA 300 units/ 285,840 sq. ft. .54 .48 .50 89 91 94 Fair Oaks........... Euless, TX 208 units/ 166,432 sq. ft. .61 .58 .55 96 96 98 Four Seasons........ Denver, CO 384 units 254,900 sq. ft. .80 .78 .77 98 94 93 Fox Club............ Indianapolis, IN 336 units/ 317,600 sq. ft. .54 .54 .54 95 88 91 Foxwood............. Memphis, TN 220 units/ 212,000 sq. ft. .54 .51 .49 94 93 95 Hidden Valley....... Grand Rapids, MI 176 units/ 260,970 sq. ft. .52 .52 .51 96 93 97 Horizon East........ Dallas, TX 166 units/ 141,081 sq. ft. .53 .52 .50 93 92 94 Kimberly Woods...... Tucson, AZ 279 units/ 249,678 sq. ft. .57 .55 .54 92 93 94 La Mirada........... Jacksonville, FL 320 units/ 341,400 sq. ft. .51 .50 .47 91 93 98 Lake Nora Arms...... Indianapolis, IN 588 units/ 429,380 sq. ft. .65 .63 .61 95 91 95 Lakewood Park....... St. Petersburg, FL 240 units/ 279,720 sq. ft. .41 .41 .40 96 94 91 Lantern Ridge....... Richmond, VA 120 units/ 112,296 sq. ft. .53 .51 .50 93 95 93 Mallard Lake........ Greensboro, NC 336 units/ 295,560 sq. ft. .63 .62 .59 93 95 97 Manchester Commons.. Manchester, MO 280 units/ 331,820 sq. ft. .53 .50 .49 95 93 95 Mesa Court.......... Mesa, AZ 224 units/ 180,291 sq. ft. .66 .66 .61 97 90 94
12 13 ITEM 2. PROPERTIES (Continued) Real Estate (Continued)
Rent Per Square Foot Occupancy % Units/ ------------------------- ------------------------- Property Location Square Footage 1997 1996 1995 1997 1996 1995 - ----------------- -------------- --------------- ------ ------ ------ ------ ------ ----- Apartments - Continued - ---------- Mesa Ridge.......... Mesa, AZ 256 units/ 206,045 sq. ft. $ .65 $ .65 $ .61 98 88 92 Nora Pines.......... Indianapolis, IN 254 units/ 254,676 sq. ft. .59 .57 .55 92 94 97 Oak Hollow.......... Austin, TX 409 units/ 290,072 sq. ft. .87 .87 .81 94 91 97 Oak Tree............ Grandview, MO 189 units/ 160,591 sq. ft. .57 .54 .52 95 94 96 Oakmont............. Monroe, LA 212 units/ 185,500 sq. ft. .48 .48 .48 99 94 92 Olde Towne.......... Middletown, OH 199 units/ 179,395 sq. ft. .57 .57 .57 94 92 91 Pheasant Ridge...... Bellevue, NE 264 units/ 243,960 sq. ft. .61 .56 .51 93 94 97 Pines............... Little Rock, AR 257 units/ 221,981 sq. ft. .41 .41 .39 90 93 90 Place One........... Tulsa, OK 407 units/ 302,263 sq. ft. .57 .51 .49 92 96 96 Quail Point......... Huntsville, AL 184 units/ 202,602 sq. ft. .42 .42 .41 91 96 86 Regency............. Lincoln, NE 106 units/ 111,700 sq. ft. .63 .60 .56 98 95 88 Regency Falls....... San Antonio, TX 546 units/ 348,692 sq. ft. .63 .63 .63 92 93 93 River Glen.......... Tulsa, OK 343 units/ 327,190 sq. ft. .40 .38 .36 94 91 92 Rockborough......... Denver, CO 345 units/ 249,723 sq. ft. .73 .70 .70 94 92 92 Royal Oaks.......... Stone Mountain, GA 300 units/ 385,000 sq. ft. .45 .45 .43 94 94 95 Santa Fe............ Kansas City, MO 225 units/ 180,416 sq. ft. .56 .53 .52 93 91 92 Shadowood........... Addison, TX 184 units/ 134,616 sq. ft. .74 .69 .66 96 97 97 Sherwood Glen....... Urbandale, IA 180 units/ 143,745 sq. ft. .77 .75 .74 94 96 93 Skipper's Pond...... Tampa, FL 260 units/ 233,760 sq. ft. .48 .47 .46 93 94 93 Stonebridge......... Florissant, MO 100 units/ 140,576 sq. ft. .45 .43 .42 100 98 92 Summerwind.......... Reseda, CA 172 units/ 114,711 sq. ft. .90 .90 .97 96 92 91 Sun Hollow.......... El Paso, TX 216 units/ 156,000 sq. ft. .65 .64 .63 97 90 96 Tanglewood.......... Arlington Heights, IL 838 units/ 612,816 sq. ft. 1.03 .99 .96 93 92 95 Timber Creek........ Omaha, NE 180 units/ 162,252 sq. ft. .66 .64 .60 95 98 94 Towne Oaks.......... Monroe, LA 152 units/ 153,488 sq. ft. .49 .49 .49 96 94 95 Villa Del Mar....... Wichita, KS 162 units/ 128,004 sq. ft. .58 .58 .58 97 94 90 Villas.............. Plano, TX 208 units/ 156,632 sq. ft. .77 .73 .70 98 95 95 Whispering Pines.... Canoga Park, CA 102 units/ 61,671 sq. ft. 1.01 1.00 .98 94 92 93 Whispering Pines.... Topeka, KS 320 units/ 299,264 sq. ft. .49 .49 .49 95 89 90 Windridge........... Austin, TX 408 units/ 281,778 sq. ft. .88 .88 .85 95 93 95 Windtree I & II..... Reseda, CA 159 units/ 109,062 sq. ft. .90 .90 .90 96 94 91 Wisperwood.......... Tampa, FL 212 units/ 199,920 sq. ft. .47 .47 .46 62 95 91 Woodlake............ Carrollton, TX 256 units/ 210,208 sq. ft. .73 .68 .66 98 99 98 Woodsong II......... Smyrna, GA 190 units/ 207,460 sq. ft. .54 .54 .51 96 85 99 Woodstock........... Dallas, TX 320 units/ 222,112 sq. ft. .60 .56 .54 92 95 96
13 14 ITEM 2. PROPERTIES (Continued) Real Estate (Continued)
Rent Per Square Foot Occupancy % Square Footage/ ------------------------- ---------------------- Property Location Acres 1997 1996 1995 1997 1996 1995 - ----------------- -------------- --------------- ------ ------ ------ ------ ------ ----- Office Buildings - ---------------- 56 Expressway........ Oklahoma City, OK 54,649 sq. ft. $ 8.64 $ 8.21 $ 7.94 94 88 93 Executive Court...... Memphis, TN 41,840 sq. ft. 9.79 10.11 9.87 96 95 92 Marina Playa......... Santa Clara, CA 124,322 sq. ft. 20.54 19.54 18.11 100 99 97 Melrose Business Park Oklahoma City, OK 124,200 sq. ft. 2.88 2.76 2.65 93 90 97 University Square.... Anchorage, AK 22,260 sq. ft. 14.07 15.07 13.16 100 84 90 Shopping Centers - ---------------- Countryside Plaza.... Clearwater, FL 184,878 sq. ft. 3.22 5.00 3.37 12 16 24 Cross County Mall.... Mattoon, IL 304,575 sq. ft. 4.88 4.90 4.86 89 90 95 Cullman.............. Cullman, AL 92,466 sq. ft. 3.87 3.86 3.83 97 98 100 Harbor Plaza......... Aurora, CO 45,863 sq. ft. 9.44 8.73 8.42 94 97 78 Katella Plaza........ Orange, CA 52,169 sq. ft. 9.20 7.73 9.97 71 71 71 Regency Point........ Jacksonville, FL 67,410 sq. ft. 12.07 11.39 11.26 83 84 81 Southern Palms....... Tempe, AZ 250,068 sq. ft. 7.96 7.83 7.73 88 87 93 Westwood............. Tallahassee, FL 149,855 sq. ft. 6.44 6.42 5.31 93 74 59 Land - ---- Indian Meadows....... Granby, CO 338 Acres
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, 1997, 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........ 17 4,242 Units/ 93% $ 74,836 4.5 Million Sq.Ft. Office Building... 1 41,840 Sq.Ft. 97% -- Shopping Centers.. 4 394,609 Sq.Ft. 66% 21,719 Southwest Apartments........ 22 5,801 Units/ 4.5 Million Sq.Ft. 95% 121,665 Office Buildings.. 2 178,249 Sq.Ft. 91% -- Shopping Center... 1 250,068 Sq.Ft. 89% 7,127 Mountain Apartments........ 2 729 Units/ 504,623 Sq.Ft. 94% 14,153 Shopping Center... 1 45,863 Sq.Ft. 97% 1,514 Pacific Apartments........ 3 433 Units/ 285,955 Sq.Ft. 95% 5,894 Office Buildings.. 2 146,582 Sq.Ft. 96% 8,015 Shopping Center... 1 52,169 Sq.Ft. 71% 1,267 Midwest Apartments........ 22 5,333 Units/ 5.2 Million Sq.Ft. 95% 103,991 Shopping Center... 1 304,575 Sq.Ft. 89% 5,409 ----------- $ 365,590
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 1997. 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. In December 1997, the Partnership entered into an agreement with the 25% general partner, 15 16 ITEM 2. PROPERTIES (Continued) Real Estate (Continued) which provides such partner with an option to purchase the Partnership's 75% interest in Southern Palms Associates. In the event that the 25% general partner does not elect to purchase the Partnership's interest, the Partnership will acquire the 25% partner's interest. The 25% general partner must exercise his option no later than March 25, 1998. In April 1997, the Partnership sold Tollhill East, a 81,115 square foot office building in Dallas, Texas, for $7.0 million in cash. The Partnership received net cash of $4.2 million after the payoff of $2.4 million in existing mortgage debt and the payment of various closing costs associated with the sale. The Partnership paid Carmel Realty a real estate brokerage commission of $209,000 based on the $7.0 million sales price of the property. The Partnership recognized a gain of $3.6 million on the sale. Also in April 1997, the Partnership modified and extended the mortgage secured by the Cross County Mall in Mattoon, Illinois. In conjunction with the modification, the Partnership made a principal reduction payment of $137,500. The modified and extended mortgage bears interest at a variable rate, currently 9.6% per annum, requires monthly payments of principal and interest of $71,262 and has an extended maturity of April 2002. In June 1997, the Partnership refinanced the mortgage debt secured by the Pheasant Ridge Apartments in Bellevue, Nebraska in the amount of $5.7 million. The Partnership received net cash of $804,000 after the payoff of $4.6 million in existing mortgage debt, the funding of escrows, and the payment of various closing costs associated with the refinancing. The new mortgage bears interest at 7.89% per annum, requires monthly payments of principal and interest of $41,742 and matures in July 2007. The Partnership paid BCM a mortgage brokerage and equity refinancing fee of $57,000 based on the new $5.7 million mortgage. Also in June 1997, the Partnership refinanced the mortgage debt secured by the Regency Apartments in Lincoln, Nebraska in the amount of $3.4 million. The Partnership received net cash of $374,000 after the payoff of $2.5 million in existing mortgage debt, the funding of escrows and the payment of various closing costs associated with the refinancing. The new mortgage bears interest at 7.89% per annum, requires monthly payments of principal and interest of $24,577 and matures in July 2007. The Partnership paid BCM a mortgage brokerage and equity refinancing fee of $34,000 based on the new $3.4 million mortgage. In conjunction with the refinancing of the Pheasant Ridge and Regency Apartments, the Partnership purchased the Federal National Mortgage Association ("FNMA") insured mortgage backed securities issued by the lender to finance the loans. These securities bear interest at 6.84% per annum and mature in July 2007. The Partnership borrowed 97% of the face amount of the securities from FNMA. These financings bear interest at a variable rate, currently 5.68% per annum, require monthly payments 16 17 ITEM 2. PROPERTIES (Continued) Real Estate (Continued) of principal and interest, currently $43,791, and mature each 30 days. The effect of these transactions is to lower the effective interest rate on the refinancings to 5.72% for Regency and 5.99% for Pheasant Ridge. The Partnership is subject to the demand by FNMA for additional collateral or credit loss in the event the interest rate associated with the securities increases in a manner that is unfavorable to the Partnership's interest in the security. However, the Partnership intends to either payoff the mortgage or modify the mortgage to increase the interest rate prior to any significant credit loss. Further in June 1997, the Partnership sold the Fondren Building, a 47,808 square foot office building in Houston, Texas, for $661,000 in cash. The Partnership received net cash of $610,000 after the payment of various closing costs associated with the sale. The Partnership recognized no gain or loss on the sale. In September 1997, the Partnership obtained mortgage financing in the amount of $15.0 million secured by four previously unencumbered office buildings: 56 Expressway in Oklahoma City, Oklahoma; Executive Court in Memphis, Tennessee; Melrose Business Park in Oklahoma City, Oklahoma; and University Square in Anchorage, Alaska; and by a security interest in NOLP's 99.3% limited partnership interest in GCLP. The Partnership received net cash of $14.7 million after the payment of various closing costs associated with the financing. The mortgage bears interest at a variable rate, currently 9.0% per annum, requires monthly payments of interest only and matures in June 1998. The Partnership paid BCM a mortgage brokerage and equity refinancing fee of $150,000 based on the $15.0 million mortgage. The net financing proceeds were used to pay the Pension Notes at their maturity. In October 1997, the Partnership refinanced the mortgage debt secured by the Brookview Apartments in Smyrna, Georgia in the amount of $4.0 million. The Partnership received net cash of $837,000 after the payoff of $2.9 million in existing mortgage debt, the funding of escrows and the payment of various closing costs associated with the refinancing. The new mortgage bears interest at 7.50% per annum, requires monthly payments of principal and interest of $27,969 and matures in November 2007. The Partnership paid BCM a mortgage brokerage and equity refinancing fee of $40,000 based on the new $4.0 million mortgage. In November 1997, the Partnership modified the mortgage debt secured by the Club Mar Apartments in Sarasota, Florida under the Housing and Urban Development ("HUD") Partial Payment of Claim ("PPC") program. Under the PPC program, $736,000 of the original principal balance and $871,000 of accrued but unpaid interest was rolled into a new second lien mortgage. The first mortgage was reduced to $5.2 million, the interest rate was reduced to 8.18% per annum, the monthly payments were reduced to $40,800 and the maturity date of July 2023 remains unchanged. The new second lien mortgage of $1.6 million bears interest at 6.91% per annum, requires monthly payments of 50% of the property's net cash flow as defined and matures in July 2023. In conjunction with the modification, 17 18 ITEM 2. PROPERTIES (Continued) Real Estate (Continued) the Partnership funded improvement escrows of $381,000 and paid $345,000 as a principal payment on the second lien mortgage from accumulated cash flow that had been held by the servicer. Also in November 1997, the Partnership sold Crestview Center, a 80,679 square foot shopping center in Crestview, Florida, for $1.6 million in cash. The Partnership received net cash of $667,000 after the payoff of $630,000 in existing mortgage debt and the payment of various closing costs associated with the sale. The Partnership paid Carmel Realty a real estate brokerage commission of $24,000 based on the $1.6 million sales price of the property. The Partnership recognized a gain of $563,000 on the sale. In December 1997, GCLP sold Village Square, a 310 unit apartment complex in Stone Mountain, Georgia, for $6.1 million in cash. GCLP received net cash of $3.3 million after the payoff of $2.0 million in existing mortgage debt and the payment of various closing costs associated with the sale. The Partnership paid Carmel Realty a real estate brokerage commission of $181,500 based on the $6.1 million sales price of the property. The Partnership recognized a gain of $2.1 million on the sale. Mortgage Loans In addition to real estate, a portion of the Partnership's assets are invested in mortgage notes receivable, principally secured by income-producing real estate. The Partnership expects that the percentage of its assets invested in mortgage loans will increase as it increases its lending activity in 1998 to take advantage of interest rate spreads or profit participation opportunities. The Partnership cannot, however, fund loans out of its operating cash flow without the approval of the Oversight Committee. The Partnership intends to service and hold for investment the mortgage notes currently in its portfolio. The Partnership's mortgage notes receivable consist of first, wraparound and junior mortgage loans secured by real estate as well as other secured loans. Types of Mortgage Activity. The Partnership may originate its own mortgage loans. The Partnership is not, however, considering acquiring existing mortgage notes. BCM, in its capacity as a mortgage servicer, services the Partnership's mortgage notes. The Partnership's investment policy is described in ITEM 1. "BUSINESS - Business Plan and Investment Policy". Types of Properties Subject to Mortgages. The properties securing the Partnership's mortgage notes receivable portfolio at December 31, 1997, consisted of an office building, an apartment complex, a single-family residence, land and partnership interests. 18 19 ITEM 2. PROPERTIES (Continued) Mortgage Loans (Continued) At December 31, 1997, the Partnership's mortgage notes had an aggregate face amount of $40.5 million and an aggregate net carrying value of $24.9 million, net of deferred gains ($13.7 million), discounts ($109,000) 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, 1997), 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, 1997 excluding the $14.7 million in mortgage notes secured by land and other security 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 - ------ ---------- ---------- ------ Southwest............. --% 10.9% 10.9% Pacific............... 67.8 -- 67.8 Midwest............... -- 21.3 21.3 ---- ---- ----- 67.8% 32.2% 100.0%
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 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. The following discussion briefly describes first mortgage loans funded by the Partnership in 1997, as well as, events that affected previously funded first mortgage loans. In April 1997, the Partnership funded a $1.5 million loan to Highway 544 Partners, L.P. ("Highway Partners"). The loan is secured by a mortgage on approximately 49 acres of undeveloped land in Plano, Texas, a pledge of 100% of the partnership interest and the personal guarantee of the owner of Highway Partner's general partner. The note receivable bears interest at 18% per annum, requires quarterly interest only payments at 12% per annum, with the deferred interest payable annually in April 1998 and 1999, and matures in April 1999. In June 1997, the Partnership funded a loan to JNC Enterprises, Ltd. ("JNC") in the amount of $2.5 million. In July 1997, an additional $1.0 million was funded and the loan was modified, increasing the principal balance to $3.5 million. The loan is secured by 81.99 acres of 19 20 ITEM 2. PROPERTIES (Continued) Mortgage Loans (Continued) undeveloped land in Frisco, Texas. The note bears interest at 16.0% per annum, requires monthly payments of interest only and matures in June 1998. In July 1997, the Partnership funded a $1.4 million loan to Avex Fund III, Inc. The loan was secured by a mortgage on 14.5 acres of undeveloped land in Las Colinas, Texas. The loan bore interest at 12.0% per annum, required monthly payments of interest only and was scheduled to mature in July 1999. The loan was paid in full in August 1997. In August 1997, the Partnership funded an $800,000 loan to Frisco Eldorado Partners, L.L.C. The loan is secured by a mortgage on 45 acres of undeveloped land in Frisco, Texas. The loan bears interest at 15.0% per annum, requires monthly payments of interest only and matures in August 1998. $250,000 of the loan balance is guaranteed by the Frisco Economic Development Corporation, a government agency. Also in August 1997, the Partnership funded a $2.8 million loan to Dallas Parkway Properties, Inc. The loan is secured by a mortgage on an office building in Addison, Texas. The loan bears interest at 14.0% per annum, requires monthly payments of interest only and matures in August 1999. In conjunction with the loan origination, the Partnership obtained financing secured by the note receivable in the amount of $2.0 million. The loan bears interest at 9.4% per annum, requires monthly payments of interest only and matures in August 1999. In October 1997, the Partnership funded a $400,000 loan to Stratford & Graham Developers, L.L.C. ("Stratford"). The loan was secured by an assignment of a contract to purchase 1,485 acres of undeveloped land in Riverside County, California and the guarantee of the parent of the borrower. The loan bore interest at 15.0% per annum and matured in November 1997. The loan was modified and extended at maturity, increasing the loan balance to $530,000 and extending the maturity date to December 1997. In December 1997, the Partnership funded a new $3.5 million loan to Stratford, a portion of the proceeds being used to payoff the first loan. The new loan is secured by a mortgage on the 1,485 acres of undeveloped land in Riverside County, California. The loan bears interest at 15.0% per annum, and matures in July 1999. All principal and interest are due at maturity. Also in October 1997, the Partnership funded a $240,000 loan to an individual. The loan is secured by a mortgage on a single-family residence in Addison, Texas. The loan bears interest at 10.0% per annum, requires monthly payments of interest only and matures in September 1998. In January and February 1998, the Partnership funded a total of $3.3 million of a $3.9 million loan to Centura Tower, Ltd. The loan is secured by a mortgage on 2.244 acres of land in Dallas, Texas. The loan bears interest at 12.0% per annum, requires monthly payments of interest only and matures in January 2003. 20 21 ITEM 2. PROPERTIES (Continued) Mortgage Loans (Continued) 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. The following discusses briefly describes events that affected previously funded wraparound mortgage loans. In January 1997, the note receivable secured by the Nellis Bonanza Shopping Center in Las Vegas, Nevada matured. In August 1997, the borrower paid the note in full. The Partnership received net cash of $4.4 million after payoff of the underlying note payable. As a result of the payoff, the Partnership recognized a deferred gain of $2.1 million from the Partnership's 1986 sale of the property. 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. Other. 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. In July, September and December 1997, an additional $118,000 was funded and the loan was modified, increasing the principal balance to $1.3 million. In the first quarter of 1998, an additional $59,000 was funded and the loan was again modified , increasing the principal balance to $1.3 million. The Partnership has committed to fund an additional $108,000, at which time the loan will be modified to increase the principal balance to its maximum $1.5 million. The Partnership received the required December 1997 deferred interest payment in January 1998. In February 1997, the Partnership funded a loan to JNC in the amount of $2.5 million. In March 1997, the Partnership funded an additional $1.5 million and modified the loan by increasing the principal balance to $4.0 million. The loan was 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 bore interest at 12% per annum and required quarterly payments of interest only and matured in October 1997. The unpaid principal balance and accrued but unpaid interest were paid at maturity. 21 22 ITEM 2. PROPERTIES (Continued) Mortgage Loans (Continued) During 1997, the Partnership also received a total of $3.0 million in principal payments from JNC to pay in full two loans funded by the Partnership during 1996. In July 1997, the Partnership funded a $700,000 loan to an individual. The loan is secured by a security interest in an oil, gas and mineral lease in Anderson County, Texas and by a second lien mortgage on a ranch in Henderson County, Texas. The loan bears interest at 12.0% per annum, requires monthly payments of interest only and matures in December 1998. In February 1998, the Partnership funded an additional $40,000 and the loan was modified, increasing the principal balance to $740,000. In October 1997, the Partnership funded a $1.7 million loan to Preston/Lomo Alto, L.L.C. The loan is secured by a pledge of the limited partnership interests in two partnerships which in turn own two office buildings, one in Dallas and the other in Plano, Texas and the personal guarantee of one of the general partners. The loan bears interest at 12.0% per annum, requires monthly payments of interest only and matures in November 1999. In December 1997, the Partnership funded a $1.2 million loan to 14875 Landmark, L.L.C. The loan is secured by a pledge of the 48% limited partnership interest in a partnership, which owns an office building in Addison, Texas. The loan is guaranteed by the limited partner. The loan bears interest at 12% per annum, requires monthly payments of interest only, and matures in December 1999. Also in December 1997, the Partnership funded $455,000 of a $475,000 loan to Tara Summit Square, Inc. The loan is secured by a pledge of 100% of the capital stock of the borrower and a second lien mortgage on a shopping center in Rhode Island. The loan is guaranteed by the sole shareholder of Tara Summit Square, Inc. The loan bears interest at 12.0% per annum, requires monthly payments of interest only and matures in December 1999. The remaining $20,000 was funded in January 1998. Further in December 1997, the Partnership obtained financing in the amount of $5.0 million secured by six notes receivable with an aggregate principal balance of $9.3 million. The financing bears interest at 13.0% per annum, requires monthly payments of interest only and matures in December 1998. The Partnership paid a mortgage brokerage and equity refinancing fee of $50,000 to BCM based on the $5.0 million financing. Investment in Marketable Equity Securities of ART At December 31, 1997, 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. Gene E. 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 22 23 ITEM 2. PROPERTIES (Continued) Investment in Marketable Equity Securities of ART (Continued) executive officers of ART. See ITEM 12. "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." At December 31, 1997, the market value of the ART common stock owned by the Partnership was $2.8 million. ART owns a 96% limited partner interest in SAMLP. In addition, as of March 6, 1998, 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, 23 24 ITEM 3. LEGAL PROCEEDINGS (Continued) Moorman Settlement (Continued) 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 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 24 25 ITEM 3. LEGAL PROCEEDINGS (Continued) Moorman Settlement (Continued) 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, 1997 to be $49.6 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, 1997) plus all accrued but unpaid interest ($7.2 million at December 31, 1997) 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 provided 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 Agreement. 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. On 25 26 ITEM 3. LEGAL PROCEEDINGS (Continued) Moorman Settlement (Continued) April 7, 1997, the Supervising Judge entered an order amending the September 23, 1996 order, approving the formal notice and setting a hearing on the Implementation Agreement for June 27, 1997. A notice was sent to all class members and unitholders in April 1997 and the hearing was held on June 27, 1997. On September 8, 1997, the Supervising Judge rendered a Statement of Decision in which he declined to approve the Implementation Agreement. As a result of the Statement of Decision, the existing Moorman Settlement Agreement remains in full force and effect and all of the provisions of the Amended and Restated Implementation Agreement have been voided. On December 15, 1997, National Realty, SAMLP, the Oversight Committee, Joseph B. Moorman, Invenex and the Moorman Class Counsel executed an Agreement for Establishment of Class Distribution Fund and Election of Successor General Partner (the "Resolution Agreement") which provides for the nomination of an entity affiliated with SAMLP to be the successor general partner of the Partnership, for the establishment of a fund for the benefit of the Moorman Class Members consisting of cash and properties owned by the Partnership and for the resolution of all related matters under the Moorman Settlement Agreement. The Resolution Agreement was submitted to the Supervising Judge and on February 11, 1998, the Supervising Judge entered an order granting preliminary approval of the Resolution Agreement and scheduled a hearing to be held on April 24, 1998, for consideration of preliminary approval of a business plan for the operation of the entity which will receive the cash and properties and to consider a form of notice to be distributed to the Moorman Class Members describing the Resolution Agreement and the business plan. 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. Upon approval by the National Realty 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 1998. SAMLP has agreed to waive its rights under the Moorman Settlement Agreement to receive any payment from the Partnership of the fees it is entitled to receive upon the election of a successor general partner. As of December 31, 1997, this fee was calculated to be $49.6 million. Upon final approval by the Supervising Judge, the Partnership will transfer $1.9 million in cash and five shopping center properties to the new entity which will be owned by the Moorman Class Members and managed for their benefit by a court approved board. This fund is being established in order to provide additional benefits to the Moorman Class Members. 26 27 ITEM 3. LEGAL PROCEEDINGS (Continued) Moorman Settlement (Continued) Upon the election and taking office of the successor general partner and the transfer of the cash and properties to the Class Fund, the Moorman Settlement Plan and the Oversight Committee shall be terminated. On September 26, 1997, one of the original Moorman litigation defendants, Robert A. McNeil, filed motions to (i) be installed as receiver for the Partnership and (ii) disband the Oversight Committee. A hearing on the motions was set for February 5, 1998. However, the Supervising Judge continued the hearing to April 24, 1998. Other. The Partnership is involved in various lawsuits arising in the ordinary course of business. Management of the Partnership is of the opinion that the outcome of these lawsuits would have no material impact on the Partnership's financial condition. 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, 1998........................... $ 24 1/8 $ 20 1/8 (through March 6, 1998) March 31, 1997........................... 19 1/8 12 7/8 June 30, 1997............................ 19 1/2 16 3/8 September 30, 1997....................... 24 19 December 31, 1997........................ 24 3/4 24 3/8 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
- --------------------------- As of March 6, 1998, the closing price of National Realty's units of limited partner interest on the AMEX was $20.13 per unit. 27 28 ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNER INTEREST AND RELATED SECURITY HOLDER MATTERS (Continued) As of March 6, 1998, National Realty's units of limited partner interest were held by 5,635 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 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 1997, the Partnership declared regular quarterly distributions of $.10 per unit. In addition to the regular quarterly distribution, the Partnership declared a special distribution of $1.50 per unit in the fourth quarter of 1997. The Partnership declared total distributions of $1.90 per unit or $12.0 million in 1997. The distributions paid by the Partnership in 1997 and 1996 were as follows:
Date Declared Record Date Payable Date Amount - ----------------- ------------------ ------------------- --------- February 26, 1997 March 14, 1997 March 31, 1997 $ .10 June 5, 1997 June 13, 1997 June 30, 1997 .10 September 3, 1997 September 15, 1997 September 30, 1997 .10 December 1, 1997 December 15, 1997 January 5, 1998 1.50* December 1, 1997 December 15, 1997 January 5, 1998 .10
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
- ----------------------- * Special distribution. 28 29 ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNER INTEREST AND RELATED SECURITY HOLDER MATTERS (Continued) 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, 1997, 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. ITEM 6. SELECTED FINANCIAL DATA
For the Years Ended December 31, ------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (dollars in thousands, except per unit) EARNINGS DATA Revenues .................. $ 117,365 $ 112,681 $ 110,892 $ 107,546 $ 103,044 Expenses Interest ............... 34,189 33,759 34,956 34,145 34,699 Property operations..... 64,620 63,136 63,320 60,793 60,374 General and administrative ...... 7,856 5,975 6,252 5,809 5,598 Depreciation ........... 10,338 10,247 10,268 10,034 10,168 ----------- ----------- ----------- ----------- ----------- Total expenses ...... 117,003 113,117 114,796 110,781 110,839 ----------- ----------- ----------- ----------- ----------- Income (loss) from operations ............. 362 (436) (3,904) (3,235) (7,795) Gain on sale of real estate ................. 8,356 61 7,701 8,252 -- ----------- ----------- ----------- ----------- ----------- Income (loss) before extraordinary gain ..... 8,718 (375) 3,797 5,017 (7,795) Extraordinary gain ........ -- -- -- -- 9,046 ----------- ----------- ----------- ----------- ----------- Net income (loss) ......... $ 8,718 $ (375) $ 3,797 $ 5,017 $ 1,251 =========== =========== =========== =========== =========== PER UNIT DATA Income (loss) before extraordinary gain ..... $ 1.35 $ (.06) $ .58 $ .77 $ (1.13) Extraordinary gain ........ -- -- -- -- 1.31 ----------- ----------- ----------- ----------- ----------- Net income (loss) ......... $ 1.35 $ (.06) $ .58 $ .77 $ .18 =========== =========== =========== =========== =========== Distributions per unit .... $ 1.90 $ 1.10 $ 1.28 $ .44 $ .07 Weighted average units of limited partner interest used in computing earnings per unit ............... 6,327,418 6,387,270 6,418,104 6,418,572 6,747,990
29 30 ITEM 6. SELECTED FINANCIAL DATA (Continued)
December 31, ------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- -------- --------- ------- ------- BALANCE SHEET DATA (dollars in thousands) Real estate, net ........ $ 211,424 $ 224,764 $ 229,482 $ 241,535 $ 251,534 Notes and interest receivable, net ...... 24,943 13,279 10,246 11,532 11,469 Total assets ............ 279,580 281,333 292,930 290,140 296,045 Notes and interest payable .............. 339,102 325,921 326,500 326,775 335,200 Redeemable General Partner interest ..... 45,442 37,855 31,997 28,800 21,600 Partners' (deficit) ..... (122,275) (112,946) (99,267) (91,823) (86,902)
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, 1997, 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 estimated current values, was 43.4% compared to 44.6% at December 31, 1996. Cash and cash equivalents aggregated $17.2 million at December 31, 1997 as compared with $5.9 million at December 31, 1996. 30 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) 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 proceeds from the sale of the Partnership's properties and other assets and proceeds from borrowings 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 1998, including, but not limited to, the payment of distributions, debt service obligations coming due and property maintenance and improvements, as more fully discussed in the paragraphs below. Currently, all of the Partnership's properties are encumbered by mortgage debt. In 1998, mortgage debt totaling $36.5 million comes due. 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. The Partnership's cash flow from property operations (rents collected less payments for property operating expenses) increased from $43.7 million in 1996 to $49.4 million in 1997. Of this increase, $2.6 million is due to the Partnership's continued success in increasing rental and occupancy rates during 1997 as compared to 1996. Rental rates at the Partnership's apartment complexes, which account for over 80% of the Partnership's properties, increased an average of 3% in 1997 as compared to 1996 rental rates and occupancy rates increased an average of 1% as compared to 1996. At the Partnership's commercial properties, rental rates increased an average of 1% as compared to 1996 rental rates and occupancy rates increased an average of 3% as compared to 1996. These increases are partially offset by a decrease of $750,000 due to properties sold in 1997. The Partnership's management believes that this trend will continue, particularly in the Partnership's apartments, if the economy remains stable or improves. Interest collected on mortgage notes receivable increased from $3.1 million in 1996 to $3.9 million in 1997. This increase is primarily due to loans funded in 1997 and 1996. Interest is expected to continue to increase as a source of cash to the Partnership as it originates additional mortgage loans. Interest paid on the Partnership's notes payable increased from $29.2 million in 1996 to $29.9 million in 1997. The increase is due in part to an increase of $655,000 from properties financed or refinanced in 1996 and 1997 and an increase of $266,000 due to an increase in the GCLP line of credit interest rate. These increases are partially offset by a decrease of $95,000 due to the modification of the mortgage secured by the Club Mar Apartments and a decrease of $117,000 due to the sale of two commercial properties encumbered by debt in 1997. The Partnership was involved in significant investing activities during 1997. The Partnership originated thirteen mortgage or other loans 31 32 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) totaling $22.9 million and collected $13.5 million on its mortgage notes receivable, from the payoff of six notes receivable. In connection with one of the payoffs, the Partnership paid off an underlying note payable in the amount of $1.0 million. Also in 1997, the Partnership made improvements to its properties totaling $5.0 million and sold one apartment complex and three commercial properties during 1997 for $15.4 million in cash, receiving net cash of $8.8 million after the payoff of existing mortgage debt and the payment of various closing costs associated with the sales. In 1997, the Partnership received net financing proceeds of $19.7 million from mortgage financing secured by four commercial properties and the Partnership's 99.3% limited partnership interest in GCLP and by six notes receivable, of which $14.6 million was used to payoff the Pension Notes. In addition, the Partnership refinanced the mortgages secured by three apartment complexes. The Partnership received net cash totaling $3.1 million after the payoff of $10.0 million in existing mortgage debt and the payment of various closing costs associated with the financings. Also in 1997, the Partnership made scheduled principal payments on mortgages totaling $6.6 million. In November 1997, the Partnership modified the mortgage debt secured by the Club Mar Apartments in Sarasota, Florida under the Housing and Urban Development ("HUD") Partial Payment of Claim ("PPC") program. Under the PPC program, $736,000 of the original principal balance and $871,000 of accrued but unpaid interest was rolled into a second lien mortgage. The first mortgage was reduced to $5.2 million, the interest rate and the monthly payments were also reduced, and the maturity date of July 2023 remains unchanged. In conjunction with the modification, the Partnership funded improvement escrows of $381,000 and paid $345,000 as a principal payment on the second lien mortgage from accumulated cash flow that had been held by the servicer. 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 1997, the Partnership received distributions from GCLP totaling $9.9 million, excluding the credit enhancement escrow as discussed below, compared to $2.5 million in 1996. GCLP's 1998 excess cash flow of approximately $7.4 million is expected to be remitted to the Partnership. In January 1997, GCLP replaced the credit enhancement escrow with an $18.5 million letter of credit. 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 32 33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) 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. The Partnership declared total distributions of $1.90 per unit or $12.0 million in 1997. 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, 1997 to be $49.6 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, 33 34 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) 1997) plus all accrued and unpaid interest ($7.2 million at December 31, 1997) on the note receivable from the General Partner representing its 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 provided 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 Agreement. 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. On April 7, 1997, the Supervising Judge entered an order amending the September 23, 1996 order, approving the formal notice and setting a hearing on the Implementation Agreement for June 27, 1997. A notice was sent to all class members and unitholders in April 1997 and the hearing was held on June 27, 1997. On September 8, 1997, the Supervising Judge rendered a Statement of Decision in which he declined to approve the Implementation Agreement. As a result of the Statement of Decision, the existing Moorman Settlement Agreement remains in full force and effect and all of the provisions of the Amended and Restated Implementation Agreement have been voided. On December 15, 1997, National Realty, SAMLP, the Oversight Committee, Joseph B. Moorman, Invenex and the Moorman Class Counsel executed an Agreement for Establishment of Class Distribution Fund and Election of Successor General Partner (the "Resolution Agreement") which provides for the nomination of an entity affiliated with SAMLP to be the successor general partner of the Partnership, for the establishment of a fund for the benefit of the Moorman Class Members consisting of cash and properties owned by the Partnership and for the resolution of all related matters under the Moorman Settlement Agreement. The Resolution Agreement was submitted to the Supervising Judge and on February 11, 1998, the Supervising Judge entered an order granting preliminary approval of the Resolution Agreement and scheduled a hearing to be held on April 24, 1998, for consideration of preliminary approval 34 35 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) of a business plan for the operation of the entity which will receive the cash and properties and to consider a form of notice to be distributed to the Moorman Class Members describing the Resolution Agreement and the business plan. 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. Upon approval by the National Realty 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 1998. SAMLP has agreed to waive its rights under the Moorman Settlement Agreement to receive any payment from the Partnership of the fees it is entitled to receive upon the election of a successor general partner. As of December 31, 1997, this fee was calculated to be $49.6 million. Upon final approval by the Supervising Judge, the Partnership will transfer $1.9 million in cash and five shopping center properties to the new entity which will be owned by the Moorman Class Members and managed for their benefit by a court approved board. This fund is being established in order to provide additional benefits to the Moorman Class Members. Upon the election and taking office of the successor general partner and the transfer of the cash and properties to the Class Fund, the Moorman Settlement Plan and the Oversight Committee shall be terminated. On September 26, 1997, one of the original Moorman litigation defendants, Robert A. McNeil, filed motions to (i) be installed as receiver for the Partnership and (ii) disband the Oversight Committee. A hearing on the motions was set for February 5, 1998. However, the Supervising Judge continued the hearing to April 24, 1998. 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, 1997, 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. 35 36 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations 1997 COMPARED TO 1996. The Partnership reported net income of $8.7 million for 1997 as compared to net loss of $375,000 for 1996. Contributing to the Partnership's 1997 net income were gains on sale of real estate of $8.4 million. The primary factors affecting the Partnership's operating results are discussed in the following paragraphs. Rents increased from $109.4 million in 1996 to $112.9 million in 1997. This increase is primarily attributable to a 3.0% increase in average rental rates combined with a 1.0% increase in average occupancy rates at the Partnership's apartment complexes and an average 1.0% increase in commercial rental rates combined with a 3.0% increase in occupancy rates as compared to 1996. These increases are partially offset by a decrease of $750,000 due to the sale of the Tollhill East Office Building in April 1997, the Fondren Office Building in June 1997, Crestview Shopping Center in November 1997 and Village Square Apartments in December 1997. Rents are expected to continue to increase. Interest income increased from $3.3 million in 1996 to $4.5 million in 1997. This increase is due to thirteen mortgage and other loans being funded in 1997. Interest is expected to continue to increase as the Partnership originates additional loans. Interest expense increased from $33.8 million in 1996 to $34.2 million in 1997. Of this increase, $802,000 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 $657,000 is due to mortgage debt which was refinanced in 1996 and 1997. These increases are partially offset by a decrease of $741,000 due to loans paid in full, including the pension notes, and a decrease of $117,000 due to the sale of the Tollhill East Office Building in April 1997, the Crestview Shopping Center in November 1997, and the Village Square Apartments in December 1997. Interest expense is expected to continue to increase. Depreciation, property taxes and insurance, utilities, property-level payroll costs, repairs and maintenance, other property operation expenses and property management fees for 1997 approximated those of 1996. General and administrative expenses increased from $6.0 million in 1996 to $7.9 million in 1997. This increase is primarily attributable to an increase in legal and consulting fees related to the Southern Palms Associates litigation of $892,000, an increase of $151,000 related to insurance deductibles and an increase of $1.0 million in the Partnership's overhead reimbursements to Basic Capital Management, Inc. ("BCM"). These increases are partially offset by a decrease of $180,000 due to a decrease in legal fees relating to the Moorman litigation and a decrease of $237,000 related to a decrease in appraisals and other professional fees. 36 37 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) 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 the sale of real estate totaling $8.4 million in 1997; $3.6 million on the sale of the Tollhill East Office Building, a $2.1 million deferred gain recognized on the payoff of the Nellis Bonanza note receivable, a gain of $563,000 on the sale of Crestview Shopping Center and a gain of $2.1 million on the sale of Village Square Apartments. See NOTE 3. "REAL ESTATE AND DEPRECIATION" and NOTE 4. "NOTES RECEIVABLE." 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. 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 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. 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 BCM. This decrease is partially offset by an increase in legal fees related to the Moorman litigation. See NOTE 13. "COMMITMENTS AND CONTINGENCIES - Moorman Settlement." 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 37 38 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) 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." 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 was $410.0 million at such date. Revaluation Equity is defined as the 38 39 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Current Value Reporting (Continued) difference between the estimated current 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, 1996, was $691.5 million, and Revaluation Equity was $345.9 million at such date. In 1997, the Partnership determined the estimated current value of the Partnership's properties as of December 31, 1997, in a manner consistent with the methodology used to determine Current Appraised Value as of December 31, 1996 and March 31, 1987. The estimated current value of the Partnership's properties at December 31, 1997 was $713.1 million and Revaluation Equity was $365.6 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. 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. Year 2000 BCM has advised the Partnership that its current computer software has been certified by the Information Technology Association of America ("ITAA") as year 2000 compliant. BCM has also advised the Partnership that it has recently received and plans to install in 1998 the ITAA certified year 2000 compliant operating system for its computer hardware. 39 40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Certified Public Accountants............. 41 Consolidated Balance Sheets - December 31, 1997 and 1996................................. 42 Consolidated Statements of Operations - Years Ended December 31, 1997, 1996 and 1995.............. 43 Consolidated Statements of in Partners' Equity (Deficit) - Years Ended December 31, 1997, 1996 and 1995.............. 44 Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995.............. 45 Notes to Consolidated Financial Statements..................... 47 Schedule III - Real Estate and Accumulated Depreciation........ 70 Schedule IV - Mortgage Loans on Real Estate................... 75
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. 40 41 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, 1997 and 1996, 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, 1997. 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 and schedules 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 resolution of this matter, 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, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, 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 23, 1998 41 42 NATIONAL REALTY, L.P. CONSOLIDATED BALANCE SHEETS
December 31, ------------------------ 1997 1996 --------- --------- Assets (dollars in thousands) Real estate held for investment Land .......................................... $ 48,738 $ 51,342 Buildings and improvements .................... 386,477 396,626 --------- --------- 435,215 447,968 Less - Accumulated depreciation ............... (223,791) (223,204) --------- --------- 211,424 224,764 Notes and interest receivable, net of deferred gains ($13,720 in 1997 and $15,787 in 1996) .............................. 26,853 15,189 Less - allowance for estimated losses ............ (1,910) (1,910) --------- --------- 24,943 13,279 Cash and cash equivalents ........................ 17,180 5,872 Accounts receivable .............................. 3,327 2,040 Prepaid expenses ................................. 1,069 1,663 Escrow deposits and other assets (including $267 in 1997 from affiliate) ....... 6,597 18,496 Marketable equity securities of affiliate (at market) ................................... 2,814 1,272 Deferred financing costs ......................... 12,226 13,947 --------- --------- $ 279,580 $ 281,333 ========= ========= Liabilities and Partners' Equity (Deficit) Liabilities Notes and interest payable .................... $ 339,102 $ 325,921 Pension notes and related interest payable, net ............................... -- 13,478 Accrued property taxes ........................ 6,906 6,928 Tenant security deposits ...................... 3,163 3,040 Accounts payable and other liabilities (including $85 in 1996 to affiliates) ...... 7,242 7,057 --------- --------- 356,413 356,424 Commitments and contingencies Redeemable General Partner Interest .............. 45,442 37,855 Partners' equity (deficit) General Partner ............................... 2,822 2,649 Limited Partners (6,323,438 units in 1997 and 6,328,303 units in 1996) .......... (78,024) (74,568) Unrealized gain on marketable equity securities of affiliate .................... 2,544 1,003 --------- --------- (72,658) (70,916) Redeemable General Partner Interest .............. (49,617) (42,030) --------- --------- (122,275) (112,946) --------- --------- $ 279,580 $ 281,333 ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 42 43 NATIONAL REALTY, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, -------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (dollars in thousands, except per unit) Revenues Rents ......................................... $ 112,875 $ 109,384 $ 108,017 Interest ...................................... 4,490 3,297 2,875 ----------- ----------- ----------- 117,365 112,681 110,892 Expenses Interest ...................................... 34,189 33,759 34,956 Depreciation .................................. 10,338 10,247 10,268 Property taxes & insurance .................... 12,279 12,511 12,196 Utilities ..................................... 12,059 11,712 11,498 Repairs and maintenance ....................... 24,735 23,726 23,875 Property-level payroll costs .................. 6,412 6,338 6,545 Other property operation expenses ............. 4,344 4,160 4,563 Property management fees (including $826 in 1997, $811 in 1996 and $674 in 1995 to affiliates) ................ 4,791 4,689 4,643 General and administrative (including $4,448 in 1997, $3,329 in 1996 and $3,907 in 1995 to affiliates) .............. 7,856 5,975 6,252 ----------- ----------- ----------- 117,003 113,117 114,796 ----------- ----------- ----------- Income (loss) from operations .................... 362 (436) (3,904) Gain on sale of real estate ...................... 8,356 61 7,701 ----------- ----------- ----------- Net income (loss) ................................ $ 8,718 $ (375) $ 3,797 =========== =========== =========== Earnings per unit Net income (loss) ................................ $ 1.35 $ (.06) $ .58 =========== =========== =========== Weighted average units of limited partner interest used in computing earnings per unit ............................. 6,327,418 6,387,270 6,418,104 =========== =========== ===========
The accompanying notes are an integral part of these Consolidated Financial Statements. 43 44 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, 1995 ............. $ 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) Adjustment to Redeemable General Partner Interest .................... -- -- -- (7,587) (7,587) Units issued on exercise of warrants ............................ -- 20 -- -- 20 Distributions ($1.90 per unit) ......... -- (12,021) -- -- (12,021) Unrealized gain on marketable equity securities of affiliate ...... -- -- 1,541 -- 1,541 Net income ............................. 173 8,545 -- -- 8,718 --------- --------- --------- --------- --------- Balance, December 31, 1997 ............. $ 2,822 $ (78,024) $ 2,544 $ (49,617) $(122,275) ========= ========= ========= ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 44 45 NATIONAL REALTY, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, --------------------------------------- 1997 1996 1995 --------- --------- --------- (dollars in thousands) Cash Flows From Operating Activities Rents collected ............................... $ 111,890 $ 109,230 $ 107,935 Interest collected ............................ 3,927 3,098 2,754 Interest paid ................................. (29,888) (29,238) (30,737) Payments for property operations (including $826 in 1997, $811 in 1996 and $674 in 1995 to affiliates) ...... (62,443) (65,505) (64,803) General and administrative expenses paid (including $4,448 in 1997, $3,329 in 1996 and $3,907 in 1995 to affiliates) ................................ (8,827) (5,892) (6,556) --------- --------- --------- Net cash provided by operating activities .............................. 14,659 11,693 8,593 Cash Flows From Investing Activities Proceeds from sales of real estate ............ 14,294 61 6,947 Real estate improvements ...................... (5,004) (5,529) (4,105) Acquisition of real estate .................... -- -- (1,663) Acquisition and settlement of notes receivable ................................. -- -- (1,207) Collections on notes receivable ............... 13,522 500 3,700 Funding of notes receivable ................... (22,898) (3,500) -- --------- --------- --------- Net cash provided by (used in) investing activities .................... (86) (8,468) 3,672 Cash Flows From Financing Activities Proceeds from notes payable ................... 36,351 8,116 40,808 Payments of notes payable ..................... (23,047) (10,159) (37,242) Payment of pension notes ...................... (14,645) -- -- Payments from (to) affiliates, net ............ -- (191) 3,558 Receipt from escrow ........................... 12,423 -- -- Deferred financing costs (including $332 in 1997 and $89 in 1996 to affiliate) ................................. (2,346) (1,459) (627) Repurchase of units of limited partner interest ........................... -- (954) -- Exercise of warrants .......................... 20 -- -- Distributions to unitholders .................. (12,021) (13,405) (1,811) --------- --------- --------- Net cash provided by (used in) financing activities .................... (3,265) (18,052) 4,686 --------- --------- --------- Net increase (decrease) in cash and cash equivalents ................................... 11,308 (14,827) 16,951 Cash and cash equivalents at beginning of year .......................................... 5,872 20,699 3,748 --------- --------- --------- Cash and cash equivalents at end of year ......... $ 17,180 $ 5,872 $ 20,699 ========= ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 45 46 NATIONAL REALTY, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31, ------------------------------------- 1997 1996 1995 --------- -------- --------- (dollars in thousands) Reconciliation of net income (loss) to net cash provided by operating activities Net income (loss) .................................. $ 8,718 $ (375) $ 3,797 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation ................................. 10,338 10,465 10,254 Gain on sale of real estate .................. (8,356) (61) (7,701) Amortization of deferred financing costs ..................................... 2,950 2,222 2,425 Increase in interest payable ................. 716 1,854 1,763 Increase in other liabilities ................ 1,799 1,146 876 (Increase) decrease in interest receivable ................................ (220) 13 76 (Increase) in other assets ................... (1,286) (3,571) (2,897) -------- -------- -------- Net cash provided by operating activities ............................. $ 14,659 $ 11,693 $ 8,593 ======== ======== ======== Schedule of noncash investing activities Notes payable assumed by buyer upon sale of properties .............................. $ -- $ -- $ 8,165 Unrealized gain on marketable equity securities of affiliate ......................... 1,541 550 86
The accompanying notes are an integral part of these Consolidated Financial Statements. 46 47 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. 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 limited partnership. The Operating Partnership is the sole limited 47 48 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. ORGANIZATION (Continued) 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 Partnership. The 1% General Partner interest in each of National Realty and 48 49 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. ORGANIZATION (Continued) 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 51 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, 1997 and 1996. 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 49 50 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 ("SFAS 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 5 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 depreciated. 50 51 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 the fair value of the collateral securing such note. 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 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, 1997 and 1996, approximated carrying value. 51 52 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. 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 6,327,418, 6,387,270 and 6,418,104 units for 1997, 1996 and 1995, respectively. NOTE 3. REAL ESTATE AND DEPRECIATION In April 1997, the Partnership sold Tollhill East, a 81,115 square foot office building in Dallas, Texas, for $7.0 million in cash. The Partnership received net cash of $4.2 million after the payoff of $2.4 million in existing mortgage debt and the payment of various closing costs associated with the sale. The Partnership recognized a gain of $3.6 million on the sale. In June 1997, the Partnership sold the Fondren Building, a 47,808 square foot office building in Houston, Texas, for $661,000 in cash. The Partnership received net cash of $610,000 after the payment of various closing costs associated with the sale. The Partnership recognized no gain or loss on the sale. In November 1997, the Partnership sold the Crestview Center, a 80,679 square foot shopping center in Crestview, Florida, for $1.6 million in cash. The Partnership received net cash of $667,000 after the payoff of $630,000 in existing mortgage debt and the payment of various closing costs associated with the sale. The Partnership recognized a gain of $563,000 on the sale. In December 1997, GCLP sold Village Square, a 310 unit apartment complex in Stone Mountain, Georgia, for $6.1 million in cash. GCLP received net cash of $3.3 million after the payoff of $2.0 million in existing mortgage debt and the payment of various closing costs associated with the sale. The Partnership recognized a gain of $2.1 million on the sale. 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. In December 52 53 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3. REAL ESTATE AND DEPRECIATION (Continued) 1997, the Partnership entered into an agreement with the 25% general partner, which provides such partner with an option to purchase the Partnership's 75% interest in Southern Palms Associates. In the event that the 25% general partner does not elect to purchase the Partnership's interest, the Partnership will acquire the 25% partner's interest. The 25% general partner must exercise his option no later than March 25, 1998. In December 1995, the Partnership sold the Harbour Pointe Apartments in Miami, Florida and the Vineyards Apartments in Broadview Heights, Ohio for a total of $15.9 million. The Partnership received net cash totaling $4.5 million after the payoff of $11.2 million in existing mortgage debt and the payment of various closing costs associated with the sales. The Partnership recognized gains totaling $7.7 million on the sales. NOTE 4. NOTES RECEIVABLE Notes and interest receivable consisted of the following:
1997 1996 ----------------------- ---------------------- Estimated Estimated Fair Book Fair Book Value Value Value Value ---------- ------- ---------- --------- Notes receivable Performing .................. $ 36,168 $ 34,927 $ 26,189 $ 25,950 Nonperforming ............... 5,500 5,500 5,108 5,100 -------- -------- -------- -------- $ 41,668 40,427 $ 31,297 31,050 ======== ======== Interest receivable ............ 255 68 Unamortized (discounts) ........ (109) (142) Deferred gains ................. (13,720) (15,787) -------- -------- $ 26,853 $ 15,189 ======== ========
The Partnership does not recognize interest income on nonperforming notes receivable. For the year 1997, unrecognized interest income on nonperforming notes receivable totaled $127,000. Notes receivable mature from 1998 through 2002 with interest rates ranging from 9.0% to 18.0% with a weighted average interest rate of 13.93%. 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." 53 54 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4. NOTES RECEIVABLE (Continued) 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 fair value of the collateral securing such note. Unrecognized interest income was $598,000, $541,000 and $524,000 in 1997, 1996 and 1995, respectively. 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. In July, September and December 1997, an additional $118,000 was funded and the loan was modified, increasing the principal balance to $1.3 million. In the first quarter of 1998, an additional $59,000 was funded and the loan was again modified, increasing the principal balance to $1.3 million. The Partnership has committed to fund an additional $108,000, at which time the loan will be modified to increase the principal balance to its maximum of $1.5 million. The Partnership received the required December 1997 deferred interest payment in January 1998. In January 1997, the note receivable secured by the Nellis Bonanza Shopping Center in Las Vegas, Nevada matured. In August 1997, the borrower paid the note in full. The Partnership received net cash of $4.4 million after payoff of the underlying note payable. As a result of the payoff, the Partnership recognized a deferred gain of $2.1 million from the Partnership's 1986 sale of the property. In February 1997, the Partnership funded a loan to JNC Enterprises, Ltd. ("JNC") in the amount of $2.5 million. In March 1997, the Partnership funded an additional $1.5 million and the loan was modified, increasing the principal balance to $4.0 million. The loan was 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 bore interest at 12% per annum, required quarterly payments of interest only and matured in October 1997. The unpaid principal balance and accrued but unpaid interest were paid at maturity. In April 1997, the Partnership funded a $1.5 million loan to Highway 544 Partners, L.P. ("Highway Partners"). The loan is secured by a mortgage on approximately 49 acres of undeveloped land in Plano, Texas, a pledge of 100% of the partnership interest and the personal guarantee of the owner of Highway Partner's general partner. The note receivable bears interest at 18% per annum, requires quarterly interest only payments at 12% per annum, with the deferred interest payable annually in April 1998 and 1999, and matures in April 1999. 54 55 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4. NOTES RECEIVABLE (Continued) In June 1997, the Partnership funded another loan to JNC in the amount of $2.5 million. In July 1997, an additional $1.0 million was funded and the loan was modified, increasing the principal balance to $3.5 million. The loan is secured by 81.99 acres of undeveloped land in Frisco, Texas. The note bears interest at 16.0% per annum, requires monthly payments of interest only and matures in June 1998. In July 1997, the Partnership funded a $700,000 loan to an individual. The loan is secured by a security interest in an oil, gas and mineral lease in Anderson County, Texas and by a second lien mortgage on a ranch in Henderson County, Texas. The loan bears interest at 12.0% per annum, requires monthly payments of interest only and matures in December 1998. In February 1998, the Partnership funded an additional $40,000 and the loan was modified, increasing the principal balance to $740,000. Also in July 1997, the Partnership funded a $1.4 million loan to Avex Fund III, Inc. The loan was secured by a mortgage on 14.5 acres of undeveloped land in Las Colinas, Texas. The loan bore interest at 12.0% per annum, required monthly payments of interest only and matured in July 1999. The loan was paid in full in August 1997. In August 1997, the Partnership funded an $800,000 loan to Frisco Eldorado Partners, L.L.C. The loan is secured by a mortgage on 45 acres of undeveloped land in Frisco, Texas. The loan bears interest at 15.0% per annum, requires monthly payments of interest only and matures in August 1998. $250,000 of the loan balance is guaranteed by the Frisco Economic Development Corporation, a government agency. Also in August 1997, the Partnership funded a $2.8 million loan to Dallas Parkway Properties, Inc. The loan is secured by a mortgage on an office building in Addison, Texas. The loan bears interest at 14.0% per annum, requires monthly payments of interest only and matures in August 1999. In conjunction with the loan origination, the Partnership obtained financing secured by the note receivable in the amount of $2.0 million. The loan bears interest at 9.4% per annum, requires monthly payments of interest only and matures in August 1999. In October 1997, the Partnership funded a $1.7 million loan to Preston/Lomo Alto, L.L.C. The loan is secured by a pledge of the limited partnership interests in two partnerships which in turn own two office buildings, one in Dallas and the other in Plano, Texas and the personal guarantee of one of the general partners. The loan bears interest at 12.0% per annum, requires monthly payments of interest only and matures in November 1999. Also in October 1997, the Partnership funded a $400,000 loan to Stratford & Graham Developers, L.L.C. ("Stratford"). The loan was secured by an assignment of a contract to purchase 1,485 acres of undeveloped land in Riverside County, California and the guarantee of the parent of the borrower. The loan bore interest at 15.0% per annum 55 56 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4. NOTES RECEIVABLE (Continued) and matured in November 1997. The loan was modified and extended at maturity, increasing the loan balance to $530,000 and extending the maturity date to December 1997. In December 1997, the Partnership funded a new $3.5 million loan to Stratford, a portion of the proceeds being used to payoff the first loan. The new loan is secured by a mortgage on the 1,485 acres of undeveloped land in Riverside County, California. The loan bears interest at 15.0% per annum and matures in July 1999. All principal and interest are due at maturity. Further in October 1997, the Partnership funded a $240,000 loan to an individual. The loan is secured by a mortgage on a single-family residence in Addison, Texas. The loan bears interest at 10.0% per annum, requires monthly payments of interest only and matures in September 1998. In December 1997, the Partnership funded a $1.2 million loan to 14875 Landmark, L.L.C. The loan is secured by a pledge of the 48% limited partnership interest in a partnership, which owns an office building in Addison, Texas. The loan is guaranteed by the limited partner. The loan bears interest at 12% per annum, requires monthly payments of interest only, and matures in December 1999. Also in December 1997, the Partnership funded $455,000 of a $475,000 loan to Tara Summit Square, Inc. The loan is secured by a pledge of 100% of the capital stock of the borrower and a second lien mortgage on a shopping center in Rhode Island. The loan is guaranteed by the sole shareholder of Tara Summit Square, Inc. The loan bears interest at 12.0% per annum, requires monthly payments of interest only and matures in December 1999. The remaining $20,000 was funded in January 1998. In June 1996, the Partnership funded a $1.5 million loan to 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 bore interest at 16.0% per annum and matured in June 1997. All principal and accrued but unpaid interest was paid in full at maturity. In November 1996, the Partnership committed to fund another 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 was secured by a 73.7% limited partner interest in a partnership which owns 272 acres of undeveloped land in The Colony, Texas. The note bore interest at 16% per annum, required monthly payments of interest only and matured in November 1997. This loan was cross-collateralized with the loan made to JNC in June 1996 and was paid in full in October 1997. 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 56 57 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4. NOTES RECEIVABLE (Continued) 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. NOTE 5. ALLOWANCE FOR ESTIMATED LOSSES The allowance for estimated losses was as follows:
1997 1996 1995 ------ ------ ------ 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 ART common stock, which the Partnership acquired in open market purchases in 1990 at an adjusted cost of $269,000. ART is a publicly held real estate investment company. 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 $2.8 million at December 31, 1997 and $1.3 million at December 31, 1996. See NOTE 1. "ORGANIZATION." NOTE 7. NOTES PAYABLE Notes payable at December 31, 1997 and 1996 are collateralized by land, buildings and improvements and are generally nonrecourse to the partnership. The GCLP mortgage debt, as discussed below, is cross- 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, 1997 bear interest at stated rates ranging from 7.5% to 13.0% with a weighted average rate of 10.6% and such notes have maturities or call dates ranging from one to 26 years. In April 1997, the Partnership modified and extended the mortgage secured by the Cross County Mall in Mattoon, Illinois. In conjunction with the modification, the Partnership made a principal reduction payment of $137,500. The modified and extended mortgage bears interest at a variable rate, currently 9.6% per annum, requires monthly payments of principal and interest of $71,262 and has an extended maturity of April 2002. In June 1997, the Partnership refinanced the mortgage debt secured by the Pheasant Ridge Apartments in Bellevue, Nebraska in the amount of $5.7 million. The Partnership received net cash of $804,000 after the payoff of $4.6 million in existing mortgage debt, the funding of 57 58 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 7. NOTES PAYABLE (Continued) escrows, and the payment of various closing costs associated with the refinancing. The new mortgage bears interest at 7.89% per annum, requires monthly payments of principal and interest of $41,742 and matures in July 2007. Also in June 1997, the Partnership refinanced the mortgage debt secured by the Regency Apartments in Lincoln, Nebraska in the amount of $3.4 million. The Partnership received net cash of $374,000 after the payoff of $2.5 million in existing mortgage debt, the funding of escrows and the payment of various closing costs associated with the refinancing. The new mortgage bears interest at 7.89% per annum, requires monthly payments of principal and interest of $24,577 and matures in July 2007. In conjunction with the refinancing of the Pheasant Ridge and Regency Apartments, the Partnership purchased the Federal National Mortgage Association ("FNMA") insured mortgage backed securities issued by the lender to finance the loans. These securities bear interest at 6.84% per annum and mature in July 2007. The Partnership borrowed 97% of the face amount of the securities from FNMA. These financings bear interest at a variable rate, currently 5.68% per annum, require monthly payments of principal and interest, currently $43,791, and mature each 30 days. The effect of these transactions is to lower the effective interest rate on the refinancings to 5.72% for Regency and 5.99% for Pheasant Ridge. The Partnership is subject to the demand by FNMA exposure for additional collateral or credit loss in the event the interest rate associated with the securities increases in a manner that is unfavorable to the Partnership's interest in the security. However, the Partnership intends to either payoff the mortgage or modify the mortgage to increase the interest rate prior to any significant credit loss. In September 1997, the Partnership obtained mortgage financing in the amount of $15.0 million secured by four previously unencumbered office buildings: 56 Expressway in Oklahoma City, Oklahoma; Executive Court in Memphis, Tennessee; Melrose Business Park in Oklahoma City, Oklahoma; and University Square in Anchorage, Alaska; and by a security interest in NOLP's 99.3% limited partnership interest in GCLP, in the amount of $15.0 million. The Partnership received net cash of $14.7 million after the payment of various closing costs associated with the financing. The mortgage bears interest at a variable rate, currently 9.0% per annum, requires monthly payments of interest only and matures in June 1998. In October 1997, the Partnership refinanced the mortgage debt secured by the Brookview Apartments in Smyrna, Georgia in the amount of $4.0 million. The Partnership received net cash of $837,000 after the payoff of $2.9 million in existing mortgage debt, the funding of escrows and the payment of various closing costs associated with the refinancing. The new mortgage bears interest at 7.50% per annum, requires monthly payments of principal and interest of $27,969 and matures in November 2007. 58 59 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 7. NOTES PAYABLE (Continued) In November 1997, the Partnership modified the mortgage debt secured by the Club Mar Apartments in Sarasota, Florida under the Housing and Urban Development ("HUD") Partial Payment of Claim ("PPC") program. Under the PPC program, $736,000 of the original principal balance and $871,000 of accrued but unpaid interest was rolled into a new second lien mortgage. The first mortgage was reduced to $5.2 million, the interest rate was reduced to 8.18% per annum, the monthly payments were reduced to $40,800 and the maturity date of July 2023 remains unchanged. The new second lien mortgage of $1.6 million bears interest at 6.91% per annum, requires monthly payments of 50% of the property's net cash flow as defined and matures in July 2023. In conjunction with the modification, the Partnership funded improvement escrows of $381,000 and paid $345,000 as a principal payment on the second lien mortgage from accumulated cash flow that had been held by the servicer. In December 1997, the Partnership obtained financing in the amount of $5.0 million secured by six notes receivable with an aggregate principal balance of $9.3 million. The financing bears interest at 13.0% per annum, requires monthly payments of interest only and matures in December 1998. 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 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. 59 60 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 7. NOTES PAYABLE (Continued) The Partnership holds a wraparound mortgage note receivable secured by a shopping center in La Crosse, Wisconsin. The underlying note payable has matured. 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 replaced the credit enhancement escrow with a $18.5 million letter of credit from a financial institution. The letter of credit was for a term of not less than two years from January 1997. 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. Under the blanket mortgage, GCLP was prohibited from further encumbering, financing or selling any of the fifty-two properties or the wraparound note receivable for a five year period which ended November 22, 1997. After such date, GCLP may retire the blanket mortgage in whole or part, with some restrictions. Scheduled notes payable principal payments are due as follows: 1998.......................... $ 36,546 1999.......................... 20,501 2000.......................... 6,449 2001.......................... 9,175 2002.......................... 13,002 Thereafter.................... 251,157 --------- $ 336,830 =========
60 61 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 were issued under an Indenture between the Partnership and Bank of America Texas as successor Trustee. The Pension Notes were unsecured, subordinated obligations of the Partnership and bore interest at the rate of 8% compounded annually. Principal and accrued interest were paid at maturity on September 18, 1997. The 8% stated interest rate on the Pension Notes was different than the assumed market rate at the time of issuance. Such discount was being amortized over the term of the Pension Notes using the interest method. Interest expense of $1,167,000, $1,444,000 and $1,289,000 was recognized on the Pension Notes in 1997, 1996 and 1995, 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. Each warrant entitled the holder thereof to purchase three quarters of one unit at the exercise price equal to $16.00 per unit. 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) First Equity Properties, Inc. ("First Equity"), which is 50% owned by BCM, (ii) Mr. Phillips and (iii) a trust for the 61 62 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. GENERAL PARTNER FEES AND COMPENSATION (Continued) benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level management and leasing of nine of the Partnership's commercial properties to Carmel Realty, Inc. ("Carmel Realty") which is a company owned by First Equity. 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, depreciation, 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. 62 63 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. GENERAL PARTNER FEES AND COMPENSATION (Continued) 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. Fees and cost reimbursement to SAMLP, the General Partner of the Partnership, and its affiliates:
1997 1996 1995 ------ ------ ------ Property and construction management fees* .................... $ 826 $ 744 $ 700 Loan placement fees .................... 332 89 423 Real estate commissions ................ 414 -- 576 Leasing commissions .................... 96 67 73 Reimbursement of administrative expenses ............................ 3,659 2,610 3,232 ------ ------ ------ $5,327 $3,510 $5,004 ====== ====== ======
- -------------------- * Net of property management fees paid to subcontractors, other than Carmel Realty. Cost reimbursements to GCMI, the general partner of GCLP:
1997 1996 1995 ---- ---- ---- Reimbursement of administrative expenses ............................ $789 $719 $675 ==== ==== ====
NOTE 11. RENTS UNDER OPERATING LEASES The Partnership's operations include the leasing of commercial properties (office buildings and shopping centers). The leases thereon 63 64 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 11. RENTS UNDER OPERATING LEASES (Continued) expire at various dates through 2013. The following is a schedule of minimum future rents on non-cancelable operating leases as of December 31, 1997: 1998 ................... $ 9,003 1999 ................... 6,239 2000 ................... 4,704 2001 ................... 3,374 2002 ................... 2,721 Thereafter ............. 11,662 ------- $37,703 =======
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 that partnership losses for certain publicly traded partnerships be 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 64 65 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued) Moorman Settlement (Continued) "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 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. 65 66 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued) Moorman Settlement (Continued) 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 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, 1997 to be $49.6 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, 1997) plus all accrued but unpaid interest ($7.2 million at December 31, 1997) on the note receivable from SAMLP described in NOTE 1. "ORGANIZATION." In the 66 67 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued) Moorman Settlement (Continued) 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 provided 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 Agreement. 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. On April 7, 1997, the Supervising Judge entered an order amending the September 23, 1996 order, approving the formal notice and setting a hearing on the Implementation Agreement for June 27, 1997. A notice was sent to all class members and unitholders in April 1997 and the hearing was held on June 27, 1997. On September 8, 1997, the Supervising Judge rendered a Statement of Decision in which he declined to approve the Implementation Agreement. As a result of the Statement of Decision, the existing Moorman Settlement Agreement remains in full force and effect and all of the provisions of the Amended and Restated Implementation Agreement have been voided. On December 15, 1997, National Realty, SAMLP, the oversight committee, Joseph B. Moorman, Invenex and the Moorman Class Counsel executed an Agreement for Establishment of Class Distribution Fund and Election of Successor General Partner (the "Resolution Agreement") which provides for the nomination of an entity affiliated with SAMLP to be the successor general partner of the Partnership, for the establishment of a fund for the benefit of the Moorman Class Members consisting of cash and properties owned by the Partnership and for the resolution of all related matters under the Moorman Settlement Agreement. The Resolution Agreement was submitted to the Supervising Judge and on February 11, 1998, the Supervising Judge entered an order granting 67 68 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued) Moorman Settlement (Continued) preliminary approval of the Resolution Agreement and scheduled a hearing to be held on April 24, 1998, for consideration of preliminary approval of a business plan for the operation of the entity which will receive the cash and properties and to consider a form of notice to be distributed to the Moorman Class Members describing the Resolution Agreement and the business plan. 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. Upon approval by the National Realty 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 1998. SAMLP has agreed to waive its rights under the Moorman Settlement Agreement to receive any payment from the Partnership of the fees it is entitled to receive upon the election of a successor general partner. As of December 31, 1997, such fee was calculated to be $49.6 million. Upon final approval by the Supervising Judge, the Partnership will transfer $1.9 million in cash and five shopping center properties to the new entity which will be owned by the Moorman Class Members and managed for their benefit by a court approved board. This fund is being established in order to provide additional benefits to the Moorman Class Members. Upon the election and taking office of the successor general partner and the transfer of the cash and properties to the Class Fund, the Moorman Settlement Plan and the Oversight Committee shall be terminated. On September 26, 1997, one of the original Moorman litigation defendants, Robert A. McNeil, filed motions to (i) be installed as receiver for the Partnership and (ii) disband the Oversight Committee. A hearing on the motions was set for February 5, 1998. However, the Supervising Judge continued the hearing to April 24, 1998. 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. 68 69 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 14. QUARTERLY DATA The following is a tabulation of the Partnership's quarterly results of operations for the years 1997 and 1996 (unaudited).
Three Months Ended --------------------------------------------------- 1997 March 31 June 30 September 30 December 31 - ---- ---------- --------- ------------ ----------- Revenues .................................... $ 28,559 $ 28,814 $ 29,797 $ 30,195 Expenses .................................... 28,786 29,080 29,645 29,492 -------- -------- -------- -------- Income (loss) from operations ............... (227) (266) 152 703 Gain on sale of real estate ................. -- 3,587 2,067 2,702 -------- -------- -------- -------- Net income (loss) ........................... $ (227) $ 3,321 $ 2,219 $ 3,405 ======== ======== ======== ======== Earnings per unit Net income (loss) ........................... $ (.04) $ .51 $ .34 $ .54 ======== ======== ======== ========
In second quarter of 1997, the Partnership sold an office building for a gain of $3.6 million. See "NOTE 3. REAL ESTATE AND DEPRECIATION." In the third quarter of 1997, the Partnership recognized a deferred gain of $2.1 million on the payoff of a note receivable. See NOTE 4. "NOTES RECEIVABLE." In the fourth quarter of 1997, the Partnership sold an apartment complex and a shopping center for gains totaling $2.7 million. See NOTE 3. "REAL ESTATE AND DEPRECIATION."
Three Months Ended ------------------------------------------------------ 1996 March 31 June 30 September 30 December 31 - ---- ---------- --------- ------------ ----------- 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 ======== ======== ======== ========
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. NOTE 15. SUBSEQUENT EVENTS In January and February 1998, the Partnership funded a total of $3.3 million of a $3.9 million loan to Centura Tower, Ltd. The loan is secured by a mortgage on 2.244 acres of land in Dallas, Texas. The loan bears interest at 12.0% per annum, requires monthly payments of interest only and matures in January 2003. 69 70 SCHEDULE III NATIONAL REALTY, L.P. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997
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 .............. $ 6,371 $ 612 $ 6,778 $ 1,350 $ -- $ 612 $ 8,128 $ 8,740 Decatur, GA Arlington Place ......... 2,671 330 3,275 715 -- 330 3,990 4,320 Pasadena, TX Barcelona ............... 3,975 1,400 5,600 303 -- 1,400 5,903 7,303 Tampa, FL Bavarian ................ 6,758 547 5,528 257 -- 547 5,785 6,332 Middletown, OH Bent Tree ............... 4,694 1,047 7,036 646 -- 1,047 7,682 8,729 Addison, TX Blackhawk ............... 3,408 253 4,081 292 -- 253 4,373 4,626 Ft. Wayne, IN Bridgestone ............. 1,332 169 1,780 192 -- 169 1,972 2,141 Friendswood, TX Brookview Gardens ....... 3,997 385 2,085 338 -- 385 2,423 2,808 Smyrna, GA Candlelight Square ...... 1,891 148 1,928 189 -- 145 2,120 2,265 Lenexa, KS Chalet I ................ 2,889 260 2,994 65 -- 260 3,059 3,319 Topeka, KS Chalet II ............... 1,137 440 1,322 -- -- 440 1,322 1,762 Topeka, KS Chateau ................. 1,878 130 1,723 126 -- 130 1,849 1,979 Bellevue, NE Club Mar ................ 6,498 1,248 4,993 235 -- 1,248 5,228 6,476 Sarasota, FL Confederate Point ....... 4,035 246 3,736 663 -- 246 4,399 4,645 Jacksonville, FL, Country Place ........... 1,954 246 3,268 70 -- 246 3,338 3,584 Round Rock, TX Covered Bridge .......... 4,586 219 3,425 129 -- 219 3,554 3,773 Gainesville, FL Creekwood ............... 4,610 489 1,955 786 -- 489 2,741 3,230 College Park, GA Fair Oaks ............... 2,938 470 2,661 174 -- 470 2,835 3,305 Euless, TX Four Seasons ............ 9,617 1,264 8,447 780 -- 1,264 9,227 10,491 Denver, CO Fox Club ................ 6,412 902 7,294 970 -- 902 8,264 9,166 Indianapolis, IN Foxwood ................. 3,366 218 3,188 489 -- 218 3,677 3,895 Memphis, TN Hidden Valley ........... 4,113 274 3,636 361 -- 261 4,010 4,271 Grand Rapids, MI Horizon East ............ 1,450 592 2,628 482 -- 592 3,110 3,702 Dallas, TX Life on Which Date Depreciation of in Latest Con- Statement Accumulated struct- Date of Operation Description Depreciation tion Acquired is Computed - ------------------------- ------------ ----- -------- ----------- APARTMENTS - ---------- Alexandria .............. $ 5,338 1973 09/77 7 - 40 years Decatur, GA Arlington Place ......... 2,808 1973 11/76 7 - 40 years Pasadena, TX Barcelona ............... 1,144 1971 09/90 7 - 40 years Tampa, FL Bavarian ................ 2,832 1972 01/84 5 - 40 years Middletown, OH Bent Tree ............... 4,316 1980 06/80 7 - 40 years Addison, TX Blackhawk ............... 2,875 1972 12/78 7 - 40 years Ft. Wayne, IN Bridgestone ............. 1,079 1979 06/82 7 - 40 years Friendswood, TX Brookview Gardens ....... 1,667 1964 12/77 5 - 40 years Smyrna, GA Candlelight Square ...... 1,366 1971 11/77 7 - 40 years Lenexa, KS Chalet I ................ 1,691 1964/ 04/82 7 - 40 years Topeka, KS ........... 74/78 Chalet II ............... 91 1986 03/95 7 - 40 years Topeka, KS Chateau ................. 1,034 1968 02/81 7 - 40 years Bellevue, NE Club Mar ................ 604 1973 07/93 7 - 40 years Sarasota, FL Confederate Point ....... 2,859 1969 05/79 7 - 40 years Jacksonville, FL, Country Place ........... 1,780 1980 07/82 7 - 40 years Round Rock, TX Covered Bridge .......... 2,841 1972 10/79 7 - 40 years Gainesville, FL Creekwood ............... 911 1973 04/90 7 - 40 years College Park, GA Fair Oaks ............... 677 1978 07/89 7 - 40 years Euless, TX Four Seasons ............ 4,035 1970 07/84 7 - 40 years Denver, CO Fox Club ................ 4,009 1972 11/83 7 - 40 years Indianapolis, IN Foxwood ................. 2,386 1974 08/79 7 - 40 years Memphis, TN Hidden Valley ........... 2,226 1973 07/81 7 - 40 years Grand Rapids, MI Horizon East ............ 2,142 1972 05/78 7 - 40 years Dallas, TX
70 71 SCHEDULE III NATIONAL REALTY, L.P. (Continued) REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997
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 .......... $ 3,134 $ 571 $ 3,802 $ 1,053 $ -- $ 571 $ 4,855 $ 5,426 Tucson, AZ La Mirada ............... 5,374 392 5,454 1,419 -- 392 6,873 7,265 Jacksonville, FL Lake Nora Arms .......... 9,721 737 10,774 769 -- 737 11,543 12,280 Indianapolis, IN Lakewood Park ........... 2,976 800 3,200 148 -- 800 3,348 4,148 St. Petersburg, FL Lantern Ridge ........... 1,454 130 1,721 66 -- 177 1,740 1,917 Richmond, VA Mallard Lake ............ 7,945 534 7,099 768 -- 534 7,867 8,401 Greensboro, NC Manchester Commons ...... 4,824 635 4,654 1,095 -- 635 5,749 6,384 Manchester, MO Mesa Court .............. 1,713 492 1,968 194 -- 492 2,162 2,654 Mesa, AZ Mesa Ridge .............. 2,289 955 3,820 357 -- 955 4,177 5,132 Mesa, AZ Nora Pines .............. 5,974 221 3,872 420 -- 221 4,292 4,513 Indianapolis, IN Oak Hollow .............. 7,333 745 6,118 765 -- 745 6,883 7,628 Austin, TX Oakmont ................. 2,817 251 1,423 87 (100) 251 1,410 1,661 Monroe, LA Oak Tree ................ 2,152 304 3,543 246 -- 304 3,789 4,093 Grandview, MO Olde Towne .............. 3,538 209 3,272 389 -- 209 3,661 3,870 Middletown, OH Pheasant Ridge .......... 5,729 231 4,682 998 -- 231 5,680 5,911 Bellevue, NE Pines ................... 2,584 278 3,490 276 -- 278 3,766 4,044 Little Rock, AR Place One ............... 4,980 784 5,186 927 -- 784 6,113 6,897 Tulsa, OK Quail Point ............. 2,136 184 2,716 249 -- 184 2,965 3,149 Huntsville, AL Regency ................. 3,373 304 1,865 412 -- 304 2,277 2,581 Lincoln, NE Regency Falls ........... 2,570 888 7,261 1,471 (100)(3) 888 8,632 9,520 San Antonio, TX River Glen .............. 3,073 683 4,871 848 -- 683 5,719 6,402 Tulsa, OK Rockborough ............. 5,711 702 4,495 905 -- 702 5,400 6,102 Denver, CO Royal Oaks .............. 2,670 738 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 Description Depreciation tion Acquired is Computed - ------------------------- ------------ ---- -------- ----------- APARTMENTS - Continued - ---------- Kimberly Woods .......... $ 3,384 1973 12/77 7 - 40 years Tucson, AZ La Mirada ............... 4,427 1971 01/79 7 - 40 years Jacksonville, FL Lake Nora Arms .......... 7,644 1973 06/78 7 - 40 years Indianapolis, IN Lakewood Park ........... 583 1976 12/90 7 - 40 years St. Petersburg, FL Lantern Ridge ........... 1,414 1974 03/79 7 - 40 years Richmond, VA Mallard Lake ............ 4,900 1974 05/79 7 - 40 years Greensboro, NC Manchester Commons ...... 3,745 1972 06/78 7 - 40 years Manchester, MO Mesa Court .............. 444 1972 05/90 7 - 40 years Mesa, AZ Mesa Ridge .............. 857 1972 05/90 7 - 40 years Mesa, AZ Nora Pines .............. 2,826 1970 05/78 5 - 40 years Indianapolis, IN Oak Hollow .............. 4,535 1974 05/78 7 - 40 years Austin, TX Oakmont ................. 323 1974 06/89 7 - 40 years Monroe, LA Oak Tree ................ 1,839 1968 03/82 7 - 40 years Grandview, MO Olde Towne .............. 2,103 1968 03/81 7 - 40 years Middletown, OH Pheasant Ridge .......... 3,357 1974 10/78 5 - 40 years Bellevue, NE Pines ................... 2,414 1977 11/77 7 - 40 years Little Rock, AR Place One ............... 4,390 1970 04/77 7 - 40 years Tulsa, OK Quail Point ............. 2,124 1960 08/75 7 - 40 years Huntsville, AL Regency ................. 1,069 1973 05/82 7 - 40 years Lincoln, NE Regency Falls ........... 5,933 1974 11/78 7 - 40 years San Antonio, TX River Glen .............. 3,710 1974 11/77 7 - 40 years Tulsa, OK Rockborough ............. 3,480 1973 01/78 7 - 40 years Denver, CO Royal Oaks .............. 4,345 1973 12/77 7 - 40 years Stone Mountain, GA
71 72 SCHEDULE III NATIONAL REALTY, L.P. (Continued) REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997
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 ................... $ 2,764 $ 529 $ 5,351 $ 214 $ -- $ 529 $ 5,565 $ 6,094 Kansas City, MO Shadowood .................. 3,623 477 3,208 207 -- 477 3,415 3,892 Addison, TX Sherwood Glen .............. 3,884 352 2,550 518 -- 352 3,068 3,420 Urbandale, IA Skipper's Pond ............. 2,613 360 3,123 128 -- 339 3,272 3,611 Tampa, FL Stonebridge ................ 1,704 193 2,076 247 -- 193 2,323 2,516 Florissant, MO Summerwind ................. 5,052 493 2,990 138 -- 493 3,128 3,621 Reseda, CA Sun Hollow ................. 3,818 385 4,159 75 -- 385 4,234 4,619 El Paso, TX Tanglewood ................. 16,894 5,682 18,340 3,723 -- 5,682 22,063 27,745 Arlington Heights, IL Timber Creek ............... 4,865 154 2,327 673 -- 154 3,000 3,154 Omaha, NE Towne Oaks ................. 2,638 188 3,576 202 -- 188 3,778 3,966 Monroe, LA Villa Del Mar .............. 2,495 387 3,134 116 -- 387 3,250 3,637 Wichita, KS Villas ..................... 3,275 516 3,948 607 -- 516 4,555 5,071 Plano, TX Whispering Pines ........... 2,324 311 1,255 163 -- 311 1,418 1,729 Canoga Park, CA Whispering Pines ........... 4,859 228 4,330 1,003 -- 228 5,333 5,561 Topeka, KS Windridge .................. 7,218 711 5,812 1,665 -- 711 7,477 8,188 Austin, TX Windtree I & II ............ 5,065 460 2,739 181 -- 460 2,920 3,380 Reseda, CA Wisperwood ................. 2,128 237 1,964 431 -- 258 2,374 2,632 Tampa, FL Woodlake ................... 4,315 585 5,848 1,029 -- 585 6,877 7,462 Carrollton, TX Woodsong II ................ 1,385 322 3,705 340 -- 322 4,045 4,367 Smyrna, GA Woodstock .................. 3,065 888 5,193 417 -- 888 5,610 6,498 Dallas, TX OFFICE BUILDINGS - ---------------- 56 Expressway .............. --(4) 406 3,976 570 (2,386)(3) 406 2,160 2,566 Oklahoma City, OK Executive Court ............ --(4) 271 2,099 673 -- 271 2,772 3,043 Memphis, TN Marina Playa ............... 8,092 1,237 4,339 5,108 -- 1,237 9,447 10,684 Santa Clara, CA Melrose Business Park ...... --(4) 367 2,674 167 (1,000)(3) 367 1,841 2,208 Oklahoma City, OK University Square .......... --(4) 562 3,276 186 (1,875)(3) 562 1,587 2,149 Anchorage, AK Life on Which Date Depreciation of in Latest Con- Statement Accumulated struct- Date of Operation Description Depreciation tion Acquired is Computed - ---------------------------- ------------ ---- -------- ----------- APARTMENTS - Continued - ---------- Santa Fe ................... $ 2,869 1964/ 04/83 7 - 40 years Kansas City, MO 67 Shadowood .................. 2,096 1976 02/79 7 - 40 years Addison, TX Sherwood Glen .............. 2,217 1970 12/77 7 - 40 years Urbandale, IA Skipper's Pond ............. 2,350 1971 07/76 7 - 40 years Tampa, FL Stonebridge ................ 1,499 1975 10/77 7 - 40 years Florissant, MO Summerwind ................. 2,359 1976 02/77 7 - 40 years Reseda, CA Sun Hollow ................. 2,507 1977 09/79 7 - 40 years El Paso, TX Tanglewood ................. 14,546 1974 03/78 7 - 40 years Arlington Heights, IL Timber Creek ............... 2,065 1974 10/78 5 - 40 years Omaha, NE Towne Oaks ................. 2,023 1974 07/82 7 - 40 years Monroe, LA Villa Del Mar .............. 1,808 1971 10/81 7 - 40 years Wichita, KS Villas ..................... 2,734 1977 04/79 7 - 40 years Plano, TX Whispering Pines ........... 170 1977 12/93 7 - 40 years Canoga Park, CA Whispering Pines ........... 3,297 1972 02/78 7 - 40 years Topeka, KS Windridge .................. 5,140 1974 09/78 7 - 40 years Austin, TX Windtree I & II ............ 2,122 1976 11/76 7 - 40 years Reseda, CA Wisperwood ................. 1,701 1975 07/76 7 - 40 years Tampa, FL Woodlake ................... 3,916 1979 08/78 7 - 40 years Carrollton, TX Woodsong II ................ 3,144 1975 08/80 7 - 40 years Smyrna, GA Woodstock .................. 3,409 1977 12/78 7 - 40 years Dallas, TX OFFICE BUILDINGS - ---------------- 56 Expressway .............. 1,916 1981 03/82 7 - 40 years Oklahoma City, OK Executive Court ............ 1,553 1980 09/82 5 - 40 years Memphis, TN Marina Playa ............... 5,921 1972 12/76 5 - 40 years Santa Clara, CA Melrose Business Park ...... 1,323 1980 03/82 5 - 40 years Oklahoma City, OK University Square .......... 1,386 1981 12/81 5 - 40 years Anchorage, AK
72 73 SCHEDULE III (Continued) NATIONAL REALTY, L.P. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997
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) SHOPPING CENTERS - ---------------- Countryside Plaza ..... $ 1,983 $ 843 $ 3,179 $ 715 $ -- $ 843 $ 3,894 $ 4,737 Clearwater, FL Cross County Mall ..... 7,223 608 6,468 5,903 -- 608 12,371 12,979 Mattoon, IL Cullman ............... 617 400 1,830 132 -- 400 1,962 2,362 Cullman, AL Harbor Plaza .......... 1,803 817 2,587 380 -- 821 2,963 3,784 Aurora, CO Katella Plaza ......... 1,309 -- 2,844 504 -- -- 3,348 3,348 Orange, CA Regency Point ......... 2,253 647 5,156 2,388 -- 1,792 6,399 8,191 Jacksonville, FL Southern Palms ........ 8,606 4,226 17,757 1,682 -- 4,285 19,380 23,665 Tempe, AZ Westwood .............. 564 -- 5,424 1,030 -- -- 6,454 6,454 -------- -------- -------- -------- -------- -------- -------- -------- Tallahassee, FL $301,084 $ 47,499 $337,232 $ 55,945 $(5,461) $ 48,738 $386,477 $435,215 ======== ======== ======== ======== ======== ======== ======== ======== Life on Which Date Depreciation of in Latest Con- Statement Accumulated struct- Date of Operation Description Depreciation tion Acquired is Computed - ----------------------- ------------ ---- -------- ----------- SHOPPING CENTERS - ---------------- Countryside Plaza ..... $ 1,912 1978 05/85 7 - 40 years Clearwater, FL Cross County Mall ..... 7,211 1971 08/79 5 - 40 years Mattoon, IL Cullman ............... 1,161 1979 02/79 7 - 40 years Cullman, AL Harbor Plaza .......... 1,703 1979 09/81 7 - 40 years Aurora, CO Katella Plaza ......... 2,124 1971 12/80 7 - 40 years Orange, CA Regency Point ......... 2,513 1982 06/84 5 - 40 years Jacksonville, FL Southern Palms ........ 9,759 1981 03/83 5 - 40 years Tempe, AZ Westwood .............. 2,780 1980 10/83 5 - 40 years -------- Tallahassee, FL $223,791 ========
- ---------------------- (1) The aggregate cost for financial statement purposes approximates that for federal tax purposes. (2) Does not include discounts and mortgages payable totaling $13,781 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. (4) Cross-collateralized securing a $15.0 million loan. Additional security of the Partnership's interest in GCLP. 73 74 SCHEDULE III (Continued) NATIONAL REALTY, L.P. REAL ESTATE AND ACCUMULATED DEPRECIATION
1997 1996 1995 --------- --------- --------- (dollars in thousands) Reconciliation of Real Estate Balance at January 1 ........................ $ 447,968 $ 442,439 $ 451,572 Acquisitions and improvements ........... 5,004 5,529 5,705 Sales ................................... (17,757) -- (14,838) --------- --------- --------- Balance at December 31, ..................... $ 435,215 $ 447,968 $ 442,439 ========= ========= ========= Reconciliation of Accumulated Depreciation Balance at January 1, ....................... $ 223,204 $ 212,957 $ 210,037 Depreciation ............................ 10,338 10,247 10,268 Sales ................................... (9,751) -- (7,348) --------- --------- --------- Balance at December 31, ..................... $ 223,791 $ 223,204 $ 212,957 ========= ========= =========
74 75 SCHEDULE IV NATIONAL REALTY, L.P. MORTGAGE LOANS ON REAL ESTATE December 31, 1997
Final Interest Maturity Description Rate Date Periodic Payment Terms - ------------------- -------- -------- --------------------------------------------- FIRST MORTGAGE LOAN Dallas Parkway Properties, Inc......... 14.00% 08/99 Monthly interest only. Secured by an office building in Addison, TX. Frisco Eldorado Partners, L.L.C........ 15.00% 07/98 Monthly interest only. Secured by 92.637 acres of undeveloped land in Frisco, TX. Highway 544 Partners, L.P.............. 18.00% 04/99 Quarterly interest only at 12% per annum, with Secured by 49 acres of undeveloped deferred interest paid annually in April. land in Plano, TX, a pledge of 100% of the partnership interest and the personal guarantee of the owner of Highway Partner's general partner. Hunt................................... 10.00% 09/98 Monthly interest only. Secured by residential property in Addison, TX. JNC Enterprises, Ltd................... 16.00% 06/98 Monthly interest only. Secured by 81.99 acres of unimproved land in Frisco, TX. Stratford & Graham Developers, L.L.C... 15.00% 07/99 All principal and interest due at maturity Secured by 1,485 acres of undeveloped or upon sale. land in Riverside County, CA. WRAPAROUND MORTGAGE LOANS Warner Creek........................... 9.50% 11/02 Monthly interest only at pay rates ranging from Secured by apartments in 6.9% to 10.5%. Prepayment with 30 days notice, Woodland Hills, CA. penalty of 3.00%. Bridgeview............................. 9.00% 02/00 Monthly interest only. May prepay up to 25% Secured by shopping center in to of the wrap equity upon 60 days written notice La Crosse, WI. 9.50% without penalty. OTHER 14875 Landmark......................... 12.00% 12/99 Monthly interest only. Secured by a pledge of partnership interest in Landmark which owns commercial real estate in Addison, TX.
Principal Amount of Carrying Amounts Loans Subject to Prior Face Amount of Mortgage Net Delinquent Principal Description Liens of Mortgage of Discount(1) or Interest - ------------------- -------- ----------- ---------------- -------------------- (dollars in thousands) FIRST MORTGAGE LOAN Dallas Parkway Properties, Inc......... $ 1,965 $ 2,800 $ 2,800 $ -- Secured by an office building in Addison, TX. Frisco Eldorado Partners, L.L.C........ --(2) 800 800 -- Secured by 92.637 acres of undeveloped land in Frisco, TX. Highway 544 Partners, L.P.............. --(2) 1,500 1,450 -- Secured by 49 acres of undeveloped land in Plano, TX, a pledge of 100% of the partnership interest and the personal guarantee of the owner of Highway Partner's general partner. Hunt................................... -- 240 240 -- Secured by residential property in Addison, TX. JNC Enterprises, Ltd................... --(2) 3,500 3,500 -- Secured by 81.99 acres of unimproved land in Frisco, TX. Stratford & Graham Developers, L.L.C... -- 3,450 3,450 -- Secured by 1,485 acres of undeveloped land in Riverside County, CA. WRAPAROUND MORTGAGE LOANS Warner Creek........................... 11,309 17,503 17,450 -- Secured by apartments in Woodland Hills, CA. Bridgeview............................. 2,472 5,500 5,391 -- Secured by shopping center in La Crosse, WI. OTHER 14875 Landmark......................... --(2) 1,152 1,152 -- Secured by a pledge of partnership interest in Landmark which owns commercial real estate in Addison, TX.
75 76 SCHEDULE IV (Continued) NATIONAL REALTY, L.P. MORTGAGE LOANS ON REAL ESTATE December 31, 1997
Final Interest Maturity Description Rate Date Periodic Payment Terms - ------------------- -------- -------- --------------------------------------------- Other - Continued Bordeaux Investments........................ 14.00% 01/99 Monthly interest only at 12%, with deferred Secured by (i) a 100% limited partnership interest paid annually in December. interest in Bordeaux, which owns a shopping center in Oklahoma City, OK; (ii) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of undeveloped land in Oklahoma City, OK; and (iii) the personal guarantees of the Bordeaux partners. Preston/Lomo Alto, L.L.C.................... 12.00% 11/99 Monthly interest only. Secured by a pledge of partnership interests in two partnerships which own commercial property in Dallas and Plano, TX. Tara Summit Square, Inc..................... 12.00% 08/98 Monthly interest only. Secured by a pledge of stock and a second lien on a shopping center in Rhode Island. Ward........................................ 12.00% 12/98 Monthly interest only. Secured by a first lien on an oil, gas and mineral lease in Anderson County, TX and by a second lien on a ranch in Henderson County, TX. Interest receivable Deferred gains Allowance for estimated losses
- --------------------------- (1) The aggregate cost for financial statement purposes approximates that for federal tax purposes. (2) Cross-collateralized securing a $5.0 million note payable.
Principal Amount of Carrying Amounts Loans Subject to Prior Face Amount of Mortgage Net Delinquent Principal Description Liens of Mortgage of Discount(1) or Interest - ------------------- ------- ----------- ---------------- -------------------- (dollars in thousands) Other - Continued Bordeaux Investments........................ $ -- $ 1,274 $ 1,274 $ -- Secured by (i) a 100% limited partnership interest in Bordeaux, which owns a shopping center in Oklahoma City, OK; (ii) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of undeveloped land in Oklahoma City, OK; and (iii) the personal guarantees of the Bordeaux partners. Preston/Lomo Alto, L.L.C.................... --(2) 1,656 1,656 -- Secured by a pledge of partnership interests in two partnerships which own commercial property in Dallas and Plano, TX. Tara Summit Square, Inc..................... -- 475 455 -- Secured by a pledge of stock and a second lien on a shopping center in Rhode Island. Ward........................................ --(2) 700 700 -- Secured by a first lien on an oil, gas and mineral lease in Anderson County, TX and by a second lien on a ranch in Henderson County, TX. ------- ------- -------- -------- $15,746 $40,500 40,318 $ ======= ======= ======== ======== Interest receivable 255 Deferred gains <13,720> Allowance for estimated losses <1,910> -------- $ 24,943 ========
- -------------------- (1) The aggregate cost for financial statement purposes approximates that for federal tax purposes. (2) Cross-collateralized securing a $5.0 million note payable. 76 77 SCHEDULE IV (Continued) NATIONAL REALTY, L.P. MORTGAGE LOANS ON REAL ESTATE
1997 1996 1995 -------- -------- -------- (dollars in thousands) Balance at January 1, ....................... $ 30,908 $ 27,863 $ 29,525 Additions Amortization of discount ................ 34 45 45 Acquisition and settlement of notes receivable ................. -- -- 2,268 Funding of notes receivable ............. 22,898 3,500 -- Deductions Collection of principal ................. (13,522) (500) (3,975) -------- -------- -------- Balance at December 31, ..................... $ 40,318 $ 30,908 $ 27,863 ======== ======== ========
77 78 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.] 78 79 ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued) GENE E. PHILLIPS: Age 60, 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; 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 51, 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. [THIS SPACE INTENTIONALLY LEFT BLANK.] 79 80 ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued) KARL L. BLAHA: Age 50, Executive Vice President - Commercial Asset Management (since July 1997) of SAMI. Executive Vice President- Commercial Asset Management (since July 1997), Executive Vice President and Director of Commercial Management (April 1992 to August 1995) of BCM, CMET, IORI and TCI; Director (since June 1996), President (since October 1993) and Executive Vice President and Director of Commercial Management (April 1992 to October 1993) of ART; Executive Vice President (October 1992 to July 1997) of Carmel Realty, Inc. ("Carmel Realty"), a company owned by First Equity Properties, Inc. ("First Equity"), a company 50% owned by BCM; Director and President (since 1996) of First Equity; Executive Vice President and Director of Commercial Management (April 1992 to February 1994) of NIRT and VPT; Partner - Director of National Real Estate Operations of First Winthrop Corporation (August 1988 to March 1992); Corporate Vice President of Southmark Corporation ("Southmark") (April 1984 to August 1988); and President of Southmark Commercial Management (March 1986 to August 1988). BRUCE A. ENDENDYK: Age 49, Executive Vice President (since January 1995) of SAMI. President (since January 1995) of 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; 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. THOMAS A. HOLLAND: Age 55, 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). 80 81 ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued) 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 1997. 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." The directors and principal officers of BCM are set forth below.
MICKEY N. PHILLIPS: Director RYAN T. PHILLIPS: Director RANDALL M. PAULSON: President KARL L. BLAHA: Executive Vice President - Commercial Asset Management BRUCE A. ENDENDYK: Executive Vice President THOMAS A. HOLLAND: Executive Vice President and Chief Financial Officer A. CAL ROSSI, JR.: Executive Vice President COOPER B. STUART: Executive Vice President CLIFFORD C. TOWNS, JR.: Executive Vice President - Finance
81 82 ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued)
DAN S. ALLRED: Senior Vice President - Land Development 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 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 82 83 ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued) 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 51, 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. RONALD T. BAKER: Age 50, 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. The case was dismissed in 1997. JOSEPH S. RADOVSKY: Age 54, member (since July 1992) of the Oversight Committee. Partner with Greene Radovsky Maloney and Share LLP, 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 83 84 ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued) 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. Raymond V. J. Schrag and Willie K. Davis resigned from the Fairness Committee in February 1995 and August 1995, respectively. 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 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, 1997. 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. 84 85 ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued) Mr. Reidler received $4,000 in 1997 for serving on the Partnership's Audit Committee. Messrs. Kelly, Baker and Radovsky each received $50,000 in 1997 for serving on the Oversight Committee. See ITEM 10. "GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER." Pursuant to the Resolution Agreement, Invenex, of which Mr. Baker is a principal, will receive $15,000 per month from December 1997 until the earlier of the date the properties are transferred to the class entity or the Resolution Agreement is terminated. The Partnership shall also reimburse Invenex for its reasonable costs and expenses incurred in negotiating and completing the transaction contemplated under the Resolution Agreement, conducting due diligence, inspecting properties and retaining experts. [THIS SPACE INTENTIONALLY LEFT BLANK.] 85 86 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, 1992 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.
1992 1993 1994 1995 1996 1997 THE PARTNERSHIP 100.00 126.47 161.10 200.33 253.43 477.92 DJ EQUITY MARKET INDEX 100.00 109.95 110.76 152.49 187.63 251.34 DJ REAL ESTATE INDEX 100.00 117.07 111.35 137.60 184.73 220.96
86 87 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 6, 1998. 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 6,323,437 units of limited partner interest outstanding at March 6, 1998. 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 6, 1998. Percent of Name of Beneficial Owner Number of Units Units (1) - ----------------------------- --------------- ---------- SAMLP, the general 3,731,444 (2) 59.0% partners of SAMLP, and the executive officers and directors of SAMI as a group (4 individuals) - ----------------------------- (1) Percentage is based upon 6,323,437 units of limited partner interest outstanding as of March 6, 1998. (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 in, each of National Realty and the Operating Partnership. Southmark 87 88 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued) Certain Business Relationships (Continued) 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, Mr. Phillips with a combined 1.95% general and limited partner interest and SAMI with .10% general partner interest. 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. Karl L. Blaha, Executive Vice President - Commercial Asset Management of SAMI, was Corporate Vice President of Southmark from April 1984 to August 1988 and President of Southmark Commercial Management from March 1986 to August 1988. 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) First Equity, which is 50% owned by BCM, (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, Blaha, 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, Blaha, 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. 88 89 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 nine of the Partnership's commercial properties to Carmel Realty, which is a company owned by First Equity. 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." 89 90 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, 1997, no payments had been received on such note. At December 31, 1997, accrued and unpaid interest on the note totaled $7.2 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, 1997 and 1996 Consolidated Statements of Operations - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Partners' Equity (Deficit) - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995 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. 90 91 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.
91 92 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 Agreement for Establishment of Class Distribution Fund and Election of Successor General Partner dated December 15, 1997, among National Realty, L.P., Syntek Asset Management, L.P., National Realty, L.P. Oversight Committee, Joseph B. Moorman, Invenex and Moorman Class Counsel (incorporated by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K, dated December 15, 1997).
(b) Reports on Form 8-K A Current Report on Form 8-K, dated December 15, 1997, was filed with respect to Item 5. "Other Events" and Item 7. "Financial Statements and Exhibits" which reports the Agreement for Establishment of Class Distribution Fund and Election of Successor General Partner. 92 93 \ 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 26, 1998 ------------------------------ Randall M. Paulson Director and President /s/ Gene E. Phillips General Partner of March 26, 1998 - --------------------------------- Syntek Asset Management, L.P. Gene E. Phillips
93 94 NATIONAL REALTY, L.P. EXHIBITS TO ANNUAL REPORT ON FORM 10-K For the Year Ended December 31, 1997
Exhibit Number Description Page - ------- ----------------- ------ 11.0 Computation of Earnings Per Unit. 95 21.0 Subsidiaries of the Registrant. 96 27.0 Financial Data Schedule 97
94 EX-11.0 2 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11.0 NATIONAL REALTY, L.P. COMPUTATION OF EARNINGS PER UNIT
For the Years Ended December 31, -------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (dollars in thousands, except per unit) Income (loss) before extraordinary gain ....................................... $ 8,718 $ (375) $ 3,797 Less - General Partners' 1.99%) interest ................................... 173 (7) 76 ----------- ----------- ----------- Income (loss) allocable to Limited Partners ................................... $ 8,545 $ (368) $ 3,721 =========== =========== =========== Earnings per unit Net income (loss) ............................. $ 1.35 $ (.06) $ .58 =========== =========== =========== Weighted average units of limited partner interest used in computing earnings per unit .......................... 6,327,418 6,387,270 6,418,104 =========== =========== ===========
95 EX-21.0 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.0 SUBSIDIARIES OF THE REGISTRANT 1. National Operating, L.P., a Delaware limited partnership. 2. Brookview NLP, Inc.; Covered Bridge NLP, Inc.; Four Seasons NLP, Inc.; Harbor Plaza NLP, Inc.; Mallard Subsidiary Corporation; Marina Playa NLP, Inc.; NLP Equity Lending, Inc.; National Melrose, 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 Equity Lending I, Ltd., a Texas 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. 96 EX-27.0 4 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 17,180 2,814 26,853 1,910 0 0 435,215 223,791 279,580 0 339,102 0 0 0 (122,275) 279,580 0 112,875 0 64,620 10,338 0 34,189 8,718 0 8,718 0 0 0 8,718 1.35 1.35
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