-----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, CvlKkheqF2ic756Bcf5ySAqb5OhRCfQN6ub4Yt7xkTpuLmUTS40knDfXkCvyuc0D m/BdpuZaJJk8bVwleC6jhw== 0000950134-98-004346.txt : 19980515 0000950134-98-004346.hdr.sgml : 19980515 ACCESSION NUMBER: 0000950134-98-004346 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 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-Q SEC ACT: SEC FILE NUMBER: 001-09648 FILM NUMBER: 98620674 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-Q 1 FORM 10-Q FOR QUARTER ENDED MARCH 31, 1998 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED MARCH 31, 1998 ---------------- 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 Office) (Zip Code) (214) 692-4700 --------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Units of Limited Partner Interest 6,323,438 - --------------------------------- ------------------------------- (Class) (Outstanding at April 30, 1998) 1 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The accompanying Consolidated Financial Statements have not been audited by independent certified public accountants, but in the opinion of the management of National Realty, L.P., all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of consolidated results of operations, consolidated financial position and consolidated cash flows at the dates and for the periods indicated, have been included. NATIONAL REALTY, L.P. CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1998 1997 ------------ ------------ (dollars in thousands) Assets Real estate held for investment Land ......................................................... $ 46,732 $ 48,738 Buildings and improvements ................................... 382,711 386,477 ------------ ------------ 429,443 435,215 Less - accumulated depreciation .............................. (223,688) (223,791) ------------ ------------ 205,755 211,424 Real estate under contract for sale, net of accumulated depreciation ($2,626 in 1998) .................... 3,412 -- Notes and interest receivable, net of deferred gains of $13,720 in 1998 and 1997 ............................ 30,842 26,853 Less - allowance for estimated losses ........................ (1,910) (1,910) ------------ ------------ 28,932 24,943 Cash and cash equivalents ....................................... 10,771 17,180 Accounts receivable ............................................. 4,104 3,327 Prepaid expenses ................................................ 955 1,069 Escrow deposits and other assets (including $296 in 1998 and $267 in 1997 from affiliates) .................... 6,356 6,597 Marketable equity securities of affiliate, at market ....................................................... 2,887 2,814 Deferred financing costs ........................................ 11,361 12,226 ------------ ------------ $ 274,533 $ 279,580 ============ ============
The accompanying notes are an integral part of these Consolidated Financial Statements. 2 3 NATIONAL REALTY, L.P. CONSOLIDATED BALANCE SHEETS - Continued
March 31, December 31, 1998 1997 ------------ ------------ (dollars in thousands) Liabilities and Partners' Equity (Deficit) Liabilities Notes and interest payable .............................. $ 337,658 $ 339,102 Accrued property taxes .................................. 5,745 6,906 Accounts payable and other liabilities .................. 4,942 3,163 Tenant security deposits ................................ 3,231 7,242 ------------ ------------ 351,576 356,413 Commitments and contingencies Redeemable General Partner Interest ........................ 45,442 45,442 Partners' equity (deficit) General Partner ......................................... 2,832 2,822 Limited Partners (6,323,438 units in 1998 and 1997) ................................................ (78,317) (78,024) Unrealized gain on marketable equity securities of affiliate ......................................... 2,617 2,544 ------------ ------------ (72,868) (72,658) Less - Redeemable General Partner Interest .............. (49,617) (49,617) ------------ ------------ (122,485) (122,275) $ 274,533 $ 279,580 ============ ============
The accompanying notes are an integral part of these Consolidated Financial Statements. 3 4 NATIONAL REALTY, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, ----------------------------------- 1998 1997 --------------- --------------- (dollars in thousands, except per unit) Revenues Rents ................................................... $ 28,258 $ 27,720 Interest ................................................ 1,320 839 --------------- --------------- 29,578 28,559 Expenses Interest ................................................ 8,711 8,521 Depreciation ............................................ 2,523 2,464 Property taxes and insurance ............................ 2,846 3,018 Utilities ............................................... 3,015 3,156 Property-level payroll costs ............................ 1,656 1,672 Repairs and maintenance ................................. 5,914 5,662 Other operating expenses ................................ 1,191 1,153 Property management fees ................................ 1,209 1,193 General and administrative .............................. 2,005 1,947 --------------- --------------- 29,070 28,786 --------------- --------------- Net income (loss) .......................................... $ 508 $ (227) =============== =============== Earnings per unit Net income (loss) ....................................... $ .08 $ (.04) =============== =============== Weighted average units of limited partner interest used in computing earnings per unit ..................... 6,323,438 6,319,884 =============== ===============
The accompanying notes are an integral part of these Consolidated Financial Statements. 4 5 NATIONAL REALTY, L.P. CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT) FOR THE THREE MONTHS ENDED MARCH 31, 1998
Accumulated Redeemable Other General Partners' General Limited Comprehensive Partner Equity Partner Partners Income Interest (Deficit) ----------- ----------- ----------- ----------- ----------- (dollars in thousands, except per unit) Balance, January 1, 1998 ........... $ 2,822 $ (78,024) $ 2,544 $ (49,617) $ (122,275) Comprehensive Income Unrealized gain on marketable equity securities of affiliate.. -- -- 73 -- 73 Net income ....................... 10 498 -- -- 508 ----------- 581 Distributions ($.125 per unit) ... -- (791) -- -- (791) ----------- ----------- ----------- ----------- ----------- Balance, March 31, 1998 ............ $ 2,832 $ (78,317) $ 2,617 $ (49,617) $ (122,485) =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these Consolidated Financial Statements. 5 6 NATIONAL REALTY, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, ------------------------------ 1998 1997 ------------ ------------ (dollars in thousands) Cash Flows From Operating Activities Rents collected ......................................... $ 27,480 $ 27,958 Interest collected ...................................... 1,004 601 Interest paid ........................................... (7,724) (7,236) Payments for property operations ........................ (16,687) (16,574) General and administrative expenses paid ................ (3,687) (2,572) ------------ ------------ Net cash provided by operating activities ............ 386 2,177 Cash Flows From Investing Activities Real estate improvements ................................ (266) (627) Funding of notes receivable ............................. (3,804) (5,156) ------------ ------------ Net cash (used in) investing activities .............. (4,070) (5,783) Cash Flows From Financing Activities Payments on mortgage notes payable ...................... (1,407) (1,419) Deposits on pending financings .......................... (500) -- Receipt from escrow ..................................... -- 12,423 Deferred financing costs ................................ (27) (1,117) Exercise of warrants .................................... -- 20 Distributions to unitholders ............................ (791) (632) ------------ ------------ Net cash provided by (used in) financing activities ........................................ (2,725) 9,275 ------------ ------------ Net increase (decrease) in cash and cash equivalents ....................................... (6,409) 5,669 Cash and cash equivalents at beginning of period ........... 17,180 5,872 ------------ ------------ Cash and cash equivalents at end of period ................. $ 10,771 $ 11,541 ============ ============ Reconciliation of net income (loss) to net cash provided by operating activities Net income (loss) .......................................... $ 508 $ (227) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation ............................................ 2,523 2,464 Decrease in other assets ................................ 114 3,992 (Increase) in interest receivable ....................... (184) (127) (Decrease) increase in interest payable ................. (37) 538 (Decrease) in other liabilities ......................... (2,538) (4,463) ------------ ------------ Net cash provided by operating activities ............ $ 386 $ 2,177 ============ ============ Schedule of noncash financing activities Unrealized gain on marketable equity securities of affiliate ......................................... $ 73 $ 2,006
The accompanying notes are an integral part of these Consolidated Financial Statements. 6 7 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The accompanying Consolidated Financial Statements of National Realty, L.P. and consolidated entities (the "Partnership") have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the three month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information, refer to the Consolidated Financial Statements and Notes thereto included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10- K"). NOTE 2. EARNINGS PER UNIT Net income (loss) per unit of limited partner interest (per "unit") is presented in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share". Net income (loss) per unit is computed based upon the weighted average number of units outstanding during each period. The limited partners of National Realty, L.P. ("National Realty") have a 99% interest and the general partner, Syntek Asset Management, L.P. (the "General Partner" or "SAMLP"), has an aggregate 1% interest in the net income, net loss and distributions of National Realty. National Realty is allocated 99% of the net income or net loss of National Operating, L.P. ("NOLP" or the "Operating Partnership"), and the General Partner is allocated an aggregate 1% of the net income or net loss of the Operating Partnership. The 1% General Partner interest in each of National Realty and the Operating Partnership is equal to a 1.99% interest on a combined basis. Accordingly, net income (loss) per unit is derived by dividing 98.01% of the net income (loss) in each period by the respective weighted average units of limited partner interest. NOTE 3. NOTES RECEIVABLE During the first quarter of 1998, the Partnership funded a total of $3.4 million of a $3.9 million loan commitment to Centura Tower, Ltd. The loan is secured by 2.244 acres of undeveloped land in Dallas, Texas. The loan bears interest at 12.0% per annum, requires monthly payments of interest only and matures in January 2003. In April 1998, the Partnership funded an additional $111,000. In March 1998, the Partnership funded $162,000 of a $2.2 million loan commitment to Varner Road Partners, L.L.C. The loan is currently secured by a contract to purchase 129.77 acres of land in Riverside County, California and when fully funded, will be secured by the land and a pledge of the stock of the borrower. The loan bears interest at 7 8 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. NOTES RECEIVABLE (Continued) 15.0% per annum and matures in September 1999. All principal and interest are due at maturity. In April 1998, the Partnership funded an additional $250,000. In 1997, the Partnership funded a total of $1.3 million of a $1.5 million loan commitment 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 on December 15, annually, and matures in January 1999. Through April 1998, an additional $74,000 was funded and the loan was modified, increasing the principal balance to $1.4 million. The Partnership has committed to fund an additional $93,000, 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 15, 1997 deferred interest payment in January 1998. NOTE 4. REAL ESTATE AND DEPRECIATION 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, which provided such partner with an option to purchase the Partnership's 75% interest in Southern Palms Associates. The 25% general partner exercised his option in May 1998. NOTE 5. INCOME TAXES No federal or state income taxes have been provided for in the accompanying Consolidated Statements of Operations as the partners include their share of Partnership income or loss in their respective tax returns. For income or loss allocation purposes, limited partners are allocated their proportionate share of income or loss commencing with the calendar month subsequent to their entry into the Partnership. NOTE 6. 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. 8 9 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 6. LEGAL PROCEEDINGS (Continued) and defendants Robert A. McNeil, National Realty, the Operating Partnership, SAMLP, Gene E. Phillips and William S. Friedman, and Shearson Lehman Hutton Inc., successor-in-interest to defendant E.F. Hutton & Company Inc., relating to the action entitled Moorman, et al. v. Southmark Corporation, et al. Such action was filed on September 2, 1987, in the Superior Court of the State of California, County of San Mateo. On May 9, 1990, the Partnership agreed to settle such action pursuant to the terms of a written agreement (the "Moorman Settlement Agreement"). On June 29, 1990, after a hearing as to its fairness, reasonableness and adequacy, the Moorman Settlement Agreement was granted final court approval. The Moorman Settlement Agreement is complex and the following summary is qualified in its entirety by reference to the text thereof, which was previously included as an exhibit to the Partnership's Form 10-Q for the quarter ended March 31, 1990, as filed with the Securities and Exchange Commission. The Moorman Settlement Agreement provides for a plan (the "Moorman Settlement Plan") consisting of, among other things, the following: (i) the appointment and operation of a committee (the "Oversight Committee"), to oversee the implementation of the Moorman Settlement Plan, (ii) the appointment and operation of an audit committee having a majority of members unaffiliated with Messrs. Phillips and Friedman or SAMLP, (iii) the establishment of specified annually increasing targets described below (each a "Target") for each of the next five years through May 1995, relating to the price of the units of limited partner interest as decreased for certain distributions to unitholders, (iv) an agreement by SAMLP not to seek reimbursement of greater than $500,000 per year for Messrs. Phillips' and Friedman's salaries for serving as general partners of SAMLP, (Mr. Friedman resigned as general partner of SAMLP effective March 4, 1994) and a deferral of such payments until such time as a Target may be met, and, if SAMLP resigns as General Partner, a waiver of any compensation so deferred, (v) a deferral until such time as a Target may be met of certain future annual General Partner compensation payable, pursuant to the Partnership's governing documents, to SAMLP or its affiliates, and, if SAMLP resigns as General Partner, a waiver of any compensation so deferred, (vi) the required distribution to unitholders of all the Partnership's operating cash flow in excess of certain renovation costs, unless the Oversight Committee approves alternative uses for such operating cash flow, (vii) the issuance of Warrants to purchase an aggregate of up to 2,019,579 units (the "Warrants") to Class Members, (viii) the contribution by certain co-defendants of cash and notes 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 9 10 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 6. LEGAL PROCEEDINGS (Continued) of certain settlement costs, including plaintiffs' attorneys' fees in the amount of $3.4 million. The Moorman Settlement Plan remains in effect until SAMLP has resigned as General Partner and a successor general partner is elected and takes office, and the Warrants remained exercisable for five years from the date of issuance and expired on February 14, 1997. Prior to their expiration a total of 1,631 Warrants were exercised for the purchase of 1,226 units. SAMLP, on behalf of itself and its general partners, has made the payments of $2.5 million (including accrued interest), to the Partnership, as required by the Moorman Settlement Agreement. If Targets are not met for any two successive years of the Moorman Settlement Plan or for the final year of the Moorman Settlement Plan, SAMLP will be required to withdraw as General Partner effective at the time a successor general partner is elected. Upon, among other things, the withdrawal of SAMLP as General Partner and the due election and taking office of a successor, the Moorman Settlement Plan would terminate. The Targets for the first and second anniversary dates were not met. Since the Targets were not met for two successive years, the Moorman Settlement Agreement requires that SAMLP resign as General Partner, effective upon the election and qualification of its successor. On July 8, 1992, SAMLP notified the Oversight Committee of the failure to meet the Target for two successive years. Upon, among other things, the withdrawal of SAMLP as General Partner and the due election and taking office of a successor, the Moorman Settlement Plan will terminate. Withdrawal of SAMLP as General Partner pursuant to the Moorman Settlement Agreement requires unitholders to elect a successor general partner by majority vote. Upon the withdrawal or removal of the General Partner without the selection of a successor, the Partnership would be dissolved. 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 10 11 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 6. LEGAL PROCEEDINGS (Continued) "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 March 31, 1998) plus all accrued but unpaid interest ($7.5 million at March 31, 1998) on the note receivable from SAMLP for its capital contribution to the Partnership. In the accompanying Consolidated Financial Statements, the Redeemable General Partner Interest is shown as a reduction of Partners' Equity. The note receivable from the General Partner has been offset against the Redeemable General Partner Interest. The Oversight Committee previously has informed the Partnership that it calculated the amount of such Redeemable General Partner Interest to be less than the amount calculated by the Managing General Partner. When SAMLP withdraws as General Partner of the Partnership, the value of the Redeemable General Partner Interest would depend on the fair value of the Partnership's assets at the time of calculation and there can be no assurance that the Redeemable General Partner Interest, fees and other compensation payable on any such withdrawal will not be substantially higher or lower than any current estimate or calculation. On January 27, 1995, National Realty, SAMLP, the Oversight Committee and William H. Elliott executed an Implementation Agreement which provides for the nomination of an entity controlled by Mr. Elliott as successor general partner and for the resolution of all related matters under the Moorman Settlement. On February 20, 1996, the parties to the Implementation Agreement executed an Amended and Restated Implementation Agreement. On September 23, 1996, the Supervising Judge entered an order granting tentative approval of the Amended and Restated Implementation Agreement and the form of notice to be sent to the original class members. 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 11 12 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 6. LEGAL PROCEEDINGS (Continued) 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 June 8, 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. 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. 12 13 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 6. LEGAL PROCEEDINGS (Continued) 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 June 8, 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. NOTE 7. SUBSEQUENT EVENTS At March 31, 1998, the Brookview Apartments, a 156 unit apartment complex in Smyrna, Georgia, was under contract for sale for $4.5 million. In April 1998, the Partnership completed the sale receiving $432,000 in net cash after the payment of various closing costs associated with the sale with the purchaser assuming the existing $4.0 million mortgage. The Partnership paid a real estate brokerage commission of $180,000 to Carmel Realty, Inc. ("Carmel Realty"), an affiliate of the Partnership's Managing General Partner, based on the $4.5 million sales price of the property. The Partnership will recognize a gain of approximately $2.9 million on the sale. Also at March 31, 1998, the Creekwood Apartments, a 300 unit apartment complex in College Park, Georgia, was under contract for sale for $5.5 million. In April 1998, the Partnership completed the sale receiving $884,000 in net cash after the payment of various closing costs associated with the sale with the purchaser assuming the existing $4.6 million mortgage. The Partnership paid a real estate brokerage commission of $166,000 to Carmel Realty based on the $5.5 million sales price of the property. The Partnership will recognize a gain of approximately $2.8 million on the sale. Further in April 1998, the Partnership sold 338 acres of undeveloped land in Granby, Colorado, for $800,000 in cash. The Partnership received net cash of $792,000 after the payment of various closing costs associated with the sale. The Partnership paid a real estate brokerage commission of $24,000 to Carmel Realty based on the $800,000 sales price of the property. The Partnership will recognize a gain of approximately $750,000 on the sale. [THIS SPACE INTENTIONALLY LEFT BLANK.] 13 14 ITEM 2. 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 properties 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. Liquidity and Capital Resources Cash and cash equivalents aggregated $10.8 million at March 31, 1998 compared to $17.2 million at December 31, 1997. The principal reasons for this decrease in cash are discussed in the paragraphs below. The Managing General Partner of the Partnership's 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 March 31, 1998, the aggregate loan-to-value ratio of the Partnership's real estate portfolio was 44.8%, computed on the basis of the ratio of total property-related debt to aggregate appraised values as of December 31, 1997, as compared with a loan-to-value ratio of 43.4% at December 31, 1997. The Partnership's principal sources of cash flow have been and will continue to be from property operations and externally generated funds. Externally generated funds include borrowings, proceeds from the sale of Partnership properties and other assets and proceeds from the issuance of debt secured by Partnership properties or mortgage notes receivable. The Partnership expects that its cash on hand, 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. In November 1992, in conjunction with the transfer of the net assets of 52 apartment complexes and a wraparound note receivable to GCLP, such 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) assets were refinanced under a $223 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 the first quarter of 1998, the Partnership received distributions from GCLP totaling $1.4 million compared to distributions totaling $786,000 received during the first quarter of 1997 (excluding proceeds from the released credit enhancement escrow, as described below). In January 1997, GCLP replaced the credit enhancement escrow with a $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 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. During the first quarter of 1998, the Partnership funded a total of $3.4 million of a $3.9 million loan commitment to Centura Tower, Ltd. The loan is secured by a mortgage on 2.244 acres of land in Dallas, Texas. In April 1998, the Partnership funded an additional $111,000. In 1997, the Partnership funded a total of $1.3 million of a $1.5 million loan commitment 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. Through April 1998, an additional $74,000 was funded and the loan was modified, increasing the principal balance to $1.4 million. The Partnership has committed to fund an additional $93,000, 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 March 1998, the Partnership funded $162,000 of a $2.2 million loan commitment to Varner Road Partners, L.L.C. The loan, when fully funded, will be secured by a mortgage on 129.77 acres of land in Riverside County, California and a pledge of stock of the borrower. In April 1998, the Partnership funded an additional $250,000. On March 31, 1998, the Partnership paid its quarterly distribution, $.125 per unit, or a total of $791,000, to unitholders of record on March 13, 1998. The Partnership's net cash flow from property operations (rents collected less payments for property operating expenses) decreased from 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) $11.4 million for the three months ended March 31, 1997 to $10.8 million for the three months ended March 31, 1998. The decrease is due to the sales of one apartment complex and three commercial properties subsequent to March 31, 1997. As discussed in NOTE 6. "LEGAL PROCEEDINGS," the Moorman litigation settlement agreement (the "Moorman Settlement Agreement") sets forth certain aggressive, annually increasing targets relating to the price of the Partnership's units of limited partner interest which were not met, resulting in, among other things, the required withdrawal of the 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 March 31, 1998) plus all accrued and unpaid interest ($7.5 million at March 31, 1998) 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 Balance Sheets, the Redeemable General Partner Interest is shown as a reduction in Partners' Equity and the note receivable from the General Partner has been offset against the Redeemable General Partner Interest. On January 27, 1995, National Realty, SAMLP, the Oversight Committee and William H. Elliott executed an Implementation Agreement which provides for the nomination of a successor general partner and for the resolution of all related matters under the Moorman Settlement. On February 20, 1996, the parties to the Implementation Agreement executed an Amended and Restated Implementation Agreement. 16 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) 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 June 8, 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 17 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) 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 June 8, 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. Results of Operations The Partnership reported net income of $508,000 for the three months ended March 31, 1998 as compared to a net loss of $227,000 for the three months ended March 31, 1997. The primary factors contributing to the Partnership's improvement in operating results are discussed in the following paragraphs. Rents increased to $28.3 million for the three months ended March 31, 1998 from $27.7 million for the three months ended March 31, 1997. This increase is primarily due to increased rental rates at the Partnership's apartments and commercial properties partially offset by a decrease of $797,000 due to the sales of one apartment complex and three commercial properties subsequent to March 31, 1997. Rents are expected to continue to increase during the remainder of 1998. Interest income increased from $839,000 for the three months ended March 31, 1997 to $1.3 million for the three months ended March 31, 1998. This increase is attributable to loans funded in 1997. Interest income for the remaining quarters of 1998 is expected to be comparable to that of the first quarter. Interest expense, depreciation, property taxes and insurance, utilities, property level payroll, repairs and maintenance, other property operation expenses, property management fees and general and administrative expenses for the three months ended March 31, 1998 all approximated those for the comparable period in 1997. Tax Matters National Realty is a publicly traded limited partnership and, for federal income tax purposes, all income or loss generated by the 18 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Tax Matters (Continued) 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. Inflation The effects of inflation on the Partnership's operations are not quantifiable. Revenues from property operations generally 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. To the extent that inflation affects interest rates, the Partnership's earnings from short-term investments and the cost of new borrowings as well as the cost of its variable rate borrowings will be affected. 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 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. Year 2000 The Managing General Partner has advised the Partnership that its current computer software has been certified by the Information Technology Association of America ("ITAA") as year 2000 compliant. The Managing General Partner 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. [THIS SPACE INTENTIONALLY LEFT BLANK.] 19 20 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See NOTE 6. "LEGAL PROCEEDINGS - Moorman Settlement," of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in PART I for information relating to legal proceedings. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
Exhibit Number Description - ------- ---------------------------------------------------- 11.0 Computation of Earnings Per Unit 27.0 Financial Data Schedule
(b) Reports on Form 8-K: None. 20 21 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 Managing General Partner: SYNTEK ASSET MANAGEMENT, INC. Date: May 14, 1998 By: /s/ Randall M. Paulson ------------------------- ------------------------------- Randall M. Paulson President Date: May 14, 1998 By: /s/ Thomas A. Holland ------------------------- ------------------------------- Thomas A. Holland Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 21 22 NATIONAL REALTY, L.P. EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the Quarter ended March 31, 1998
Exhibit Number Description - ------- ---------------------------------------------------- 11.0 Computation of Earnings Per Unit 27.0 Financial Data Schedule
EX-11 2 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.0 NATIONAL REALTY, L.P. A DELAWARE LIMITED PARTNERSHIP Computation of Earnings Per Unit
Three Months Ended March 31, ------------------------------- 1998 1997 ------------- ------------- (dollars in thousands, except per unit) Net income (loss) .......................................... $ 508 $ (227) Less - General Partner's 1.99% Interest ................. 10 (5) ------------- ------------- Net income (loss) allocable to Limited Partner ............. $ 498 $ (222) ============= ============= Earnings Per Unit Net income (loss) ....................................... $ .08 $ (.04) ============= ============= Weighted average units of limited partner interest used in computing earnings per unit ..................... 6,323,438 6,319,884 ============= =============
EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JAN-01-1998 MAR-31-1998 10,771 2,887 30,842 1,910 0 0 435,481 226,314 274,533 0 337,658 0 0 0 (122,485) 274,533 0 28,258 0 15,831 2,523 0 8,711 508 0 508 0 0 0 508 0.08 0.08
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