<PAGE> 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, 1993
Commission File Number 0-9211
NATIONAL INCOME REALTY TRUST
(Exact Name of Registrant as Specified in Its Charter)
California 94-2537061
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3878 Oak Lawn Avenue, Suite 300, Dallas, Texas 75219
(Address of Principal Executive Offices) (Zip Code)
(214) 522-9909
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Shares of Beneficial Interest, no par value
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)
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
--- ---
As of March 11, 1994, the Registrant had 3,088,663 shares of beneficial
interest outstanding. Of the total shares outstanding, 2,181,796 were held by
other than those who may be deemed to be affiliates, for an aggregate value of
$27,272,450 based on the last trade as reported on the National Association of
Securities Dealers Automated Quotation system on March 11, 1994. 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.
- This Report Contains No Exhibits -
- Page 1 of 95 -
<PAGE> 2
INDEX TO
ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I
------
Item 1. Business........................................... 3
Item 2. Properties......................................... 6
Item 3. Legal Proceedings.................................. 19
Item 4. Submission of Matters to a Vote of Security
Holders......................................... 20
PART II
-------
Item 5. Market for Registrant's Shares of Beneficial
Interest and Related Shareholder Matters........ 21
Item 6. Selected Financial Data............................ 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 23
Item 8. Financial Statements and Supplementary Data........ 31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 67
PART III
--------
Item 10. Trustees, Executive Officers and Advisor of the
Registrant...................................... 67
Item 11. Executive Compensation............................. 82
Item 12. Security Ownership of Certain Beneficial Owners and
Management...................................... 85
Item 13. Certain Relationships and Related Transactions..... 88
PART IV
-------
Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K............................. 92
Signature Page................................................. 95
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
General
National Income Realty Trust (the "Trust" or the "Registrant") is a California
business trust organized pursuant to a declaration of trust dated October 31,
1978, and amended and restated as of June 15, 1987 (as amended through the date
hereof, the "Declaration of Trust"). The Trust commenced operations on March
27, 1979. The Trust elected to be treated as a Real Estate Investment Trust
("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986,
as amended. The Trust has, in the opinion of the Trust's management, qualified
for federal taxation as a REIT for each year subsequent to December 31, 1978.
The Trust's real estate at December 31, 1993 consisted of 35 properties held
for investment, three partnerships reported on the equity method (owning 33
industrial buildings, two office buildings and a 300 unit apartment property)
and 9 properties held for sale. During 1993, the Trust obtained two of the
properties held for sale through foreclosure. The Trust's real estate and
mortgage loan portfolios are more fully described in ITEM 2. "PROPERTIES".
Business Plan and Investment Policy
The Trust's business and only industry segment is investing in equity interests
in real estate through direct acquisitions, partnerships and, to a lesser
extent, financing real estate and real estate related activities through
mortgage loans, including first, wraparound and junior mortgage loans. The
Trust's real estate investments are located throughout the continental United
States, with concentrations in Florida, California, Texas, Maryland and
Colorado. Information regarding the real estate and mortgage notes receivable
portfolios of the Trust is set forth in ITEM 2. "PROPERTIES" and in Schedules
XI and XII to the Consolidated Financial Statements included at ITEM 8.
"FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA".
The Trust's business is not seasonal. The Trust has determined to pursue a
balanced investment policy, seeking both current income and capital
appreciation. The Trust's plan of operation is to continue to make long-term
equity investments in real estate, with an emphasis on older, middle market,
multifamily properties. The type of investments made by the Trust will depend
upon the availability of suitable investment opportunities. In general, the
Trust intends to be an aggressive and opportunistic investor, focusing on the
leveraged acquisition of 10 to 30 year old apartment complexes. Geographically,
the acquisitions are expected to be concentrated in areas in which the Trust
presently owns property. In addition to apartments, on a highly selected
basis, the Trust is considering investing in one or more hotel properties. The
Trust will also continue to seek to sell selected assets where the obtainable
prices justify their disposition. With respect to properties
3
<PAGE> 4
ITEM 1. BUSINESS (Continued)
Business Plan and Investment Policy (Continued)
acquired through foreclosure, the Trust intends to enhance the value of such
properties through renovations and, if possible, to finance such properties
with first mortgages. The Trust also intends to pursue its rights vigorously
with respect to mortgage notes that are in default.
Management of the Trust
Although the Trust's Board of Trustees is directly responsible for managing the
affairs of the Trust and for setting the policies which guide it, the
day-to-day operations of the Trust are performed by a contractual advisor under
the supervision of the Trust's Board of Trustees. From March 1989 until March
31, 1994, Basic Capital Management, Inc. ("BCM" or the "Advisor") performed
such services. The duties of the advisor include, among other things,
locating, investigating, evaluating and recommending real estate and mortgage
note investment and sales opportunities, as well as financing and refinancing
sources, for the Trust. The advisor also serves as a consultant in connection
with the business plan and investment policy decisions made by the Trust's
Board of Trustees.
William S. Friedman, the President and a Trustee of the Trust, served as the
President of BCM until May 1, 1993. BCM is beneficially owned by a trust for
the benefit of the children of Gene E. Phillips. Mr. Phillips served as a
Trustee of the Trust until December 31, 1992. Messrs. Phillips and Friedman
served as directors of BCM until December 22, 1989, and Mr. Phillips served as
Chief Executive Officer of BCM until September 1, 1992. BCM is more fully
described in ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT - The Advisor".
BCM has provided advisory services to the Trust since March 28, 1989. Renewal
of the Trust's advisory agreement with BCM was approved by the Trust's
shareholders at the Trust's last annual meeting of shareholders held on April
26, 1993, as required by Section 4.2 of the Trust's Declaration of Trust. BCM
has resigned as advisor to the Trust effective March 31, 1994. BCM also serves
as advisor to Continental Mortgage and Equity Trust ("CMET"), Income
Opportunity Realty Trust ("IORT") and Transcontinental Realty Investors, Inc.
("TCI"). All of the Trustees of the Trust, except for John A. Doyle, William
S. Friedman and Carl B. Weisbrod, are also directors or trustees of CMET, IORT
and TCI. Mr. Phillips is also a general partner and until March 4, 1994, Mr.
Friedman was a general partner of the general partner of National Realty, L.P.
("NRLP"). BCM performs certain administrative functions for NRLP and National
Operating, L.P. ("NOLP"), the operating partnership of NRLP, on a
cost-reimbursement basis. BCM also serves as advisor to American Realty Trust,
Inc. ("ART"). Messrs. Phillips and Friedman served as executive officers and
directors of ART until November 16, 1992 and December 31, 1992, respectively.
On February 10, 1994, the Trust's Board of Trustees selected Tarragon Realty
Advisors, Inc. ("Tarragon") to replace BCM as the Trust's advisor. Commencing
April 1, 1994, Tarragon will provide advisory
4
<PAGE> 5
ITEM 1. BUSINESS (Continued)
Management of the Trust (Continued)
services to the Trust under an advisory agreement as discussed in ITEM 10.
"TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR TO THE REGISTRANT - The Advisor."
Mr. Friedman serves as director and Chief Executive Officer of Tarragon.
Tarragon is owned by Lucy N. Friedman, Mr. Friedman's wife, and Mr. Doyle, who
serves as Director, President and Chief Operating Officer of Tarragon and
Trustee and Executive Vice President of the Trust. Mr. Friedman's family owns
approximately 30% of the outstanding shares of the Trust.
Tarragon also serves as advisor to Vinland Property Trust ("VPT"). All of the
trustees of VPT serve as Trustees of the Trust.
Commencing April 1, 1994, Tarragon will provide property management services to
the Trust. Tarragon intends to subcontract with other entities for the
provision of much of the property-level management services to the Trust. From
February 1, 1990 through March 31, 1994, affiliates of BCM provided property
management services to the Trust.
Through March 31, 1994, affiliates of BCM also received real estate brokerage
commissions in accordance with the terms of a non-exclusive brokerage
agreement as discussed in ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR TO
THE REGISTRANT - The Advisor."
Competition
The Trust has no employees. Employees of the Advisor render services to the
Trust.
The real estate business is highly competitive and the Trust competes with
numerous entities engaged in real estate activities (including certain entities
described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Related
Party Transactions"), some of which may have greater financial resources than
those of the Trust. The Trust's management 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 and industrial 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
Trust's management believes that general economic conditions and trends and new
properties in the vicinity of each of the Trust's properties are also
competitive factors.
To the extent that the Trust seeks to sell any of its real estate portfolio,
the sales price for such properties may be affected by competition from
governmental and financial institutions seeking to liquidate foreclosed
properties.
5
<PAGE> 6
ITEM 1. BUSINESS (Continued)
Competition (Continued)
As described above and in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Related Party Transactions", most of the Trustees of the Trust
also serve as officers, directors or trustees of CMET, IORT, TCI, VPT and
Tarragon. The Trust's Trustees owe fiduciary duties to such other entities as
well as to the Trust under applicable law. In determining to which entity a
particular investment opportunity will be allocated, the trustees or directors
and Tarragon consider the respective investment objectives of each such entity
and the appropriateness of a particular investment in light of each such
entity's existing real estate and mortgage notes receivable portfolios. To the
extent that any particular investment opportunity is appropriate to more than
one of such entities, such investment opportunity will be allocated to the
entity which has had uninvested funds for the longest period of time or, if
appropriate, the investment may be shared among all or some of such entities.
In addition, also as described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Certain Business Relationships", the Trust also competes with
other entities which may have investment objectives similar to the Trust's and
that may compete with the Trust in purchasing, selling, leasing and financing
real estate and real estate related investments. In resolving any potential
conflicts of interest which may arise, Tarragon has informed the Trust that it
intends to exercise its best judgment as to what is fair and reasonable under
the circumstances in accordance with applicable law.
Certain Factors Associated with Real Estate and Related Investments
The Trust is subject to all the risks incident to ownership and financing of
real estate and interests therein, many of which relate to the general
illiquidity of real estate investments. These risks include, but are not
limited to, changes in general or local economic conditions, changes in
interest rates and the availability of permanent mortgage financing which may
render the acquisition, 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 and other acts of God and other factors
beyond the control of the Trust or the Advisor. The illiquidity of real estate
investments generally may impair the ability of the Trust to respond promptly
to changing circumstances. The Trust's management believes that such risks are
partially mitigated by the diversification by geographic region and property
type of the Trust's real estate and mortgage notes receivable portfolios.
However, to the extent new equity investments and mortgage lending are
concentrated in any particular region, the advantages of geographic
diversification may be mitigated.
ITEM 2. PROPERTIES
The Trust's principal offices are located at One Turtle Creek, 3878 Oak Lawn
Avenue, Suite 300, Dallas, Texas 75219. In the opinion of the
6
<PAGE> 7
ITEM 2. PROPERTIES (Continued)
Trust's management, the Trust's offices are adequate for its present
operations.
Details of the Trust's real estate and mortgage notes receivable portfolios at
December 31, 1993, are set forth in Schedules XI and XII, 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 Trust's real estate and mortgage notes receivable portfolios.
The Trust's real estate portfolio consists of properties held for investment
(which includes direct equity investments and partnerships) and properties held
for sale, primarily obtained through foreclosure of mortgage notes receivable.
The discussion set forth below under the heading "Real Estate" provides certain
summary information concerning the Trust's real estate and further summary
information with respect to the portion of the Trust's real estate which
consists of properties held for investment, the portion which consists of
investments in partnerships and the portion which consists of properties held
for sale.
At December 31, 1993, only the Century Centre II Office Building, with a
carrying value of $24.5 million, accounted for 10% or more of the Trust's total
assets. At December 31, 1993, 85% of the Trust's assets consisted of
investments in real estate, 6% consisted of investments in partnerships and 6%
consisted of mortgage notes and interest receivable. The remaining 3% of the
Trust's assets at December 31, 1993, were cash, cash equivalents and other
assets. It should be noted, however, that the percentage of the Trust's
assets invested in any one category is subject to change and no assurance can
be given that the composition of the Trust's assets in the future will
approximate the percentages listed above.
At December 31, 1993, the Trust held mortgage notes receivable secured by real
estate located in several geographic regions of the continental United States,
with a concentration in the Southeast, as shown more specifically in the table
under "Mortgage Loans" below. The Trust's real estate is also geographically
diverse. At December 31, 1993, the Trust held investments in apartments and
commercial real estate in each of the geographic regions of the continental
United States, although its apartments are concentrated in the Southeast, as
shown more specifically in the table under "Real Estate" below.
To continue to qualify for federal taxation as a REIT under the Internal
Revenue Code of 1986, as amended, the Trust will, among other things, be
required to hold at least 75% of the value of its total assets in real estate
assets, government securities, cash and cash equivalents at the close of each
quarter of each taxable year.
7
<PAGE> 8
ITEM 2. PROPERTIES (Continued)
Geographic Regions
The Trust has divided the continental United States into the following six
geographic regions.
Northeast region comprised of the states of Connecticut, Delaware, Maine,
Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania,
Rhode Island and Vermont, and the District of Columbia.
Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia.
Southwest region comprised of the states of Arizona, Arkansas, Louisiana, New
Mexico, Oklahoma and Texas.
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.
Mountain region comprised of the states of Colorado, Idaho, Montana, Nevada,
Utah and Wyoming.
Pacific region comprised of the states of California, Oregon and Washington.
Real Estate
At December 31, 1993, 85% of the Trust's assets were invested in real estate
located throughout the continental United States. The Trust's real estate
portfolio consists of properties held for investment, investments in
partnerships, properties held for sale, primarily obtained through foreclosure
of mortgage notes receivable, and an investment in the equity securities of
CMET, a REIT advised by BCM.
Types of Real Estate Investments. The Trust's real estate consists of
apartments and commercial properties, primarily office buildings and shopping
centers, or similar properties having established income-producing
capabilities. In selecting real estate, the location, age and type of
property, gross rentals, lease terms, financial and business standing of
tenants, operating expenses, fixed charges, land values and
8
<PAGE> 9
ITEM 2. PROPERTIES (Continued)
physical condition are considered. The Trust may acquire properties subject
to, or assume, existing debt and may mortgage, pledge or otherwise obtain
financing for a portion of its real estate. The Trust's Board of Trustees may
alter the types of and criteria for selecting new equity investments and for
obtaining financing without a vote of shareholders to the extent such policies
are not governed by the Declaration of Trust.
Although the Trust has typically invested in developed real estate, the Trust
may invest in new construction or development either directly or in partnership
with affiliated or unaffiliated partners. To the extent that the Trust invests
in construction and development projects, the Trust would be subject to
business risks, such as cost overruns and delays, associated with such high
risk activities.
At December 31, 1993, the Trust was making significant capital improvements to
five of its properties, the Dunhill/Devonshire, Huntington Green and Lakepointe
Apartments and the Emerson Center and Rancho Sorrento Office Buildings.
In the opinion of the Trust's management, the real estate owned by the Trust is
adequately covered by insurance.
The following table sets forth the percentages, by property type and geographic
region, of the Trust's real estate (other than the unimproved land and a
single-family residence described below) at December 31, 1993.
<TABLE>
<CAPTION>
Commercial
Region Apartments Properties
--------- ---------- ----------
<S> <C> <C>
Northeast.................... 10.9% - %
Southeast.................... 38.0 33.6
Southwest.................... 16.6 12.0
Midwest...................... 10.1 30.1
Mountain..................... 17.8 3.8
Pacific...................... 6.6 20.5
------ ------
100.0% 100.0%
</TABLE>
The foregoing table is based solely on the number of apartment units and amount
of commercial square footage owned by the Trust and does not reflect the value
of the Trust's investment in each region. The Trust also owns one parcel of
unimproved land of 46.27 acres located in the Southeast region and one
single-family residence located in the Southwest region. See Schedule XI to
the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA" for a more detailed description of the Trust's real
estate portfolio.
(THIS SPACE INTENTIONALLY LEFT BLANK.)
9
<PAGE> 10
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
A summary of activity in the Trust's owned real estate portfolio during 1993 is
as follows:
<TABLE>
<S> <C>
Owned properties in real estate portfolio
at January 1, 1993......................................... 43
Properties obtained through foreclosure...................... 2
Property sold................................................ (1)
---
Owned properties in real estate portfolio
at December 31, 1993....................................... 44
</TABLE>
(THIS SPACE INTENTIONALLY LEFT BLANK.)
10
<PAGE> 11
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Properties Held for Investment. Set forth below are the Trust's properties
held for investment and monthly rental rate for apartments and the average
annual rental rate for commercial properties and occupancy thereof at December
31, 1993 and 1992:
<TABLE>
<CAPTION>
Monthly
Rent Per
Square Foot Occupancy
Units/ --------------- --------------
Property Location Square Footage 1993 1992 1993 1992
- -------------------- -------------- --------------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Apartments
- ----------
Bayfront Houston, TX 200 units/
172,720 sq. ft. $ .54 $ .51 97% 95%
Bay West Bradenton, FL 299 units/
323,774 sq.ft. .48 .47 92% 75%
Carlyle Towers Detroit, MI 162 units/
244,800 sq. ft. .51 .50 88% 94%
Cornell Los Angeles, CA 55 units/
30,375 sq. ft. 1.11 1.11 84% 95%
Creekwood North Altomonte Springs, FL 180 units/
166,500 sq.ft. .52 .50 89% 74%
Cross Creek Lexington, KY 144 units/
98,190 sq.ft. .69 .66 93% 85%
Diamond Loch Fort Worth, TX 138 units/
135,126 sq. ft. .48 .47 92% 89%
Dunhill/Devonshire Denver, CO 480 units/
336,000 sq. ft. .52 .44 55% 39%
Fenway Hall Los Angeles, CA 52 units/
27,175 sq. ft. 1.03 1.01 92% 92%
Flannery House Baton Rouge, LA 120 units/
143,450 sq. ft. .35 .33 92% 97%
Heather Hills Temple Hills, MD 459 units/
401,229 sq. ft. .85 .85 95% 95%
Kirklevington Lexington, KY 126 units/
99,080 sq. ft. .56 .54 92% 95%
Palm Court Miami, FL 144 units/
125,280 sq. ft. .62 .57 97% 97%
Park Dale Gardens Dallas, TX 224 units/
205,240 sq. ft. .44 .41 88% 96%
Pheasant Pointe Sacramento, CA 215 units/
178,666 sq. ft. .70 .70 87% 95%
Pinecrest Ft. Lauderdale, FL 323 units/
226,065 sq. ft. 1.03 .96 92% 96%
Plaza Hills Kansas City, MO 66 units/
60,855 sq. ft. .63 .57 100% 97%
Prado Bay Miami, FL 123 units/
109,756 sq. ft. .79 .68 95% 98%
Sandstone Denver, CO 288 units/
201,660 sq. ft. .52 .48 97% 99%
Spring Pines Houston, TX 136 units/
118,430 sq. ft. .47 .44 88% 94%
Woodcreek Denver, CO 120 units/
99,612 sq. ft. .64 .60 98% 92%
Woodcreek Jacksonville, FL 260 units/
214,700 sq. ft. .51 .50 93% 95%
</TABLE>
11
<PAGE> 12
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
<TABLE>
<CAPTION>
Annual
Rent Per
Square Foot Occupancy
--------------- --------------
Property Location Square Footage 1993 1992 1993 1992
- -------------------- -------------- --------------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Office Buildings
- ----------------
Century Centre II San Mateo, CA 173,209 sq. ft. $ 17.87 $ 20.98 97% 98%
Emerson Center Atlanta, GA 132,366 sq. ft. 10.88 10.65 42% 55%
NW O'Hare Des Plaines, IL 129,064 sq. ft. 12.27 12.32 64% 66%
Rancho Sorrento San Diego, CA 147,827 sq. ft. 9.54 10.33 70% 71%
Shopping Centers
- ----------------
K-Mart Plaza Charlotte, NC 133,200 sq. ft. 1.74 2.09 100% 100%
K-Mart Kansas City, MO 84,180 sq. ft. 3.06 3.06 100% 100%
K-Mart Temple Terrace, FL 63,887 sq. ft. 3.65 3.65 100% 100%
K-Mart Thomasville, GA 55,552 sq. ft. 2.96 2.96 100% 100%
Lakeview Mall Manitowoc, WI 224,613 sq. ft. 2.16 2.13 69% 89%
Midland Plaza Midland, MI 30,650 sq. ft. 3.38 3.38 100% 100%
Midway Mills Carrollton, TX 73,314 sq. ft. 9.07 8.90 86% 81%
Northside Mall Gainesville, FL 138,325 sq. ft. 4.23 4.17 100% 100%
Southgate Waco, TX 94,675 sq. ft. 4.01 3.99 79% 75%
</TABLE>
Occupancy presented above and throughout this ITEM 2. is without reference to
whether leases in effect are at, below or above market rates.
In June 1993, the Trust obtained first mortgage financing secured by the
Bayfront Apartments in the amount of $2.1 million. The Trust received net cash
of $1.8 million. The remainder of the financing proceeds were used to fund
escrows for replacements and repairs and to pay closing costs associated with
the financing. The Trust paid a 1% mortgage brokerage and equity refinancing
fee of $21,000 to BCM based upon the new first mortgage financing of $2.1
million.
In October 1991, after determining that further investment in the Century
Centre II Office Building could not be justified without a substantial
modification of the mortgage debt, the property was placed in bankruptcy. A
plan of reorganization was filed with the bankruptcy court in March 1993 and
the bankruptcy court confirmed the Plan in November 1993. The confirmed Plan
of Reorganization reduces the interest rate on the $21 million first mortgage
to 1-1/2% above LIBOR, which currently results in an interest rate of 5 1/2%
per annum. The reduced interest rate was retroactively applied as of October
15, 1991. The Plan also extends the note's maturity two years to November
1995, with three consecutive one-year extension options.
Under the Plan, the Trust deposited $1.0 million in cash with the lender to pay
accrued and unpaid interest, 1993 property taxes and all closing costs
associated with the transaction. In 1994, the Trust will be required to
maintain a $200,000 balance in the escrow account with the lender. The Trust
has also pledged one of its properties held for sale, Stewart Square Shopping
Center, as additional collateral on the first mortgage. Also pursuant to the
Plan of Reorganization, the Trust acquired the $7.5 million second mortgage plus
all accrued and unpaid interest of $1.7 million, for $300,000 in cash. The
Trust recognized an extraordinary gain of $8.9 million in connection with the
debt modification and discounted debt purchase.
12
<PAGE> 13
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
In 1990, the Trust ceased making payments on the first mortgage secured by a
portion of the Dunhill/Devonshire Apartments. At the time, the Trust was the
holder and 50% owner of this first mortgage. The other 50% of the mortgage was
owned by a financial institution in receivership, which refused to fund its
share of advances necessary to preserve the value of the property.
Accordingly, the Trust, as mortgage holder, foreclosed on this property and
was, for its own accord, the high bidder at the foreclosure sale. To date, the
Trust has not received an executed release of lien. In lieu of recording a
gain of $1.3 million on this transaction, the Trust has written down the
carrying value of such property by that amount.
The $1.6 million first mortgage secured by the Palm Court Apartments, located
in Miami, Florida, matured in July 1993. Prior to the maturity, the Trust
obtained the lender's written agreement to extend the note. Thereafter, the
lender refused to execute the extension documents and has subsequently rejected
the Trust's tender of mortgage payments in accordance with the extension
agreement. The matter is presently in litigation. If adversely determined,
the Trust is prepared to payoff the mortgage debt.
In January 1994, the Trust obtained first mortgage financing secured by the Bay
West Apartments in the amount of $5.1 million. The Trust received net cash of
$1.0 million after the payoff of $3.9 million in existing debt. The remainder
of the financing proceeds were used to fund escrows for replacements and
repairs and to pay closing costs associated with the financing. The Trust paid
a mortgage brokerage and equity refinancing fee of $51,000 to BCM based upon
the new first mortgage financing of $5.1 million.
In March 1994, the Trust obtained first mortgage financing secured by the
Carlyle Towers Apartments in the amount of $4.5 million. The Trust received
net cash of $2.3 million after the payoff of $2.2 million in existing debt.
The remainder of the financing proceeds were used to fund escrows for
replacements and repairs and to pay closing costs associated with the
financing.
Also in March 1994, the Trust obtained first mortgage financing secured by the
Woodcreek Apartments, located in Denver, Colorado, in the amount of $3.0
million. The Trust received net cash of $1.2 million after the payoff of $1.7
million in existing debt. The remainder of the financing proceeds were used to
fund escrows for replacements and repairs and to pay closing costs associated
with the financing.
Partnership Properties. Set forth below are the Trust's investments in
partnership properties and the average annual rental rate and occupancy thereof
at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
Rent Per
Square Foot Occupancy
---------------- --------------
Property Location Square Footage 1993 1992 1993 1992
- -------------------- -------------- ----------------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Sacramento Nine Rancho Cordova, CA 105,249 sq. ft. $ 10.46 $ 8.00 100% 70%
Adams Properties Dallas, TX 628,803 sq. ft. 2.30 2.15 100% 100%
Associates San Antonio, TX 420,522 sq. ft. 2.00 2.44 100% 91%
Atlanta, GA 1,585,419 sq. ft. 1.92 2.06 91% 94%
Memphis, TN 653,852 sq. ft. 2.04 2.39 79% 80%
</TABLE>
13
<PAGE> 14
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
The Trust, in partnership with CMET, owns Sacramento Nine ("SAC 9"), which
currently owns two office buildings in the vicinity of Sacramento, California.
The Trust has a 70% interest in the partnership. The SAC 9 partnership
agreement requires the consent of both the Trust and CMET for any material
changes in the operations of the partnership's properties, including sales,
refinancings and changes in the property manager. Therefore, the Trust is a
noncontrolling partner and accounts for its investment in the partnership under
the equity method.
The Trustees of the Trust, except for Messrs. Friedman, Doyle and Weisbrod,
also serve as trustees of CMET. BCM, the Trust's advisor until March 31, 1994,
also serves as advisor to CMET. See ITEM 13. "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS".
In April 1993, SAC 9 sold one of its office buildings for $1.2 million. SAC 9
received $123,000 in cash, of which the Trust's equity share was $86,000, after
the payoff of an existing first mortgage with a principal balance of $685,000.
SAC 9 also provided $356,000 of purchase money financing. The note receivable
bears interest at 9% per annum, requires monthly payments of principal and
interest and matures in June 1998. SAC 9 recognized a gain of $59,000 on the
sale, of which the Trust's equity share was $41,000.
In June 1993, SAC 9 sold two other of its office buildings. One was sold for
$1.3 million in cash, of which the Trust's equity share was $910,000. SAC 9
recognized a gain of $437,000 on the sale, of which the Trust's equity share
was $306,000. SAC 9 paid a 3% sales commission of $39,000 to Carmel Realty,
Inc., an affiliate of BCM, ("Carmel Realty") based upon the $1.3 million sales
price of the property.
The other office building was sold for $2.0 million. SAC 9 received $1.1
million in cash, of which the Trust's equity share was $750,000. SAC 9 also
provided $887,000 of purchase money financing. SAC 9 recognized a gain of
$720,000 on the sale, of which the Trust's equity share was $504,000. One note
receivable with a principal balance of $410,000 bears interest at a variable
interest rate, currently 6% per annum, requires monthly interest only payments
and matures in June 1994. A second note receivable, with a principal balance
of $477,000 bears interest at 10% per annum, and all principal and accrued
interest are due at maturity in May 1994. SAC 9 paid a 3% sales commission of
$59,000 to Carmel Realty based upon the $2.0 million sales price of the
property.
The Trust and CMET are also the partners in Income Special Associates ("ISA"),
a joint venture partnership in which the Trust has a 40% partnership interest.
ISA owns a 100% interest in Adams Properties Associates ("APA"). APA owns 33
industrial warehouses. The Trust accounts for its investment in the APA
partnership under the equity method. See ITEM 13. "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS".
In November 1992, the Trust acquired all of the general and limited partnership
interests in Consolidated Capital Properties II ("CCP II"),
14
<PAGE> 15
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
whose assets included a 23% limited partnership interest in English Village
Partners, L.P. ("English Village"). On July 1, 1993, CCP II made an additional
capital contribution to English Village of $464,000 to increase its limited
partnership ownership interest to 49% and to acquire a 1% general partnership
interest in the partnership. The Trust continues to account for its investment
in English Village under the equity method.
Properties Held for Sale. Set forth below are the Trust's properties held for
sale (primarily obtained through foreclosure), except for a single-family
residence, and the monthly rental rate for apartments and the average annual
rental rate for commercial properties and occupancy thereof at December 31,
1993 and 1992:
<TABLE>
<CAPTION>
Rent Per
Square Foot Occupancy
Units/Acres ---------------- ----------------
Property Location Square Footage 1993 1992 1993 1992
- ---------------- ------------------ --------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Apartments
- ----------
Huntington Green West Town, PA 81 units/
80,240 sq. ft. $ .58 $ * 93% *
Lake Highlands Dallas, TX 200 units/
123,335 sq. ft. N/A .43 N/A 52%
Lakepointe Memphis, TN 540 units/
540,160 sq. ft. .39 * 92% *
Shopping Centers
- ----------------
Mountain View Las Vegas, NV 16,092 sq. ft. 12.04 9.57 100% 100%
Stewart Square Las Vegas, NV 39,600 sq. ft. 8.38 7.94 79% 87%
Times Square Lubbock, TX 19,550 sq. ft. 5.63 5.20 55% 56%
Land and Other
- --------------
Orangeburg Anderson, SC 46 acres
Pepperkorn Manitowoc, WI N/A N/A N/A N/A
</TABLE>
________________________
* Property obtained through foreclosure in 1993.
N/A - Not applicable as property is shut down.
In January 1993, the Trust shut down the Lake Highlands Apartments as a result
of a change in zoning of the property. No assurance can be given that the
Trust will be able to operate the property as an apartment complex in the
future. Based on the land value under the current zoning, the Trust does not
anticipate incurring a loss in excess of previously established reserves.
In March 1993, the Trust recorded the insubstance foreclosure of the Lakepointe
Apartments, a 540 unit apartment complex in Memphis, Tennessee. The Lakepointe
Apartments had an estimated fair value (minus estimated costs of sale) of at
least $8.3 million at the date of foreclosure. In connection with this
insubstance foreclosure, the Trust recorded the $6.7 million mortgage payable
secured by the property. The foreclosure resulted in no loss to the Trust in
excess of previously established reserves.
Also in March 1993, the Trust recorded the insubstance foreclosure of the
Huntington Green Apartments, an 81 unit apartment complex in West Town,
Pennsylvania. The Huntington Green Apartments had an estimated
15
<PAGE> 16
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
fair value (minus estimated costs of sale) of at least $1.8 million at the date
of foreclosure. The foreclosure resulted in no loss to the Trust in excess of
previously established reserves.
In 1993, the State of Wisconsin commenced eminent domain proceedings to acquire
the Pepperkorn Building, located in Manitowoc, Wisconsin, for highway
development. The State of Wisconsin's initial offer was $175,000, which is
being appealed by the Trust. There is no assurance that the Trust's appeal
will be successful or of the amount, if any, of additional compensation that it
may receive. However, based on the information presently available, the Trust
does not anticipate incurring any losses in excess of previously established
reserves.
Mortgage Loans
In addition to real estate, a portion of the Trust's assets consist of mortgage
notes, principally secured by income-producing properties including first,
wraparound and junior mortgages. The Trust's investment policy is described in
ITEM 1. "BUSINESS - Business Plan and Investment Policy."
Types of Properties Subject to Mortgages. The types of properties securing the
Trust's mortgage portfolio at December 31, 1993, consisted of office buildings,
apartments, shopping centers, single-family residences, a retirement home and
developed land. To the extent the Declaration of Trust does not control such
matters, the Trust's Board of Trustees may alter the types of mortgages in
which the Trust invests without a vote of the Trust's shareholders. In
addition to restricting the types of collateral and priority of mortgages, the
Declaration of Trust imposes certain restrictions on transactions with related
parties which limits the entities to which the Trust may make a mortgage, as
discussed in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
At December 31, 1993, the Trust's mortgage portfolio included 12 mortgage loans
with an aggregate outstanding balance of $18.1 million, secured by
income-producing properties located throughout the United States, 4 mortgage
loans with an outstanding balance of $437,000 secured by single-family
residences located in the Southwest and Pacific regions of the United States
and one mortgage loan with a carrying value of $856,000 secured by 55 acres of
land located near Sacramento, California. At December 31, 1993, 6% of the
Trust's assets were invested in mortgages (5.1% in first mortgage loans, .2% in
a wraparound mortgage and .7% in junior mortgage loans).
The following table sets forth the percentages (based on the outstanding
mortgage note balance), by both property type and geographic region, of the
properties that serve as collateral for the Trust's outstanding mortgages at
December 31, 1993. The table does not include the $437,000 in single-family
mortgages or the $856,000 mortgage secured by land discussed in the preceding
paragraph. See Schedule XII to the Consoli-
16
<PAGE> 17
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
dated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA" for further details of the Trust's mortgage notes
receivable portfolio.
<TABLE>
<CAPTION>
Commercial
Region Apartments Properties Total
------------ ---------- ---------- -------
<S> <C> <C> <C>
Northeast................... 19.1% - % 19.1%
Southeast................... 2.2 45.8 48.0
Southwest................... 13.0 - 13.0
Midwest..................... - 10.1 10.1
Pacific..................... 1.6 8.2 9.8
------ ------ ------
35.9% 64.1% 100.0%
</TABLE>
A summary of activity in the Trust's mortgage notes receivable portfolio during
1993 is as follows:
<TABLE>
<S> <C>
Loans in mortgage portfolio at January 1, 1993....... 24
Loans foreclosed by the Trust........................ (4)
Loans paid in full................................... (3)
---
Loans in mortgage portfolio at December 31, 1993..... 17
</TABLE>
First Mortgage Loans. The Trust may make first mortgage loans, with either
short, medium or long-term maturities. 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 Trust'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 Trust may grant to other lenders participations in first mortgage
loans originated by the Trust.
The Trust did not originate or acquire any first mortgage loans during 1993.
The following discussion briefly describes the events that affected previously
funded or otherwise acquired first mortgage loans during 1993:
During 1993, the Trust received payment in full, totaling $2.4 million, on
three first mortgages.
At December 31, 1993, two of the Trust's first mortgages were classified as
nonperforming. One note, with an outstanding principal balance of $943,000, is
secured by an apartment complex located in Paris, Texas. The Trust has
obtained a judgment against the maker and guarantors for the amount of this
mortgage. The Trust does not anticipate incurring a loss in excess of
previously established reserves on this note.
17
<PAGE> 18
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
Another nonperforming first mortgage note with a carrying value of $856,000 and
legal balance of $1.2 million at December 31, 1993 is secured by 55 acres of
developed land located near Sacramento, California. The borrower on this note
has recently confirmed a plan of reorganization, and has begun making principal
payments on the note as parcels are sold. In addition, the note was modified
to require monthly interest only payments at 9%, increasing to 24% until
maturity in February 1999. The Trust does not anticipate incurring a loss on
this note as the estimated value of the property is in excess of the total debt
on the property.
As discussed in "Real Estate" above, in March 1993, the Trust recorded the
insubstance foreclosure of the Huntington Green Apartments, an apartment
complex which secured a $2.4 million first mortgage. The foreclosure resulted
in no loss to the Trust in excess of previously established reserves. See
"Real Estate" above.
Wraparound Mortgage Loans. The Trust may invest in wraparound mortgage loans
on real estate subject to prior mortgage indebtedness. A wraparound mortgage
loan is a mortgage loan having an original principal amount equal to the
outstanding balance under the prior existing mortgage plus the amount actually
advanced under the wraparound mortgage loan.
Wraparound mortgage loans may provide for full, partial or no amortization of
principal. The Trust's policy is to make wraparound mortgage loans in amounts
and on properties as to which it would otherwise make first mortgage loans.
The Trust did not originate or acquire any wraparound mortgage loans in 1993.
The following discussion briefly describes the events that affected previously
funded or otherwise acquired wraparound mortgage loans during 1993.
As part of the Trust's 1992 acquisition of the general and limited partnership
interests in CCP II, the Trust received a wraparound mortgage note secured by
the Plaza Jardin, an office building located in El Toro, California. In May
1993, the Trust foreclosed on the property securing the note receivable.
Immediately following the foreclosure, the Trust sold the property for $200,000
in cash, subject to the $3.3 million underlying mortgage debt. The Trust
recognized a $94,000 gain on the sale of the property.
Junior Mortgage Loans. The Trust may invest in junior mortgage loans. Such
loans are 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. The Trust's Declaration of
Trust restricts investment in junior mortgage loans, excluding wraparound
mortgage loans, to not more than 10% of the Trust's assets. At December 31,
1993, .7% of the Trust's assets were invested in junior mortgage loans.
18
<PAGE> 19
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
The Trust did not originate or acquire any junior mortgage loans in 1993.
As discussed in "Real Estate" above, in March 1993, the Trust recorded the
insubstance foreclosure of the Lakepointe Apartments, an apartment complex
which secured a $3.8 million junior mortgage loan. The foreclosure resulted in
no loss to the Trust in excess of previously established reserves.
At December 31, 1993, four of the Trust's junior mortgages were classified as
nonperforming.
A nonperforming junior mortgage note with a principal balance of $256,000 at
December 31, 1993 is secured by a retirement center in Tuscon, Arizona. The
borrower on this note, Eldercare Housing Foundation ("Eldercare"), is currently
in bankruptcy. The Trust does not anticipate incurring losses on this note in
excess of previously established reserves. Ted P. Stokely, a Trustee of the
Trust, was employed as a real estate consultant for Eldercare from April 1992
to December 1993.
The three remaining nonperforming junior mortgage notes have an aggregate
principal balance of $1.3 million and were acquired in a package of similar
loans in 1991. All three loans are secured by shopping centers net leased to a
major national tenant. The Trust is currently negotiating a settlement of
these loans with the owners. The Trust expects that such settlement will not
result in any loss in excess of previously established reserves.
Equity Investment in REIT
In December 1990, the Trust's Board of Trustees, based on the recommendation of
its Related Party Transaction Committee, authorized the purchase of up to $1.0
million of the shares of beneficial interest of CMET through negotiated or open
market transactions. The Trustees of the Trust, except for Messrs. Friedman,
Doyle and Weisbrod, are also trustees of CMET. BCM, the Trust's advisor, also
serves as advisor to CMET. BCM resigned as advisor to the Trust effective
March 31, 1994. At December 31, 1993, the Trust owned 54,500 shares of
beneficial interest of CMET which it had purchased through open market
transactions in 1990 and 1991, at a total cost to the Trust of $250,000. At
December 31, 1993, the market value of such shares was $702,000. Pursuant to an
amendment to the Trust's Declaration of Trust approved by the Trust's
shareholders, the Trust may hold the shares of CMET until July 30, 1996.
ITEM 3. LEGAL PROCEEDINGS
Securities and Exchange Commission Inquiry
On December 1, 1988, the Trust was informed in writing that the staff of the
Securities and Exchange Commission (the "Commission") had made a preliminary
determination to recommend administrative proceedings
19
<PAGE> 20
ITEM 3. LEGAL PROCEEDINGS (Continued)
Securities and Exchange Commission Inquiry (Continued)
against the Trust, CMET and Consolidated Capital Equities Corporation, among
others, for various alleged reporting violations in public filings made during
certain periods in 1985, and possibly other matters. The allegations relate to
a time prior to the time when the Trust's current management and Advisor or any
of its personnel became associated with the Trust. No administrative
proceeding was ever commenced and due to the lapse of time the Trust's
management believes there will be no further activity involving this matter.
Olive Litigation
In February 1990, the Trust, together with CMET, IORT and TCI, three real
estate entities with the same officers, directors or trustees and advisor as
the Trust at the time, entered into a settlement of a class and derivative
action entitled Olive et al. v. National Income Realty Trust et al., relating
to the operation and management of each of such entities. On April 23, 1990,
the court granted final approval of the terms of the settlement. By agreeing
to settle these actions, the defendants, including the Trust, did not and do
not admit any liability whatsoever.
An evidentiary hearing was held in February and April 1993 concerning
allegations by the plaintiffs that the terms of the settlement had been
breached by the Trust, CMET, IORT and TCI. No determination on the matters has
been made by the court pending the outcome of ongoing settlement discussions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
(THIS SPACE INTENTIONALLY LEFT BLANK.)
20
<PAGE> 21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND
RELATED SHAREHOLDER MATTERS
The Trust's shares of beneficial interest are traded in the over-the-counter
market on the National Association of Securities Dealers Automated Quotation
("NASDAQ") system using the symbol "NIRTs". Over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commissions
and may not necessarily represent actual transactions. The following table
sets forth the high and low bid quotations as reported by the NASDAQ system:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------------ ---------- ---------
<S> <C> <C>
March 31, 1994................................. $ 13 1/2 $ 12 1/4
(through March 11, 1994)
March 31, 1993................................. 8 5 1/8
June 30, 1993.................................. 8 3/4 7 3/4
September 30, 1993............................. 13 7 1/2
December 31, 1993.............................. 14 3/4 12 1/4
March 31, 1992................................. 7 3/4 7
June 30, 1992.................................. 7 3/4 6 3/4
September 30, 1992............................. 7 1/8 6 3/8
December 31, 1992.............................. 6 7/8 5
</TABLE>
As of March 11, 1994, the closing price of the Trust's shares of beneficial
interest on the NASDAQ system was $12.50 per share.
As of March 11, 1994, the Trust's shares of beneficial interest were held by
7,443 holders of record.
Based on the performance of the Trust's properties, the Trust's Board of
Trustees, at their July 1993 meeting, voted to resume regular quarterly
distributions. The distributions paid in 1993 were as follows:
<TABLE>
<CAPTION>
Date Declared Record Date Payable Date Amount
- ------------- ---------------- ---------------- ------
<S> <C> <C> <C>
July 1, 1993 August 16, 1993 September 1, 1993 $ .10
October 29, 1993 December 6, 1993 December 21, 1993 $ .10
</TABLE>
In addition, on July 1, 1993, the Trust's Board of Trustees approved the
payment of a 10% stock dividend, which was paid on September 1, 1993 to
shareholders of record on August 16, 1993.
No distributions were declared or paid in 1992.
On December 5, 1989, the Trust's Board of Trustees approved a program for the
Trust to repurchase its shares of beneficial interest. The Trust's Board of
Trustees has authorized the Trust to repurchase a total of 1,026,667 of its
shares of beneficial interest pursuant to such program. As of March 11, 1994,
the Trust had repurchased 849,631 shares pursuant to such program at a cost to
the Trust of $6.7 million.
21
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------- ------------ ------------ ------------- -------------
(dollars in thousands, except per share)
<S> <C) <C> <C> <C> <C)
EARNINGS DATA
Income.................. $ 36,357 $ 30,047 $ 28,137 $ 29,487 $ 28,312
Expense................. (40,370) (38,361) (33,890) (39,237) (36,252)
------------ ------------ ------------ ------------- -------------
(Loss) before gain on
sale of real estate
and extraordinary
gain............... (4,013) (8,314) (5,753) (9,750) (7,940)
Gain on sale of
real estate........ 945 - 462 5,934 -
Extraordinary gain...... 8,888 - 2,170 686 -
------------- ------------ ------------ ------------- -------------
Net income (loss)....... $ 5,820 $ (8,314) $ (3,121) $ (3,310) $ (7,940)
============= ============ ============ ============= =============
FUNDS FROM OPERATIONS(1) $ 1,385 $ (958) $ (751) $ (335) $ 2,301
EARNINGS PER SHARE DATA
(Loss) before gain on
sale of real estate
and extraordinary
gain.................. $ (1.24) $ (2.33) $ (1.53) $ (2.50) $ (1.96)
Gain on sale of
real estate........... .29 - .12 1.52 -
Extraordinary gain...... 2.75 - .58 .18 -
------------- ------------ ------------ ------------- -------------
Net income (loss)....... $ 1.80 $ (2.33) $ (.83) $ (.80) $ (1.96)
============= ============ ============ ============= =============
Distributions........... $ .20 $ - $ 2.11 $ .33 $ .72
Weighted average shares
outstanding........... 3,227,053 3,566,563 3,756,097 3,895,242 4,057,910
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------- ------------ ------------ ------------- -------------
(dollars in thousands, except per share)
<S> <C) <C> <C> <C> <C>
BALANCE SHEET DATA
Notes and interest
receivable........... $ 19,394 $ 30,611 $ 28,870 $ 28,564 $ 42,428
Real estate............. 173,244 167,883 163,980 153,763 143,383
Investments in
partnerships......... 11,804 12,583 17,027 17,213 18,852
Total assets............ 199,486 205,517 202,097 199,434 204,138
Notes, debentures and
interest payable..... 114,351 123,263 108,939 97,363 97,188
Shareholders' equity.... 78,174 74,927 84,933 88,896 102,363
Book value per share.... $ 25.01 $ 22.00 $ 23.23 $ 23.41 $ 25.58
- ------------------------
</TABLE>
(1) Funds from operations is defined as net income (loss) before gains or
losses from the sale of properties and debt restructurings plus
depreciation and amortization. FUNDS FROM OPERATIONS DOES NOT
REPRESENT CASH AVAILABLE TO FUND THE TRUST'S OPERATIONS.
22
<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA (Continued)
Share and per share data have been restated to give effect to the 10% share
distribution declared in July 1993 and the one-for-three reverse share split
effected March 26, 1990.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
National Income Realty Trust (the "Trust") invests in real estate through
acquisitions, leases and partnerships and in mortgages on real estate. The
Trust was organized on October 31, 1978 and commenced operations on March 27,
1979.
Liquidity and Capital Resources
Cash and cash equivalents aggregated $1.1 million at December 31, 1993 compared
with $1.8 million at December 31, 1992. The Trust's principal sources of cash
have been and will continue to be property operations, proceeds from property
sales, the collection of mortgage notes receivable and borrowings. The Trust
expects that funds from operations, collection of mortgage notes receivable and
from anticipated external sources, such as property sales and refinancings,
will be sufficient to meet the Trust's various cash needs, including debt
service obligations, property maintenance and improvements and continuation of
regular distributions, as more fully discussed in the paragraphs below.
The Trust's cash flow from property operations (rentals collected less payments
for property operating expenses) has increased from $10.1 million for 1992 to
$14.4 million for 1993. This increase in cash flow from property operations is
primarily attributable to four apartment complexes purchased in November 1992
and two apartment complexes obtained through foreclosure in March 1993. Cash
flows from property operations decreased from $10.7 million in 1991 to $10.1
million in 1992, primarily attributable to an increase in payments for property
taxes in 1992.
The Trust's interest collected decreased from $3.2 million in 1991 to $2.1
million in 1992 and $1.5 million in 1993. The decrease from 1991 to 1992 is
primarily attributable to interest of $849,000 collected in 1991 on a revolving
loan to National Operating, L.P. ("NOLP"), which was paid in full in September
1991. In addition, $166,000 of the decrease relates to other loans which were
paid in full in 1991 and 1992. Of the decrease from 1992 to 1993, $245,000 is
due to a note which was paid in full in March 1993 and $221,000 is due to
interest payments received in 1992 on a cash flow mortgage, but not received in
1993. Interest collections are expected to continue to decline due to the $2.4
million in loans paid off in 1993.
Interest paid on the Trust's indebtedness increased from $7.7 million in 1992
to $9.3 million in 1993. Of this increase, $1.3 million is due to interest
paid on mortgages secured by properties acquired by the Trust
23
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
during 1992 and 1993 and an additional $723,000 of the increase is attributable
to interest paid on the mortgage secured by the Century Centre II Office
Building, on which the Trust made a $1.0 million payment of accrued interest in
accordance with the confirmed Plan of Reorganization as discussed in NOTE 6.
"NOTES, DEBENTURES AND INTEREST PAYABLE." These increases were partially
offset by a decrease in interest of $314,000 due to the mortgage secured by
Pinecrest Apartments, whose variable interest rate decreased from 1992 to 1993.
An additional decrease of $213,000 is attributable to two mortgages on which
the Trust stopped making payments in 1993 also as discussed in NOTE 6. "NOTES,
DEBENTURES AND INTEREST PAYABLE."
The Trust was not involved in significant investing activities during 1993.
The Trust did however, make $3.1 million of improvements to its properties in
1993. The Trust anticipates making capital improvements to its properties of
approximately $4 million in 1994. The Trust received $410,000 in net cash from
the sale of three foreclosed properties during 1993. In addition, the Trust
also received payment in full on three notes receivable resulting in cash of
$2.4 million. Principal payments of $113,000 on other notes were also
received.
In the second quarter of 1993, Sacramento Nine ("SAC 9"), a joint venture
partnership in which the Trust owns a 70% interest, sold 3 of its office
buildings for $2.5 million in cash, of which the Trust's equity share was $1.7
million.
In October 1992, the Trust borrowed $1.6 million from a bank secured by a $1.6
million unsecured note receivable of the Trust. The note payable was paid in
full on its maturity date in March 1993 from the collection of the note
receivable.
In June 1993, the Trust obtained first mortgage financing secured by the
Bayfront Apartments in the amount of $2.1 million, of which the Trust received
net cash of $1.8 million from the financing proceeds. In January 1994, the
Trust obtained first mortgage financing secured by the Bay West Apartments in
the amount of $5.1 million. The Trust received net cash of $1.0 million after
the payoff of $3.9 million in existing debt. In March 1994, the Trust also
obtained first mortgage financing on both the Carlyle Towers Apartments and the
Woodcreek Apartments totaling $7.5 million. The Trust received net cash of
$3.5 million after the payoff of $4.0 million in existing debt. The Trust
intends to increase its emphasis on obtaining financing or refinancing of its
properties. However, there is no assurance that the Trust will continue to be
successful in its efforts in this regard.
Principal payments on the Trust's notes payable of $11.9 million are due in
1994. Of this amount, $1.6 million relates to a nonrecourse debt which had
matured December 31, 1993. The Trust is currently negotiating a modification
and extension of this debt secured by an apartment complex in Miami, Florida.
However, in the event that the Trust is
24
<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
unsuccessful in extending this note, the Trust is prepared to payoff the
mortgage debt. See NOTE 6. "NOTES, DEBENTURES AND INTEREST PAYABLE."
During 1993, the Trust repurchased 280,038 of its shares of beneficial interest
at a cost of $2.4 million pursuant to the repurchase program originally
announced by the Trust on December 5, 1989. The Trust's Board of Trustees has
authorized the repurchase of a total of 1,026,667 shares under such repurchase
program of which 177,036 shares remain to be purchased as of March 11, 1994.
Based on the performance of the Trust's properties, the Trust's Board of
Trustees voted in July 1993 to resume the payment of regular quarterly
distributions to shareholders. The Trust paid distributions totaling $617,000
($0.20 per share) to its shareholders in 1993, and also paid a 10% stock
dividend to its shareholders in 1993.
On a quarterly basis, the Trust's management reviews the carrying value of the
Trust's mortgages, properties held for investment and properties held for sale.
Generally accepted accounting principles require that the carrying value of an
investment held for sale cannot exceed the lower of its cost or its estimated
net realizable value. In those instances in which estimates of net realizable
value of the Trust's properties are less than the carrying value thereof at the
time of evaluation, a provision for loss is recorded by a charge against
operations. The estimate of net realizable value of the mortgage loans is
based on management's review and evaluation of the collateral properties
securing the mortgage loans. The review generally includes selective property
inspections, a review of the property's current rents compared to market rents,
a review of the property's expenses, a review of the maintenance requirements,
discussions with the manager of the property and a review of the surrounding
area.
Results of Operations
1993 compared to 1992. For the year ended December 31, 1993, the Trust had net
income of $5.8 million, as compared to a net loss of $8.3 million for the year
ended December 31, 1992. The primary factors contributing to the improvement
in the Trust's operating results are discussed in the following paragraphs.
Net rental income (rental income less property operating expenses) increased
from $9.4 million in 1992 to $14.6 million in 1993. Of this increase, $1.3
million is due to four apartment complexes acquired in November 1992 and an
additional $654,000 is due to two apartment complexes obtained through
foreclosure in 1993. An additional $618,000 is due to a decrease in the
amortization of free rent at the Century Centre Office Building and $295,000 is
due to a decrease in replacements at Park Dale Gardens, the renovation of which
was completed in 1992. The remaining increase is due to increased occupancy
and rental rates at
25
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
the Trust's apartment complexes, primarily in the Southeast and Southwest
regions, and overall expense control at certain of the Trust's apartment and
commercial properties.
Interest income decreased from $2.5 million in 1992 to $1.6 million in 1993.
Of this decrease, $553,000 is due to loans which were placed on nonaccrual
status or loans on which the collateral securing the loan was foreclosed in
1993. In addition, a decrease of $245,000 is due to a note which was paid in
full in March 1993 and a decrease of $221,000 is due to interest payments
received in 1993 compared to 1992 on a mortgage where interest is recognized on
the cash flow basis. Interest income is anticipated to decline further in 1994
due to notes which were paid off in 1993.
The Trust's equity in income <losses> of partnerships was income of $204,000 in
1992 compared to a loss of $34,000 in 1993. This decrease in operating results
is primarily due to the sale of three properties by the SAC 9 partnership in
the second quarter of 1993.
Interest expense decreased from $10.4 million in 1992 to $9.7 million in 1993.
A decrease of $1.2 million is attributable to a reduction in the interest rate
on the first mortgage secured by the Century Centre II Office Building and the
purchase of the second mortgage at a significant discount. An additional
decrease of $163,000 is due to a reduction in the variable interest rate on the
note payable secured by Pinecrest Apartments and $414,000 is due to interest
expense on the underlying note payable associated with one of the Trust's
wraparound mortgage notes receivable, which was concurrently foreclosed and
sold in 1993. These decreases were partially offset by an increase of $857,000
due to interest expense recorded on mortgages secured by four apartment
complexes which were acquired in November 1992 and an additional $416,000
attributable to interest expense recorded on the underlying mortgage secured by
a property acquired through foreclosure in March 1993. See NOTE 6. "NOTES,
DEBENTURES AND INTEREST PAYABLE."
Depreciation expense increased from $4.0 million in 1992 to $4.6 million in
1993, primarily due to the acquisition of four apartment complexes in November
1992 and two additional apartment complexes through foreclosure in March 1993.
Advisory fees increased from $1.4 million in 1992 to $1.5 million in 1993, as a
result of increase in the average monthly gross assets of the Trust, calculated
in accordance with the terms of the advisory agreement.
Commencing April 1, 1994, Tarragon Realty Advisors, Inc. ("Tarragon") will
become the Trust's advisor. The terms of the Trust's advisory agreement with
Tarragon are substantially the same as those with Basic Capital Management,
Inc., the Trust's current advisor, except for the annual base advisory fee and
the elimination of the net income fee. If the
26
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Tarragon advisory agreement had been in effect in 1993 the Trust's annual base
advisory fee would have been reduced by approximately $1.0 million. See NOTE
8. "ADVISORY AGREEMENT."
General and administrative expenses decreased from $2.2 million in 1992 to $1.8
million in 1993. Of this decrease, $250,000 is due to a reduction in legal
fees, an additional $123,000 is related to the Trust's March 1992 annual
meeting of shareholders and the February 1992 Rights redemption and $198,000 is
due to a decrease in professional fees related to the reduced level of property
acquisitions in 1993 compared to 1991 and 1992.
For the year 1993, the Trust expensed $1.0 million for the issuance of a $1.0
million convertible subordinated debenture to John A. Doyle, Trustee and
Executive Vice President of the Trust, in exchange for his 10% participation in
the profits of the Consolidated Capital Properties II ("CCP II") assets, which
were acquired in November 1992, over a year before Mr. Doyle's affiliation with
the Trust. This participation was granted as consideration for Mr. Doyle's
services to the Trust in connection with the CCP II portfolio. See NOTE 6.
"NOTES, DEBENTURES AND INTEREST PAYABLE."
For the year 1993, the Trust recorded a provision for losses of $1.4 million to
provide for estimated losses on one of the Trust's properties held for sale and
one of the Trust's first lien mortgage notes. A provision for losses of $2.4
million was recorded in 1992 to reserve against certain junior mortgage notes
receivable.
For the year ended December 31, 1993, the Trust recognized gains on sales of
real estate of $851,000 related to the sale of three properties by SAC 9 and
$94,000 on the sale of the Plaza Jardin Office Building. No gains on sales of
real estate were recognized in 1992.
Also for the year 1993, the Trust recorded an extraordinary gain on the
forgiveness of debt of $8.9 million related to the discounted purchase of the
second lien mortgage secured by Century Centre II Office Building, which was
purchased by the Trust for $300,000 as part of a bankruptcy Plan of
Reorganization. The Trust recorded no extraordinary gain in 1992.
1992 compared to 1991. For the year ended December 31, 1992, the Trust had a
net loss of $8.3 million as compared with a net loss of $3.1 million for the
year ended December 31, 1991. The primary factors contributing to the increase
in the Trust's net loss are discussed in the following paragraphs.
Net rental income (rental income less property operations expenses) increased
from $8.5 million in 1991 to $9.4 million in 1992. Of this increase $1.7
million is the result of net rental income recorded on properties purchased in
1992 and the fourth quarter of 1991 and an
27
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
additional $776,000 is attributable to increased net rental income at Pinecrest
Apartments, where a major renovation was substantially completed during 1992.
In addition, net rental income also increased $800,000 due to increased rental
and occupancy rates at certain of the Trust's apartment complexes, primarily in
the Southeast and Southwest. These increases were partially offset by a
decrease in net rental income of $1.4 million at the Century Centre II Office
Building, attributable to the temporary increases in vacancy coincident with
the bankruptcy filing in October 1991. In addition, net rental income
decreased $279,000 due to the transfer of the Afton Aero Business Park to the
senior lienholder in August 1991, decreased $378,000 due to properties sold
during 1992 and the fourth quarter of 1991 and decreased $340,000 due to a
decrease in occupancy and rental rates at Rancho Sorrento Business Park related
to weakness in the San Diego office market.
Interest income on mortgage receivables decreased from $2.8 million in 1991 to
$2.4 million in 1992. Of this decrease, $415,000 is attributable to interest
recognized in 1991 on a $7.0 million revolving loan to NOLP, which was paid in
full in September 1991. An additional $393,000 is due to interest income not
being recognized on notes receivable classified as nonperforming and $190,000
of the decrease is related to notes which were paid off in 1991 and 1992.
These decreases were partially offset by an increase of $332,000 attributable
to interest income on mortgage loans funded or acquired during 1991 and
$128,000 attributable to a note classified as nonperforming in 1991 which was
brought current in 1992.
Equity in results of operations of partnerships produced income of $204,000 in
1992 as compared to a loss of $171,000 in 1991. The 1991 loss was attributable
to Adams Properties Associates ("APA"), a partnership in which the Trust has a
40% interest, recording a $1.2 million charge against earnings for the
permanent write-down of three of the partnership's warehouses to their
estimated net realizable value. The Trust's equity share of such charge was
$480,000. In addition, SAC 9, a partnership in which the Trust has 70%
interest, recorded a $1.1 million charge against earnings in 1991 relating to a
property which was transferred to the senior lienholder. The Trust's equity
share of such charge was $770,000. Neither partnership incurred similar
charges in 1992.
Interest expense increased from $9.4 million in 1991 to $10.4 million in 1992.
Of this increase, $2.0 million is attributable to interest expense on notes
payable secured by properties which were acquired in 1991 and 1992. This
increase is partially offset by a decrease of $531,000 in the interest accrual
rate, attributable to a decrease in the interest rate, on the Century Centre II
first mortgage, a decrease of $222,000 related to the Afton Aero Business Park,
which was returned to the senior lienholder in August 1991, and a decrease of
$135,000 due to the restructuring of the mortgage secured by Emerson Center,
which emerged from bankruptcy in March 1992.
28
<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
General and administrative expenses decreased from $2.4 million in 1991 to $2.2
million in 1992. This decrease is due to a decrease of $200,000 in legal fees
paid in 1992 in connection with the Olive litigation discussed in NOTE 15.
"COMMITMENTS AND CONTINGENCIES - Olive Litigation." In addition, $104,000 was
recorded in 1991 for the settlement of the adversary proceedings with Southmark
Corporation.
For the year ended December 31, 1992, the Trust recorded a provision for losses
of $2.4 million to reserve against certain junior mortgages. No such provision
for losses was recorded in 1991.
For the year ended December 31, 1991, the Trust reported gains on sales of real
estate of $257,000 related to APA and SAC 9 partnerships and $205,000 on the
sale of Coronado Village Apartments. No gains on sales of real estate were
recognized in 1992.
The Trust also recognized an extraordinary gain on the extinguishment of debt
of $2.2 million for 1991 related to the return of one of the SAC 9 office
buildings to the senior lienholder. None was recorded in 1992.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, the Trust may be potentially liable for removal or remediation
costs, as well as certain other potential costs relating to hazardous or toxic
substances (including governmental fines and injuries to persons and property)
where property-level managers have arranged for the removal, disposal or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos- containing materials into the
air, and third parties may seek recovery from the Trust for personal injury
associated with such materials.
The Trust's management is not aware of any environmental liability relating to
the above matters that would have a material adverse effect on the Trust's
business, assets or results of operations.
Inflation
The effects of inflation on the Trust's operations are not quantifiable.
Revenues from property operations fluctuate proportionately with increases and
decreases in housing costs. Fluctuations in the rate of inflation also affect
the sales values of properties and, correspondingly, the ultimate gains to be
realized by the Trust from property sales. Inflation also has an effect on the
Trust's earnings from short-term investments.
29
<PAGE> 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Tax Matters
For the years ended December 31, 1993, 1992 and 1991, the Trust elected, and in
the opinion of the Trust's management, qualified to be taxed as a Real Estate
Investment Trust ("REIT") as defined under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"). The Code requires a
REIT to distribute at least 95% of its REIT taxable income plus 95% of its net
income from foreclosure property, as defined in Section 857 of the Code, on an
annual basis to shareholders.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has recently issued Statement
of Financial Accounting Standards ("SFAS") No. 114 - "Accounting by Creditors
for Impairment of a Loan", which amends SFAS No. 5 - "Accounting for
Contingencies" and SFAS No. 15 - "Accounting by Debtors and Creditors for
Troubled Debt Restructurings." The statement requires that impaired loans be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate. SFAS No. 114 is effective for fiscal years
beginning after December 15, 1994. The Trust's management has not fully
evaluated the effects of implementing this statement, but expects that they
will not be material as the statement is applicable to debt restructurings and
loan impairments after the earlier of the effective date of the statement or
the Trust's adoption of the statement.
At its January 26, 1994 meeting, the FASB directed its staff to prepare an
exposure draft, that if approved, would eliminate the provisions of SFAS No.
114 that describe how a creditor should recognize income on an impaired loan
and add disclosure requirements on income recognized on impaired loans. The
effective date of SFAS No. 114 is not anticipated to change.
(THIS SPACE INTENTIONALLY LEFT BLANK.)
30
<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants............ 32
Consolidated Balance Sheets -
December 31, 1993 and 1992.................................. 33
Consolidated Statements of Operations -
Years Ended December 31, 1993, 1992 and 1991................ 34
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1993, 1992 and 1991................ 35
Consolidated Statements of Cash Flows -
Years Ended December 31, 1993, 1992 and 1991................ 36
Notes to Consolidated Financial Statements.................... 39
Schedule X - Supplementary Statement of Operations Information 58
Schedule XI - Real Estate and Accumulated Depreciation....... 59
Schedule XII - Mortgage Loans on Real Estate.................. 63
</TABLE>
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.
31
<PAGE> 32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Trustees of
National Income Realty Trust
We have audited the accompanying consolidated balance sheets of National Income
Realty Trust and Subsidiaries as of December 31, 1993 and 1992 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1993. We have also
audited the schedules listed in the accompanying index. These financial
statements and schedules are the responsibility of the Trust's management. 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 our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
National Income Realty Trust and Subsidiaries as of December 31, 1993 and 1992,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles.
Also, in our opinion, the schedules referred to above present fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN
Dallas, Texas
March 25, 1994
32
<PAGE> 33
NATIONAL INCOME REALTY TRUST
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------
1993 1992
------------- -------------
(dollars in thousands)
Assets
------
<S> <C> <C>
Notes and interest receivable
Performing..................................... $ 15,990 $ 18,280
Nonperforming, nonaccruing..................... 3,404 12,331
------------- -------------
19,394 30,611
Real estate held for sale, net of accumulated
depreciation ($2,293 in 1993 and $1,955 in
1992).......................................... 18,496 9,641
Less - allowance for estimated losses........... (11,106) (12,240)
------------- -------------
28,174 28,012
Real estate held for investment, net of
accumulated depreciation ($33,535 in 1993 and
$29,289 in 1992)............................... 154,748 158,242
Investments in partnerships..................... 11,804 12,583
Cash and cash equivalents....................... 1,060 1,750
Investment in marketable equity securities of
affiliate (at market in 1993 and at cost in
1992).......................................... 702 250
Other assets (including $261 in 1993 and $218 in
1992 from affiliates).......................... 4,388 4,680
------------- -------------
$ 199,486 $ 205,517
============= =============
Liabilities and Shareholders' Equity
------------------------------------
Liabilities
Notes, debentures and interest payable.......... $ 114,351 $ 123,263
Other liabilities (including $1,267 in 1993 and
$294 in 1992 to affiliates).................... 6,961 7,327
------------- -------------
121,312 130,590
Commitments and contingencies
Shareholders' equity
Shares of beneficial interest, no par value;
authorized shares, unlimited; issued and
outstanding, 3,126,116 shares in 1993 and
3,132,625 shares in 1992....................... 9,387 9,407
Paid-in capital................................. 274,515 273,896
Accumulated distributions in excess of
accumulated earnings........................... (206,180) (208,376)
Unrealized gains on marketable equity securities 452 -
------------- -------------
78,174 74,927
------------- -------------
$ 199,486 $ 205,517
============= =============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
33
<PAGE> 34
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(dollars in thousands, except per share)
<S> <C> <C> <C>
Income
Rentals............................. $ 34,825 $ 27,373 $ 25,361
Interest (including $415 in 1992
from affiliates).................. 1,566 2,470 2,947
Equity in income (losses) of
partnerships...................... (34) 204 (171)
----------- ----------- -----------
36,357 30,047 28,137
Expenses
Property operations (including
$360 in 1993, $270 in 1992 and
$273 in 1991 to affiliates)....... 20,228 17,935 16,828
Interest............................ 9,734 10,431 9,381
Depreciation........................ 4,639 3,982 3,842
Provision for losses................ 1,390 2,400 --
Profit participation buyout......... 1,000 -- --
Advisory fee to affiliate........... 1,537 1,381 1,486
General and administrative
(including $627 in 1993, $621 in
1992 and $644 in 1991 to
affiliate)........................ 1,842 2,232 2,353
----------- ----------- -----------
40,370 38,361 33,890
----------- ----------- -----------
(Loss) before gain on sale of real
estate and extraordinary gain....... (4,013) (8,314) (5,753)
Gain on sale of real estate........... 945 -- 462
Extraordinary gain.................... 8,888 -- 2,170
----------- ----------- -----------
Net income (loss)..................... $ 5,820 $ (8,314) (3,121)
=========== =========== ===========
Earnings per share
(Loss) before gain on sale of real
estate and extraordinary gain....... $ (1.24) $ (2.33) $ (1.53)
Gain on sale of real estate........... .29 -- .12
Extraordinary gain.................... 2.75 -- .58
----------- ----------- -----------
Net income (loss)..................... $ 1.80 $ (2.33) $ (.83)
=========== =========== ===========
Weighted average shares of beneficial
interest used in computing earnings
per share........................... 3,227,053 3,566,563 3,756,097
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
34
<PAGE> 35
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated Unrealized
Shares of Distributions Gains on
Beneficial Interest in Excess of Marketable
------------------- Paid-in Accumulated Equity Shareholders'
Shares Amount Capital Earnings Securities Equity
------ ------ ------- ------------- ----------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1991................ 3,523,615 $ 10,571 $ 275,266 $ (196,941) $ -- $ 88,896
Repurchase of shares of
beneficial interest. (141,321) (415) (427) -- -- (842)
Net (loss)................. -- -- -- (3,121) -- (3,121)
--------- -------- --------- ---------- ------ --------
Balance, December 31,
1991................ 3,382,294 10,156 274,839 (200,062) -- 84,933
Repurchase of shares of
beneficial interest. (249,669) (749) (840) -- -- (1,589)
Redemption of share
purchase rights..... -- -- (103) -- -- (103)
Net (loss)................ -- -- -- (8,314) -- (8,314)
--------- -------- --------- ---------- ------ --------
Balance, December 31,
1992................ 3,132,625 9,407 273,896 (208,376) -- 74,927
Repurchase of shares of
beneficial interest. (280,038) (840) (1,568) -- -- (2,408)
Cash distributions
($.20 per share).... -- -- -- (617) -- (617)
Share distributions........ 273,529 820 2,187 (3,007) -- --
Unrealized gains on
marketable equity
securities.......... -- -- -- -- 452 452
Net income................. -- -- -- 5,820 -- 5,820
--------- -------- --------- ---------- ------ --------
Balance, December 31,
1993................ 3,126,116 $ 9,387 $ 274,515 $ (206,180) $ 452 $ 78,174
========= ======== ========= ========== ====== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
35
<PAGE> 36
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Rentals collected...................... $ 35,105 $ 28,155 $ 26,221
Interest collected (including $415 in
1991 from affiliates)............... 1,515 2,093 3,224
Interest paid.......................... (9,253) (7,712) (6,872)
Payments for property operations
(including $360 in 1993, $270 in
1992 and $273 in 1991 to affiliates) (20,685) (18,028) (15,553)
General and administrative expenses
paid (including $627 in 1993, $621
in 1992 and $644 in 1991 to
affiliates)......................... (1,412) (2,142) (2,141)
Advisory fee paid to affiliate......... (1,537) (1,454) (1,329)
Distributions from partnerships'
operating cash flow................. -- 1,023 989
Other.................................. 151 (83) (95)
--------- --------- ---------
Net cash provided by operating
activities....................... 3,884 1,852 4,444
Cash Flows from Investing Activities
Acquisition of real estate (including
$125 in 1992 and $1,258 in 1991
to affiliates)...................... -- (642) (7,430)
Real estate improvements............... (2,835) (4,556) (3,910)
Proceeds from sale of real estate...... 410 368 5,344
Collections on notes receivable........ 2,431 2,156 1,495
Collection of note receivable from
affiliate........................... -- -- 7,000
Fundings of notes receivable........... (329) (666) (2,758)
Distributions from partnerships'
investing cash flow................. 1,746 825 2,131
Investments in partnerships............ (151) -- --
--------- --------- ---------
Net cash provided by (used in)
investing activities................ 1,272 (2,515) 1,872
Cash Flows from Financing Activities
Payment on notes payable............... (4,782) (1,727) (1,176)
Proceeds from notes payable............ 1,961 2,140 2,740
Distributions to shareholders.......... (617) -- (7,441)
Repurchase of shares of beneficial
interest............................ (2,408) (1,589) (842)
Redemption of share purchase rights.... -- (103) --
Distribution from partnership's
financing cash flows................ -- 2,800 --
--------- --------- ---------
Net cash provided by (used in)
financing activities............. (5,846) 1,521 (6,719)
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
36
<PAGE> 37
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------
1993 1992 1991
-------------- -------------- --------------
(dollars in thousands)
<S> <C> <C> <C>
Net increase (decrease) in cash and
cash equivalents...................... (690) 858 (403)
Cash and cash equivalents, beginning
of year............................... 1,750 892 1,295
-------------- -------------- --------------
Cash and cash equivalents, end of year.. $ 1,060 $ 1,750 $ 892
============== ============== ==============
Reconciliation of net income (loss) to
net cash provided by operating
activities
Net income (loss)................... $ 5,820 $ (8,314) $ (3,121)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities
Gain on sale of real estate......... (945) - (462)
Extraordinary gain.................. (8,888) - (2,170)
Depreciation and amortization....... 4,660 3,975 3,814
Provision for losses................ 1,390 2,400 -
Profit participation buyout......... 1,000 - -
Equity in losses of partnerships.... 34 - -
(Increase) decrease in interest
receivable........................ (25) (333) 424
(Increase) decrease in other assets. 598 917 (1,036)
Increase in other liabilities....... 89 21 3,707
Increase in interest payable........ 151 2,367 2,128
Cash distributions received in
excess of equity in current
period earnings of partnerships... - 819 1,160
-------------- -------------- --------------
Net cash provided by operating
activities.................... $ 3,884 $ 1,852 $ 4,444
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
37
<PAGE> 38
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Schedule of noncash investing activities
Carrying value of real estate acquired
through foreclosure (in satisfaction
of notes receivable with a carrying
value of $5,891 in 1993, $91 in 1992
and $1,877 in 1991)................. $ 10,118 $ 91 $ 1,448
Note receivable from sale of real
estate.............................. -- 550 1,268
Notes payable from acquisition of real
estate and notes receivable......... 6,651 13,485 15,498
Foreclosure of wraparound mortgage
note and concurrent sale, with buyer
assuming underlying note payable.... 3,410 -- --
Permanent write-down of real estate
held for investment................. 1,952 5,185 --
Issuance of convertible subordinated
debentures (in exchange for profits
participation)...................... 1,000 -- --
Forgiveness of notes payable (through
abandonment of real estate in 1992
and deed-in-lieu of foreclosure of
real estate with a carrying value of
$1,529 in 1992 and $4,609 in 1991).. -- 1,529 4,624
Share distribution (10% share
distribution)....................... 3,007 -- --
Unrealized gains on marketable equity
securities.......................... 452 -- --
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
38
<PAGE> 39
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of National Income Realty
Trust and consolidated entities (the "Trust") have been prepared in conformity
with generally accepted accounting principles, the most significant of which
are described in NOTE 1. "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 and for the year then ended, unless otherwise indicated. Dollar amounts
in tables are in thousands, except per share amounts.
Certain balances for 1991 and 1992 have been reclassified to conform to the
1993 presentation.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Trust business. National Income Realty Trust ("NIRT"), is a
California business trust organized on October 31, 1978. The Trust was formed
to invest in real estate. Since 1991, the Trust has sought only to make equity
investments and accordingly, its mortgage note receivable portfolio represents
an increasingly smaller portion of the Trust's assets.
Basis of consolidation. The Consolidated Financial Statements include the
accounts of NIRT and partnerships and subsidiaries which it controls. All
intercompany transactions and balances have been eliminated.
Interest recognition on notes receivable. It is the Trust'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 the underlying
collateral exceeds the carrying value of the receivable.
Allowance for estimated losses. Valuation allowances are provided for
estimated losses on notes receivable and properties held for sale to the extent
that the investment in the notes or properties exceeds the Trust's estimate of
net realizable value of the property or collateral securing each such note, or
fair value of the collateral if foreclosure is probable. In estimating net
realizable value, consideration is given to the current estimated collateral or
property value adjusted for costs to complete or improve, hold and dispose.
The cost of funds, one of the criteria used in the calculation of estimated net
realizable value (approximately 5.4% and 5.5% as of December 31, 1993 and 1992,
respectively), is based on the average cost of all capital. The provision for
losses is based on estimates, and actual losses may vary from current
estimates. Such estimates are reviewed periodically and any additional
provision determined to be necessary is charged against earnings in the period
in which it becomes reasonably estimable.
39
<PAGE> 40
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed 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. After foreclosure, the excess of new cost, if any,
over fair value minus estimated costs of sale is recognized in a valuation
allowance. Subsequent changes in fair value either increase or decrease such
valuation allowance. See "Allowance for estimated losses" above. Properties
held for sale are depreciated in accordance with the Trust's established
depreciation policies. See "Real estate and depreciation" below.
Annually, all foreclosed properties held for sale are reviewed by the Trust's
management and a determination is made if the held for sale classification
remains appropriate. The following are among the factors considered in
determining that a change in classification to held for investment is
appropriate: (i) the property has been held for at least one year; (ii) Trust
management has no intent to dispose of the property within the next twelve
months; (iii) the property is a "qualifying asset" as defined in the Internal
Revenue Code of 1986, as amended; (iv) property improvements have been funded;
and (v) the Trust's financial resources are such that the property can be held
long-term. The subsequent classification of property previously held for sale
to held for investment does not result in a restatement of previously reported
revenues, expenses or net income (loss).
Real estate and depreciation. Real estate is carried at the lower of cost or
estimated net realizable value, except for foreclosed properties held for sale,
which are recorded initially at the lower of original cost or fair value minus
estimated costs of sale. Depreciation is provided for by the straight-line
method over the estimated useful lives of the assets, which range from 5 to 40
years.
Present value premiums/discounts. The Trust provides for present value
premiums and discounts on notes receivable or payable that have interest rates
that differ substantially from prevailing market rates and amortizes such
premiums and 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.
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.
Investment in noncontrolled partnerships. The Trust uses the equity method to
account for investments in partnerships which the Trust does
40
<PAGE> 41
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
not control. Under the equity method, the Trust's initial investment, recorded
at cost, is increased by the Trust's proportionate share of the partnership's
operating income and additional advances and decreased by the Trust's
proportionate share of the partnership's operating losses and distributions
received.
Marketable equity securities. Marketable equity securities are considered to
be available-for-sale and are carried at fair value, defined as year end
closing market value. Net unrealized holding gains and losses are reported as
a separate component of shareholders' equity. Such securities were carried at
adjusted cost in the Trust's December 31, 1992 Consolidated Balance Sheet.
Fair value of financial instruments. The Trust 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 Trust's interest in the collateral property was used. For marketable
equity securities, fair value was based on the year end closing market price of
each security. The estimated fair values presented do not purport to present
amounts to be ultimately realized by the Trust. The amounts ultimately
realized may vary significantly from the estimated fair values presented. For
notes payable, the fair value was estimated using current rates for mortgages
with similar terms and maturities.
Cash equivalents. For purposes of the Consolidated Statements of Cash Flows,
the Trust considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Earnings per share. Income (loss) per share of beneficial interest is computed
based upon the weighted average number of shares of beneficial interest
outstanding during each year.
(THIS SPACE INTENTIONALLY LEFT BLANK.)
41
<PAGE> 42
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. NOTES AND INTEREST RECEIVABLE
Notes and interest receivable consisted of the following:
<TABLE>
<CAPTION>
1993 1992
------------------------------ ------------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Notes receivable
Performing................. $ 16,985 $ 16,046 $ 15,429 $ 18,342
Nonperforming, nonaccruing. 3,137 3,370 10,793 12,715
-------------- ------------ ------------- ------------
$ 20,122 19,416 $ 26,222 31,057
============== =============
Unamortized discounts........ - (292)
Deferred gain................ (153) (707)
Interest receivable.......... 131 553
------------ ------------
$ 19,394 $ 30,611
============ ============
</TABLE>
The Trust does not recognize interest income on nonperforming notes receivable.
Notes receivable are considered to be nonperforming when they become 60 days or
more delinquent. For the years 1993, 1992 and 1991, unrecognized interest
income on nonperforming notes totaled $833,000, $867,000 and $561,000,
respectively.
Notes receivable at December 31, 1993 mature from 1994 through 2021, with
interest rates ranging from 6% to 24% and an effective weighted average
interest rate of 6.4%. Notes receivable are generally nonrecourse and are
generally collateralized by real estate. Scheduled principal maturities of
$2.5 million are due in 1994, including $1.8 million in mortgage notes
receivable classified as nonperforming at December 31, 1993.
The Trust received payment in full on three mortgage loans during 1993 totaling
$2.4 million. In addition, the Trust foreclosed on three mortgage loans with
principal balances totaling $6.2 million, with the Trust obtaining three
properties with a fair value of $10.1 million and assumed a $6.7 million
mortgage payable secured by one of the properties. These transactions resulted
in no loss to the Trust in 1993 as all losses had been previously provided.
See NOTE 4. "REAL ESTATE AND DEPRECIATION."
In May 1993, the Trust foreclosed on the Plaza Jardin mortgage receivable.
Immediately following the foreclosure, the Trust sold the property for $200,000
in cash subject to the $3.3 million underlying mortgage. The Trust recognized
a $94,000 gain on the sale of the property.
At December 31, 1993, five mortgage notes receivable with a principal balance
totaling $3.1 million were classified as nonperforming. The Trust does not
anticipate incurring losses in excess of the reserves established at December
31, 1993.
42
<PAGE> 43
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)
During 1992, the Trust funded or purchased two mortgage loans with principal
balances totaling $3.8 million, and an additional mortgage loan with a
principal balance of $550,000 was created through the sale of real estate. The
Trust also received payment in full on four mortgage loans during 1992 totaling
$975,000 and received payment on an additional mortgage note receivable,
receiving cash of $775,000 and accepting a new second lien mortgage in the
amount of $306,000.
In addition, in 1992 the Trust foreclosed on one mortgage loan with a principal
balance of $91,000 and wrote off as uncollectible another mortgage loan with a
principal balance of $200,000. These transactions resulted in no loss to the
Trust in 1992 as all losses had been previously provided.
NOTE 3. ALLOWANCE FOR ESTIMATED LOSSES
Activity in the allowance for estimated losses was as follows:
<TABLE>
<CAPTION>
1993 1992 1991
------------- ------------ ---------------
<S> <C> <C> <C>
Balance January 1,........... $ 12,240 $ 15,936 $ 16,609
Provision for losses......... 1,390 2,400 -
Amounts charged off.......... (2,524) (6,096) (673)
------------- ------------ -------------
Balance December 31,......... $ 11,106 $ 12,240 $ 15,936
============= ============ =============
</TABLE>
NOTE 4. REAL ESTATE AND DEPRECIATION
In January 1993, the Trust shut down the Lake Highlands Apartments as a result
of a change in zoning of the property. No assurance can be given that the
Trust will be able to operate the property as an apartment complex in the
future. The Trust does not anticipate incurring a loss in excess of previously
established reserves.
In March 1993, the Trust recorded the insubstance foreclosure of the Lakepointe
Apartments, a 540 unit apartment complex in Memphis, Tennessee. The Lakepointe
Apartments had an estimated fair value (minus estimated costs of sale) of $8.3
million at the date of foreclosure. In connection with this insubstance
foreclosure, the Trust recorded the $6.7 million mortgage payable secured by
the property. The foreclosure resulted in no loss to the Trust in excess of
previously established reserves.
Also in March 1993, the Trust recorded the insubstance foreclosure of the
Huntington Green Apartments, an 81 unit apartment complex in West Town,
Pennsylvania. The Huntington Green Apartments had an estimated fair value
(minus estimated costs of sale) of $1.8 million at the date of foreclosure.
The foreclosure resulted in no loss to the Trust in excess of previously
established reserves.
43
<PAGE> 44
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
In 1992, the Trust sold two of its properties held for sale, receiving net cash
of $368,000 and financing an additional $550,000 through a purchase money
mortgage.
Also in 1992, the Trust acquired all of the general and limited partnership
interest in Consolidated Capital Properties II ("CCP II") for $2.6 million. CCP
II's assets included cash of $1.6 million, four apartment complexes, a
partnership interest, a note receivable participation and a note receivable. In
connection with the acquisition, the Trust granted John A. Doyle, Trustee and
Executive Vice President of the Trust since February 1994, a 10% participation
in the profits of the acquired CCP II assets in excess of the return of the
Trust's investment and a 10% annual cumulative return to the Trust. This
participation was granted as consideration for Mr. Doyle's services to the
Trust in connection with the CCP II portfolio. In December 1993, the Trust's
Board of Trustees approved the issuance of a $1.0 million convertible
subordinated debenture to Mr. Doyle in settlement of the Trust's participation
obligation. See NOTE 6. "NOTES, DEBENTURES AND INTEREST PAYABLE."
NOTE 5. INVESTMENT IN EQUITY METHOD PARTNERSHIPS
The Trust's investment in equity method partnerships consisted of the
following:
<TABLE>
<CAPTION>
1993 1992
------ ------
<S> <C> <C>
Sacramento Nine ("SAC 9")............... $ 2,296 $ 3,359
Adams Properties Associates ("APA")..... 9,460 9,466
Other................................... 48 (242)
------ ------
$ 11,804 $ 12,583
====== ======
</TABLE>
The Trust, in partnership with Continental Mortgage and Equity Trust ("CMET"),
owns SAC 9, which currently owns two office buildings in the vicinity of
Sacramento, California. The Trust has a 70% interest in the partnership's
earnings, losses and distributions. The SAC 9 partnership agreement requires
unanimous consent of both the Trust and CMET for any material changes in the
operations of the partnership's properties, including sales, refinancings and
changes in property management. The Trust, as a noncontrolling partner,
accounts for its investment in the partnership under the equity method.
Certain Trustees of the Trust are also trustees of CMET.
In April 1993, SAC 9 sold one of its office buildings for $1.2 million. SAC 9
received $123,000 in cash, of which the Trust's equity share was $86,000, after
the payoff of an existing first mortgage with a principal balance of $685,000.
SAC 9 provided $356,000 of purchase money financing. The note receivable bears
interest at a rate of 9% per
44
<PAGE> 45
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. INVESTMENT IN EQUITY METHOD PARTNERSHIPS (Continued)
annum, requires monthly payments of principal and interest and matures in June
1998. SAC 9 recognized a gain of $59,000 on the sale, of which the Trust's
equity share was $41,000.
In June 1993, SAC 9 sold two other of its office buildings. One was sold for
$1.3 million in cash, of which the Trust's equity share was $910,000. SAC 9
recognized a gain of $437,000 on the sale, of which the Trust's equity share
was $306,000.
The other office building was sold for $2.0 million. SAC 9 received $1.1
million in cash, of which the Trust's equity share was $750,000, and provided
$887,000 of purchase money financing. One note receivable with a principal
balance of $410,000 bears interest at a variable interest rate, currently 6%,
requires monthly interest only payments and matures in June 1994. A second
note receivable with a principal balance of $477,000 bears interest at 10% per
annum, and all principal and accrued interest are due at maturity in May 1994.
SAC 9 recognized a gain of $720,000 on the sale, of which the Trust's equity
share was $504,000.
The Trust and CMET are also partners in Income Special Associates ("ISA"), a
joint venture partnership in which the Trust has a 40% interest in earnings,
losses and distributions. ISA in turn owns a 100% interest in APA, which owns
33 industrial warehouses.
In November 1992, the Trust acquired all of the general and limited partnership
interests in CCP II, whose assets included a 23% limited partnership interest
in English Village Partners, L.P. ("English Village"). English Village owns a
300 unit apartment complex located in Memphis, Tennessee. On July 1, 1993, CCP
II made an additional capital contribution to English Village of $464,000 to
increase its limited partnership ownership interest to 49% and to acquire a 1%
general partnership interest in the partnership. The Trust continues to
account for its investment in English Village under the equity method.
(THIS SPACE INTENTIONALLY LEFT BLANK.)
45
<PAGE> 46
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. INVESTMENT IN EQUITY METHOD PARTNERSHIPS (Continued)
Set forth below are summarized financial data for all partnerships the Trust
accounts for using the equity method (unaudited):
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Real estate, net of accumulated depreciation
($18,909 in 1993 and $17,453 in 1992)...... $ 54,254 $ 54,816
Other assets................................. 6,574 6,399
Notes payable................................ (33,069) (31,834)
Other liabilities............................ (1,309) (916)
---------- ---------
Partners' capital............................ $ 26,450 $ 28,465
========= =========
1993 1992 1991
---- ---- ----
Rentals.............................. $ 8,556 $ 7,567 $ 9,393
Depreciation......................... (2,119) (1,697) (1,935)
Property operations.................. (3,520) (3,037) (3,466)
Interest............................. (3,448) (2,973) (2,278)
Provision for losses................. -- -- (2,336)
-------- --------- ---------
(Loss) before gain on sale of real
estate and extraordinary gain.... (531) (140) (622)
Gain on sale of real estate.......... 1,216 -- 398
Extraordinary gain................... -- -- 3,100
-------- --------- ---------
Net income (loss).................... $ 685 $ (140) $ 2,876
======== ========= =========
</TABLE>
NOTE 6. NOTES, DEBENTURES AND INTEREST PAYABLE
Notes, debentures and interest payable consisted of the following:
<TABLE>
<CAPTION>
1993 1992
---- ----
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Notes, debentures payable..... $ 104,943 $ 112,347 $ 122,137 $ 118,409
========= =========
Interest payable.............. 1,985 4,859
Unamortized premium/
(discounts)................. 19 (5)
--------- ---------
$ 114,351 $ 123,263
========= =========
</TABLE>
Scheduled principal payments on notes payable are due as follows:
<TABLE>
<S> <C>
1994................................................... $ 11,861
1995................................................... 9,790
1996................................................... 5,771
1997................................................... 8,425
1998................................................... 34,066
Thereafter............................................. 42,434
--------
$112,347
========
</TABLE>
46
<PAGE> 47
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. NOTES, DEBENTURES AND INTEREST PAYABLE (Continued)
In June 1993, the Trust obtained first mortgage financing secured by the
Bayfront Apartments in the amount of $2.1 million. The Trust received $1.8
million in net cash from the financing proceeds and the remainder of the
proceeds were used to fund escrows for replacements and repairs and to pay
various closing costs associated with the financing.
In October 1991, after determining that further investment in the Century
Centre II Office Building could not be justified without a substantial
modification of the mortgage debt, the property was placed in bankruptcy. A
plan of reorganization was filed with the bankruptcy court in March 1993 and
the bankruptcy court confirmed the Plan in November 1993. The confirmed Plan
of Reorganization reduces the interest rate on the $21 million first mortgage
to 1-1/2% above LIBOR, which currently results in an interest rate of 5 1/2%
per annum. The reduced interest rate was retroactively applied as of October
15, 1991. The Plan also extends the note's maturity by two years to November
1995, with three consecutive one-year extension options.
Under the Plan, the Trust deposited $1.0 million in cash with the lender to pay
accrued and unpaid interest, 1993 property taxes and all closing costs
associated with the transaction. In 1994, the Trust will be required to
maintain a $200,000 balance in the escrow account with the lender. The Trust
has also pledged one of its properties held for sale, Stewart Square Shopping
Center, as additional collateral on the first mortgage. Also pursuant to the
Plan of Reorganization, the Trust acquired the $7.5 million second mortgage
plus all accrued but unpaid interest of $1.7 million, for $300,000 in cash.
The Trust recognized an extraordinary gain of $8.9 million in connection with
the debt modification and discounted debt purchase.
In 1993, the State of Wisconsin commenced eminent domain proceedings to acquire
the Pepperkorn Building, located in Manitowoc, Wisconsin, for highway
development and made an initial offer of $175,000. Such purchase price is
being appealed by the Trust. There is no assurance that the Trust will be
successful or of the amount, if any, of additional compensation that it may
receive. Based on the information presently available, the Trust does not
anticipate any losses in excess of previously established reserves.
The $1.6 million first mortgage secured by the Palm Court Apartments, located
in Miami, Florida, matured in July 1993. Prior to the maturity, the Trust
obtained the lender's written agreement to extend the note. Thereafter, the
lender refused to execute the extension documents and has subsequently rejected
the Trust's tender of mortgage payments in accordance with the extension
agreement. The matter is presently in litigation. If adversely determined,
the Trust is prepared to payoff the mortgage debt.
Notes payable at December 31, 1993 bear interest at rates ranging from 4.2% to
19.7% and mature from 1994 through 2022. These notes payable
47
<PAGE> 48
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. NOTES, DEBENTURES AND INTEREST PAYABLE (Continued)
are nonrecourse and are collateralized by deeds of trust on real estate with a
carrying value of $157.0 million.
In December 1993, the Trust's Board of Trustees approved the issuance of a $1.0
million convertible subordinated debenture to Mr. Doyle, Trustee and Executive
Vice President of the Trust since February 1994, in exchange for his 10%
participation in the profits of the CCP II assets, which the Trust had acquired
in November 1992. This participation was granted as consideration for Mr.
Doyle's services to the Trust in connection with the CCP II portfolio. The
debenture bears interest at a rate of 6% per annum, matures in five years and
is convertible into 76,923 of the Trust's shares of beneficial interest. Mr.
Doyle also serves as Director, President and Chief Operating Officer and is a
50% shareholder of Tarragon Realty Advisors, Inc. ("Tarragon"), the Trust's
advisor commencing April 1, 1994. See NOTE 4. "REAL ESTATE AND DEPRECIATION."
NOTE 7. DISTRIBUTIONS
The Trust's Board of Trustees voted at their July 1993 meeting to resume the
payment of regular quarterly distributions. The first quarterly distribution
of $.10 per share of beneficial interest and a 10% stock distribution was paid
on September 1, 1993 to shareholders of record on August 16, 1993. On December
21, 1993, the Trust paid a distribution of $.10 per share of beneficial
interest to shareholders of record on December 6, 1993.
On May 15, 1991, the Trust's Board of Trustees declared a distribution of $2.11
per share of beneficial interest. The distribution, totaling $7.4 million, was
paid on May 23, 1991 to shareholders of record on May 20, 1991. Such
distribution had been accrued at December 31, 1990, in accordance with the
terms of the Olive settlement as described in NOTE 15. "COMMITMENTS AND
CONTINGENCIES - Olive Litigation".
No distributions were declared or paid in 1992.
The Trust reported to the Internal Revenue Service that 100% of the
distribution paid in 1993 was taxable to Trust shareholders as ordinary income
and 100% of the 1991 distribution represented a return of capital.
NOTE 8. ADVISORY AGREEMENT
Basic Capital Management, Inc. ("BCM" or the "Advisor") has served as advisor
to the Trust since March 28, 1989. At the Trust's annual meeting of
shareholders held on April 26, 1993, the renewal of the Trust's Advisory
Agreement with BCM was approved. BCM resigned as advisor to the Trust
effective March 31, 1994. William S. Friedman, the President and a Trustee of
the Trust, served as President of BCM until May 1, 1993 and, prior to December
22, 1989, also served as director of
48
<PAGE> 49
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. ADVISORY AGREEMENT (Continued)
BCM. BCM is beneficially owned by a trust for the benefit of the children of
Gene E. Phillips. Mr. Phillips served as a Trustee of the Trust until December
31, 1992. Mr. Phillips served as a director of BCM until December 22, 1989,
and served as Chief Executive Officer of BCM until September 1, 1992.
On February 10, 1994, the Trust's Board of Trustees selected Tarragon to
replace BCM as the Trust's advisor. Commencing April 1, 1994, Tarragon will
provide advisory services to the Trust under an advisory agreement. Mr.
Friedman serves as a director and Chief Executive Officer of Tarragon.
Tarragon is owned by Lucy N. Friedman, Mr. Friedman's wife, and Mr. Doyle, who
serves as a director, President and Chief Operating Officer of Tarragon and as
a Trustee and Executive Vice President of the Trust. Mr. Friedman's family
owns approximately 30% of the outstanding shares of the Trust.
The provisions of the Trust's advisory agreement with Tarragon are
substantially the same as those of the BCM advisory agreement except for the
annual base advisory fee and the elimination of the net income fee. The
Tarragon advisory agreement calls for an annual base advisory fee of $100,000
plus an incentive advisory fee in the amount of 16% of the Trust's adjusted
funds from operations before deduction of the advisory fee. Adjusted funds
from operations is defined as net income (loss) before gains or losses from the
sale of properties and debt restructurings plus depreciation and amortization
plus any loss due to the writedown or sale of any real property or mortgage
loan acquired prior to January 1, 1989.
The BCM advisory agreement provided for BCM to be responsible for the
day-to-day operations of the Trust and to receive an advisory fee comprised of
a gross asset fee of .0625% per month (.75% per annum) of the average of the
gross asset value of the Trust (total assets less allowance for amortization,
depreciation or depletion and valuation reserves) and an annual net income fee
equal to 7.5% per annum of the Trust's net income.
Under both the Tarragon and the BCM advisory agreements, the advisor is
required to formulate and submit annually for approval by the Trust's Board of
Trustees a budget and business plan for the Trust containing a twelve-month
forecast of operations and cash flow, a general plan for asset sales or
acquisitions, lending, foreclosure and borrowing activity, and other
investments, and the advisor is required to report quarterly to the Trust's
Board of Trustees on the Trust's performance against the business plan. In
addition, all transactions or investments by the Trust shall require prior
approval by the Trust's Board of Trustees unless they are explicitly provided
for in the approved business plan or are made pursuant to authority expressly
delegated to the advisor or to the Trust's President by the Trust's Board of
Trustees.
49
<PAGE> 50
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. ADVISORY AGREEMENT (Continued)
Each of the advisory agreements also require prior approval of the Trust's
Board of Trustees for the retention of all consultants and third party
professionals, other than legal counsel. The advisory agreements provide that
the advisor shall be deemed to be in a fiduciary relationship to the Trust's
shareholders; contain a broad standard governing the advisor's liability for
losses by the Trust; and contain guidelines for the advisor's allocation of
investment opportunities as among itself, the Trust and other entities it
advises.
Each of the advisory agreements also provide for the advisor to receive an
annual incentive sales fee equal to 10% of the amount, if any, by which the
aggregate sales consideration for all real estate sold by the Trust during such
fiscal year exceeds the sum of: (i) the cost of each such property as
originally recorded in the Trust's books for tax purposes (without deduction
for depreciation, amortization or reserve for losses), (ii) capital
improvements made to such assets during the period owned by the Trust, and
(iii) all closing costs, (including real estate commissions) incurred in the
sale of such property; provided, however, no incentive fee shall be paid unless
(i) such real estate sold in such fiscal year, in the aggregate, has produced
an 8% simple annual return on the Trust's net investment including capital
improvements, calculated over the Trust's holding period before depreciation
and inclusive of operating income and sales consideration and (ii) the
aggregate net operating income from all real estate owned by the Trust for each
of the prior and current fiscal years shall be at least 5% higher in the
current fiscal year than in the prior fiscal year.
Additionally, pursuant to each of the advisory agreements, the advisor or an
affiliate of the advisor is to receive an acquisition commission for
supervising the acquisition, purchase or long term lease of real estate for the
Trust equal to the lesser of (i) up to 1% of the cost of acquisition, inclusive
of commissions, if any, paid to nonaffiliated brokers or (ii) the compensation
customarily charged in arm's-length transactions by others rendering similar
property acquisition services as an ongoing public activity in the same
geographical location and for comparable property; provided that the purchase
price of each property (including acquisition commissions and all real estate
brokerage fees) may not exceed such property's appraised value at acquisition.
Each of the advisory agreements require the advisor or any affiliate of the
advisor to pay to the Trust one-half of any compensation received from third
parties with respect to the origination, placement or brokerage of any loan
made by the Trust; provided, however, that the compensation retained by the
advisor or any affiliate of the advisor shall not exceed the lesser of (i) 2%
of the amount of the loan committed by the Trust or (ii) a loan brokerage and
commitment fee which is reasonable and fair under the circumstances.
50
<PAGE> 51
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. ADVISORY AGREEMENT (Continued)
Each of the advisory agreements also provide that the advisor or an affiliate
of the advisor is to receive a mortgage or loan acquisition fee with respect to
the acquisition or purchase from an unaffiliated party of any existing mortgage
or loan by the Trust equal to the lesser of (i) 1% of the amount of the loan
purchased or (ii) a loan brokerage or commitment fee which is reasonable and
fair under the circumstances. Such fee will not be paid in connection with
the origination or funding by the Trust of any mortgage loan.
Under each of the advisory agreements, the advisor or an affiliate of the
advisor is also to receive a mortgage brokerage and equity refinancing fee for
obtaining loans to the Trust or refinancing on Trust properties equal to the
lesser of (i) 1% of the amount of the loan or the amount refinanced or (ii) a
brokerage or refinancing fee which is reasonable and fair under the
circumstances; provided, however, that no such fee shall be paid on loans from
the advisor or an affiliate of the advisor without the approval of the Trust's
Board of Trustees. No fee shall be paid on loan extensions.
Under each of the advisory agreements, the advisor is to receive reimbursement
of certain expenses incurred by it in the performance of advisory services to
the Trust.
Under each of the advisory agreements (as required by the Trust's Declaration
of Trust) all or a portion of the annual advisory fee must be refunded by the
advisor to the Trust if the Operating Expenses of the Trust (as defined in the
Trust's Declaration of Trust) exceed certain limits specified in the
Declaration of Trust based on the book value, net asset value and net income of
the Trust during such fiscal year. The operating expenses of the Trust did not
exceed such limitation in 1991, 1992 or 1993.
Additionally, if the Trust were to request that the advisor render services to
the Trust other than those required by the advisory agreements, the advisor or
an affiliate of the advisor will be separately compensated for such additional
services on terms to be agreed upon from time to time. As discussed in NOTE 9.
"PROPERTY MANAGEMENT", the Trust has hired Carmel Realty Services, Ltd.
("Carmel, Ltd."), an affiliate of BCM, to provide property management services
for the Trust's properties and, as discussed in NOTE 10. "REAL ESTATE
BROKERAGE", the Trust has engaged, on a non-exclusive basis, Carmel Realty,
Inc. ("Carmel Realty"), also an affiliate of BCM, to perform brokerage services
for the Trust.
NOTE 9. PROPERTY MANAGEMENT
Since February 1, 1990, affiliates of BCM have provided property management
services to the Trust. Currently, Carmel, Ltd. provides property management
services for a fee of 5% or less of the monthly
51
<PAGE> 52
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. PROPERTY MANAGEMENT (Continued)
gross rents collected on the properties under management. In many cases,
Carmel, Ltd. subcontracts with other entities for the property-level management
services to the Trust at various rates. The general partner of Carmel, Ltd. is
BCM. The limited partners of Carmel, Ltd. are (i) Syntek West, Inc. ("SWI"),
of which Mr. Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a
trust for the benefit of the children of Mr. Phillips. Carmel, Ltd.
subcontracts the property-level management and leasing of eleven of the Trust's
commercial properties and the commercial properties owned by two of the real
estate partnerships in which the Trust is a partner, to Carmel Realty, which is
owned by SWI. Carmel, Ltd. has resigned as property manager for the Trust's
properties effective March 31, 1994.
Commencing April 1, 1994, Tarragon will provide property management services to
the Trust for a fee of 4.5% of the monthly gross rents collected on apartment
properties and not in excess of 5% of the monthly gross rents collected on
commercial properties. Tarragon intends to subcontract with other entities for
the provision of property-level management services to the Trust.
NOTE 10. REAL ESTATE BROKERAGE
Prior to December 1, 1992, affiliates of BCM provided brokerage services to the
Trust and received brokerage commissions in accordance with the advisory
agreement. The Trust's Board of Trustees approved, effective December 1,
1992, the non-exclusive engagement by the Trust of Carmel Realty to perform
brokerage services for the Trust. Such agreement terminates March 31, 1994.
Carmel Realty is entitled to receive a real estate acquisition commission for
locating and negotiating the lease or purchase by the Trust of any property
equal to the lesser of (i) up to 3% of the purchase price, inclusive of
commissions, if any, paid by the Trust to other brokers or (ii) the
compensation customarily charged in arm's-length transactions by others
rendering similar property acquisition services in the same geographical
location and for comparable property. Any commission which is paid to Carmel
Realty by the seller shall be credited against the commission to be paid by the
Trust. Carmel Realty is also entitled to receive a real estate sales
commission for the sale of each Trust property equal to the lesser of (i) 3%
(inclusive of fees, if any, paid by the Trust to other brokers) of the sales
price of each property or (ii) the compensation customarily charged in
arm's-length transactions paid by others rendering similar services in the same
geographic location for comparable property.
(THIS SPACE INTENTIONALLY LEFT BLANK.)
52
<PAGE> 53
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
Fees and cost reimbursements to BCM, the Trust's advisor until March 31, 1994,
and its affiliates:
<TABLE>
<CAPTION>
1993 1992 1991
-------------- ---------------- --------------
<S> <C> <C> <C>
Fees
Advisory.................... $ 1,537 $ 1,381 $ 1,486
Real estate and mortgage
brokerage commissions..... 21 298 1,653
Property management
and leasing commissions*.. 360 270 273
-------------- -------------- -------------
$ 1,918 $ 1,949 $ 3,412
============== ============== =============
Cost reimbursements........... $ 627 $ 621 $ 644
============== ============== =============
</TABLE>
- --------------------------------
* Net of property management fees paid to subcontractors.
NOTE 12. INCOME TAXES
For the years 1993, 1992 and 1991, the Trust has elected and qualified to be
treated as a Real Estate Investment Trust ("REIT"), as defined in Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and
as such, will not be taxed for federal income tax purposes on that portion of
its taxable income which is distributed to shareholders, provided that at least
95% of its REIT taxable income, plus 95% of its taxable income from foreclosure
property as defined in Section 857 of the Code, is distributed. See NOTE 7.
"DISTRIBUTIONS."
The Trust had a net loss for federal income tax purposes in 1991, 1992 and
1993; therefore, the Trust recorded no provision for income taxes.
The Trust's tax basis in its net assets differs from the amount at which its
net assets are reported for financial statement purposes, principally due to
the accounting for gains and losses on property sales, the difference in the
allowance for estimated losses, depreciation on owned properties and
investments in joint venture partnerships. At December 31, 1993, the Trust's
tax basis in its net assets exceeded its basis for financial statement purposes
by $53.2 million. As a result, aggregate future income for income tax purposes
will be less than such amount for financial statement purposes, and the Trust
will be able to maintain its REIT status without distributing 95% of its
financial statement income. Additionally, at December 31, 1993, the Trust had
a tax net operating loss carryforward of $41 million expiring through 2007.
As a result of the Trust's election to be treated as a REIT for income tax
purposes and of its intention to distribute its taxable income, no deferred tax
asset, liability or valuation allowance was recorded.
53
<PAGE> 54
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. RENTALS UNDER OPERATING LEASES
The Trust's rental operations include the leasing of office buildings and
shopping centers. The leases thereon expire at various dates through 2005.
The following is a schedule of minimum future rentals on non-cancelable
operating leases as of December 31, 1993:
<TABLE>
<S> <C>
1994................................................... $ 7,700
1995................................................... 5,984
1996................................................... 4,989
1997................................................... 3,730
1998................................................... 2,788
Thereafter............................................. 4,885
------
$ 30,076
======
</TABLE>
NOTE 14. EXTRAORDINARY GAIN
In 1993, the Trust acquired the $7.5 million second mortgage secured by its
Century Center II Office Building for $300,000. In addition, the first lien
holder retroactively reduced the interest rate on the debt owed by the Trust.
The Trust recognized an extraordinary gain of $8.9 million in connection with
the debt modification and discounted debt purchase. See NOTE 6. "NOTES,
DEBENTURES AND INTEREST PAYABLE."
During 1991, SAC 9, a joint venture partnership, returned properties to senior
lienholders in lieu of foreclosure proceedings. SAC 9 recognized an
extraordinary gain of $3.1 million in 1991, of which the Trust's equity share
was $2.2 million, from the forgiveness of nonrecourse mortgage debt and a
provision for loss of $1.1 million, of which the Trust's equity share was
$770,000. The provision for loss is included in equity in income of
partnerships in 1991. This provision for losses and the extraordinary gain
represent the amounts by which the nonrecourse mortgage debt exceeded the fair
market value of the properties on the dates the properties were returned to the
lienholders.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Securities and Exchange Commission Inquiry. On December 1, 1988, the Trust was
informed in writing that the staff of the Securities and Exchange Commission
(the "Commission") had made a preliminary determination to recommend
administrative proceedings against the Trust, CMET and Consolidated Capital
Equities Corporation, a former advisor to the Trust, among others, for various
alleged reporting violations in public filings made during certain periods in
1985, and possibly other matters. The allegations relate to a time prior to
the time when the Trust's current management and BCM or any of its personnel
became associated with the Trust. No administrative proceeding has been
commenced and due to the lapse of time, the Trust's management believes that
there will be no further activity regarding this matter.
54
<PAGE> 55
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued)
Olive Litigation. In February 1990, the Trust, together with CMET, Income
Opportunity Realty Trust ("IORT") and Transcontinental Realty Investors, Inc.
("TCI"), three real estate entities with, at the time, the same officers,
directors or trustees and advisor as the Trust, entered into a settlement of a
class and derivative action entitled Olive et al. v. National Income Realty
Trust et al., relating to the operation and management of each of the entities.
On April 23, 1990, the court granted final approval of the terms of the
settlement. By agreeing to settle these actions, the defendants, including the
Trust, did not and do not admit any liability whatsoever.
Among other things, the settlement required the creation of committees of the
Board of Trustees to review transactions with related parties and certain
litigation involving members of the Trust's management.
In January 1991, the plaintiffs in this action filed a motion with the court
for the appointment of a receiver for the Trust, CMET, IORT and TCI, based on
an alleged failure by the trustees or directors of these entities to abide by
the terms of the court-approved settlement.
In March 1991, the court appointed a Special Master to review the facts and
determine whether there had been any breach of the settlement agreement by the
Trust, CMET, IORT or TCI. In his report to the court filed July 26, 1991, the
Special Master found that the breaches which were found did not constitute
deliberate violations of the settlement agreement and that the other
allegations did not constitute breaches.
In September and November 1991, hearings were held relating to the Special
Master's report. An order was issued by the court on November 27, 1991. Under
the order: (i) the plaintiffs' request for the appointment of a receiver was
denied; (ii) the findings of the Special Master were confirmed and adopted by
the court; (iii) independent counsel to the Related Party Transaction Committee
and Litigation Committee of each of the Trust, CMET, IORT and TCI was required
to submit, until December 1992, a written bimonthly report to the Special
Master concerning the activities of such committees, and the Special Master was
required to report periodically to the court on the activities of these
committees; (iv) the Litigation Committees of each of the Trust, CMET, IORT and
TCI were directed to evaluate the nature and quality of the allegations made in
any litigations or investigations involving Messrs. Phillips and Friedman in
order to assess whether Messrs. Phillips and Friedman should continue to act as
trustees or directors of each entity and to assess whether BCM should continue
to serve as advisor to each entity; and (v) the court retained jurisdiction to
enforce the terms of its order and to issue subsequent orders if circumstances
so dictate.
A status conference was held in December 1992 to determine whether the
bimonthly reports to the Special Master by the committees' independent
55
<PAGE> 56
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued)
counsel and the Special Master's periodic reports to the court should be
continued, or whether other appropriate relief should be ordered. The court
held an evidentiary hearing on these matters in February and April 1993
concerning allegations by the plaintiffs that the terms of the settlement had
been breached by the Trust, CMET, IORT and TCI. No determination on the
matters has been made by the court pending the outcome of ongoing settlement
discussions.
Other litigation. The Trust is also involved in various lawsuits arising in
the ordinary course of business. The Trust's management is of the opinion that
the outcome of these lawsuits would have no material impact on the Trust's
financial condition.
NOTE 16. SUBSEQUENT EVENTS
In January 1994, the Trust obtained first mortgage financing secured by the Bay
West Apartments in the amount of $5.1 million. The Trust received net cash of
$1.0 million after the payoff of $3.9 million in existing debt. The remainder
of the financing proceeds were used to fund escrows for replacements and
repairs and to pay closing costs associated with the financing.
In March 1994, the Trust obtained first mortgage financing secured by the
Carlyle Towers Apartments in the amount of $4.5 million. The Trust received
net cash of $2.3 million after the payoff of $2.2 million in existing debt.
Also in March 1994, the Trust obtained first mortgage financing secured by the
Woodcreek Apartments, located in Denver, Colorado, in the amount of $3.0
million. The Trust received net cash of $1.2 million after the payoff of $1.7
million in existing debt. The remainder of the financing proceeds were used to
fund escrows for replacements and repairs and to pay closing costs associated
with the financing.
(THIS SPACE INTENTIONALLY LEFT BLANK.)
56
<PAGE> 57
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 17. QUARTERLY RESULTS OF OPERATIONS
The following is a tabulation of the quarterly results of operations for the
years ended December 31, 1993 and 1992 (unaudited):
<TABLE>
<CAPTION>
First Second Third Fourth
1993 quarter quarter quarter quarter
- ------------------------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Income......................... $ 8,530 $ 8,998 $ 9,286 $ 9,543
Expenses....................... (9,447) (9,496) (9,718) (11,709)
------------- ------------ ------------- ------------
(Loss) before gain on sale of
real estate and extraordinary
gain.......................... (917) (498) (432) (2,166)
Gain on sale of real estate... - 945 - -
Extraordinary gain............. - - - 8,888
------------- ------------ ------------- ------------
Net income (loss).............. $ (917) $ 447 $ (432) $ 6,722
============= ============ ============= ============
Earnings Per Share
(Loss) before gain on sale of
real estate and extraordinary
gain.......................... $ (.27) $ (.15) $ (.14) $ (.69)
Gain on sale of real estate.... - .29 - -
Extraordinary gain............. - - - 2.83
------------ ------------ ------------ -----------
Net income (loss).............. $ (.27) $ .14) $ (.14) $ 2.14
============ ============ ============ ===========
</TABLE>
Fourth quarter results include a charge against earnings of $1.4 million to
provide for estimated losses on one of the Trust's properties held for sale and
one of the Trust's first lien notes receivable. In addition, $1.0 million was
charged to operations in the fourth quarter in connection with the issuance of
a $1.0 million convertible subordinated debenture in exchange for the buyout of
the CCP II profit participation. See NOTE 6. "NOTES, DEBENTURES AND INTEREST
PAYABLE."
<TABLE>
<CAPTION>
First Second Third Fourth
1992 quarter quarter quarter quarter
- ------------------------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Income......................... $ 7,340 $ 7,247 $ 7,698 $ 7,762
Expenses....................... (9,099 (9,055) (11,041) (9,166)
------------ ------------ ----------- -----------
Net (loss)..................... $ (1,759) $ (1,808) $ (3,343) $ (1,404)
============ ============ =========== ===========
Earnings Per Share
Net (loss)..................... $ (.48) $ (.50) $ (.94) $ (.40)
============ ============ =========== ===========
</TABLE>
Third quarter results include a charge against earnings of $2.4 million to
provide for estimated losses on certain of the Trust's junior lien notes
receivable.
57
<PAGE> 58
SCHEDULE X
NATIONAL INCOME REALTY TRUST
SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------
1993 1992 1991
-------------- --------------- ---------------
(dollars in thousands)
<S> <C> <C> <C>
Items charged to expense
Maintenance and repairs......... $ 4,388 $ 3,721 $ 3,233
Taxes, other than payroll
and income taxes.............. 3,259 3,250 2,869
Advertising costs............... 492 481 432
</TABLE>
58
<PAGE> 59
SCHEDULE XI
NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1993
<TABLE>
<CAPTION>
Cost
Capitalized
Subsequent
to Gross Amounts of Which Carried
Initial Cost to Trust Acquisition at End of Year
----------------------- ------------- ------------------------------
Buildings & Buildings &
Property/Location Encumbrances Land Improvements Improvements Land Improvements Total(1)
- --------------------- ------------ -------- ------------ ------------ -------- ------------ ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Apartments
- ----------
Bayfront............ $ 2,081 $ 457 $ 2,052 $ 414 $ 457 $ 2,466 $ 2,923
Houston, TX
Bay West............ 3,963 891 3,566 150 891 3,716 4,607
Bradenton, FL
Carlyle Towers...... 2,359 559 5,939 190 559 6,129 6,688
Southfield, MI
Cornell............. 1,552 822 1,183 17 822 1,200 2,022
Los Angeles, CA
Creekwood.... 2,434 532 2,127 (96) 532 2,031 2,563
College Park, FL
Crosscreek.......... 993 221 883 13 221 896 1,117
Lexington, KY
Diamond Loch........ 1,957 380 2,791 350 380 3,141 3,521
North Richland
Hills, TX
Dunhill/Devonshire.. - 429 1,718 (912) 429 806 1,235
Denver, CO
Fenway Hall......... 1,359 461 1,460 - 461 1,460 1,921
Los Angeles, CA
Flannery House...... 590 897 2,608 555 897 3,163 4,060
Baton Rouge, LA
Heather Hills....... 16,210 643 14,562 4,548 643 19,110 19,753
Temple Hills, MD
Kirklevington....... 2,502 490 1,961 132 490 2,093 2,583
Lexington, KY
Palm Court.......... 1,645 599 2,393 - 599 2,393 2,992
North Miami, FL
Park Dale........... 1,320 354 1,416 68 354 1,484 1,838
Dallas, TX
Pheasant Pointe..... 5,949 810 8,073 159 810 8,232 9,042
Sacramento, CA
Pinecrest........... 8,859 3,612 8,427 5,115 3,612 13,542 17,154
Ft. Lauderdale, FL
Plaza Hills......... - 253 1,195 261 253 1,456 1,709
Kansas City, MO
Prado Bay.......... - 614 3,482 453 614 3,935 4,549
North Bay Village, FL
Sandstone........... 775 619 1,444 893 619 2,337 2,956
Denver, CO
Spring Pines........ - 371 1,486 35 371 1,521 1,892
Houston, TX
</TABLE>
<TABLE>
<CAPTION>
Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
Property/Location Depreciation Construction Acquired is Computed
- --------------------- ------------ ------------ -------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Apartments
- ----------
Bayfront............. $ 616 1971 Feb-87 40 years
Houston, TX
Bay West............. 122 1974 Nov-92 40 years
Bradenton, FL
Carlyle Towers....... 963 1970 Nov-88 40 years
Southfield, MI
Cornell.............. 118 1929 Apr-90 40 years
Los Angeles, CA
Creekwood............ 60 1973 Nov-92 40 years
College Park, FL
Crosscreek........... 27 1966 Nov-92 40 years
Lexington, KY
Diamond Loch......... 682 1978 Oct-85 40 years
North Richland
Hills, TX
Dunhill/Devonshire... 256 1969 Mar-89 40 years
Denver, CO
Fenway Hall.......... 137 1929 Apr-90 40 years
Los Angeles, CA
Flannery House....... 878 1922 Mar-84 40 years
Baton Rouge, LA
Heather Hills........ 5,784 1976 May-86 40 years
Temple Hills, MD
Kirklevington........ 61 1975 Nov-92 40 years
Lexington, KY
Palm Court........... 267 1971 Oct-89 40 years
North Miami, FL
Park Dale............ 77 1975 Dec-91 40 years
Dallas, TX
Pheasant Pointe...... 1,866 1985 Sep-86 40 years
Sacramento, CA
Pinecrest............ 1,006 1965 Jul-90 40 years
Ft. Lauderdale, FL
Plaza Hills.......... 124 1967 Oct-91 40 years
Kansas City, MO
Prado Bay........... 322 1966 Oct-90 40 years
North Bay Village, FL
Sandstone............. 206 1969 Mar-90 40 years
Denver, CO
Spring Pines.......... 285 1964 Feb-88 40 years
Houston, TX
</TABLE>
59
<PAGE> 60
SCHEDULE XI
(Continued)
NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1993
<TABLE>
<CAPTION>
Cost
Capitalized
Subsequent
to Gross Amounts of Which Carried
Initial Cost to Trust Acquisition at End of Year
----------------------- ------------- ------------------------------
Buildings & Buildings &
Property/Location Encumbrances Land Improvements Improvements Land Improvements Total(1)
- --------------------- ------------ -------- ------------ ------------ -------- ------------ ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Apartments (Continued)
- ----------
Woodcreek............. 1,750 913 3,193 (728) 913 2,465 3,378
Denver, CO
Woodcreek............. 2,662 472 4,976 642 472 5,618 6,090
Jacksonville, FL
Office Buildings
- ----------------
Century Center II..... 21,000 7,098 29,869 (5,788) 5,733 25,446 31,179
San Mateo, CA
Emerson Center........ 4,816 131 9,144 (1,489) 917 6,869 7,786
Atlanta, GA
NW O'Hare............. 1,452 1,990 7,965 (2,569) 1,990 5,396 7,386
Des Plaines, IL
Rancho Sorrento....... 3,203 1,251 12,901 (1,837) 968 11,347 12,315
San Diego, CA
Shopping Centers
- ----------------
K-Mart................ 1,341 571 1,333 - 571 1,333 1,904
Charlotte, NC
K-Mart................ 1,277 802 1,871 - 802 1,871 2,673
Kansas City, MO
K-Mart Plaza.......... 1,584 689 1,608 - 689 1,608 2,297
Temple Terrace, FL
K-Mart................ 1,244 497 1,159 - 497 1,159 1,656
Thomasville, GA
Lakeview Centre....... 249 513 2,050 238 513 2,288 2,801
Manitowoc, WI
Midland Plaza......... 301 321 748 - 321 748 1,069
Midland, MI
Midway Mills.......... 3,159 588 2,365 1,247 588 3,612 4,200
Carrollton, TX
Northside Center...... 2,220 1,591 3,712 62 1,591 3,774 5,365
Gainesville, FL
Southgate............. 1,422 578 2,430 51 578 2,481 3,059
Waco, TX -------- --------- -------- -------- --------- --------- ---------
102,228 32,019 154,090 2,174 31,157 157,126 188,283
-------- --------- -------- -------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
Property/Location Depreciation Construction Acquired is Computed
- --------------------- ------------ ------------ -------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Apartments (Continued)
- ----------
Woodcreek............. 826 1980 Aug-86 40 years
Denver, CO
Woodcreek............. 1,603 1975 Nov-86 40 years
Jacksonville, FL
Office Buildings
- ----------------
Century Center II..... 6,655 1986 Nov-86 40 years
San Mateo, CA
Emerson Center........ 2,990 1974 Jul-86 40 years
Atlanta, GA
NW O'Hare............. 2,501 1972 Apr-86 40 years
Des Plaines, IL
Rancho Sorrento....... 3,376 1980 May-86 40 years
San Diego, CA
Shopping Centers
- ----------------
K-Mart................ 68 1977 Dec-91 40 years
Charlotte, NC
K-Mart................ 96 1977 Dec-91 40 years
Kansas City, MO
K-Mart Plaza.......... 83 1979 Dec-91 40 years
Temple Terrace, FL
K-Mart................ 59 1974 Dec-91 40 years
Thomasville, GA
Lakeview Centre....... 670 1968 Apr-87 40 years
Manitowoc, WI
Midland Plaza......... 38 1976 Dec-91 40 years
Midland, MI
Midway Mills.......... 346 1986 Oct-91 40 years
Carrollton, TX
Northside Center...... 201 1977 Dec-91 40 years
Gainesville, FL
Southgate............. 166 1959 Jul-91 40 years
Waco, TX --------
33,535
--------
</TABLE>
60
<PAGE> 61
SCHEDULE XI
(Continued)
NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1993
<TABLE>
<CAPTION>
Cost
Capitalized
Subsequent
to Gross Amounts of Which Carried
Initial Cost to Trust Acquisition at End of Year
---------------------- ------------ ---------------------------------
Buildings & Buildings &
Property/Location Encumbrances Land Improvements Improvements Land Improvements Total(1)
- --------------------------- ------------ -------- ------------ ------------ -------- ------------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR SALE
Apartments
- ----------
Huntington Green...... - 446 1,336 101 446 1,437 1,883
West Town, PA
Lake Highlands........ - 737 3,782 795 737 4,577 5,314
Dallas, TX
Lakepointe............ 6,615 2,075 6,225 19 2,075 6,244 8,319
Memphis, TN
Shopping Centers
- ----------------
Mountain View......... 999 118 578 227 118 805 923
Las Vegas, NV
Stewart Square........ 149(2) 294 1,460 582 294 2,042 2,336
Las Vegas, NV
Times Square.......... - 125 499 - 125 499 624
Lubbock, TX
Other
- -----
Pepperkorn............ 1,020 300 928 - 300 928 1,228
Manitowoc, WI
Gilbert, AZ........... - - 39 - 39 39
Orangeburg, SC........ - 123 - - 123 - 123
-------- --------- -------- -------- --------- --------- --------
8,783 4,218 14,847 1,724 4,218 16,571 20,789
-------- --------- -------- -------- --------- --------- --------
$111,011 $ 36,237 $168,937 $ 3,898 $ 35,375 $ 173,697 209,072
======== ========= ======== ======== ========= =========
Allowance for
estimated losses... (4,126)
--------
$204,946
========
</TABLE>
<TABLE>
<CAPTION>
Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
Property/Location Depreciation Construction Acquired is Computed
- --------------------------- ------------ ------------ -------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C>
PROPERTIES HELD FOR SALE
Apartments
- ----------
Huntington Green...... 28 1963 Mar-93 40 years
West Town, PA
Lake Highlands........ 1,393 1965 Jun-86 40 years
Dallas, TX
Lakepointe............ 119 1974 Mar-93 40 years
Memphis, TN
Shopping Centers
- ----------------
Mountain View......... 166 1971 Oct-87 40 years
Las Vegas, NV
Stewart Square........ 467 1971 Oct-87 40 years
Las Vegas, NV
Times Square.......... 62 1985 Jul-89 40 years
Lubbock, TX
Other
- -----
Pepperkorn............ 58 Jul-91 40 years
Manitowoc, WI
Gilbert, AZ........... -
Orangeburg, SC........ - N/A Jun-89 N/A
-------
2,293
-------
$35,828
=======
Allowance for
estimated losses...
</TABLE>
- ---------------
(1) The aggregate cost for federal income tax purposes is $195,478.
(2) Also pledged as additional collateral on the $21 million first mortgage
secured by Century Centre II.
61
<PAGE> 62
SCHEDULE XI
(Continued)
NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
1993 1992 1991
-------------- -------------- ---------------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of Real Estate
Balance at January 1,............. $ 199,127 $ 191,562 $ 180,250
Additions
Acquisitions and improvements 2,835 15,390 27,649
Foreclosures.................. 10,118 91 1,448
Deductions
Sales......................... (1,056) (1,083) (12,287)
Deeds given in lieu of
foreclosure................ - (1,648) (5,498)
Write-downs due to permanent
impairment................. (1,952) (5,185) -
-------------- -------------- ---------------
Balance at December 31,........... $ 209,072 $ 199,127 $ 191,562
============== ============== ===============
Reconciliation of Accumulated
Depreciation
Balance at January 1,............. $ 31,244 $ 27,582 $ 26,487
Additions
Depreciation.................. 4,639 3,982 3,842
Deductions
Sale of real estate........... (55) (320) (1,858)
Deeds given in lieu of
foreclosure................ - - (889)
-------------- -------------- ---------------
Balance at December 31,........... $ 35,828 $ 31,244 $ 27,582
============== ============== ===============
</TABLE>
62
<PAGE> 63
SCHEDULE XII
NATIONAL INCOME REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
December 31, 1993
<TABLE>
<CAPTION>
Interest Maturity Prior Face Amount
Description Rate Date Periodic Payment Terms Liens of Mortgage
----------- -------- -------- ---------------------- ----- -----------
<S> <C> <C> <C> <C> <C>
FIRST MORTGAGE LOANS
Jackson Square 4.90% Dec-95 Monthly payments of interest only $ -- $ 8,000
- -------------- to of the lesser of $39,583 or net cash flow.
$8.0 million construction 5.70%
loan secured by a
shopping center in
Jackson, MS.
Greentree Village 10.50% May-96 Monthly payments of interest only at 10% -- 3,625
- ----------------- through April 1991, 10.5% through April 1994;
$3.6 million mortgage 2% in excess of the Citibank, N.A. reference
loan secured by a rate not in excess of 13.5% through April
shopping center 1996.
in Flagstaff, AZ.
Sherwood Trust 15.00% Sep-97 Monthly payments of interest only at 12% of $14,413. -- 1,400
- --------------
$1.4 million mortgage
secured by 4.5 acres
of land in Dallas, TX.
Casa Bonita 18.00% Jun-88 Monthly interest only payments of $12,300. -- 1,000
- -----------
$1 million mortgage
secured by apartments
in Paris, TX.
Pioneer Office Bldg. 7.50% Apr-97 Monthly interest payments of $3,438 due -- 550
- -------------------- to through May 1994; $3,896 due from June 1994
$.6 million mortgage 9.50% to May 1995; $4,354 due thereafter to maturity.
secured by office
building in Milwaukee,
WI.
Alder Creek 9.00% Mar-99 Interest only payments due monthly. -- 2,432
- ----------- to Principal paydowns as lots are sold.
$2.4 million mortgage 24.00%
secured by 54 acres
in Folsom, CA.
Other Residential 7.50% Nov-07 Monthly payments of principal -- 531
- ----------------- to to and interest ranging from $408 to $2,199.
4 mortgage loans 11.00% Jan-21
secured by single-
family homes located
in AZ and HI.
WRAPAROUND MORTGAGE LOANS
South Westmoreland 8.00% Mar-94 Monthly interest only payments. 336 1,100
- ------------------
$1.1 million mortgage
secured by office
building in
Los Angeles, CA.
</TABLE>
<TABLE>
<CAPTION>
Principal Amount of
Carrying Loans Subject to
Amounts Delinquent Principal
of Mortgage(1) or Interest
-------------- --------------------
(dollars in thousands)
<S> <C> <C>
FIRST MORTGAGE LOANS
Jackson Square $ 8,567 $ --
- --------------
$8.0 million construction
loan secured by a
shopping center in
Jackson, MS.
Greentree Village 3,575 --
- -----------------
$3.6 million mortgage
loan secured by a
shopping center
in Flagstaff, AZ.
Sherwood Trust 1,494 --
- --------------
$1.4 million mortgage
secured by 4.5 acres
of land in Dallas, TX.
Casa Bonita 944 944
- -----------
$1 million mortgage
secured by apartments
in Paris, TX.
Pioneer Office Bldg. 550 --
- --------------------
$.6 million mortgage
secured by office
building in Milwaukee,
WI.
Alder Creek
- -----------
$2.4 million mortgage 856 856 (2)
secured by 54 acres
in Folsom, CA.
Other Residential 436 --
- -----------------
- -4 mortgage loans
secured by single-
family homes located
in AZ and HI.
WRAPAROUND MORTGAGE LOANS
South Westmoreland 685 --
- ------------------
$1.1 million mortgage
secured by office
building in
Los Angeles, CA.
</TABLE>
63
<PAGE> 64
SCHEDULE XII
(Continued)
NATIONAL INCOME REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
December 31, 1993
<TABLE>
<CAPTION>
Interest Maturity Prior Face Amount
Description Rate Date Periodic Payment Terms Liens of Mortgage
----------- -------- -------- ---------------------- ----- -----------
<S> <C> <C> <C> <C> <C>
JUNIOR MORTGAGE LOANS
K-Mart, Fairbault 7.58% Sep-07 Monthly payments of principal and $ 1,285 $ 2,600
- ----------------- interest of $20,140.
$2.6 million mortgage
loan secured by shopping
center in Fairbault, MN.
K-Mart, Racine 12.70% Dec-06 Monthly payments of principal and 1,454 4,714
- -------------- interest ranging from $9,133 to
$4.7 million mortgage loan $53,763.
secured by shopping center
in Racine, WI.
K-Mart, Indianapolis 12.00% Jul-07 Monthly payments of principal and 2,050 3,626
- -------------------- interest of $38,733.
$3.6 million mortgage loan
secured by shopping center
in Indianapolis, IN.
Villa Maria 14.00% Nov-93 Monthly interest only payments of $2,683. 2,000 230
- -----------
$230,000 mortgage loan
secured by retirement
center in Tuscon, AZ.
Mariposa Manor 12.00% Mar-95 Monthly interest payments of $2,300. Unpaid 777 307
- -------------- interest accruals deferred to maturity.
$.3 million mortgage
secured by apartments
in Los Angeles, CA.
</TABLE>
<TABLE>
<CAPTION>
Principal Amount of
Carrying Loans Subject to
Amounts Delinquent Principal
of Mortgage(1) or Interest
-------------- --------------------
(dollars in thousands)
<S> <C> <C>
JUNIOR MORTGAGE LOANS
K-Mart, Fairbault $ 332 $ 332
- -----------------
$2.6 million mortgage
loan secured by shopping
center in Fairbault, MN
K-Mart, Racine 586 586
- --------------
$4.7 million mortgage loan
secured by shopping center
in Racine, WI.
K-Mart, Indianapolis 430 430
- --------------------
$3.6 million mortgage loan
secured by shopping center
in Indianapolis, IN.
Villa Maria 256 256
- -----------
$230,000 mortgage loan
secured by retirement
center in Tuscon, AZ.
Mariposa Manor 297 --
- --------------
$.3 million mortgage
secured by apartments
in Los Angeles, CA.
</TABLE>
64
<PAGE> 65
SCHEDULE XII
(Continued)
NATIONAL INCOME REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
December 31, 1993
<TABLE>
<CAPTION>
Interest Maturity Prior Face Amount
Description Rate Date Periodic Payment Terms Liens of Mortgage
----------- -------- -------- ---------------------- ----- -----------
<S> <C> <C> <C> <C> <C>
PARTICIPATION INTEREST
Creekwood 10.25% Nov-95 Monthly P&I payments of $4,525. $ 2,019 $ 1,000
- ---------
$1 million participation
in note secured by
apartments in Altomonte
Springs, FL
------- -------
$ 9,921 $31,115
======= =======
Interest receivable
Deferred gains
Allowance for estimated losses
</TABLE>
<TABLE>
<CAPTION>
Principal Amount of
Carrying Loans Subject to
Amounts Delinquent Principal
of Mortgage(1) or Interest
-------------- --------------------
(dollars in thousands)
<S> <C> <C>
PARTICIPATION INTEREST
Creekwood $ 408 $ --
- ---------
$1 million participation
in note secured by
apartments in Altomonte
Springs, FL
-------- -------
$ 19,416 $ 3,404
=======
Interest receivable 131
Deferred gains (153)
--------
19,394
Allowance for estimated losses (6,980)
--------
$ 12,414
========
</TABLE>
_______________________
(1) The aggregate cost for federal income tax purposes is $19,547.
(2) Note brought current subsequent to yearend.
65
<PAGE> 66
SCHEDULE XII
(Continued)
NATIONAL INCOME REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
<TABLE>
<CAPTION>
1993 1992 1991
-------------- -------------- ---------------
(dollars in thousands)
<S> <C> <C> <C>
Balance at January 1,............. $ 30,765 $ 28,800 $ 28,280
Additions
Fundings and acquisitions of
notes receivable........... 329 3,844 2,758
Notes from sales of
foreclosed properties...... - 550 1,268
Amortization of discount...... 7 31 64
Accrued interest shortfall
and participation.......... 47 66 41
Deductions
Collections of principal...... (2,431) (2,156) (1,496)
Foreclosures.................. (9,301) (289) (1,877)
Other......................... - (81) (238)
-------------- -------------- ---------------
Balance at December 31,........... $ 19,416 $ 30,765 $ 28,800
============== ============== ===============
</TABLE>
66
<PAGE> 67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
______________________________________
PART III
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
Trustees
The affairs of National Income Realty Trust (the "Trust" or the "Registrant")
are managed by a ten-member Board of Trustees. The Trustees are elected at the
annual meeting of shareholders or appointed by the incumbent Board of Trustees
and serve until the next annual meeting of shareholders or until a successor
has been elected or approved.
The Trustees of the Trust are listed below, together with their ages, terms of
service, all positions and offices with the Trust or its advisor, Basic Capital
Management, Inc. ("BCM" or the "Advisor"), or Tarragon Realty Advisors, Inc.
("Tarragon"), the Trust's advisor commencing April 1, 1994, their principal
occupations, business experience and directorships with other companies during
the last five years or more. The designation "Affiliated", when used below
with respect to a Trustee, means that the Trustee is an officer, director or
employee of BCM or Tarragon or an officer or employee of the Trust. The
designation "Independent", when used below with respect to a Trustee, means
that the Trustee is neither an officer or employee of the Trust nor a director,
officer or employee of BCM or Tarragon, although the Trust may have certain
business or professional relationships with such Trustee as discussed in ITEM
13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Certain Business
Relationships."
WILLIE K. DAVIS: Age 62, Trustee (Independent) (since October 1988).
President (1971 to 1985) and Chairman and 50% shareholder (since 1985) of
Mid-South Financial Corporation, holding company for Mid-South Mortgage
Company and Gibbs Mortgage Company; President (since 1978) and Chairman and
sole shareholder (since December 1985) of FMS, Inc. ("FMS"), a property
management and real estate development firm; President (1983 to February
1990) of BVT Management Services, Inc., a real estate advisory and tax
service firm; Director (since 1987) of SouthTrust Bank of Middle Tennessee;
Trustee and Treasurer (since 1986) of Baptist Hospital, Inc., Tennessee
General Welfare nonprofit corporation; and Director or Trustee (since October
1988) of Continental Mortgage and Equity Trust ("CMET"), Income Opportunity
Realty Trust ("IORT"), Transcontinental Realty Investors, Inc. ("TCI") and
Vinland Property Trust ("VPT").
67
<PAGE> 68
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
JOHN A. DOYLE: Age 35, Trustee (Affiliated) and Executive Vice President
(since February 1994).
Trustee and Executive Vice President (since February 1994) of VPT; Director,
President, Chief Operating Officer and 50% shareholder (since February 1994)
of Tarragon; President and Chairman of the Board (since December 1993) of
Investors General Acquisition Corp., which owns 100% of the shares of
Investors General, Inc.; Director, President and Chief Executive Officer
(since June 1992) of Garden Capital Incorporated; Director (since October
1993) of Home States Holdings; Director and Chief Operating Officer (October
1990 to December 1991) of ConCap Equities, Inc.; President, Chief Executive
Officer, Chief Operating Officer and sole Director (April 1989 to October
1990) of Consolidated Capital Equities Corporation ("CCEC"); Director of
Restructuring, Reorganization and Insolvency Services (February 1987 to April
1989) of Arthur Young & Co., independent certified public accountants; and
Certified Public Accountant (since 1985).
GEOFFREY C. ETNIRE: Age 45, Trustee (Independent) (since January 1993).
Attorney engaged in the private practice of real estate law in Pleasanton,
California (since 1981); Licensed Real Estate Broker in California (since
1985); Director (1985 to 1989) of Mission Valley Bancorp; Director (1984 to
1989) and Chairman (1986 to 1989) of Bank of Pleasanton; and Managing Partner
(1981 to 1988) with Smith, Etnire, Polson & Scott law firm; and Trustee or
Director (since January 1993) of CMET, IORT and TCI.
(THIS SPACE INTENTIONALLY LEFT BLANK.)
68
<PAGE> 69
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
WILLIAM S. FRIEDMAN: Age 50, Trustee (Affiliated) (since March 1988). Chief
Executive Officer (since December 1993), President (since December 1988) and
formerly Acting Chief Financial Officer (May 1990 to February 1991), Treasurer
(August to September 1989) and Acting Principal Financial and Accounting
Officer (December 1988 to August 1989).
Trustee (since March 1988), Chief Executive Officer (since December 1993),
President (since December 1988), Acting Chief Financial Officer (May 1990 to
February 1991), Treasurer (August to September 1989) and Acting Principal
Financial and Accounting Officer (December 1988 to August 1989) of VPT;
Trustee or Director (March 1988 to February 1994), Chief Executive Officer
(December 1993 to February 1994), President (December 1988 to February 1994),
Acting Chief Financial Officer (May 1990 to February 1991), Treasurer (August
to September 1989) and Acting Principal Accounting Officer (December 1988 to
August 1989) of CMET, IORT and TCI; Director and Chief Executive Officer
(since December 1990) of Tarragon, the Advisor to the Trust effective April
1, 1994; President (February 1989 to March 1993) and Director (February to
December 1989) of BCM, the advisor to the Trust (March 1989 to March 1994);
General Partner (1987 to March 1994) of Syntek Asset Management, L.P.
("SAMLP"), which is the General Partner of National Realty, L.P. ("NRLP") and
National Operating, L.P. ("NOLP"); Director and President (March 1989 to
February 1994)) and Secretary (March 1989 to December 1990) of Syntek Asset
Management, Inc. ("SAMI"), the Managing General Partner of SAMLP and a
corporation owned by BCM; President (1982 to October 1990) of Syntek
Investment Properties, Inc. ("SIPI"), which has invested in, developed and
syndicated real estate through its subsidiaries and other related entities
since 1973; Director and President (1982 to October 1990) of Syntek West,
Inc. ("SWI"); Vice President (1984 to October 1990) of Syntek Finance
Corporation; Director (1981 to December 1992), President (July 1991 to
December 1992), Vice President and Treasurer (January 1987 to July 1991) and
Acting Chief Financial Officer (May 1990 to February 1991) of American Realty
Trust, Inc. ("ART"); Practicing Attorney (since 1971) with the Law Offices of
William S. Friedman; Director and Treasurer (November 1989 to February 1991)
of Carmel Realty Services, Inc. ("CRSI"); Limited Partner (January 1991 to
December 1992) of Carmel Realty Services, Ltd. ("Carmel, Ltd."); Trustee
(1987 to November 1989) of Wespac Investors Trust; Director (1985 to April
1989) of Pratt Hotel Corporation; and Trustee (March 1988 to February 1989)
of The Consolidated Companies. Until January 1989, Mr. Friedman served in
the following positions: Director (from 1980), Vice Chairman of the Board of
Directors (from 1982) and Secretary (from 1984) of Southmark Corporation;
Director of Pacific Standard Life Insurance Company (from 1984), Servico,
Inc. (from 1985), NACO Finance Corporation (from 1986), Integon Corporation
(from 1986), Southmark San Juan, Inc. (from 1987), Thousand Trails, Inc.
(from 1987), MGF Oil Corporation (from 1988), and two former advisors to the
Trust - Consolidated Capital Equities Corporation and Consolidated Advisors,
Inc. (from March 1988).
69
<PAGE> 70
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
DAN L. JOHNSTON: Age 56, Trustee (Independent) (April 1990 to June 1990 and
since February 1991).
Attorney in solo practice in New York, New York (since 1991); Chief Counsel,
Subcommittee on Criminal Justice, U.S. House of Representatives (June 1990 to
January 1991); Executive Director (1986 to 1990) of Prosecuting Attorneys'
Research Council, a nationwide organization of metropolitan prosecutors which
acts to further research to improve the prosecutorial function; Consultant
(February 1985 to June 1990) to the Edna McConnell Clark Foundation, which
supports efforts of District Attorneys to reduce jail and prison
overcrowding; Member (October 1987 to June 1990) of the Civilian Complaint
Review Board of the New York City Police Department; Project Director (March
1985 to February 1986) and Consultant (January 1984 to March 1985) of the
Vera Institute of Justice; County Attorney (March 1977 to March 1985) of Polk
County, Des Moines, Iowa; Assistant Iowa Attorney General in charge of
consumer fraud division (1965); Director or Trustee (April 1990 to June 1990
and since February 1991) of CMET, IORT and TCI; and Trustee (since December
1992) of VPT.
A. BOB JORDAN: Age 61, Trustee (Independent) (since October 1992).
Attorney in solo practice in Oklahoma City, Oklahoma; and Director or Trustee
(since October 1992) of CMET, IORT and TCI.
RAYMOND V.J. SCHRAG: Age 48, Trustee (Independent) (since October 1988).
Attorney in solo practice in New York, New York (since 1975); Trustee (1986
to December 1989) of Hidden Strength Mutual Funds; and Director or Trustee
(since October 1988) of CMET, IORT, TCI and VPT.
BENNETT B. SIMS: Age 61, Trustee (Independent) (since April 1990).
Author (since February 1964); Screen and Television Writer (since January
1960); Independent Marketing Consultant (since January 1980) for various
companies; Professor of Dramatic Writing (since September 1987) at Tisch
School of the Arts, New York University; Director or Trustee (since April
1990) of CMET, IORT and TCI; and Trustee (since December 1992) of VPT.
70
<PAGE> 71
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
TED P. STOKELY: Age 60, Trustee (Independent) (since April 1990).
General Manager (since January 1993) of Minority and Elderly Housing
Assistance Foundation, Inc., a nonprofit corporation; Part- time unpaid
Consultant (since January 1993) of Eldercare Housing Foundation
("Eldercare"); Real Estate Consultant (April 1992 to December 1993) for
Eldercare, a nonprofit corporation engaged in the acquisition of low income
and elderly housing; President (since April 1992) of PSA Group (real estate
management and consulting); Executive Vice President (1987 to 1991) of Key
Companies Inc., a publicly traded company that develops, acquires and sells
water and minerals; Managing General Partner (1985 to 1987) of RCB Houston
Venture I, a Texas Partnership; Executive Vice President (1982 to 1985) of
Success Properties, a Texas real estate investment company; and Director or
Trustee (since April 1990) of CMET, IORT and TCI.
CARL B. WEISBROD: Age 49, Trustee (Independent) (since February 1994).
Consultant (since 1994), President and Chief Executive Officer (April 1990 to
1994) of New York City Economic Development Corporation; President (May 1987
to April 1990) of 42nd Street Development Project, Inc. of New York State
Urban Development Corporation; Executive Director (March 1986 to May 1987) of
Department of City Planning of the City of New York; and Executive Director
(July 1984 to March 1986) of City Volunteer Corps of the City of New York.
Separation of Messrs. Phillips and Friedman from Southmark. Until January
1989, Gene E. Phillips, who served as a Trustee of the Trust until December 31,
1992, and William S. Friedman, the President and a Trustee of the Trust, were
executive officers and directors of Southmark Corporation ("Southmark"). Mr.
Phillips served as Chairman of the Board and Director (since 1980) and
President and Chief Executive Officer (since 1981) and Mr. Friedman served as
Vice Chairman of the Board (since 1982), Director (since 1980) and Secretary
(since 1984) of Southmark.
As a result of a deadlock on Southmark's Board of Directors, Messrs. Phillips
and Friedman reached a series of related agreements with Southmark on January
17, 1989 (collectively, the "Separation Agreement"), whereby Messrs. Phillips
and Friedman resigned their positions with Southmark and certain of Southmark's
subsidiaries and affiliates. The Separation Agreement was later modified by
certain agreements in another set of agreements dated as of June 30, 1989
(collectively, the "June Agreements"). Southmark filed a voluntary petition in
bankruptcy under Chapter 11 of the United States Bankruptcy Code on July 14,
1989.
71
<PAGE> 72
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
Litigation Against Southmark or its Affiliates Alleging Fraud or Mismanagement.
In addition to the litigation related to the Southmark bankruptcy, there were
several lawsuits filed against Southmark, its former officers and directors
(including Messrs. Phillips and Friedman) and others, alleging, among other
things, that such persons and entities engaged in conduct designed to defraud
and mislead the investing public by intentionally misrepresenting the financial
condition of Southmark. In so far as such allegations related to them, Messrs.
Phillips and Friedman deny them. Those lawsuits in which Mr. Friedman was also
a defendant are summarized below. THE TRUST IS NOT A DEFENDANT IN ANY OF THESE
LAWSUITS.
In Burt v. Grant Thornton, Gene E. Phillips and William S. Friedman, the
plaintiff, a purchaser of Southmark preferred stock, alleged that the
defendants disseminated false and misleading corporate reports, financial
analysis and news releases in order to induce the public to continue investing
in Southmark. Grant Thornton served as independent certified public
accountants to Southmark and, for 1988 and 1989, to the Trust. The plaintiff
sought actual damages in the amount of less than $10,000, treble damages and
punitive damages in an unspecified amount plus attorneys' fees and costs. This
case was settled in October 1993 for a nominal payment.
Consolidated actions entitled Salsitz v. Phillips et al., purportedly brought
as class actions on behalf of purchasers of Southmark securities during
specified periods, were pending before the United States District Court for the
Northern District of Texas. These actions alleged violations of the federal
securities laws and state laws, based upon claims of fraud, deceit and
negligent misrepresentations made in connection with the sale of Southmark
securities. The plaintiffs sought unspecified damages, attorneys' fees and
costs. The defendants included Messrs. Phillips and Friedman, among others.
Messrs. Phillips and Friedman entered into a settlement agreement with the
plaintiffs, which was approved by the court in October 1993.
Messrs. Phillips and Friedman also served as directors of Pacific Standard Life
Insurance Company ("PSL"), a wholly-owned subsidiary of Southmark, from October
1984 to January 1989. In a proceeding brought by the California Insurance
Commissioner, a California Superior Court appointed a conservator for PSL on
December 11, 1989, and directed that PSL cease doing business. On October 12,
1990, the California Insurance Commissioner filed suit against Messrs. Phillips
and Friedman and other former directors of PSL seeking damages of $12 million
and additional punitive damages. Such lawsuit alleged, among other things,
that the defendants knowingly and willfully conspired among themselves to
breach their duties as directors of PSL and to loot and waste corporate assets
of PSL to benefit Southmark and its other subsidiaries and certain of the
defendants (including Messrs. Phillips and Friedman), resulting in a required
write-down of $25 million, PSL's insolvency and conservatorship. Such suit
further alleged that the defendants caused
72
<PAGE> 73
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
PSL to make loans to, or enter into transactions with, Southmark, Southmark
affiliates and others in violation of applicable state laws, and to make loans
and investments that could not be included as assets on PSL's balance sheet to
entities controlled by Charles H. Keating, Jr. It is also alleged that PSL's
board of directors failed to convene meetings and delegated to Mr. Phillips
authority to make decisions regarding loans, investments and other transfers
and exchanges of PSL assets. In August 1993, five former directors of PSL,
including Messrs. Phillips and Friedman, settled this lawsuit without admitting
any liability.
Southmark Partnership Litigation. One of Southmark's principal businesses was
real estate syndication and from 1981 to 1987 Southmark raised over $500
million in investments from limited partners of several hundred limited
partnerships. Several lawsuits have been filed by investors against Messrs.
Phillips and Friedman alleging breach of fiduciary duties. The following
actions relate to and involve such activities.
In Adkisson, et al. v. Friedman et al., the plaintiffs, limited partners in a
tax shelter partnership sponsored by Southmark, alleged violations of state
consumer protection laws, negligence and fraud. This case was settled in July
1993 for a nominal payment.
In Sable et al. v. Southmark/Envicon Capital Corp. et al., the plaintiffs,
limited partners in nine Southmark-sponsored limited partnerships, made several
claims alleging breach of fiduciary duty and waste or mismanagement of
partnership assets, among other things. In April 1993, the court dismissed all
of the claims and awarded Messrs. Phillips and Friedman sanctions against
plaintiffs' counsel.
In Southmark/CRCA Healthcare Fund VIII, L.P. v. Southmark Investment Group 87,
Inc., et al., the plaintiff, a former Southmark related public limited
partnership, alleged that in 1988 the defendants caused the plaintiff to
purchase five nursing homes in violation of the partnership agreement. The
plaintiff sought to recover actual damages in an unspecified amount, plus
punitive damages and attorneys' fees and costs. The defendants included, among
others, Messrs. Phillips and Friedman and TCI, which provided refinancing for
the properties. The case was settled in October 1993.
In an action filed in January 1993 in a Michigan state court captioned Van
Buren Associates Limited Partnership, et.al. v. Friedman, et. al., the
plaintiff, an affiliate of the plaintiff in two other cases against Messrs.
Phillips and Friedman which have been dismissed without payment, alleges a
claim in connection with an alleged 1988 transfer of certain property by the
partnership. The plaintiff seeks damages in an unspecified amount, plus costs
and attorney's fees. The plaintiff also seeks to quiet title to the property
at issue. The defendants include, among others, Messrs. Phillips and Friedman.
73
<PAGE> 74
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Board Committees
The Trust's Board of Trustees held nine meetings during 1993. For such year,
no incumbent Trustee attended fewer than 75% of the aggregate of (i) the total
number of meetings held by the Board of Trustees during the period for which he
had been a Trustee and (ii) the total number of meetings held by all
committees of the Board of Trustees on which he served during the periods that
he served.
The Trust's Board of Trustees has an Audit Committee, the function of which is
to review the Trust's operating and accounting procedures. The current members
of the Audit Committee, all of whom are Independent Trustees, are Messrs.
Schrag (Chairman), Davis and Etnire. The Audit Committee met three times
during 1993.
The Trust's Board of Trustees does not have Nominating or Compensation
Committees.
The Trust's Board of Trustees has a Related Party Transaction Committee which
reviews and makes recommendations to the Board of Trustees with respect to
transactions involving the Trust and any other party or parties related to or
affiliated with the Trust, any of its Trustees or any of their affiliates, and
a Litigation Committee which reviews litigation involving Messrs. Phillips and
Friedman. Messrs. Johnston (Chairman), Davis, Etnire, Schrag, Sims and
Stokely, all of whom are Independent Trustees, are the members of the Related
Party Transaction Committee, while Messrs. Johnston (Chairman), Etnire, Jordan,
Schrag, Sims and Stokely comprise the Litigation Committee. During 1993, the
Related Party Transaction Committee met six times and the Litigation Committee
met six times.
The Litigation Committee has formally requested each of Messrs. Phillips and
Friedman to furnish the Advisor's in-house counsel with copies of the
complaints filed in all pending litigation in which either is named as a
defendant. The Advisor's counsel, in turn, has furnished the Litigation
Committee with summaries of the allegations contained in each such complaint as
well as summaries of developments in existing and new matters. The Litigation
Committee is represented by independent counsel, which counsel periodically
reviews certain litigation matters and reports to the Committee thereon.
The Litigation Committee evaluates the nature and quality of the allegations
made in any litigations or investigations involving Messrs. Phillips and
Friedman in order to assess whether Mr. Friedman should continue to act as a
Trustee and to assess whether BCM should continue to act as the advisor to the
Trust. The Litigation Committee, while not needing to duplicate the
adjudicatory process, is also required to conduct any investigation that is
appropriate and necessary to discharge the above obligations.
74
<PAGE> 75
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Executive Officers
The following persons currently serve as executive officers of the Trust:
William S. Friedman, President and Chief Executive Officer; John A. Doyle,
Executive Vice President; and Ivan Roth, Treasurer and Chief Financial Officer.
Their positions with the Trust are not subject to a vote of shareholders. The
age, terms of service, all positions and offices with the Trust, BCM or
Tarragon, other principal occupations, business experience and directorships
with other companies during the last five years or more of Messrs. Friedman and
Doyle are set forth above. Corresponding information regarding Mr. Roth is set
forth below.
IVAN ROTH: Age 58, Treasurer and Chief Financial Officer (since February
1994).
Treasurer and Chief Financial Officer (since February 1994) of VPT; Treasurer
(since February 1994) of Tarragon and Tarragon Capital Corporation; Treasurer
and Chief Financial Officer (1978 to 1992) of Servico, Inc.; Financial
Controller (1970 to 1978) of New York Motel Enterprises, Inc.; General
Manager (1968 to 1970) of Affiliated Financial Corporation; and Certified
Public Accountant (since 1968).
On September 19, 1990, Servico, Inc. filed a voluntary petition under Chapter
11 of the United States Bankruptcy Code and was reorganized effective August 5,
1992.
Officers
Although not executive officers of the Trust, the following persons currently
serve as officers of the Trust: Cary L. Newburger, Vice President - General
Counsel; John C. Stricklin, Vice President - Real Estate and Mary E.
Montagnino, Secretary. Their positions with the Trust are not subject to a
vote of shareholders. Their ages, terms of service, all positions and offices
with the Trust, BCM or Tarragon, other principal occupations, business
experience and directorships with other companies during the last five years or
more are set forth below.
CARY L. NEWBURGER: Age 34, Vice President - General Counsel (since February
1994) and Vice President - Real Estate (1992 to February 1994).
Vice President - General Counsel (since February 1994) of VPT; Vice President
(since February 1994) of Tarragon; Vice President and Real Estate Counsel
(1990 to 1994) of BCM; Vice President (1993 to February 1994) of ART; Vice
President and Real Estate Counsel (1992 to February 1994) of CMET, IORT and
TCI; Attorney (1987 to 1989) of Southmark; and Associate (1985 to 1987) with
the law firm of Baker & McKenzie.
75
<PAGE> 76
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Officers (Continued)
JOHN C. STRICKLIN: Age 47, Vice President - Real Estate (since January 1994).
Vice President - Real Estate (since February 1994) of VPT; Senior Vice
President (since February 1994) of Tarragon; Vice President (June 1992 to
January 1994) of Carmel Realty, Inc.; Real Estate Broker (June 1989 to May
1992) with Carmel, Ltd.; Executive Vice President (June 1980 to May 1989) of
Windsor Financial Corporation; and Vice President (June 1975 to June 1980) of
Syntek Corporation.
MARY E. MONTAGNINO: Age 35, Secretary (since February 1994).
Secretary (since February 1994) of VPT; Secretary and Paralegal (since
February 1994) of Tarragon; Paralegal (1989 to February 1994) of BCM; and
Paralegal (1984 to 1989) of Southmark.
In addition to the foregoing officers, the Trust has other officers who are not
listed herein.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Under the securities laws of the United States, the Trust's Trustees, executive
officers, and any persons holding more than ten percent of the Trust's shares
of beneficial interest are required to report their ownership of the Trust's
shares 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 Trust is required to report any failure to file by these
dates during 1993. During 1993, all of these filing requirements were
satisfied by its Trustees and executive officers and ten percent holders. In
making these statements, the Trust has relied on the written representations of
its incumbent Trustees and executive officers and its ten percent holders and
copies of the reports that they have filed with the Commission.
The Advisor
Although the Trust's Board of Trustees is directly responsible for managing the
affairs of the Trust and for setting the policies which guide it, the
day-to-day operations of the Trust are performed by a contractual advisory firm
under the supervision of the Trust's Board of Trustees. The duties of the
advisor include, among other things, locating, investigating, evaluating and
recommending real estate and mortgage note investment and sales opportunities,
as well as financing and refinancing sources for the Trust. The advisor also
serves as a consultant in connection with the business plan and investment
policy decisions made by the Trust's Board of Trustees.
CCEC was the sponsor of and original advisor of the Trust. CCEC was replaced
as advisor on August 1, 1988, by Consolidated Advisors, Inc. ("CAI"), the
parent of CCEC. On December 2, 1988, CCEC filed a petition
76
<PAGE> 77
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
seeking reorganization under Chapter 11 of the United States Bankruptcy Code in
the United States District Court for the Northern District of Texas. Mr.
Friedman was a director of CCEC and CAI from March 1988 through January 1989.
Mr. Doyle was President, Chief Executive Officer, Chief Operating Officer and
sole director of CCEC from April 1989 through October 1990. Southmark was a
controlling shareholder of The Consolidated Companies, the parent of CAI, from
March 1988 through February 1989.
In February 1989, the Trust's Board of Trustees voted to retain BCM as the
Trust's advisor. BCM has served as the Trust's advisor since March 1989.
Prior to December 22, 1989, Messrs. Phillips and Friedman also served as
directors of BCM. Mr. Phillips served as chief executive officer of BCM until
September 1, 1992 and Mr. Friedman served as President of BCM until May 1,
1993. BCM is beneficially owned by a trust for the benefit of the children of
Mr. Phillips, who served as a Trustee of the Trust until December 7, 1992. At
the Trust's annual meeting of shareholders held on April 26, 1993, the Trust's
shareholders approved the renewal of the Trust's advisory agreement with BCM.
BCM has resigned as advisor to the Trust effective March 31, 1994.
On February 10, 1994, the Trust's Board of Trustees selected Tarragon to
replace BCM as the Trust's advisor. Commencing April 1, 1994, Tarragon will
provide advisory services to the Trust under an advisory agreement. Mr.
Friedman serves as a director and Chief Executive Officer of Tarragon.
Tarragon is owned by Lucy N. Friedman, Mr. Friedman's wife, and Mr. Doyle, who
serves as a director, President and Chief Operating Officer of Tarragon and
Trustee and Executive Vice President of the Trust. Mr. Friedman's family owns
approximately 30% of the outstanding shares of the Trust.
The provisions of the Trust's advisory agreement with Tarragon are
substantially the same as to those of the BCM advisory agreement except for the
annual base advisory fee and the elimination of the net income fee. The
Tarragon advisory agreement calls for an annual base advisory fee of $100,000
plus an incentive advisory fee equal to 16% of the Trust's adjusted funds from
operations before deduction of the advisory fee. Adjusted funds from
operations is defined as net income (loss) before gains or losses from the
sales of properties and debt restructurings plus depreciation and amortization
plus any loss due to the writedown or sale of any real property or mortgage
loan acquired prior to January 1, 1989.
The BCM advisory agreement provided for BCM to be responsible for the
day-to-day operations of the Trust and to receive an advisory fee comprised of
a gross asset fee of .0625% per month (.75% per annum) of the average of the
gross asset value of the Trust (total assets less allowance for amortization,
depreciation or depletion and valuation reserves) and an annual net income fee
equal to 7.5% per annum of the Trust's net income.
77
<PAGE> 78
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
Under both the Tarragon and the BCM advisory agreements, the advisor is
required to formulate and submit annually for approval by the Trust's Board of
Trustees a budget and business plan for the Trust containing a twelve-month
forecast of operations and cash flow, a general plan for asset sales or
acquisitions, lending, foreclosure and borrowing activity, and other
investments, and the advisor is required to report quarterly to the Trust's
Board of Trustees on the Trust's performance against the business plan. In
addition, all transactions or investments by the Trust shall require prior
approval by the Trust's Board of Trustees unless they are explicitly provided
for in the approved business plan or are made pursuant to authority expressly
delegated to the advisor by the Trust's Board of Trustees.
Both the Tarragon and the BCM advisory agreements also require prior approval
of the Trust's Board of Trustees for retention of all consultants and third
party professionals, other than legal counsel. The advisory agreements provide
that the advisor shall be deemed to be in a fiduciary relationship to the
Trust's shareholders; contain a broad standard governing the advisor's
liability for losses by the Trust; and contain guidelines for the advisor's
allocation of investment opportunities as among itself, the Trust and other
entities it advises.
The advisory agreements also provide for the advisor to receive an annual
incentive sales fee equal to 10% of the amount, if any, by which the aggregate
sales consideration for all real estate sold by the Trust during such fiscal
year exceeds the sum of: (i) the cost of each such property as originally
recorded in the Trust's books for tax purposes (without deduction for
depreciation, amortization or reserve for losses), (ii) capital improvements
made to such assets during the period owned by the Trust and (iii) all closing
costs, (including real estate commissions) incurred in the sale of such
property; provided, however, no incentive fee shall be paid unless (i) such
real estate sold in such fiscal year, in the aggregate, has produced an 8%
simple annual return of the Trust's net investment including capital
improvements, calculated over the Trust's holding period before depreciation
and inclusive of operating income and sales consideration and (ii) the
aggregate net operating income from all real estate owned by the Trust for each
of the prior and current fiscal years shall be at least 5% higher in the
current fiscal year than in the prior fiscal year.
Additionally, pursuant to each of the advisory agreements, the advisor or an
affiliate of the advisor is to receive an acquisition commission for
supervising the acquisition, purchase or long term lease of real estate for the
Trust equal to the lesser of (i) up to 1% of the cost of acquisition, inclusive
of commissions, if any, paid to nonaffiliated brokers or (ii) the compensation
customarily charged in arm's-length transactions by others rendering similar
property acquisition services as an ongoing public activity in the same
geographical location and for
78
<PAGE> 79
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
comparable property; provided that the purchase price of each property
(including acquisition commissions and all real estate brokerage fees) may not
exceed such property's appraised value at acquisition.
Each of the advisory agreements require the advisor or any affiliate of the
advisor to pay to the Trust one-half of any compensation received from third
parties with respect to the origination, placement or brokerage of any loan
made by the Trust, provided, however, that the compensation retained by the
advisor or any affiliate of the advisor shall not exceed the lesser of (i) 2%
of the amount of the loan committed by the Trust or (ii) a loan brokerage and
commitment fee which is reasonable and fair under the circumstances.
Each of the advisory agreements also provide that the advisor or an affiliate
of the advisor is to receive a mortgage or loan acquisition fee with respect to
the acquisition or purchase from an unaffiliated party of any existing mortgage
or loan by the Trust equal to the lesser of (i) 1% of the amount of the loan
purchased or (ii) a loan brokerage or commitment fee which is reasonable and
fair under the circumstances. Such fee will not be paid in connection with
the origination or funding by the Trust of any mortgage loan.
Under each of the advisory agreements, the advisor or an affiliate of the
advisor is also to receive a mortgage brokerage and equity refinancing fee for
obtaining loans to the Trust or refinancing on Trust properties equal to the
lesser of (i) 1% of the amount of the loan or the amount refinanced or (ii) a
brokerage or refinancing fee which is reasonable and fair under the
circumstances; provided, however, that no such fee shall be paid on loans from
the advisor or an affiliate of the advisor without the approval of the Trust's
Board of Trustees. No fee shall be paid on loan extensions.
Under each of the advisory agreements, the advisor is to receive reimbursement
of certain expenses incurred by it in the performance of advisory services to
the Trust.
Under each of the advisory agreements (as required by the Trust's Declaration
of Trust) all or a portion of the annual advisory fee must be refunded by the
advisor to the Trust if the Operating Expenses of the Trust (as defined in the
Trust's Declaration of Trust) exceed certain limits specified in the
Declaration of Trust based on the book value, net asset value and net income of
the Trust during such fiscal year. The operating expenses of the Trust did not
exceed such limitation in 1991, 1992 or 1993.
Additionally, if the Trust were to request that the advisor render services to
the Trust other than those required by the advisory agreement, the advisor or
an affiliate of the advisor would be separately compensated for such additional
services on terms to be agreed upon from time to time. As discussed below
under "Property
79
<PAGE> 80
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
Management," the Trust has hired Carmel, Ltd., an affiliate of BCM, to provide
property management services for the Trust's properties. Commencing, April 1,
1994, Tarragon will provide property management services for the Trust's
properties. Also as discussed below under "Real Estate Brokerage," the Trust
has engaged, on a non-exclusive basis, Carmel Realty, Inc. ("Carmel Realty"),
also an affiliate of BCM, to perform brokerage services for the Trust until
March 31, 1994.
Approval of the renewal of the Tarragon advisory agreement is required by the
Trust's shareholders.
The advisory agreement may only be assigned with the prior consent of the
Trust.
The directors and principal officers of BCM are set forth below.
MICKEY NED PHILLIPS: Director
RYAN T. PHILLIPS: Director
OSCAR W. CASHWELL: President and Director of Property and
Asset Management
KARL L. BLAHA: Executive Vice President and Director of
Commercial Management
HAMILTON P. SCHRAUFF: Executive Vice President and Chief
Financial Officer
CLIFFORD C. TOWNS, JR: Executive Vice President, Finance
THOMAS A. HOLLAND: Senior Vice President and Chief
Accounting Officer
DREW D. POTERA: Vice President, Treasurer and Securities
Manager
ROBERT A. WALDMAN: Vice President, Corporate Counsel and
Secretary
Mickey Ned Phillips is Gene E. Phillips' brother and Ryan T. Phillips is Gene
E. Phillips' son.
The directors and principal officers of Tarragon are set forth below:
WILLIAM S. FRIEDMAN: Director and Chief Executive Officer
JOHN A. DOYLE: Director, President and Chief Operating
Officer
80
<PAGE> 81
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
CHRIS CLINTON: Senior Vice President
TODD MINOR: Senior Vice President
JOHN C. STRICKLIN: Senior Vice President
CARY L. NEWBURGER: Vice President - General Counsel
IVAN ROTH: Treasurer
MARY E. MONTAGNINO: Secretary
Property Management
Since February 1, 1990, affiliates of BCM have provided property management
services to the Trust. Currently Carmel, Ltd. provides property management
services for a fee of 5% or less of the monthly gross rents collected on the
properties under management. In many cases, Carmel, Ltd. subcontracts with
other entities for the provision of the property-level management services to
the Trust at various rates. The general partner of Carmel, Ltd. is BCM. The
limited partners of Carmel, Ltd. are (i) SWI, of which Mr. Phillips is the
sole shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of the
children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level
management and leasing of eleven of the Trust's commercial properties and the
commercial properties owned by two of the real estate partnerships in which the
Trust is a partner to Carmel Realty, which is owned by SWI. Carmel, Ltd. has
resigned as property manager for the Trust's properties effective March 31,
1994.
Commencing April 1, 1994, Tarragon will provide property management services to
the Trust for a fee of 4.5% of the monthly gross rents collected on apartment
properties and not in excess of 5% of the monthly gross rents collected on
commercial properties. Tarragon intends to subcontract with other entities for
the provision of most of the property-level management services to the Trust.
Real Estate Brokerage
Prior to December 1, 1992, affiliates of BCM provided brokerage services to the
Trust and received brokerage commissions in accordance with the advisory
agreement. Effective December 1, 1992, the Trust's Board of Trustees approved
the non-exclusive engagement by the Trust of Carmel Realty to provide brokerage
services for the Trust. Such agreement terminates March 31, 1994. Carmel
Realty is entitled to receive a real estate acquisition commission for locating
and negotiating the lease or purchase by the Trust of any property equal to the
lesser of (i) up to 3% of the purchase price, inclusive of commissions, if any,
paid by the Trust to other brokers or (ii) the compensation customarily charged
in arm's-length transactions by others rendering similar property
81
<PAGE> 82
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Real Estate Brokerage (Continued)
acquisition services in the same geographical location and for comparable
property. Any commission which is paid to Carmel Realty by the seller shall be
credited against the commission to be paid by the Trust. Carmel Realty is also
entitled to receive a real estate sales commission for the sale of each Trust
property equal to the lesser of (i) 3% (inclusive of fees, if any, paid by the
Trust to other brokers) of the sales price of each property or (ii) the
compensation customarily charged in arm's-length transactions paid by others
rendering similar services in the same geographic location for comparable
property.
ITEM 11. EXECUTIVE COMPENSATION
The Trust has no employees, payroll or benefit plans and pays no compensation
to the executive officers of the Trust. The Trustees and executive officers of
the Trust who are also officers or employees of the Trust's Advisor are
compensated by the Advisor. Such affiliated Trustees and executive officers of
the Trust perform a variety of services for the Advisor and the amount of their
compensation is determined solely by the Advisor. BCM does not allocate the
cash compensation of its officers among the various entities for which it
serves as advisor. See ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF
THE REGISTRANT - The Advisor" for a more detailed discussion of the
compensation payable to BCM or Tarragon by the Trust.
The only direct remuneration paid by the Trust is to the Trustees who are not
officers or directors of BCM or Tarragon or their affiliated companies. The
Independent Trustees (i) review the business plan of the Trust to determine
that it is in the best interest of the Trust's shareholders, (ii) review the
Trust's contract with the advisor, (iii) supervise the performance of the
Trust's advisor and review the reasonableness of the compensation which the
Trust pays to its advisor in terms of the nature and quality of services
performed, (iv) review the reasonableness of the total fees and expenses of the
Trust and (v) select, when necessary, a qualified independent real estate
appraiser to appraise properties acquired by the Trust. The Independent
Trustees receive compensation in the amount of $6,000 per year, plus
reimbursement for expenses. In addition, each Independent Trustee receives (i)
$3,000 per year for each committee of the Board of Trustees on which he serves,
(ii) $2,500 per year for each committee chairmanship and (iii) $1,000 per day
for any special services rendered by him to the Trust outside of his ordinary
duties as Trustee, plus reimbursement for expenses.
During 1993, $128,516 was paid to the Independent Trustees in total Trustees'
fees for all services, including the annual fee for service during the period
June 1, 1993 through May 31, 1994, and 1993 special service fees: Willie K.
Davis, $14,875; Geoffrey C. Etnire, $19,625; Randall K. Gonzalez, $12,750; Dan
L. Johnston, $25,250; A. Bob Jordan, $10,042; Raymond V.J. Schrag, $17,500;
Bennett B. Sims, $13,500; and Ted P. Stokely, $14,974.
82
<PAGE> 83
ITEM 11. EXECUTIVE COMPENSATION (Continued)
Messrs. Davis and Schrag serve on the Fairness Committee of NRLP (for which
they each received $4,000 in 1993) whose function is to review certain
transactions between NRLP and its general partner and affiliates of such
general partner.
TMC, a company of which Mr. Gonzalez, a Trustee of the Trust until February 18,
1994, is the Managing Partner and President, provides property-level management
services, as a sub-contractor to Carmel, Ltd., for certain properties owned by
the Trust. In 1993, TMC earned fees of $58,000 for performing such services.
TMC also provides property-level management services, as a subcontractor to
Carmel, Ltd., for properties owned by ART, CMET, NOLP and TCI and through April
1993, for a property owned by a partnership which includes IORT and TCI.
Christon, a company for which Mr. Gonzalez serves as Vice President, provides
property leasing services, as a subcontractor to Carmel, Ltd., to such
partnership. Mr. Gonzalez is the son of Al Gonzalez, an ART director not
affiliated with BCM.
Since January 1, 1993, FMS, a company of which Mr. Davis is Chairman, President
and sole shareholder, has been providing property- level management services,
as a subcontractor to Carmel, Ltd., for two properties owned by the Trust. In
1993, FMS earned fees of $54,000 for performing such services.
During 1993, Mr. Jordan performed legal services for BCM and its affiliates, as
well as for ART, TCI and the Trust. The Trust paid Mr. Jordan $4,000 in legal
fees and cost reimbursements in 1993.
The Trust believes that such fees received by FMS, TMC and Mr. Jordan were at
least as favorable to the Trust as those that would be paid to unaffiliated
third parties for the performance of similar services.
(THIS SPACE INTENTIONALLY LEFT BLANK.)
83
<PAGE> 84
ITEM 11. EXECUTIVE COMPENSATION (Continued)
Performance Graph
The following performance graph compares the cumulative total shareholder
return on the Trust's shares of beneficial interest with the Standard & Poor's
500 Stock Index ("S&P 500 Index") and the National Association of Real Estate
Investment Trusts, Inc. Hybrid REIT Total Return Index ("REIT Index"). The
comparison assumes that $100 was invested on December 30, 1988 in the Trust's
shares of beneficial interest and in each of the indices and further assumes
the reinvestment of all dividends. Past performance is not necessarily an
indicator of future performance.
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
THE TRUST 100 79 55 84 55 141
S&P 500 INDEX 100 131 127 166 179 197
REIT INDEX 100 88 63 88 102 124
</TABLE>
84
<PAGE> 85
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners. The following table sets
forth the ownership of the Trust's shares of beneficial interest, both
beneficially and of record, both individually and in the aggregate for those
persons or entities known by the Trust to be beneficial owners of more than 5%
of its shares of beneficial interest as of the close of business on March 11,
1994.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percent of
Beneficial Owner Ownership Class (1)
- --------------------------- ---------------------- ----------
<S> <C> <C>
Lucy N. Friedman 802,386 (2)(3)(4) 25.3%
645 Madison Avenue (5)(6)
Suite 2200
New York, New York 10022
</TABLE>
- ---------------
(1) Percentages are based upon 3,088,663 shares of beneficial interest
outstanding at March 11, 1994.
(2) Includes 12,612 shares owned by Lucy N. Friedman's husband, William S.
Friedman.
(3) Includes 609,595 shares owned by Lucy N. Friedman. In addition, includes
44,512 shares and 44,259 shares owned by Lucy N. Friedman's minor sons,
Gideon and Samuel Friedman. Lucy Friedman has control of such shares.
(4) Does not include 49,894 shares owned by Lucy N. Friedman's adult son,
Ezra Friedman, and 48,190 shares owned by Lucy N. Friedman's adult
daughter, Tanya Friedman. Mrs. Friedman disclaims beneficial ownership
of such shares.
(5) Includes 23,942 shares owned by a trust for the benefit of the children
and grandchildren of Samuel Friedman, deceased, William S. Friedman's
father, for which Robert A. Friedman and Gerald C. Friedman, siblings of
William S. Friedman and Ruth Friedman, his mother, are the trustees.
Lucy N. Friedman disclaims beneficial ownership of such shares.
(6) Includes 33,000 shares owned by Tarragon Capital Corporation, of which
Lucy N. Friedman and William S. Friedman are executive officers and
directors and 34,466 shares owned by Tarragon Partners, Ltd., of which
Lucy N. Friedman and William S. Friedman are limited partners. Mrs.
Friedman disclaims beneficial ownership of such shares.
(THIS SPACE INTENTIONALLY LEFT BLANK.)
85
<PAGE> 86
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(Continued)
Security Ownership of Management. The following table sets forth the ownership
of the Trust's shares of beneficially interest, both beneficially and of record,
both individually and in the aggregate for the Trustees and executive officers
of the Trust as of the close of business on March 11, 1994.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percent of
Name of Beneficial Owner Ownership Class (1)
- -------------------------- --------------------- ----------
<S> <C> <C>
William S. Friedman 831,354 (2)(3)(4) 26.9%
(5)(6)(7)
Willie K. Davis 69,903 (8) 2.3%
John A. Doyle 112,783 (6)(9) 3.6%
Geoffrey C. Etnire 69,903 (8) 2.3%
Dan L. Johnston 69,903 (8) 2.3%
A. Bob Jordan 69,903 (8) 2.3%
Bennett B. Sims 69,903 (8) 2.3%
Raymond V.J. Schrag 72,653 (8)(9) 2.4%
Ted P. Stokely 69,903 (8) 2.3%
All Trustees and Executive 983,790 (2)(3)(4) 30.4%
Officers as a group (5)(6)(7)
(12 individuals) (8)(9)(10)
</TABLE>
- ---------------
* Less than 1%.
(1) Percentages are based upon 3,088,663 shares of beneficial interest
outstanding at March 11, 1994.
(2) Includes 28,968 shares held by a trust for the benefit of the children of
Gene E. Phillips for which William S. Friedman is the trustee. Mr.
Friedman disclaims beneficial ownership of such shares. Mr. Friedman
also owns 12,612 shares of beneficial interest personally.
(3) Includes 609,595 shares owned by William S. Friedman's wife, Lucy
Friedman. Mr. Friedman disclaims beneficial ownership of such shares.
In addition, includes 44,512 shares and 44,259 shares owned by William S.
Friedman's minor sons, Gideon and Samuel Friedman. Lucy Friedman has
control of such shares. Mr. Friedman disclaims beneficial ownership of
such shares.
86
<PAGE> 87
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(Continued)
(4) Does not include 49,894 shares owned by William S. Friedman's adult son,
Ezra Friedman, and 44,259 shares owned by William S. Friedman's adult
daughter, Tanya Friedman. Mr. Friedman disclaims beneficial ownership
of such shares.
(5) Includes 23,942 shares owned by a trust for the benefit of the children
and grandchildren of Samuel Friedman, deceased, William S. Friedman's
father, for which Robert A. Friedman and Gerald C. Friedman, siblings of
William S. Friedman and Ruth Friedman, his mother, are the trustees. Mr.
Friedman disclaims beneficial ownership of such shares.
(6) Includes 33,000 shares owned by Tarragon Capital Corporation, of which
Lucy N. Friedman, William S. Friedman and John A. Doyle are executive
officers and directors.
(7) Includes 34,466 shares owned by Tarragon Partners, Ltd., of which Lucy N.
Friedman and William S. Friedman are limited partners. Mr. Friedman
disclaims beneficial ownership of such shares.
(8) Includes 69,903 shares owned by CMET of which Messrs. Davis, Etnire,
Johnston, Jordan, Schrag, Sims and Stokely may be deemed to be beneficial
owners by virtue of their positions as CMET trustees.
(9) Includes 76,923 shares in which Mr. Doyle has beneficial interest as a
result of a $1.0 million subordinated debenture which is convertible to
76,923 of the Trust's shares. John A. Doyle also owns 2,860 shares
personally.
(10) Raymond V.J. Schrag owns 2,750 shares personally.
(THIS SPACE INTENTIONALLY LEFT BLANK.)
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Business Relationships
In February 1989, the Trust's Board of Trustees voted to retain BCM as the
Trust's advisor as discussed in ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND
ADVISOR OF THE REGISTRANT - The Advisor." BCM is a corporation of which
Messrs. Cashwell, Blaha, Schrauff and Holland serve as executive officers.
Messrs. Phillips and Friedman served as directors of BCM until December 22,
1989. Mr. Phillips served as Chief Executive Officer of BCM until September
1, 1992 and Mr. Friedman served as President of BCM until May 1, 1993. BCM is
beneficially owned by a trust for the benefit of the children of Mr. Phillips.
On February 10, 1994, the Trust's Board of Trustees selected Tarragon to
replace BCM as the Trust's advisor. Commencing April 1, 1994, Tarragon will be
providing advisory services to the Trust under an advisory agreement. Mr.
Friedman serves as director and Chief Executive Officer of Tarragon. Tarragon
is owned by Lucy N. Friedman, Mr. Friedman's wife, and Mr. Doyle, who serves as
President and Chief Operating Officer of Tarragon and Trustee and Executive
Vice President of the Trust. Mr. Friedman's family owns approximately 30% of
the outstanding shares of the Trust.
Also on February 10, 1994, VPT's Board of Trustees selected Tarragon to replace
BCM as VPT's advisor commencing March 1, 1994. Messrs. Davis, Doyle, Friedman,
Johnson, Schrag, Sims and Weisbrod, Trustees of the Trust, serve as trustees of
VPT.
Tarragon occupies office space at VPT's One Turtle Creek Office/Retail Complex,
which serves as the Trust's executive offices.
Since February 1, 1990, affiliates of BCM have provided property management
services to the Trust. Currently, Carmel, Ltd. provides property management
services for a fee of 5% or less of the monthly gross rents collected on the
properties under management. In many cases, Carmel, Ltd. subcontracts with
other entities for the property-level management services to the Trust at
various rates. The general partner of Carmel, Ltd. is BCM. The limited
partners of Carmel, Ltd. are (i) SWI, of which Mr. Phillips is the sole
shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of the
children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level
management and leasing of eleven of the Trust's commercial properties and the
commercial properties owned by two of the real estate partnerships in which the
Trust is a partner to Carmel Realty, which is owned by SWI. Carmel, Ltd.
resigned as property manager for the Trust's properties effective March 31,
1994. Commencing April 1, 1994, Tarragon will provide property management
services to the Trust.
Prior to December 1, 1992, affiliates of BCM provided brokerage services to the
Trust and received brokerage commissions in accordance with the advisory
agreement. Effective December 1, 1992, the Trust engaged Carmel Realty, on a
non-exclusive basis, to provide brokerage services for the Trust. Carmel
Realty is owned by SWI. Such agreement terminates March 31, 1994.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Certain Business Relationships (Continued)
The Trustees, with the exception of Messrs. Etnire, Jordan and Stokely, and the
officers of the Trust serve as trustees and officers of VPT. The Trustees,
with the exception of Messrs. Friedman, Doyle and Weisbrod, also serve as
trustees or directors of CMET, IORT and TCI. The Trust's Trustees owe
fiduciary duties to such entities as well as to the Trust under applicable law.
VPT has the same relationship with Tarragon as the Trust. CMET, IORT and TCI
have the same relationships with BCM as the Trust. Mr. Phillips is the general
partner and until March 4, 1994, Mr. Friedman was a general partner of the
general partner of NRLP and NOLP. BCM performs certain administrative
functions for NRLP and NOLP on a cost-reimbursement basis. BCM also serves as
advisor to ART. Messrs. Phillips and Friedman served as executive officers
and directors of ART until November 16, 1992 and December 31, 1992,
respectively.
As discussed in ITEM 11. "EXECUTIVE COMPENSATION," Messrs. Davis and Schrag
serve on the Fairness Committee of NRLP, whose function is to review certain
transactions between NRLP and its general partner and affiliates of such
general partner. TMC, a company of which Mr. Gonzalez, a trustee of the Trust
until February 18, 1994, is the Managing Partner and President, provides
property-level management services as a subcontractor to Carmel, Ltd. for
certain properties owned by ART, CMET, NOLP, TCI and the Trust and through
April 30, 1993, for a property owned by a partnership which includes IORT and
TCI. Christon, a company of which Mr. Gonzalez serves as Vice President,
provides property leasing services, as a subcontractor to Carmel, Ltd., for
such partnership property. Mr. Gonzalez is the son Al Gonzalez, a director of
ART not affiliated with BCM.
From April 1992 to December 31, 1993, Mr. Stokely was employed as a Real Estate
Consultant for Eldercare, a nonprofit corporation engaged in the acquisition of
low income and elderly housing. Eldercare has a revolving loan commitment from
SWI which is owned by Mr. Phillips and affiliated with BCM. In addition, in
November 1991, the Trust funded a $230,000 loan to Eldercare. Eldercare filed
for bankruptcy protection in October 1993. At December 31, 1993, the Trust's
loan to Eldercare was in default.
During 1993, Mr. Jordan performed legal services for BCM and its affiliates, as
well as for TCI, ART and the Trust.
Related Party Transactions
Historically, the Trust has engaged in and may continue to engage in business
transactions, including real estate partnerships, with related parties. All
related party transactions entered into by the Trust must be approved by a
majority of the Trust's Board of Trustees, including a majority of the
Independent Trustees. In addition, the Related Party Transaction Committee of
the Trust's Board of Trustees must review all such transactions prior to their
submission to the Trust's Board of Trustees for consideration. The Trust's
management believes that all of
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Related Party Transactions (Continued)
the related party transactions represented the best investments available at
the time and were at least as advantageous to the Trust as could have been
obtained from unrelated third parties.
As more fully described in ITEM 2. "PROPERTIES - Real Estate", the Trust is a
partner with CMET in the Sacramento Nine and Adams Properties Associates
partnerships.
On December 10, 1990, the Trust's Board of Trustees, based on the
recommendation of its Related Party Transaction Committee, authorized the
purchase of up to $1.0 million of the shares of beneficial interest of CMET
through negotiated or open market transactions. At December 31, 1993, the
Trust owned 54,500 shares of beneficial interest of CMET which it purchased in
1990 and 1991 through open market transactions, at a total cost to the Trust of
$250,000. At December 31, 1993, the aggregate market value of the CMET shares
was $702,000. See ITEM 2. "PROPERTIES - Equity Investment in REIT."
In December 1993, the Trust's Board of Trustees approved the issuance of a $1.0
million convertible subordinated debenture to Mr. Doyle, Trustee and Executive
Vice President of the Trust since February 1994, in exchange for his 10%
participation in the profits of the Consolidated Capital Properties II ("CCP
II") assets, which the Trust had acquired in November 1992. This participation
was granted as consideration for Mr. Doyle's services to the Trust in
connection with the CCP II portfolio. The debenture bears interest at a rate
of 6% per annum, matures in five years and is convertible into 76,923 of the
Trust's shares of beneficial interest. Mr. Doyle also serves as Director,
President and Chief Operating Officer and is a 50% shareholder of Tarragon
Realty Advisors, Inc. ("Tarragon"), the Trust's advisor commencing April 1,
1994. See NOTE 4. "REAL ESTATE AND DEPRECIATION."
In 1993, the Trust paid BCM and its affiliates $1.5 million in advisory fees,
$21,000 in real estate and mortgage brokerage commissions and $360,000 in
property management fees and leasing commissions. In addition, as provided in
the Advisory Agreement, BCM received cost reimbursements from the Trust of
$627,000 in 1993.
Restrictions on Related Party Transactions
The Trust's Declaration of Trust provides that:
"(t)he Trustees shall not . . . purchase, sell or lease any Real
Properties or Mortgages to or from . . . the Advisor or any of (its)
Affiliates," and that "(t)he Trustees shall not . . . make any loan to .
. . the Advisor or any of (its) Affiliates."
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Restrictions on Related Party Transactions (Continued)
Moreover, the Declaration of Trust further provides that:
(t)he Trust shall not purchase or lease, directly or indirectly, any Real
Property or purchase any Mortgage from the Advisor or any affiliated
Person, or any partnership in which any of the foregoing may also be a
general partner, and the Trust will not sell or lease, directly or
indirectly, any of its Real Property or sell any Mortgage to any of the
foregoing Persons." The Declaration of Trust further provides that "the
Trust shall not directly or indirectly, engage in any transaction with
any Trustee, officer or employee of the Trust or any director, officer or
employee of the Advisor . . . or of any company or other organization of
which any of the foregoing is an Affiliate, except for . . . (among other
things) transactions with . . . the Advisor or Affiliates thereof
involving loans, real estate brokerage services, real property management
services, the servicing of Mortgages, the leasing of real or personal
property, or other services, provided such transactions are on terms not
less favorable to the Trust than the terms on which nonaffiliated parties
are then making similar loans or performing similar services for
comparable entities in the same area and are not entered into on an
exclusive basis.
The Declaration of Trust defines "Affiliate" as follows:
(A)s to any Person, any other Person who owns beneficially, directly, or
indirectly, 1% or more of the outstanding capital stock, shares, or
equity interests of such Person or of any other Person which controls, is
controlled by, or is under common control with, such Person or is an
officer, retired officer, director, employee, partner, or trustee
(excluding independent trustees not otherwise affiliated with the entity)
of such Person or of any other Person which controls, is controlled by,
or is under common control with, such Person.
The Declaration of Trust further provides that:
The Trustees shall not...invest in any equity Security, including the
shares of other REITs for a period in excess of 18 months, except for
shares of a qualified REIT subsidiary, as defined in Section 856(i) of
the Internal Revenue Code, and regular or residual interests in
REMICs...(or) acquire Securities in any company holding investments or
engaging in activities prohibited by this Section...
As discussed in "Related Party Transactions," above, since September 1990, the
Trust has invested in shares of CMET. As of March 11, 1994, the Trust owned
54,500 shares of CMET. CMET has the same advisor as the Trust and certain of
its Trustees are also trustees of CMET. As noted above, under the terms of its
Declaration of Trust, the Trust is prohibited from investing in equity
securities for a period in excess of 18 months. The Trust's shareholders
approved an amendment to the Trust's Declaration of Trust allowing the Trust to
hold these shares of CMET until July 30, 1996.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Restrictions on Related Party Transactions (Continued)
All related party transactions that the Trust may enter into must be reviewed
by the Related Party Transaction Committee of the Trust's Board of Trustees to
determine whether such transactions are (i) fair to the Trust and (ii) are
permitted by the Trust's governing documents. Each of the members of the
Related Party Transaction Committee is a Trustee who is not an officer,
director or employee of the Trust's advisor, BCM or Tarragon, and is not an
officer or employee of the Trust.
____________________________________
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, 1993 and 1992
Consolidated Statements of Operations -
Years Ended December 31, 1993, 1992 and 1991
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1993, 1992 and 1991
Consolidated Statements of Cash Flows -
Years Ended December 31, 1993, 1992 and 1991
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule X - Supplementary Income Statement Information
Schedule XI - Real Estate and Accumulated Depreciation
Schedule XII - 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.
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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
- ------- -----------
3.1 Second Amended and Restated Declaration of Trust (incorporated by
reference to the Registrant's Current Report on Form 8- K dated
August 14, 1987).
3.2 Amendment No. 1 to the Second Amended and Restated Declaration of
Trust, (incorporated by reference to the Registrant's Current Report
on Form 8-K dated July 5, 1989) reporting change in name of Trust.
3.3 Amendment No. 2 to the Second Amended and Restated Declaration of
Trust, (incorporated by reference to the Registrant's Current Report
on Form 8-K dated March 22, 1990,) reporting deletion of liquidation
provisions.
3.4 Amendment No. 3 to the Second Amended and Restated Declaration of
Trust, (incorporated by reference to the Registrant's Current Report
on Form 8-K dated June 3, 1992) reporting the extension of the
holding period of the Trust's marketable equity securities.
3.5 Restated Trustees' Regulations dated as of April 21, 1989,
(incorporated by reference to the Registrant's Current Report on
Form 8-K dated March 24, 1989).
10.1 Advisory Agreement dated as of December 1, 1992, between National
Income Realty Trust and Basic Capital Management, Inc. (incorporate
by reference to Exhibit No. 10.2 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1992).
10.2 Brokerage Agreement dated as of December 1, 1992, between National
Income Realty Trust and Carmel Realty, Inc. (incorporated by
reference to Exhibit No. 10.3 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992).
10.3 Advisory Agreement dated as of February 15, 1994, between National
Income Realty Trust and Tarragon Realty Advisors, Inc.
(incorporated by reference to Exhibit No. 10 to the Registrant's
Current Report on Form 8-K dated February 10, 1994).
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ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)
(b) Reports on Form 8-K.
A Current Report on Form 8-K, dated November 10, 1993, was filed with
respect to Item 5, which reports the confirmation of the Plan of
Reorganization of the Century Centre II Office Building.
A Current Report on Form 8-K, dated February 10, 1994, was filed with
respect to Item 5, which reports the selection of Tarragon Realty
Advisors, Inc. as the new advisor to the Registrant.
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SIGNATURES
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 INCOME REALTY TRUST
Dated: March 30, 1994 By: /s/ William S. Friedman
William S. Friedman
President, Chief Executive Officer
and Trustee
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
By: /s/ Willie K. Davis By: /s/ A. Bob Jordan
Willie K. Davis A. Bob Jordan
Trustee Trustee
By: /s/ John A. Doyle By: /s/ Raymond V. J. Schrag
John A. Doyle Raymond V. J. Schrag
Trustee and Executive Vice President Trustee
By: By: /s/ Bennett B. Sims
Geoffrey C. Etnire Bennett B. Sims
Trustee Trustee
By: /s/ William S. Friedman By: /s/ Ted P. Stokely
William S. Friedman Ted P. Stokely
President, Chief Executive Officer Trustee
and Trustee
By: /s/ Dan L. Johnston By: /s/ Carl Weisbrod
Dan L. Johnston Carl Weisbrod
Trustee Trustee
By: /s/ Ivan Roth
Ivan Roth
Treasurer and Chief Financial Officer
Dated: March 30, 1994
95
