<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED MARCH 31, 1994
Commission File Number 1-9648
NATIONAL REALTY, L.P.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 75-2163175
- - ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas 75231
- - -----------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(214) 692-4700
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
Units of Limited Partner Interest 2,139,607
- - --------------------------------- -------------------------------
(Class) (Outstanding at April 29, 1994)
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements have not been audited by
independent certified public accountants, but in the opinion of the management
of National Realty, L.P., all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of consolidated results of
operations, consolidated financial position and consolidated cash flows at the
dates and for the periods indicated, have been included.
NATIONAL REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
Assets -------------- --------------
------ (dollars in thousands)
<S> <C> <C>
Real estate held for investment
Land............................................ $ 47,985 $ 47,985
Buildings and improvements...................... 362,315 362,116
-------------- --------------
410,300 410,101
Less - accumulated depreciation................. (188,287) (186,059)
-------------- --------------
222,013 224,042
Real estate held for sale........................ 47,553 47,553
Less - Accumulated depreciation................. (20,352) (20,061)
-------------- --------------
27,201 27,492
Notes and interest receivable, net of deferred
gains of $16,198 in 1994 and 1993............... 13,601 13,379
Less - allowance for estimated losses........... (1,910) (1,910)
-------------- --------------
11,691 11,469
Cash and cash equivalents........................ 3,612 4,038
Accounts receivable.............................. 906 2,005
Prepaid expenses................................. 1,052 1,066
Escrow deposits and other assets................. 8,114 7,815
Marketable equity securities of affiliate, at
market value.................................... 624 593
Deferred financing costs......................... 17,414 17,525
-------------- --------------
$ 292,627 $ 296,045
============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
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NATIONAL REALTY, L.P.
CONSOLIDATED BALANCE SHEETS - Continued
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
-------------- --------------
(dollars in thousands)
<S> <C> <C>
Liabilities and Partners' Equity (Deficit)
------------------------------------------
Liabilities
Notes and interest payable...................... $ 334,595 $ 335,200
Pension notes and related interest payable...... 9,906 9,618
Accrued property taxes.......................... 6,129 7,138
Accounts payable and other liabilities.......... 5,017 5,128
Tenant security deposits........................ 2,815 2,813
Amounts due to affiliates....................... 895 1,450
-------------- --------------
359,357 361,347
Commitments and contingencies
Redeemable General Partner Interest.............. 21,600 21,600
Partners' Equity (Deficit)
General Partner................................. 2,459 2,480
Limited Partners................................ (65,369) (63,931)
Unrealized gain on marketable equity securities. 355 324
-------------- --------------
(62,555) (61,127)
Less - Redeemable General Partner Interest...... (25,775) (25,775)
-------------- --------------
(88,330) (86,902)
-------------- --------------
$ 292,627 $ 296,045
============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
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NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
---------------------------------
1994 1993
--------------- -------------
(dollars in thousands,
except per unit)
<S> <C> <C>
Revenues
Rentals.......................................... $ 25,744 $ 24,392
Interest......................................... 592 1,068
--------------- -------------
26,336 25,460
Expenses
Interest......................................... 8,573 8,607
Depreciation & amortization...................... 2,519 2,504
Property taxes & insurance....................... 2,917 3,028
Utilities........................................ 3,181 2,827
Property-level payroll costs..................... 1,601 1,553
Repairs and maintenance.......................... 4,842 4,597
Other operating expenses......................... 1,140 1,123
Property management fees......................... 1,120 1,033
General and administrative....................... 1,513 1,550
--------------- -------------
27,406 26,822
--------------- -------------
(Loss) before extraordinary gain.................. (1,070) (1,362)
Extraordinary gain................................ - 9,046
--------------- -------------
Net income (loss)................................. $ (1,070) $ 7,684
=============== =============
Earnings per unit
(Loss) before extraordinary gain................. $ (.49) $ (.58)
Extraordinary gain............................... - 3.83
--------------- -------------
Net income (loss)................................ $ (.49) $ 3.25
=============== =============
Weighted average units of limited partner interest
used in computing earnings per unit.............. 2,139,607 2,314,816
=============== =============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
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NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Unrealized
Gain/(Loss) Redeemable
on Marketable General Partners'
General Limited Equity Partner Equity
Partner Partners Securities Interest (Deficit)
--------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994........ $ 2,480 $ (63,931) $ 324 $ (25,775) $ (86,902)
Unrealized gain on marketable
equity securities of affiliate. - - 31 - 31
Distributions ($0.20 per unit).. - (389) - - (389)
Net (loss)...................... (21) (1,049) - - (1,070)
-------- ---------- ------ --------- ---------
Balance, March 31, 1994......... $ 2,459 $ (65,369) $ 355 $ (25,775) $ (88,330)
======== ========== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
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NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------------------
1994 1993
-------------- --------------
(dollars in thousands)
<S> <C> <C>
Cash Flows From Operating Activities
Rentals collected............................... $ 26,006 $ 24,466
Interest collected.............................. 345 642
Interest paid................................... (7,753) (7,544)
Payments for property operations................ (15,599) (13,679)
General and administrative expenses paid........ (1,311) (1,879)
Deferred financing costs........................ (461) (388)
-------------- --------------
Net cash provided by operating activities.... 1,227 1,618
Cash Flows From Investing Activities
Real estate improvements........................ (199) (384)
Collections on notes receivable................. 5 -
-------------- --------------
Net cash (used in) investing activities...... (194) (384)
Cash Flows From Financing Activities
Borrowings from financial institutions.......... 4,743 -
Payments to affiliates, net..................... (555) (909)
Payments of mortgage notes payable.............. (5,258) (980)
Distributions to unitholders.................... (389) -
Repurchase of units of limited partner interest. - (39)
Achievement escrows............................. - 717
-------------- --------------
Net cash (used in) financing activities...... (1,459) (1,211)
-------------- --------------
Net increase (decrease) in cash and
cash equivalents......................... (426) 23
Cash and cash equivalents at beginning of period. 4,038 3,387
-------------- --------------
Cash and cash equivalents at end of period....... $ 3,612 $ 3,410
============== ==============
Reconciliation of net income (loss) to net cash
provided by operating activities
Net income (loss)................................ $ (1,070) $ 7,684
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation and amortization................... 2,519 2,504
Extraordinary gain.............................. - (9,046)
Decrease in other assets........................ 558 1,686
(Increase) in interest receivable............... (226) (142)
Increase in interest payable.................... 200 75
(Decrease) in other liabilities................. (754) (1,143)
-------------- --------------
Net cash provided by operating activities.... $ 1,227 $ 1,618
============== ==============
Schedule of noncash financing activities
Settlement of debt obligation of $9,946 in
exchange for note payable.................... $ - $ 900
Unrealized gain on marketable equity securities. 31 -
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements of National Realty, L.P. and
consolidated entities (the "Partnership") have been prepared in conformity with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
Operating results for the three month period ended March 31, 1994 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1994. For further information, refer to the Consolidated
Financial Statements and Notes thereto included in the Partnership's Annual
Report on Form 10-K for the year ended December 31, 1993 (the "1993 Form
10-K").
Certain 1993 balances have been reclassified to conform to the 1994
presentation.
NOTE 2. EARNINGS PER UNIT
Net income (loss) per unit of limited partner interest (per "unit") is computed
based upon the weighted average number of units outstanding during the period.
The limited partners of National Realty, L.P. ("National Realty") have a 99%
interest and the general partner, Syntek Asset Management, L.P. (the "General
Partner" or "SAMLP"), has an aggregate 1% interest in the net income, net loss
and distributions of National Realty. National Realty is allocated 99% of the
net income or net loss of National Operating, L.P. (the "Operating
Partnership"), and the General Partner is allocated an aggregate 1% of the net
income or net loss of the Operating Partnership. The 1% General Partner
interest in each of National Realty and the Operating Partnership is equal to a
1.99% interest on a combined basis. Accordingly, net income (loss) per unit is
derived by dividing 98.01% of the net income (loss) in each period by the
respective weighted average units of limited partner interest.
NOTE 3. INCOME TAXES
No federal or state income taxes have been provided for in the accompanying
Consolidated Financial Statements as the partners include their share of
Partnership income or loss in their respective tax returns. For income or loss
allocation purposes, limited partners are allocated their proportionate share
of income or loss commencing with the calendar month subsequent to their entry
into the Partnership.
NOTE 4. REAL ESTATE
In March 1994, the Partnership obtained new first mortgage financing secured by
the Cross County Shopping Center in Mattoon, Illinois. The Partnership can
borrow up to $7.5 million under the loan, to repay
7
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NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
existing debt and for the renovation of the shopping center as well as tenant
improvements. $4.7 million was advanced at closing. $4.3 million of the
proceeds were used to payoff existing debt, including prepayment penalties of
$104,000. The remainder of the proceeds were used to pay various closing costs
associated with the transaction. The new first mortgage bears interest at 1.5%
above prime rate, requires monthly payments of principal and interest based
upon the outstanding balance of the note, and matures in March 1997 with an
option to extend the maturity date to March 2002. Additional advances under
the loan are to be made primarily to finance tenant improvements related to the
expansion by a major tenant. The Partnership, in accordance with the
Partnership Agreement, paid Basic Capital Management, Inc. a 1% loan
arrangement fee of $75,000 based upon the new first mortgage financing of $7.5
million.
The Partnership has a 75% interest in Southern Palms Associates, which owns
Southern Palms Shopping Center. In August 1992, Southern Palms Associates
filed a voluntary petition in bankruptcy, seeking to restructure the $9.3
million nonrecourse mortgage secured by the shopping center. On October 26,
1993, the bankruptcy court approved the plan of reorganization and disclosure
statement subject to certain conditions, involving the 25% general partner of
Southern Palms Associates, to be rectified by the Partnership prior to the
confirmation hearing, tentatively scheduled for the second quarter of 1994.
The approved plan provides for a reduction in the interest rate from 11.7% per
annum to a variable rate, currently 8.9% per annum, and for the lender to
extend the maturity date of the mortgage to March 1998. If the plan of
reorganization is not confirmed and the shopping center is foreclosed, the
Partnership will record a loss on foreclosure of $5.8 million equal to the
amount by which the carrying value of the property exceeds the mortgage debt.
NOTE 5. WARRANTS
Pursuant to the Moorman Settlement Agreement, on February 14, 1992, the
Partnership issued 2,692,773 warrants to purchase an aggregate of 673,193 of
its units of limited partner interest subject to adjustment. Each warrant
initially entitled the holder thereof to purchase one quarter of one unit at
the exercise price ($11.00 per warrant). The initial exercise price was equal
to $44.00 per unit and increased to $48.00 per unit on February 14, 1993,
subject to adjustment. The warrants may be exercised for five years from the
February 14, 1992 date of issuance or until earlier redemption. See NOTE 6.
"LEGAL PROCEEDINGS - Moorman Settlement."
NOTE 6. LEGAL PROCEEDINGS
Moorman Settlement. The Partnership is party to a settlement agreement, dated
as of May 9, 1990, between plaintiffs Joseph B. Moorman, et al.
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NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. LEGAL PROCEEDINGS (Continued)
and defendants Robert A. McNeil, National Realty, the Operating Partnership,
SAMLP, Messrs. Phillips and Friedman, and Shearson Lehman Hutton Inc.,
successor-in-interest to defendant E.F. Hutton & Company Inc., relating to the
action entitled Moorman, et al. v. Southmark Corporation, et al. Such action
was filed on September 2, 1987, in the Superior Court of the State of
California, County of San Mateo. The plaintiffs' motion for class
certification, was granted, for purposes of settlement only, on May 16, 1990.
The "Class Members" are those persons who, as of September 17, 1987, were
limited partners of one or more of McNeil Real Estate Fund VI, Ltd., McNeil
Real Estate Fund VII, Ltd. and McNeil Real Estate Fund VIII, Ltd. (each a
California limited partnership that was merged into the Operating Partnership
by means of an exchange transaction), exclusive of (i) the defendants in the
action and certain affiliates of such defendants and (ii) those persons who
elected to be excluded from the plaintiff class. On May 9, 1990, the
Partnership agreed to settle such action pursuant to the terms of a written
agreement (the "Moorman Settlement Agreement"). On June 29, 1990, after a
hearing as to its fairness, reasonableness and adequacy, the Moorman Settlement
Agreement was granted final court approval.
By agreeing to settle the Moorman action, the Partnership, SAMLP, and Messrs.
Phillips and Friedman did not and do not admit any liability whatsoever.
The terms of the Moorman Settlement Agreement are complex and the following
summary is qualified in its entirety by reference to the text thereof, which
was previously included as an exhibit to a Partnership filing with the
Securities and Exchange Commission. The Moorman Settlement Agreement provides
for a plan (the "Moorman Settlement Plan") consisting of, among other things,
the following: (i) the appointment and operation of a committee (the "Oversight
Committee") to oversee the implementation of the Moorman Settlement Plan, (ii)
the appointment and operation of an audit committee having a majority of
members unaffiliated with Messrs. Phillips and Friedman or SAMLP, (iii) the
establishment of specified annually increasing targets described below (each a
"Target") for each of the next five years, relating to the price of the units
of limited partner interest as decreased for certain distributions to
unitholders, (iv) an agreement by SAMLP not to seek reimbursement of greater
than $500,000 per year for Messrs. Phillips' and Friedman's salaries for
serving as general partners of SAMLP, (Mr. Friedman resigned as general partner
of SAMLP effective March 4, 1994) and a deferral of such payments until such
time as a Target may be met, and, if SAMLP resigns as General Partner, a waiver
of any compensation so deferred, (v) a deferral until such time as a Target may
be met of certain future annual General Partner compensation payable, pursuant
to the Partnership's governing documents, to SAMLP or its affiliates, and, if
SAMLP resigns as General Partner, a waiver of any compensation so deferred,
(vi) the required distribution to unitholders of all the Partnership's
operating cash flow in excess of certain renovation costs,
9
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NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. LEGAL PROCEEDINGS (Continued)
unless the Oversight Committee approves alternative uses for such operating
cash flow, (vii) the issuance of Warrants to purchase an aggregate of up to
687,500 units (the "Warrants") to Class Members, (viii) the contribution by
certain co-defendants of cash and notes payable to the Partnership aggregating
$5.5 million (including $2.5 million to be contributed by SAMLP and its general
partners over a four-year period), (ix) the amendment of the Partnership
Agreement to reduce the vote required to remove the General Partner from a
two-thirds vote to a majority vote of the units, (x) the Partnership's
redemption of its unit purchase rights and an agreement not to adopt a similar
rights plan without Oversight Committee approval and (xi) the Partnership's
payment of certain settlement costs, including plaintiffs' attorneys' fees in
the amount of $3.4 million. The Moorman Settlement Plan will remain in effect
for a maximum period of five years from the May 9, 1990 announcement of the
Moorman Settlement Agreement to the financial press, and the Warrants will
remain exercisable for five years from the February 14, 1992 date of issuance
or until earlier redemption.
In May 1991, 1992 and 1993, SAMLP, on behalf of itself and its general
partners, made the first three of its four annual payments of $631,000
(including accrued interest), to the Partnership, as required by the Moorman
Settlement Agreement. The final payment of $631,000 is to be paid in May 1994.
If the Partnership falls short of a Target for any one year of the Moorman
Settlement Plan by 10% or more, then the Oversight Committee may request that
the Partnership dispose of a portion of its assets and distribute the resulting
net proceeds to unitholders. Specifically, (i) if the shortfall equals 10% or
more but less than 35% of a Target, then the Oversight Committee may request
that the Partnership sell assets having at least 10% of the Partnership's then
aggregate Equity Value, as defined in the Moorman Settlement Agreement, in real
estate and other assets, and (ii) if the shortfall equals 35% or more of a
Target, then the Oversight Committee may request that the Partnership sell
assets having at least 20% of the Partnership's then aggregate Equity Value in
real estate and other assets.
If Targets are not met for any two successive years of the Moorman Settlement
Plan or for the final year of the Moorman Settlement Plan, SAMLP will be
required to withdraw as General Partner effective at the time a successor
general partner is elected. Upon, among other things, the withdrawal of SAMLP
as General Partner and the due election and taking office of a successor, the
Moorman Settlement Plan would terminate.
The first two annual Targets, relating to unit market price were as follows:
Anniversary Date Target
---------------- -------
May 9, 1991............................. $ 44.00
May 9, 1992............................. 57.00
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NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. LEGAL PROCEEDINGS (Continued)
Whether a given Target was achieved was determined by reference to the average
closing price per unit of National Realty's units of limited partner interest
on the American Stock Exchange ("AMEX") for the period beginning 30 days before
the corresponding Anniversary Date and ending 30 days thereafter. There shall
be added to this average closing price all distributions made after May 9,
1990, compounded at 9% per annum. Thus, achievement of the Targets may be
accomplished both through increases in the price of units and by distributions
to unitholders. The May 1991 Target of $44.00 per unit was not achieved and
the Oversight Committee formally requested that the Partnership sell real
property and other assets with an equity value of at least 20% of the aggregate
equity value of the real property and other assets owned by the Partnership as
of December 31, 1990. The General Partner selected a group of assets which it
offered for sale and such assets were classified as real estate held for sale.
Five of the assets selected were apartment complexes which were transferred to
Garden Capital, L.P. ("GCLP") and refinanced in 1992, and are no longer being
offered for sale. Accordingly, these assets were classified as held for
investment in the Partnership's Consolidated Balance Sheets at December 31,
1992 and 1993.
The Target for the second anniversary date of May 9, 1992 was $57.00 per unit.
The average market price per unit for the averaging period was $20.93 and
therefore, the second Target was not met. Since the Target has not been met
for two successive years, the Moorman Settlement Agreement requires that SAMLP
resign as General Partner, effective upon the election and qualification of its
successor. On July 8, 1992, SAMLP notified the Oversight Committee of the
failure to meet the Target for two successive years.
Upon, among other things, the withdrawal of SAMLP as General Partner and the
due election and taking office of a successor, the Moorman Settlement Plan
would terminate. Withdrawal of SAMLP as General Partner pursuant to the Moorman
Settlement Agreement requires unitholders to elect a successor general partner
by majority vote. Upon the withdrawal or removal of the General Partner
without the selection of a successor, the Partnership would be dissolved.
The Moorman Settlement Agreement provides that between the date of the
certification causing the General Partner's resignation and the date a
successor general partner takes office, the resigning General Partner shall
limit its activities, as General Partner, to the conduct of the business of the
Partnership in the ordinary course, shall not, without consent of the Oversight
Committee, purchase or sell any real estate or other assets of the Partnership
not in progress on said date, shall cooperate in the election of a successor
general partner and shall cooperate with its successor to facilitate a change
in the office of General Partner of the Partnership. The resigning General
Partner will continue to receive fees, expenses and distributions, if any,
while the solicitation is prepared.
11
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NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. LEGAL PROCEEDINGS (Continued)
Any dispute between the General Partner and the Oversight Committee concerning
the operation of the Moorman Settlement Agreement is to be resolved by the
Judge appointed pursuant to the Moorman Settlement Agreement to supervise its
implementation.
The withdrawal of the General Partner would require the Partnership to acquire
the General Partner's interest in the Partnership (the "Redeemable General
Partner Interest") at its then fair value, and to pay certain fees and other
compensation, as provided in the Partnership Agreement and the Moorman
Settlement Agreement. Under the Moorman Settlement Agreement, payment for such
Redeemable General Partner Interest, fees and other compensation may, at the
Oversight Committee's option, be paid over a three year period pursuant to a
secured promissory note bearing interest at the prime rate and containing
commercially reasonable terms and collateral. Under the Moorman Settlement
Plan, the purchase price for Redeemable General Partner Interest would be
calculated, as of the time SAMLP withdraws as General Partner under the
Partnership's governing documents. The Managing General Partner has calculated
the Redeemable General Partner Interest at December 31, 1993 to be $25.8
million, and believes there has been no material change in such value since
such date. The Partnership would be entitled to offset against any such
payment the then outstanding principal balance ($4.2 million at March 31, 1994)
plus all accrued but unpaid interest ($3.7 million at March 31, 1994) on the
note receivable from SAMLP for its capital contribution to the Partnership. In
the accompanying Consolidated Financial Statements, the Redeemable General
Partner Interest is shown as a reduction of Partners' Equity. The note
receivable from the General Partner has been offset against the Redeemable
General Partner Interest. The Oversight Committee has informed the Partnership
that it calculated the amount of such Redeemable General Partner Interest at
December 31, 1993, before the note receivable and unpaid interest offset
described above, to be approximately $20.0 million. When SAMLP withdraws as
General Partner of the Partnership, the value of the Redeemable General Partner
Interest would depend on the fair value of the Partnership's assets at the time
of calculation and there can be no assurance that the Redeemable General
Partner Interest, fees and other compensation payable on any such withdrawal
will not be substantially higher or lower than any current estimate or
calculation.
In October 1993, SAMLP and the Oversight Committee reached an agreement in
principle, evidenced by a detailed Term Sheet, to nominate a candidate for
successor General Partner and to resolve all related matters under the Moorman
Settlement Agreement. The following summary is qualified in its entirety by
reference to the text of the Term Sheet filed as an exhibit to the
Partnership's Current Report on Form 8-K dated October 6, 1993. The Term Sheet
provides that the nominee for successor General Partner will be a newly formed
corporation which will be a wholly-owned subsidiary of SAMLP. The Term Sheet
also sets forth
12
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NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. LEGAL PROCEEDINGS (Continued)
an agreement in principle to effect a restructuring of National Realty and the
spinoff by National Realty to its unitholders of shares of a newly formed
subsidiary which would qualify as a Real Estate Investment Trust ("REIT") for
federal tax purposes and would be the beneficial owner of 75% of NOLP's
partnership interest in GCLP. The Term Sheet also contains proposed amendments
to the National Realty partnership agreement. Pursuant to the Term Sheet, the
Partnership will be relieved of any obligation to acquire the Redeemable
General Partner Interest or to pay any other fees or compensation to SAMLP upon
SAMLP's withdrawal as General Partner.
The parties are preparing the agreements and other documents contemplated by
the Term Sheet. Upon execution of an agreement embodying the provisions of the
Term Sheet, the Oversight Committee and SAMLP will petition the Supervising
Judge for his approval of the agreement. The proposed restructuring of
National Realty and the formation and spinoff of the REIT, the election of the
new general partner and the proposed amendments to the Partnership Agreement
require unitholder approval before becoming effective.
Other. The Partnership is involved in various lawsuits arising in the ordinary
course of business. Management of the Partnership is of the opinion that the
outcome of these lawsuits would have no material impact on the Partnership's
financial condition.
_____________________________
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
National Realty, L.P. ("National Realty") is a Delaware limited partnership
formed on January 29, 1987, the business of which consists primarily of owning
and operating through National Operating, L.P., also a Delaware limited
partnership (the "Operating Partnership"), a portfolio of real estate. Most of
the Operating Partnership's properties were acquired in transactions
consummated on September 18, 1987, pursuant to which National Realty acquired
all of the assets, and assumed all of the liabilities, of 35 public and private
limited partnerships. National Realty and the Operating Partnership operate as
an economic unit and, unless the context otherwise requires, all references
herein to the "Partnership" shall constitute references to National Realty and
the Operating Partnership as a unit.
In November 1992, the Operating Partnership, in conjunction with a refinancing
of 52 of its apartment properties and a wraparound note
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Introduction (Continued)
receivable, transferred such assets to Garden Capital, L.P. ("GCLP"), a
Delaware limited partnership in which the Operating Partnership holds a 99.3%
limited partner interest.
National Realty's units of limited partner interest are traded on the American
Stock Exchange (the "AMEX") using the symbol "NLP." National Realty no longer
meets certain of the criteria of the AMEX for continued listing and will likely
continue to fail to meet such criteria. Although National Realty does not
anticipate that the AMEX will seek to delist its units of limited partner
interest, there can be no assurance that the AMEX will not seek to do so.
Liquidity and Capital Resources
Cash and cash equivalents aggregated $3.6 million at March 31, 1994 compared to
$4.0 million at December 31, 1993. The principal reasons for this decrease in
cash are discussed in the paragraphs below.
The Managing General Partner of the Partnership's General Partner has
discretion in determining methods of obtaining funds for the Partnership's
operations. The Partnership's governing documents place no limitation on the
amount of leverage that the Partnership may incur either in the aggregate or
with respect to any particular property or other investment. At March 31,
1994, the aggregate loan-to-value ratio of the Partnership's real estate
portfolio was 52.0%, computed on the basis of the ratio of total property-
related debt to aggregate appraised values as of December 31, 1993, as compared
with a loan-to-value ratio of 52.1% at December 31, 1993.
Historically, the Partnership's principal sources of cash flow have been and
will continue to be from property operations, proceeds from property sales and
externally generated funds. Externally generated funds include borrowings,
proceeds from the sale of assets, proceeds from the issuance of debt secured by
Partnership properties or mortgage notes receivable and in the future may
include proceeds from the exercise of outstanding Warrants. The Partnership
continues to experience liquidity problems and expects that cash flow from
operations together with externally generated funds will be sufficient to meet
the Partnership's various cash needs only if the Partnership is able to renew
and extend mortgage financings as they mature, obtain mortgage financing on its
unencumbered properties, or alternatively, increase the rate of property and
other asset sales, in amounts sufficient to provide adequate cash.
The Partnership's properties, except for five, are encumbered by mortgages. In
1994, mortgages totaling $21.6 million have or will become due. In March 1994,
$4.2 million of this amount was successfully refinanced. The new $7.5 million
loan, of which only $4.7 million has been advanced to date, matures in March
1997. In addition, the Partnership has reached a tentative agreement with the
lender for the modification and extension of a $9.3 million mortgage which
matured in
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
1993. The agreement is expected to be finalized in the second quarter of 1994.
It is the Partnership's intention to either pay the remaining mortgages that
mature in 1994 when due, or seek to extend the due dates one or more years
while attempting to obtain alternate financing. The Partnership also intends
to seek to refinance certain mortgages not due in 1994 and use the proceeds for
working capital purposes. Due to the limited long-term financing available to
the Partnership, there can be no assurance that the Partnership will be
successful in extending such "balloon" payments or that it will not ultimately
lose certain of its properties to foreclosure. However, the General Partner
believes it will continue to be successful in obtaining at least the minimum
amount of extensions or other proceeds to enable the Partnership to maintain
ownership of all properties in which it has equity.
The Partnership currently has two apartment complexes under contract for sale.
The Partnership anticipates closing these two sales during the third quarter of
1994. The properties are classified as real estate held for sale in the
Partnership's accompanying Consolidated Balance Sheets. The Partnership,
however, can give no assurance that it will successfully complete these
property sales.
In November 1992, in conjunction with the transfer of the net assets of 52
apartment complexes and a wraparound note receivable to GCLP, such assets were
refinanced under a $223 million blanket mortgage loan. The blanket mortgage
loan requires that cash flow from the GCLP properties be used to fund various
escrow and reserve accounts and limits the payment of distributions to the
Partnership. During the first quarter of 1994, the Partnership received
distributions from GCLP totaling $225,000. No distributions were received in
the first quarter of 1993.
On March 30, 1994, the Partnership paid a quarterly distribution of $0.20 per
unit to unitholders of record on March 18, 1994.
The Partnership's net cash flow from property operations (rentals collected
less payments for property operating expenses) decreased from $10.8 million for
the three months ended March 31, 1993 to $10.4 million for the three months
ended March 31, 1994. This decrease is primarily attributable to a $1.1
million increase in payments for tax and insurance escrows related to the GCLP
properties. This decrease is offset in part by a $700,000 increase in cash
flow attributable to two properties obtained subsequent to the first quarter of
1993 and an increase in the average rental rates at the Partnership's apartment
complexes.
As discussed in NOTE 6. "LEGAL PROCEEDINGS," the Moorman litigation settlement
agreement (the "Moorman Settlement Agreement") sets forth certain aggressive,
annually increasing targets relating to the price of the Partnership's units of
limited partner interest which were not met, resulting in, among other things,
withdrawal of the General Partner and the resulting required repurchase of the
General Partner's interest. The
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
effects of some or all of these provisions could adversely affect the
Partnership's already strained liquidity. However, the General Partner has
reached an agreement in principle with the Oversight Committee concerning
possible arrangements which may alleviate the adverse effect of such
provisions.
The withdrawal of the General Partner requires the Partnership to acquire the
General Partner's interest at its then fair value, and to pay certain fees and
other compensation, as provided in the Partnership Agreement and the Moorman
Settlement Agreement. The Moorman Settlement Agreement provides that any
payment for such Redeemable General Partner Interest, fees and other
compensation during the pendency of the Moorman Settlement Agreement may, at
the option of the Oversight Committee (also established under the Moorman
Settlement Agreement), be made over three years pursuant to a secured
promissory note bearing interest at a financial institution's prime rate. The
Managing General Partner has calculated the fair value of the Redeemable
General Partner Interest at December 31, 1993 to be $25.8 million, and believes
that there has been no material change in such value since that date. The
Partnership would be entitled to offset against such payment the then
outstanding principal balance of the note receivable ($4.2 million at March 31,
1994) plus all accrued and unpaid interest ($3.7 million at March 31, 1994) on
the note receivable from the General Partner representing its capital
contribution to the Partnership. The Oversight Committee has informed the
Partnership that it calculates the amount of such Redeemable General Partner
Interest, fees and other compensation at December 31, 1993, before the note
receivable and unpaid interest offset discussed above, to be approximately
$20.0 million. When SAMLP withdraws as General Partner of the Partnership, the
fair value of the Redeemable General Partner Interest would depend on the value
of the Partnership's assets at the time of calculation and there can be no
assurance that the Redeemable General Partner Interest, fees and other
compensation payable on any such withdrawal will not be substantially higher or
lower than any current estimate or calculation.
In the accompanying Consolidated Financial Statements, the Redeemable General
Partner Interest is shown as a reduction in Partners' Equity and the note
receivable from the General Partner has been offset against the Redeemable
General Partner Interest.
In connection with the Moorman Settlement Agreement, the Partnership received
contributions from certain co-defendants of cash and notes including a
promissory note for $2.0 million from Gene E. Phillips and William S. Friedman,
at the time, general partners of SAMLP, and guaranteed by SAMLP. The final
payment of $631,000 is due in May 1994.
In October 1993, SAMLP and the Oversight Committee reached an agreement in
principle, evidenced by a detailed Term Sheet, to nominate a candidate for
successor general partner and to resolve all related matters under the Moorman
Settlement Agreement. The Term Sheet provides
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
that the nominee for successor General Partner will be a newly formed
corporation which will be a wholly-owned subsidiary of SAMLP. The Term Sheet
also sets forth an agreement in principle to effect a restructuring of National
Realty and the spinoff by National Realty to its unitholders of shares of a
newly formed subsidiary which would qualify as a Real Estate Investment Trust
("REIT") for federal tax purposes and would be the beneficial owner of 75% of
NOLP's partnership interest in GCLP. The Term Sheet also contains proposed
amendments to the Partnership Agreement. Pursuant to the Term Sheet, the
Partnership will be relieved of any obligation to acquire the Redeemable
General Partner Interest or to pay any other fees or compensation to SAMLP upon
SAMLP's withdrawal as General Partner. However, if the spinoff of the to be
formed REIT shares occurs, the Partnership will no longer receive 100% of the
cash distributions from the GCLP properties which amounted to $1.7 million
in 1993.
The parties are preparing the agreements and other documents contemplated by
the Term Sheet. Upon execution of an agreement embodying the provisions of the
Term Sheet, the Oversight Committee and SAMLP will petition the Supervising
Judge for his approval of the agreement. The proposed restructuring of
National Realty and the formation and spinoff of the REIT, the election of the
new general partner and the proposed amendments to the Partnership Agreement
require unitholder approval before becoming effective.
Results of Operations
The Partnership reported a net loss of $1.1 million for the three months ended
March 31, 1994 as compared to net income of $7.7 million for the same period in
1993. The Partnership's first quarter 1993 net income was attributable to a
$9.0 million extraordinary gain, related to the discounted acquisition of a
mortgage obligation.
Net rental income for the Partnership (rental income less property operating
expenses) increased from $10.2 million for the first quarter of 1993 compared
to $10.9 million for the first quarter of 1994. Of this increase, $246,000 is
due to the acquisition in June 1993 of a controlling partnership interest in
Club Mar Realty Group, Ltd., which owns the Club Mar Apartments, and obtaining
an apartment complex through insubstance foreclosure in December 1993. The
remainder of the increase is primarily attributable to a 6% increase in average
rental rates at the Partnership's apartment complexes.
Interest income decreased from $1.1 million for the three months ended March
31, 1993 to $592,000 for the three months ended March 31, 1994. This decrease
is primarily attributable to interest income recorded in the first quarter of
1993 on a loan on which the collateral was foreclosed in December 1993 and to a
decrease in cash received in 1994 on a mortgage note receivable on which
interest is recognized on a cash flow basis.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Interest expense for the three months ended March 31, 1994 and the three months
ended March 31, 1993 was constant at $8.6 million. An increase in interest
expense of $125,000 related to the acquisition of the partnership interest in
Club Mar Apartments in June 1993 was offset by decreases in interest expense
attributable to achievement escrows applied against the principal balances of
three of the Partnership's mortgage loans and reduced interest expense related
to the Southern Palms bankruptcy plan of reorganization.
General and administrative expenses for the three months ended March 31, 1994
of $1.5 million was comparable to that of the three months ended March 31,
1993. However, an increase in legal fees of $81,000 related to the Moorman
litigation and several bankruptcy proceedings was offset by a decrease in
accounting fees which were incurred in 1993 in connection with the formation of
GCLP.
_____________________________________
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See NOTE 6. "LEGAL PROCEEDINGS," of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in PART I for information relating to legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
- - ------ ----------------
11.1 Computation of Earnings Per Unit
(b) Reports on Form 8-K:
None.
18
<PAGE> 19
NATIONAL REALTY, L.P.
Signature Page
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NATIONAL REALTY, L.P.
By its General Partner:
SYNTEK ASSET MANAGEMENT, L.P.
By its Managing General Partner:
SYNTEK ASSET MANAGEMENT, INC.
Date: May 13, 1994 By: /s/ Oscar W. Cashwell
Oscar W. Cashwell
President
Date: May 13, 1994 By: /s/ Hamilton P. Schrauff
Hamilton P. Schrauff
Executive Vice President and
Chief Financial Officer
19
<PAGE> 20
NATIONAL REALTY, L.P.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the quarter ended March 31, 1994
EXHIBIT INDEX
Exhibit Page
Number Description Number
- - ------- ----------- ------
11.1 Computation of Earnings Per Unit 21
20
<PAGE> 1
Exhibit 11.1
NATIONAL REALTY, L.P.
A DELAWARE LIMITED PARTNERSHIP
Computation of Earnings Per Unit
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
1994 1993
-------------- ---------------
(dollars in thousands,
except per unit)
<S> <C> <C>
(Loss) before extraordinary gain................... $ (1,070) $ (1,362)
Less - General Partner's 1.99% Interest........... (21) (27)
-------------- ---------------
(Loss) before extraordinary gain allocable to
Limited Partners.................................. $ (1,049) $ (1,335)
============== ===============
Extraordinary gain................................. $ - $ 9,046
Less - General Partner's 1.99% Interest........... - 180
-------------- ---------------
Extraordinary gain allocable to Limited Partners... $ - $ 8,866
============== ===============
Net income (loss).................................. $ (1,070) $ 7,684
Less - General Partner's 1.99% Interest........... (21) 153
-------------- ---------------
Net income (loss) allocable to Limited Partner..... $ (1,049) $ 7,531
============== ===============
Earnings Per Unit
Income (loss) before extraordinary gain........... $ (.49) $ (.58)
Extraordinary gain................................ - 3.83
-------------- ---------------
Net income (loss)................................. $ (.49) $ 3.25
============== ===============
Weighted average units of limited partner interest
used in computing earnings per unit............... 2,139,607 2,314,816
============== ===============
</TABLE>
21
