<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, 1996
Commission File Number 1-9648
NATIONAL REALTY, L.P.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 75-2163175
- -------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas 75231
- --------------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(214) 692-4700
---------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
----- -----
Units of Limited Partner Interest 6,417,916
--------------------------------- ---------------------------------
(Class) (Outstanding at April 26, 1996)
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements have not been examined 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,
1996 1995
------------- ------------
(dollars in thousands)
<S> <C> <C>
Assets
------
Real estate held for investment
Land............................................ $ 51,342 $ 51,342
Buildings and improvements...................... 391,708 391,097
----------- -----------
443,050 442,439
Less - accumulated depreciation................. (215,467) (212,957)
----------- -----------
227,583 229,482
Notes and interest receivable, net of deferred
gains of $15,787 in 1996 and 1995............... 12,171 12,156
Less - allowance for estimated losses........... (1,910) (1,910)
----------- -----------
10,261 10,246
Cash and cash equivalents........................ 12,022 20,699
Accounts receivable.............................. 1,154 1,220
Prepaid expenses................................. 1,187 1,253
Escrow deposits and other assets (including $283
in 1996 from affiliates)........................ 14,651 14,930
Marketable equity securities of affiliate, at
market.......................................... 917 722
Deferred financing costs......................... 13,891 14,378
----------- -----------
$ 281,666 $ 292,930
=========== ===========
</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,
1996 1995
----------- ------------
(dollars in thousands)
<S> <C> <C>
Liabilities and Partners' Equity (Deficit)
------------------------------------------
Liabilities
Notes and interest payable...................... $ 325,514 $ 326,500
Pension notes and related interest payable...... 12,383 12,034
Accrued property taxes.......................... 5,081 6,792
Accounts payable and other liabilities
(including $276 in 1995 to affiliates)....... 4,920 11,966
Tenant security deposits........................ 2,915 2,908
---------- ----------
350,813 360,200
Commitments and contingencies
Redeemable General Partner Interest.............. 31,997 31,997
Partners' equity (deficit)
General Partner................................. 2,647 2,656
Limited Partners (6,417,916 units in 1996 and
6,417,981 units in 1995)..................... (68,267) (66,204)
Unrealized gain on marketable equity securities. 648 453
---------- ----------
(64,972) (63,095)
Less - Redeemable General Partner Interest...... (36,172) (36,172)
---------- ----------
(101,144) (99,267)
---------- ----------
$ 281,666 $ 292,930
========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
------------------------------
1996 1995
------------- -----------
(dollars in thousands,
except per unit)
<S> <C> <C>
Revenues
Rents............................................. $ 27,014 $ 26,248
Interest.......................................... 746 665
------------- ------------
27,760 26,913
Expenses
Interest.......................................... 8,427 8,515
Depreciation & amortization....................... 2,510 2,560
Property taxes & insurance........................ 3,093 2,983
Utilities......................................... 2,970 2,950
Property-level payroll costs...................... 1,670 1,708
Repairs and maintenance........................... 5,492 5,360
Other operating expenses.......................... 1,098 1,168
Property management fees.......................... 1,155 1,130
General and administrative........................ 1,813 1,743
------------- ------------
28,228 28,117
------------- ------------
Net (loss)........................................... $ (468) $ (1,204)
============= ============
Earnings per unit
Net (loss)......................................... $ (.07) $ (.18)
============= ============
Weighted average units of limited partner interest
used in computing earnings per unit............... 6,417,943 6,418,212
============= ============
</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)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Unrealized
Gain On Redeemable
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, 1996......... $ 2,656 $ (66,204) $ 453 $ (36,172) $ (99,267)
Distributions ($.25 per unit).... - (1,604) - - (1,604)
Unrealized gain on marketable
equity securities of affiliate. - - 195 - 195
Net (loss)....................... (9) (459) - - (468)
--------- ---------- -------- ---------- -----------
Balance, March 31, 1996.......... $ 2,647 $ (68,267) $ 648 $ (36,172) $ (101,144)
========= ========== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------------
1996 1995
------------ ------------
(dollars in thousands)
<S> <C> <C>
Cash Flows From Operating Activities
Rents collected................................ $ 27,087 $ 26,040
Interest collected............................. 732 645
Interest paid.................................. (7,407) (7,644)
Payments for property operations............... (16,338) (16,627)
General and administrative expenses paid....... (1,922) (1,678)
----------- -----------
Net cash provided by operating activities... 2,152 736
Cash Flows From Investing Activities
Acquisition of real estate..................... - (463)
Real estate improvements....................... (611) (393)
Collections on notes receivable................ - 5
----------- -----------
Net cash (used in) investing activities..... (611) (851)
Cash Flows From Financing Activities
Borrowings from financial institutions......... 2,400 -
Payments from (to) affiliates, net............. (559) 1,470
Payments of mortgage notes payable............. (3,526) (1,150)
Deferred financing costs (44) -
Distributions to unitholders................... (8,489) (428)
----------- -----------
Net cash (used in) financing activities..... (10,218) (108)
----------- -----------
Net (decrease) in cash and cash
equivalents................................. (8,677) (223)
Cash and cash equivalents at beginning of period 20,699 3,748
----------- -----------
Cash and cash equivalents at end of period...... $ 12,022 $ 3,525
=========== ===========
Reconciliation of net (loss) to net cash
provided by operating activities
Net (loss)...................................... $ (468) $ (1,204)
Adjustments to reconcile net (loss) to net
cash provided by operating activities
Depreciation and amortization.................. 3,041 3,139
(Increase) Decrease in other assets............ (694) 692
(Increase) in interest receivable.............. (3) (9)
Increase in interest payable................... 75 279
Increase (decrease) in other liabilities....... 201 (2,161)
----------- -----------
Net cash provided by operating activities... $ 2,152 $ 736
=========== ===========
Schedule of noncash financing activities
Unrealized gain on marketable equity securities
of affiliate................................ $ 195 $ 6
Note payable from acquisition of real estate... - 1,200
</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, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. 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, 1995 (the "1995 Form
10-K").
Units and per unit data have been restated for the three for one forward unit
split effected January 2, 1996.
NOTE 2. EARNINGS PER UNIT
Net (loss) per unit of limited partner interest (per "unit") is computed based
upon the weighted average number of units outstanding during each period. The
limited partners of National Realty, L.P. ("National Realty") have a 99%
interest and the general partner, Syntek Asset Management, L.P. (the "General
Partner" or "SAMLP"), has an aggregate 1% interest in the net income, net loss
and distributions of National Realty. National Realty is allocated 99% of the
net income or net loss of National Operating, L.P. ("NOLP" or the "Operating
Partnership"), and the General Partner is allocated an aggregate 1% of the net
income or net loss of the Operating Partnership. The 1% General Partner
interest in each of National Realty and the Operating Partnership is equal to a
1.99% interest on a combined basis. Accordingly, net (loss) per unit is
derived by dividing 98.01% of the net (loss) in each period by the respective
weighted average units of limited partner interest.
NOTE 3. NOTES PAYABLE
In March 1996, the Partnership refinanced the mortgage debt secured by the
Whispering Pines Apartments in Canoga Park, California in the amount of $2.4
million. The Partnership received net cash of $37,000 after the payoff of $2.3
million in existing mortgage debt, which matured in December 1995. The new
mortgage bears interest at the rate of 7.5% per annum, requires monthly
payments of principal and interest of $19,000 and matures in April 2001.
NOTE 4. WARRANTS
Pursuant to a litigation settlement agreement, on February 14, 1992, the
Partnership issued warrants to purchase an aggregate of 2,019,579 of its units
of limited partner interest subject to adjustment. Each warrant entitles the
holder thereof to purchase three quarters of one unit
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NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. WARRANTS (Continued)
at the exercise price ($12.00 per warrant), equal to $16.00 per unit, 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 5. INCOME TAXES
No federal or state income taxes have been provided for in the accompanying
Consolidated Statements of Operations as the partners include their share of
Partnership income or loss in their respective tax returns. For income or loss
allocation purposes, limited partners are allocated their proportionate share
of income or loss commencing with the calendar month subsequent to their entry
into the Partnership.
NOTE 6. LEGAL PROCEEDINGS
Moorman Settlement. The Partnership is party to a settlement agreement, dated
as of May 9, 1990, between plaintiffs Joseph B. Moorman, et al. and defendants
Robert A. McNeil, National Realty, the Operating Partnership, SAMLP, Gene E.
Phillips and William S. Friedman, and Shearson Lehman Hutton Inc.,
successor-in-interest to defendant E.F. Hutton & Company Inc., relating to the
action entitled Moorman, et al. v. Southmark Corporation, et al. Such action
was filed on September 2, 1987, in the Superior Court of the State of
California, County of San Mateo. On May 9, 1990, the Partnership agreed to
settle such action pursuant to the terms of a written agreement (the "Moorman
Settlement Agreement"). On June 29, 1990, after a hearing as to its fairness,
reasonableness and adequacy, the Moorman Settlement Agreement was granted final
court approval.
The Moorman Settlement Agreement is complex and the following summary is
qualified in its entirety by reference to the text thereof, which was
previously included as an exhibit to the Partnership's Form 10-Q for the
quarter ended March 31, 1990, as filed with the Securities and Exchange
Commission. The Moorman Settlement Agreement provides for a plan (the "Moorman
Settlement Plan") consisting of, among other things, the following: (i) the
appointment and operation of a committee (the "Oversight Committee"), to
oversee the implementation of the Moorman Settlement Plan, (ii) the appointment
and operation of an audit committee having a majority of members unaffiliated
with Messrs. Phillips and Friedman or SAMLP, (iii) the establishment of
specified annually increasing targets described below (each a "Target") for
each of the next five years through May 1995, relating to the price of the
units of limited partner interest as decreased for certain distributions to
unitholders, (iv) an agreement by SAMLP not to seek reimbursement of greater
than $500,000 per year for Messrs. Phillips' and Friedman's salaries for
serving as general partners of SAMLP, (Mr. Friedman resigned as general partner
of SAMLP effective March 4, 1994) and a deferral of such payments until such
time as a Target may be met, and,
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NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. LEGAL PROCEEDINGS (Continued)
if SAMLP resigns as General Partner, a waiver of any compensation so deferred,
(v) a deferral until such time as a Target may be met of certain future annual
General Partner compensation payable, pursuant to the Partnership's governing
documents, to SAMLP or its affiliates, and, if SAMLP resigns as General
Partner, a waiver of any compensation so deferred, (vi) the required
distribution to unitholders of all the Partnership's operating cash flow in
excess of certain renovation costs, unless the Oversight Committee approves
alternative uses for such operating cash flow, (vii) the issuance of Warrants
to purchase an aggregate of up to 2,019,579 units (the "Warrants") to Class
Members, (viii) the contribution by certain co-defendants of cash and notes
payable to the Partnership aggregating $5.5 million (including $2.5 million to
be contributed by SAMLP and its general partners over a four-year period), (ix)
the amendment of the Partnership Agreement to reduce the vote required to
remove the General Partner from a two-thirds vote to a majority vote of the
units, (x) the Partnership's redemption of its unit purchase rights and an
agreement not to adopt a similar rights plan without Oversight Committee
approval and (xi) the Partnership's payment of certain settlement costs,
including plaintiffs' attorneys' fees in the amount of $3.4 million. The
Moorman Settlement Plan will remain in effect until SAMLP has resigned as
General Partner and a successor general partner is elected and takes office,
and the Warrants will remain exercisable for five years from the February 14,
1992 date of issuance or until earlier redemption.
SAMLP, on behalf of itself and its general partners, has made the payments of
$2.5 million (including accrued interest), to the Partnership, as required by
the Moorman Settlement Agreement.
If Targets are not met for any two successive years of the Moorman Settlement
Plan or for the final year of the Moorman Settlement Plan, SAMLP will be
required to withdraw as General Partner effective at the time a successor
general partner is elected. Upon, among other things, the withdrawal of SAMLP
as General Partner and the due election and taking office of a successor, the
Moorman Settlement Plan would terminate.
The Targets for the first and second anniversary dates were not met. Since the
Targets were not met for two successive years, the Moorman Settlement Agreement
requires that SAMLP resign as General Partner, effective upon the election and
qualification of its successor. On July 8, 1992, SAMLP notified the Oversight
Committee of the failure to meet the Target for two successive years.
Upon, among other things, the withdrawal of SAMLP as General Partner and the
due election and taking office of a successor, the Moorman Settlement Plan will
terminate. Withdrawal of SAMLP as General Partner pursuant to the Moorman
Settlement Agreement requires unitholders to elect a successor general partner
by majority vote. Upon the withdrawal or removal of the General Partner
without the selection of a successor, the Partnership would be dissolved.
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NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. LEGAL PROCEEDINGS (Continued)
The Moorman Settlement Agreement provides that between the date of the
certification causing the General Partner's resignation and the date a
successor general partner takes office, the resigning General Partner shall
limit its activities, as General Partner, to the conduct of the business of the
Partnership in the ordinary course, shall not, without consent of the Oversight
Committee, purchase or sell any real estate or other assets of the Partnership
not in progress on said date, shall cooperate in the election of a successor
general partner and shall cooperate with its successor to facilitate a change
in the office of General Partner of the Partnership. The resigning General
Partner will continue to receive fees, expenses and distributions, if any,
while the solicitation is prepared.
The withdrawal of the General Partner would require the Partnership to acquire
the General Partner's interest in the Partnership (the "Redeemable General
Partner Interest") at its then fair value, and to pay certain fees and other
compensation, as provided in the Partnership Agreement and the Moorman
Settlement Agreement. Under the Moorman Settlement Agreement, payment for such
Redeemable General Partner Interest, fees and other compensation may, at the
Oversight Committee's option, be paid over a three year period pursuant to a
secured promissory note bearing interest at the prime rate and containing
commercially reasonable terms and collateral. Under the Moorman Settlement
Plan, the purchase price for Redeemable General Partner Interest would be
calculated, as of the time SAMLP withdraws as General Partner under the
Partnership's governing documents. The Managing General Partner has calculated
the Redeemable General Partner Interest at December 31, 1995 to be $36.2
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, 1996)
plus all accrued but unpaid interest ($5.4 million at March 31, 1996) on the
note receivable from SAMLP for its capital contribution to the Partnership. In
the accompanying Consolidated Financial Statements, the Redeemable General
Partner Interest is shown as a reduction of Partners' Equity. The note
receivable from the General Partner has been offset against the Redeemable
General Partner Interest. The Oversight Committee previously has informed the
Partnership that it calculated the amount of such Redeemable General Partner
Interest to be less than the amount calculated by the Managing General Partner.
When SAMLP withdraws as General Partner of the Partnership, the value of the
Redeemable General Partner Interest would depend on the fair value of the
Partnership's assets at the time of calculation and there can be no assurance
that the Redeemable General Partner Interest, fees and other compensation
payable on any such withdrawal will not be substantially higher or lower than
any current estimate or calculation.
On January 27, 1995, National Realty, SAMLP and the Oversight Committee
executed an Implementation Agreement which provides for the nomination
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NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. LEGAL PROCEEDINGS (Continued)
of a successor general partner and for the resolution of all related matters
under the Moorman Settlement. On February 20, 1996, the parties to the
Implementation Agreement executed an Amended and Restated Implementation
Agreement.
Provided that the successor general partner is elected pursuant to the terms of
the Amended and Restated Implementation Agreement, SAMLP shall receive
$12,471,500 from the Partnership. This amount represents a compromise
settlement of the net amounts owed by the Partnership to SAMLP upon SAMLP's
withdrawal as General Partner and any amounts which SAMLP and its affiliates
may owe to the Partnership. This amount shall be paid to SAMLP pursuant to a
promissory note in accordance with the terms set forth in the Amended and
Restated Implementation Agreement.
The Amended and Restated Implementation Agreement has been submitted to the
Supervising Judge for tentative approval and approval of the notice to be sent
to the original class members. Upon final approval by the Supervising Judge,
the proposal to elect the successor general partner will be submitted to the
unitholders of National Realty for a vote. In addition, the unitholders will
vote upon amendments to the National Realty Partnership Agreement which relate
to the proposed compensation of the successor general partner and other related
matters.
Upon approval by the unitholders, SAMLP shall resign as General Partner and the
successor general partner shall take office. If the required approvals are
obtained, National Realty anticipates that the successor general partner may be
elected and take office during the fourth quarter of 1996.
The Amended and Restated Implementation Agreement provides that SAMLP, and its
affiliates owning units in National Realty, shall not vote to remove the
successor general partner, except for removal with cause, for a period of 36
months from the date the successor general partner takes office.
Upon the election and taking office of the successor general partner, the
Moorman Settlement Plan and the Oversight Committee shall terminate. If the
successor general partner nominee does not stand for election or is not
elected, the existing Moorman Settlement Agreement shall remain in full force
and effect and all of the provisions of the Amended and Restated Implementation
Agreement shall be voided.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
National Realty, L.P. ("National Realty") is a Delaware limited partnership
formed on January 29, 1987, the business of which consists primarily of owning
and operating through National Operating, L.P., also a Delaware limited
partnership (the "Operating Partnership"), a portfolio of real estate. Most of
the Operating Partnership's properties were acquired in transactions
consummated on September 18, 1987, pursuant to which National Realty acquired
all of the assets, and assumed all of the liabilities, of 35 public and private
limited partnerships. National Realty and the Operating Partnership operate as
an economic unit and, unless the context otherwise requires, all references
herein to the "Partnership" shall constitute references to National Realty and
the Operating Partnership as a unit.
In November 1992, the Operating Partnership, in conjunction with a refinancing
of 52 of its apartment properties and a wraparound note receivable, transferred
such assets to Garden Capital, L.P. ("GCLP"), a Delaware limited partnership in
which the Operating Partnership holds a 99.3% limited partner interest.
Liquidity and Capital Resources
Cash and cash equivalents aggregated $12.0 million at March 31, 1996 compared
to $20.7 million at December 31, 1995. 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,
1996, the aggregate loan-to-value ratio of the Partnership's real estate
portfolio was 47.1%, computed on the basis of the ratio of total
property-related debt to aggregate appraised values as of December 31, 1995, as
compared with a loan-to-value ratio of 47.3% at December 31, 1995.
The Partnership's principal sources of cash flow have been and will continue to
be from property operations and externally generated funds. Externally
generated funds include borrowings, proceeds from the sale of Partnership
properties and other assets and proceeds from the issuance of debt secured by
Partnership properties or mortgage notes receivable. The Partnership expects
that its cash on hand, cash flow from property operations together with
externally generated funds will be sufficient to meet the Partnership's various
cash needs in 1996, including but not limited to the payment of distributions,
debt service obligations coming due and property maintenance and improvements,
as more fully discussed in the paragraphs below.
In November 1992, in conjunction with the transfer of the net assets of 52
apartment complexes and a wraparound note receivable to GCLP, such
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
assets were refinanced under a $223 million blanket mortgage loan. The blanket
mortgage loan requires that cash flow from the GCLP properties be used to fund
various escrow and reserve accounts and limits the payment of distributions to
the Partnership. During the first quarter of 1996, the Partnership received
distributions from GCLP totaling $550,000, compared to distributions totaling
$712,000 received during the first quarter of 1995.
In March 1996, the Partnership announced an increase in its regular quarterly
distribution from $.07 per unit to $.10 per unit. The Partnership also
announced a special distribution of $.15 per unit. On March 31, 1996, the
Partnership paid such distributions, totaling $.25 per unit, or $1.6 million,
to unitholders of record on March 15, 1996.
On January 2, 1996, the Partnership paid a total of $6.8 million in
distributions that had been declared in 1995.
In May 1996, the Partnership announced an offer to buy back its units of
limited partner interest from unitholders owning 99 or fewer units. The
Partnership will pay a premium of $.50 per unit over the average closing price
of its units as reported from May 10, 1996 through June 28, 1996, the
expiration date of the offer.
The Partnership's net cash flow from property operations (rents collected less
payments for property operating expenses) increased from $9.4 million for the
three months ended March 31, 1995 to $10.7 million for the three months ended
March 31, 1996. This increase is primarily due to an increase in rental and
occupancy rates at the Partnership's apartment complexes and commercial
properties, partially offset by a decrease of $400,000 due to the sale of the
Vineyards and Harbour Pointe Apartments in December 1995.
As discussed in NOTE 6. "LEGAL PROCEEDINGS," the Moorman litigation settlement
agreement (the "Moorman Settlement Agreement") sets forth certain aggressive,
annually increasing targets relating to the price of the Partnership's units of
limited partner interest which were not met, resulting in, among other things,
the required withdrawal of the General Partner upon election of a successor and
the resulting required purchase of the Redeemable General Partner Interest, as
defined below.
The withdrawal of the General Partner requires the Partnership to acquire the
General Partner's interest in the Partnership (the "Redeemable General Partner
Interest") at its then fair value, and to pay certain fees and other
compensation, as provided in the Partnership Agreement and the Moorman
Settlement Agreement. The Moorman Settlement Agreement provides that any
payment for such Redeemable General Partner Interest, fees and other
compensation during the pendency of the Moorman Settlement Agreement may, at
the option of the Oversight Committee (also established under the Moorman
Settlement Agreement), be made over three
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<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
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, 1995 to be
$36.2 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, 1996) plus all accrued and unpaid interest ($5.4
million at March 31, 1996) on the note receivable from the General Partner
representing its capital contribution to the Partnership. When Syntek Asset
Management, L.P. ("SAMLP") withdraws as General Partner of the Partnership, the
fair value of the Redeemable General Partner Interest would depend on the value
of the Partnership's assets at the time of calculation and there can be no
assurance that the Redeemable General Partner Interest, fees and other
compensation payable on any such withdrawal will not be substantially higher or
lower than any current estimate or calculation.
In the accompanying Consolidated Balance Sheets, the Redeemable General Partner
Interest is shown as a reduction in Partners' Equity and the note receivable
from the General Partner has been offset against the Redeemable General
Partner Interest.
On January 27, 1995, National Realty, SAMLP and the Oversight Committee
executed an Implementation Agreement which provides for the nomination of a
successor general partner and for the resolution of all related matters under
the Moorman Settlement. On February 20, 1996, the parties to the
Implementation Agreement executed an Amended and Restated Implementation
Agreement.
Provided that the successor general partner is elected pursuant to the terms of
the Amended and Restated Implementation Agreement, SAMLP shall receive
$12,471,500 from the Partnership. This amount represents a compromise
settlement of the net amounts owed by the Partnership to SAMLP upon SAMLP's
withdrawal as General Partner and any amounts which SAMLP and its affiliates
may owe to the Partnership. This amount shall be paid to SAMLP pursuant to a
promissory note in accordance with the terms set forth in the Amended and
Restated Implementation Agreement.
The Amended and Restated Implementation Agreement has been submitted to the
Supervising Judge for tentative approval and approval of the notice to be sent
to the original class members. Upon final approval by the Supervising Judge,
the proposal to elect the successor general partner will be submitted to the
unitholders of National Realty for a vote. In addition, the unitholders will
vote upon amendments to the National Realty Partnership Agreement which relate
to the proposed compensation of the successor general partner and other related
matters.
Upon approval by the unitholders, SAMLP shall resign as General Partner and the
successor general partner shall take office. If the required approvals are
obtained, National Realty anticipates that the successor general partner may be
elected and take office during the fourth quarter of 1996.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
The Amended and Restated Implementation Agreement provides that SAMLP, and its
affiliates owning units in National Realty, shall not vote to remove the
successor general partner, except for removal with cause, for a period of 36
months from the date the successor general partner takes office.
Upon the election and taking office of the successor general partner, the
Moorman Settlement Plan and the Oversight Committee shall terminate. If the
successor general partner is not elected, the existing Moorman Settlement
Agreement shall remain in full force and effect and all of the provisions of
the Amended and Restated Implementation Agreement shall be voided.
Results of Operations
The Partnership reported a net loss of $468,000 for the three months ended
March 31, 1996 as compared to a net loss of $1.2 million for the three months
ended March 31, 1995. The primary factors contributing to the Partnership's
improvement in operating results are discussed in the following paragraphs.
Net rental income for the Partnership (rents less property operating expenses)
for the three months ended March 31, 1996 was $11.5 million, compared to $10.9
million for the three months ended March 31, 1995. A decrease in net rental
income of $404,000 due to the sale of the Vineyards and Harbour Pointe
Apartments in December 1995 was more than offset by increased rental and
occupancy rates at the Partnership's other apartment complexes and commercial
properties.
Interest income increased from $665,000 for the three months ended March 31,
1995 to $746,000 for the three months ended March 31, 1996. This increase is
primarily attributable to an increase in interest earned on the GCLP credit
enhancement escrow account.
Interest expense decreased slightly from $8.5 million for the three months
ended March 31, 1995 to $8.4 million for the three months ended March 31, 1996.
Of this decrease, $277,000 is attributable to the sale of the Vineyards and
Harbour Pointe Apartments in December 1995 and an additional $125,000 is
attributable to a decrease in the London Interbank Offering Rate interest rate
on the variable portion of the GCLP mortgage. These decreases are partially
offset by increases in interest expense due to mortgage debt which was
refinanced in 1995 and the first quarter of 1996.
General and administrative expenses increased from $1.7 million for the three
months ended March 31, 1995 to $1.8 million for the three months ended March
31, 1996. This increase is primarily due to an increase in legal fees related
to the Moorman litigation.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Tax Matters
National Realty is a publicly traded limited partnership and, for federal
income tax purposes, all income or loss generated by the Partnership is
included in the income tax returns of the individual partners. In December
1987, Congress passed legislation requiring certain publicly traded
partnerships to be taxed as corporations. National Realty qualifies for
"grandfather" treatment and will be treated as a partnership until at least
1997, unless the Partnership adds a substantial new line of business, which
would require approval of the Oversight Committee, and will continue to be so
treated thereafter if 90% or more of its gross income consists of qualifying
income from real estate activities. As presently operated, the Partnership
meets these requirements. Under Internal Revenue Service guidelines generally
applicable to publicly traded partnerships and thus to the Partnership, a
limited partner's use of his or her share of partnership losses is subject to
special limitations.
Inflation
The effects of inflation on the Partnership's operations are not quantifiable.
Revenues from property operations generally fluctuate proportionately with
inflationary increases and decreases in housing costs. Fluctuations in the
rate of inflation also affect the sales values of the Partnership's properties
and, correspondingly, the ultimate gains to be realized by the Partnership from
property sales. To the extent that inflation affects interest rates, the
Partnership's earnings from short-term investments and the cost of new
borrowings as well as the cost of its variable rate borrowings will be
affected.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, the Partnership, may be potentially liable for removal or
remediation costs, as well as certain other potential costs relating to
hazardous or toxic substances (including governmental fines and injuries to
persons and property) where property-level managers have arranged for the
removal, disposal or treatment of hazardous or toxic substances. In addition,
certain environmental laws impose liability for release of asbestos-containing
materials into the air, and third parties may seek recovery from the
Partnership for personal injury associated with such materials.
The General Partner is not aware of any environmental liability relating to the
above matters that would have a material adverse effect on the Partnership's
business, assets or results of operations.
Recent Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Recent Accounting Pronouncement (Continued)
Of". The statement requires that long-lived assets be considered impaired
"...if the sum of the expected future cash flows (undiscounted and without
interest charges) is less than the carrying amount of the asset." If
impairment exists, an impairment loss shall be recognized, by a charge against
earnings, equal to "...the amount by which the carrying amount of the asset
exceeds the fair value of the asset." If impairment of a long-lived asset is
recognized, the carrying amount of the asset shall be reduced by the amount of
the impairment, shall be accounted for as the asset's "new cost" and such new
cost shall be depreciated over the asset's remaining useful life.
SFAS No. 121 further requires that long-lived assets held for sale "...be
reported at the lower of carrying amount or fair value less cost to sell." If
a reduction in a held for sale asset's carrying amount to fair value less cost
to sell is required, a provision for loss shall be recognized by a charge
against earnings. Subsequent revisions, either upward or downward, to a held
for sale asset's fair value less cost to sell shall be recorded as an
adjustment to the asset's carrying amount, but not in excess of the asset's
carrying amount when originally classified as held for sale. A corresponding
charge or credit to earnings is to be recognized. Long-lived assets held for
sale are not to be depreciated. SFAS No. 121 is effective for fiscal years
beginning after December 15, 1995. The Partnership adopted SFAS No. 121
effective January 1, 1996.
The adoption of SFAS No. 121 had no effect on the Partnership's depreciation or
reported net loss for the three months ended March 31, 1996.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See NOTE 6. "LEGAL PROCEEDINGS - Moorman Settlement," of NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS in PART I for information relating to legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -------------------------------------------------------------
<S> <C>
11.0 Computation of Earnings Per Unit
27.0 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
A Current Report on Form 8-K, dated February 27, 1996, was filed with
respect to Item 5, "Other Events", which reports the execution of the
Amended and Restated Implementation Agreement.
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 14, 1996 By: /s/ Randall M. Paulson
------------------------- -----------------------------------
Randall M. Paulson
President
Date: May 14, 1996 By: /s/ Thomas A. Holland
-------------------------- -----------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
<PAGE> 20
NATIONAL REALTY, L.P.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Quarter ended March 31, 1996
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- --------------------------------------------------- ------
<S> <C> <C>
11.0 Computation of Earnings Per Unit 21
27.0 Financial Data Schedule 22
</TABLE>
20
<PAGE> 1
EXHIBIT 11.0
NATIONAL REALTY, L.P.
A DELAWARE LIMITED PARTNERSHIP
Computation of Earnings Per Unit
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1996 1995
---------- ----------
(dollars in thousands,
except per unit)
<S> <C> <C>
Net (loss).......................................... $ (468) $ (1,204)
Less - General Partner's 1.99% Interest............ (9) (24)
---------- ----------
Net (loss) allocable to Limited Partner............. $ (459) $ (1,180)
========== ==========
Earnings Per Unit
Net (loss)......................................... $ (.07) $ (.18)
========== ==========
Weighted average units of limited partner interest
used in computing earnings per unit................ 6,417,943 6,418,212
========== ==========
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 12,022
<SECURITIES> 917
<RECEIVABLES> 12,171
<ALLOWANCES> 1,910
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 443,050
<DEPRECIATION> 215,467
<TOTAL-ASSETS> 281,666
<CURRENT-LIABILITIES> 0
<BONDS> 337,897
<COMMON> 0
0
0
<OTHER-SE> (101,144)
<TOTAL-LIABILITY-AND-EQUITY> 281,666
<SALES> 0
<TOTAL-REVENUES> 27,014
<CGS> 0
<TOTAL-COSTS> 15,478
<OTHER-EXPENSES> 2,510
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,427
<INCOME-PRETAX> (468)
<INCOME-TAX> 0
<INCOME-CONTINUING> (468)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (468)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
