<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 JUNE 30, 1996
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Commission File Number 1-9648
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NATIONAL REALTY, L.P.
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(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 6,340,415
- --------------------------------- ---------------------------------
(Class) (Outstanding at July 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>
June 30, December 31,
1996 1995
-------------- --------------
(dollars in thousands)
<S> <C> <C>
Assets
------
Real estate held for investment
Land.................................................................... $ 50,208 $ 51,342
Buildings and improvements.............................................. 394,119 391,097
-------------- --------------
444,327 442,439
Less - accumulated depreciation......................................... (217,997) (212,957)
-------------- --------------
226,330 229,482
Notes and interest receivable, net of deferred
gains of $15,787 in 1996 and 1995....................................... 13,640 12,156
Less - allowance for estimated losses................................... (1,910) (1,910)
-------------- --------------
11,730 10,246
Cash and cash equivalents................................................ 4,886 20,699
Accounts receivable (including $4,000 in 1996
from affiliates)........................................................ 5,181 1,220
Prepaid expenses (including $174 in 1996 to
affiliates)............................................................. 1,186 1,253
Escrow deposits and other assets......................................... 16,145 14,930
Marketable equity securities of affiliate, at
market.................................................................. 942 722
Deferred financing costs................................................. 13,363 14,378
-------------- --------------
$ 279,763 $ 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>
June 30, December 31,
1996 1995
-------------- --------------
(dollars in thousands)
<S> <C> <C>
Liabilities and Partners' Equity (Deficit)
------------------------------------------
Liabilities
Notes and interest payable...................... $ 324,458 $ 326,500
Pension notes and related interest payable...... 12,732 12,034
Accrued property taxes.......................... 5,853 6,792
Accounts payable and other liabilities
(including $276 in 1995 to affiliates)........ 4,810 11,966
Tenant security deposits........................ 3,015 2,908
-------------- --------------
350,868 360,200
Commitments and contingencies
Redeemable General Partner Interest............... 31,997 31,997
Partners' equity (deficit)
General Partner................................. 2,639 2,656
Limited Partners (6,417,683 units in 1996 and
6,417,981 units in 1995)...................... (70,242) (66,204)
Unrealized gain on marketable equity securities. 673 453
-------------- --------------
(66,930) (63,095)
Less - Redeemable General Partner Interest...... (36,172) (36,172)
-------------- --------------
(103,102) (99,267)
-------------- --------------
$ 279,763 $ 292,930
============== ==============
</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 For the Six Months
Ended June 30, Ended June 30,
---------------------------------- ---------------------------------
1996 1995 1996 1995
-------------- -------------- --------------- -------------
(dollars in thousands, except per unit)
<S> <C> <C> <C> <C>
Revenues
Rents................................. $ 27,171 $ 26,856 $ 54,185 $ 53,104
Interest.............................. 764 686 1,510 1,351
-------------- -------------- --------------- -------------
27,935 27,542 55,695 54,455
Expenses
Interest.............................. 8,433 8,646 16,860 17,161
Depreciation & amortization........... 2,530 2,526 5,040 5,086
Property taxes & insurance............ 3,082 3,005 6,175 5,988
Utilities............................. 2,833 2,712 5,803 5,662
Property-level payroll costs.......... 1,448 1,540 3,118 3,248
Repairs and maintenance............... 6,578 6,677 12,070 12,037
Other operating expenses.............. 972 1,078 2,070 2,246
Property management fees.............. 1,172 1,149 2,327 2,279
General and administrative............ 1,265 1,586 3,078 3,329
-------------- -------------- --------------- -------------
28,313 28,919 56,541 57,036
-------------- -------------- --------------- -------------
Net (loss)............................. $ (378) $ (1,377) $ (846) $ (2,581)
============== ============== =============== =============
Earnings per unit
Net (loss)............................ $ (.06) $ (.22) $ (.14) $ (.40)
============== ============== ============== =============
Weighted average units of
limited partner interest
used in computing earnings
per unit.............................. 6,417,832 6,418,140 6,417,832 6,418,176
============== ============== ============== =============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
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NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 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 ($.50 per unit).... - (3,209) - - (3,209)
Unrealized gain on marketable
equity securities of affiliate. - - 220 - 220
Net (loss)....................... (17) (829) - - (846)
------------- ------------- ------------- ------------- -------------
Balance, June 30, 1996........... $ 2,639 $ (70,242) $ 673 $ (36,172) $ (103,102)
============= ============= ============= ============= =============
</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 Six Months
Ended June 30,
-----------------------------------
1996 1995
-------------- -------------
(dollars in thousands)
<S> <C> <C>
Cash Flows From Operating Activities
Rents collected................................. $ 54,401 $ 53,262
Interest collected.............................. 1,432 1,240
Interest paid................................... (15,869) (15,273)
Payments for property operations................ (33,369) (33,694)
General and administrative expenses paid........ (2,999) (3,286)
-------------- --------------
Net cash provided by operating activities..... 3,598 2,249
Cash Flows From Investing Activities
Acquisition of real estate...................... - (463)
Real estate improvements........................ (1,888) (1,228)
Collections on notes receivable................. - 10
Funding of note receivable...................... (1,485) -
-------------- --------------
Net cash (used in) investing activities....... (3,373) (1,681)
Cash Flows From Financing Activities
Proceeds from notes payable..................... 2,400 7,957
Payoffs on notes payable........................ (2,331)
Advances from (repayments to affiliates, net.... (4,277) 1,343
Payments on notes payable....................... (2,405) (8,854)
Deferred financing costs........................ (70) (175)
Distributions to unitholders.................... (9,355) (855)
-------------- --------------
Net cash (used in) financing activities....... (16,038) (584)
-------------- --------------
Net (decrease) in cash and cash equivalents... (15,813) (16)
Cash and cash equivalents at beginning of period.. 20,699 3,748
-------------- --------------
Cash and cash equivalents at end of period........ $ 4,886 $ 3,732
============== ==============
Reconciliation of net (loss) to net cash
provided by operating activities
Net (loss)........................................ $ (846) $ (2,581)
Adjustments to reconcile net (loss) to net
cash provided by operating activities
Depreciation and amortization................... 5,040 5,063
Decrease in other assets........................ 807 953
(Increase) in interest receivable............... (25) (19)
Increase in interest payable.................... 163 681
(Decrease) in other liabilities................. (1,541) (1,848)
-------------- --------------
Net cash provided by operating activities..... $ 3,598 $ 2,249
============== ==============
Schedule of noncash financing activities
Unrealized gain on marketable equity securities
of affiliate.................................. $ 220 $ 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 six-month period ended June 30, 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 RECEIVABLE
In June 1996, the Partnership funded a $1.5 million to JNC Enterprises, Ltd.
The loan is secured by a first lien on 100 acres of land in Denton, Texas and
by a second lien on 182 acres of land in McKinney, Texas. The loan bears
interest at 16.0% per annum and matures December 10, 1996. All principal and
interest is due at maturity.
NOTE 4. 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.
7
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NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. 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 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 7. "LEGAL PROCEEDINGS - Moorman
Settlement."
NOTE 6. 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 7. 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
8
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NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. LEGAL PROCEEDINGS (Continued)
salaries for serving as general partners of SAMLP, (Mr. Friedman resigned as
general partner of SAMLP effective March 4, 1994) and a deferral of such
payments until such time as a Target may be met, and, if SAMLP resigns as
General Partner, a waiver of any compensation so deferred, (v) a deferral until
such time as a Target may be met of certain future annual General Partner
compensation payable, pursuant to the Partnership's governing documents, to
SAMLP or its affiliates, and, if SAMLP resigns as General Partner, a waiver of
any compensation so deferred, (vi) the required distribution to unitholders of
all the Partnership's operating cash flow in excess of certain renovation
costs, unless the Oversight Committee approves alternative uses for such
operating cash flow, (vii) the issuance of Warrants to purchase an aggregate of
up to 2,019,579 units (the "Warrants") to Class Members, (viii) the
contribution by certain co-defendants of cash and notes payable to the
Partnership aggregating $5.5 million (including $2.5 million to be contributed
by SAMLP and its general partners over a four-year period), (ix) the amendment
of the Partnership Agreement to reduce the vote required to remove the General
Partner from a two-thirds vote to a majority vote of the units, (x) the
Partnership's redemption of its unit purchase rights and an agreement not to
adopt a similar rights plan without Oversight Committee approval and (xi) the
Partnership's payment of certain settlement costs, including plaintiffs'
attorneys' fees in the amount of $3.4 million. The Moorman Settlement Plan
will remain in effect until SAMLP has resigned as General Partner and a
successor general partner is elected and takes office, and the Warrants 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
9
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NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. LEGAL PROCEEDINGS (Continued)
pursuant to the Moorman Settlement Agreement requires unitholders to elect a
successor general partner by majority vote. Upon the withdrawal or removal of
the General Partner without the selection of a successor, the Partnership would
be dissolved.
The Moorman Settlement Agreement provides that between the date of the
certification causing the General Partner's resignation and the date a
successor general partner takes office, the resigning General Partner shall
limit its activities, as General Partner, to the conduct of the business of the
Partnership in the ordinary course, shall not, without consent of the Oversight
Committee, purchase or sell any real estate or other assets of the Partnership
not in progress on said date, shall cooperate in the election of a successor
general partner and shall cooperate with its successor to facilitate a change
in the office of General Partner of the Partnership. The resigning General
Partner will continue to receive fees, expenses and distributions, if any,
while the solicitation is prepared.
The withdrawal of the General Partner would require the Partnership to acquire
the General Partner's interest in the Partnership (the "Redeemable General
Partner Interest") at its then fair value, and to pay certain fees and other
compensation, as provided in the Partnership Agreement and the Moorman
Settlement Agreement. Under the Moorman Settlement Agreement, payment for such
Redeemable General Partner Interest, fees and other compensation may, at the
Oversight Committee's option, be paid over a three year period pursuant to a
secured promissory note bearing interest at the prime rate and containing
commercially reasonable terms and collateral. Under the Moorman Settlement
Plan, the purchase price for Redeemable General Partner Interest would be
calculated, as of the time SAMLP withdraws as General Partner under the
Partnership's governing documents. The Managing General Partner has calculated
the Redeemable General Partner Interest at December 31, 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 June 30, 1996)
plus all accrued but unpaid interest ($5.7 million at June 30, 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
10
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NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. LEGAL PROCEEDINGS (Continued)
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 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.
11
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NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. LEGAL PROCEEDINGS (Continued)
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 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 $4.9 million at June 30, 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 June 30, 1996,
the aggregate loan-to-value ratio of the Partnership's real estate portfolio
was 47.2%, 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.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(Continued)
Liquidity and Capital Resources (Continued)
The Partnership's principal sources of cash 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 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 three and six months ended June 30, 1996, the
Partnership received distributions from GCLP totaling $250,000 and $800,000,
compared to distributions totaling $625,000 and $1.3 million received during
the three and six months ended June 30, 1995.
On January 2, 1996, the Partnership paid a total of $6.8 million in
distributions that had been declared in 1995. In the first six months of 1996,
the Partnership declared and paid quarterly and special distributions
aggregating $0.50 per unit, or a total of $3.2 million.
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 paid 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. On July 12, 1996, the Partnership repurchased 77,725 units
at a total cost of $841,000. The Partnership extended this repurchase offer
through August 5, 1996.
The Partnership's net cash flow from property operations (rents collected less
payments for property operating expenses) increased from $10.2 million and
$19.6 million for the three and six months ended June 1995 to $10.3 million and
$21.0 million for the three and six months ended June 1996. These increases
are 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 and $800,000 due to the sale of the Vineyards and
Harbour Pointe Apartments in December 1995.
As discussed in NOTE 7. "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,
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
resulting in, among other things, the required withdrawal of the General
Partner upon election of a successor and the resulting required purchase of the
Redeemable General Partner Interest, as defined below.
The withdrawal of the General Partner requires the Partnership to acquire the
General Partner's interest in the Partnership (the "Redeemable General Partner
Interest") at its then fair value, and to pay certain fees and other
compensation, as provided in the Partnership Agreement and the Moorman
Settlement Agreement. The Moorman Settlement Agreement provides that any
payment for such Redeemable General Partner Interest, fees and other
compensation during the pendency of the Moorman Settlement Agreement may, at
the option of the Oversight Committee (also established under the Moorman
Settlement Agreement), be made over three years pursuant to a secured
promissory note bearing interest at a financial institution's prime rate. The
Managing General Partner has calculated the fair value of the Redeemable
General Partner Interest at December 31, 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 June 30,
1996) plus all accrued and unpaid interest ($5.7 million at June 30, 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.
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 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 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 $378,000 and $846,000 for the three and
six months ended June 30, 1996 as compared to a net loss of $1.4 million and
$2.6 million for the three and six months ended June 30, 1995. The primary
factors effecting the Partnership's operating results are discussed in the
following paragraphs.
Net rental income for the Partnership (rents less property operating expenses)
increased to $11.1 million and $22.6 million for the three and six months ended
June 30, 1996 from $10.6 million and $21.6 million for the three and six months
ended June 30, 1995. These increases are primarily due to increased rental
rates at the Partnership's apartment properties.
Interest income increased from $686,000 and $1.4 million for the three and six
months ended June 30, 1995 to $764,000 and $1.5 million for the three and six
months ended June 30, 1996. This increase is primarily attributable to an
increase in interest earned on a credit enhancement escrow account.
Interest expense decreased from $8.7 million and $17.2 million for the three
and six months ended June 30, 1995 to $8.4 million and $16.9
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
million for the three and six months ended June 30, 1996. This decrease is due
primarily to the sale of two apartment properties in 1996.
General and administrative expenses decreased from $1.6 million and $3.3
million for the three and six months ended June 30, 1995 to $1.3 million and
$3.1 million for the three months ended June 30, 1996. This decrease is
primarily due to a decrease in advisor cost reimbursements.
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.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Environmental Matters (Continued)
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 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 six months ended June 30, 1996.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See NOTE 7. "LEGAL PROCEEDINGS - Moorman Settlement," of NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS in PART I for information relating to legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
- ------- -----------
11.0 Computation of Earnings Per Unit
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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: August 12, 1996 By: /s/ Randall M. Paulson
------------------------- -----------------------------------
Randall M. Paulson
President
Date: August 12, 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 June 30, 1996
Exhibit Page
Number Description Number
- ------- ----------- ------
11.0 Computation of Earnings Per Unit 21
27.0 Financial Data Schedule 22
20
<PAGE> 1
Exhibit 11.1
NATIONAL REALTY, L.P.
A DELAWARE LIMITED PARTNERSHIP
Computation of Earnings Per Unit
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------------- ---------------------------------
1996 1995 1996 1995
-------------- -------------- --------------- -------------
(dollars in thousands, except per unit)
<S> <C> <C> <C> <C>
Net (loss).................... $ (378) $ (1,377) $ (846) $ (2,581)
Less - General Partners'
1.99% Interest............ (8) (27) (17) (51)
-------------- -------------- --------------- -------------
Net (loss) allocable to
Limited Partner............. $ (370) $ (1,350) $ (829) $ (2,530)
============== ============== =============== =============
Earnings Per Unit
Net (loss).................. $ (.06) $ (.22) $ (.14) $ (.40)
============== ============== =============== =============
Weighted average units of
limited partner interest
used in computing earnings
per unit.................... 6,417,832 6,418,140 6,417,832 6,418,176
============== ============== =============== =============
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,886
<SECURITIES> 942
<RECEIVABLES> 13,640
<ALLOWANCES> 1,910
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 444,327
<DEPRECIATION> 217,997
<TOTAL-ASSETS> 279,763
<CURRENT-LIABILITIES> 0
<BONDS> 337,190
<COMMON> 0
0
0
<OTHER-SE> (103,102)
<TOTAL-LIABILITY-AND-EQUITY> 279,763
<SALES> 0
<TOTAL-REVENUES> 54,185
<CGS> 0
<TOTAL-COSTS> 31,563
<OTHER-EXPENSES> 5,040
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,860
<INCOME-PRETAX> (846)
<INCOME-TAX> 0
<INCOME-CONTINUING> (846)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (846)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
