ITEM 1. BUSINESS (Continued)
Business Plan (Continued)
totaling $388,000. During the first three quarters of 1994, the Partnership continued the payment of regular quarterly distributions of $0.20 per unit. In the fourth quarter of 1994, in addition to the regular quarterly distribution of $0.20 per unit, the Partnership paid an extra distribution of $0.50 per unit. The Partnership made total distributions of $2.8 million in 1994.
At the discretion of the General Partner, the Partnership may, from time to time, sell properties or other assets, renovate or make improvements to properties, make additional investments or obtain additional or initial financing for its properties.
The establishment, implementation and modification of the business objectives and policies of the Partnership are the responsibility of the General Partner, and, in general, the limited partners have no voting rights with respect to such matters. With respect to the GCLP properties, such business objectives and policies are the responsibility of GCMI. The Partnership's primary business purpose is the ownership of improved, income-producing real estate, but the Partnership may also conduct any business that may lawfully be conducted under the Delaware Revised Uniform Limited Partnership Act. As long as the Settlement Plan is in effect, Oversight Committee approval would be required for the Partnership to enter into any new line of business. See "Management and Operations" below.
Management and Operations
Since February 1, 1990, affiliates of the Managing General Partner have provided property management services to the Partnership. Currently, Carmel, Ltd. provides such property management services. Carmel, Ltd. subcontracts with other entities for the property-level management services to the Partnership. The general partner of Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (i) Syntek West, Inc. ("SWI") of which Mr. Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level management and leasing of twelve of the Partnership's commercial properties to Carmel Realty, Inc. ("Carmel Realty"), which is a company owned by SWI. Carmel Realty is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Carmel, Ltd. Effective November 25, 1992, Carmel, Ltd. ceased providing property management services for the apartment complexes transferred to GCLP.
BCM performs administrative functions such as accounting services, mortgage servicing and portfolio review and analysis for the Partnership on a cost reimbursement basis. Affiliates of BCM also perform loan placement services, leasing services and real estate brokerage, and other services, for the Partnership for fees and commissions. GCMI performs similar administrative functions for GCLP, also on a cost reimbursement basis.
ITEM 1. BUSINESS (Continued)
Pending Withdrawal of General Partner
As described in ITEM 3. "LEGAL PROCEEDINGS - Moorman Settlement," the Settlement Plan provides that, if certain aggressive, annually increasing Targets relating to the price of National Realty's units of limited partner interest and distributions to unitholders are not met for two successive years of the Settlement Plan or the fifth and final year of the Settlement Plan, the General Partner is required to resign and the Partnership is required to repurchase the General Partner's interest for its fair value.
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 Settlement Agreement. The Settlement Agreement provides that any payment for such Redeemable General Partner Interest, fees and other compensation during the pendency of the Settlement Plan may, at the Oversight Committee's option, 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 Redeemable General Partner Interest at December 31, 1994 to be $33.0 million and believes that there has been no material change in such value since such date. However, the calculation of such Redeemable General Partner Interest at any particular time depends primarily upon the appraised value of the Partnership's properties at such time. The Partnership would be entitled to offset against any such payment the then-outstanding principal balance ($4.2 million at December 31, 1994) plus accrued unpaid interest ($4.3 million at December 31, 1994) on the note receivable from SAMLP described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Indebtedness of Management."
Upon the withdrawal of SAMLP as general partner, the 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 value of the Redeemable General Partner Interest payable on any such withdrawal will not be substantially higher or lower than any current calculation. If at the time of such withdrawal, SAMLP and the Oversight Committee are unable to agree on the value of the Redeemable General Partner Interest, it is expected that such disagreement would be resolved by means of a petition to the Judge appointed pursuant to the Settlement Agreement to supervise its implementation.
If Targets are not met for any two successive years of the Settlement Plan or for the final year of the Settlement Plan, SAMLP must withdraw as General Partner effective at the time a successor general partner is selected. The Settlement Plan terminates upon the withdrawal of SAMLP as General Partner and the due election and taking office of a successor. Withdrawal of SAMLP as General Partner pursuant to the Settlement Agreement would be subject to the provisions of the Partnership Agreement, including the right of unitholders to elect a
ITEM 1. BUSINESS (Continued)
Pending Withdrawal of General Partner (Continued)
successor general partner by majority vote. Upon the withdrawal or removal of the General Partner without the election of a successor, the Partnership would be dissolved.
The Targets for the first and second anniversary dates were not met. Since the Targets were not met for two successive years, SAMLP expects to 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. See ITEM 3. "LEGAL PROCEEDINGS - Moorman Settlement," for further information regarding the pending resignation of SAMLP as General Partner.
Separation of Mr. Phillips and the Partnership from Southmark
Until January 1989, Mr. Phillips, a general partner of SAMLP, served as an executive officer and director of Southmark and certain of Southmark's subsidiaries and affiliates, including Southmark Asset Management, Inc., then the managing general partner of SAMLP and a wholly-owned subsidiary of Southmark. Mr. Phillips served as Chairman of the Board and a director (since 1980) and President and Chief Executive Officer (since 1981) of Southmark, and as a director and Chairman of the Board of Southmark Asset Management, Inc.
As a result of a deadlock on Southmark's Board of Directors, Mr. Phillips, among others, reached an agreement whereby Mr. Phillips resigned his positions with Southmark and certain of Southmark's subsidiaries and affiliates, including Southmark Asset Management, Inc. Southmark Asset Management, Inc. exchanged its general partner interest in SAMLP for a limited partner interest representing an equivalent 96% beneficial interest.
Following continual disputes, effective June 30, 1989, Mr. Phillips and others entered into additional agreements with Southmark and its affiliates under which, among other things, Southmark Asset Management, Inc. transferred its limited partner interest in SAMLP to ART. On February 25, 1992, as part of the settlement of litigation described in ITEM 3. "LEGAL PROCEEDINGS - Southmark Litigation", ART transferred to Southmark a 19.2% limited partner interest in SAMLP. ART had an option which expired December 27, 1994, to reacquire such limited partner interest from Southmark for $2.4 million, less any distributions received.
In December 1991, Mr. Phillips and the Partnership entered into a settlement with Southmark and its affiliates which concluded all disputes among the parties. See ITEM 3. "LEGAL PROCEEDINGS - Southmark Litigation."
Competition
The real estate business is highly competitive and the Partnership competes with numerous entities engaged in real estate activities
ITEM 1. BUSINESS (Continued)
Competition (Continued)
(including certain entities described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Certain Business Relationships,") some of which may have greater financial resources than the Partnership. The Partnership believes that success against such competition is dependent upon the geographic location of the property, the performance of the property managers in areas such as marketing, collection and the ability to control operating expenses, the amount of new construction in the area, and the maintenance and appearance of the property. Additional competitive factors with respect to commercial properties are the ease of access to the property, the adequacy of related facilities, such as parking, and sensitivity to market conditions in setting rent levels. With respect to apartments, competition is also based upon the design and mix of the units and the ability to provide a community atmosphere for the tenants. The Partnership believes that general economic circumstances and trends and the rate at which properties are renovated or new properties are developed in the vicinity of each of the Partnership's properties are also competitive factors.
As discussed in "Business Plan" above, the Partnership does not anticipate making material property acquisitions at the present time. However, to the extent that the Partnership seeks to sell certain of its properties, the sales prices for such properties may be affected by competition from other real estate entities also attempting to sell their properties and governmental agencies and financial institutions, whose assets are located in areas in which the Partnership's properties are located, and are seeking to liquidate foreclosed properties.
As described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Certain Business Relationships," Oscar W. Cashwell, the President and a director of SAMI, the Managing General Partner of SAMLP, and the President of BCM, is also the President or director of certain other entities, each of which has business objectives similar to the Partnership's. Mr. Cashwell owes fiduciary duties to such other entities and the Partnership under applicable law.
In addition, the Partnership also competes with other entities which are affiliates of BCM or for which BCM acts as advisor, and which may have investment objectives similar to the Partnership's and that may compete with the Partnership in purchasing, selling, leasing and financing real estate and real estate related investments. In resolving any potential conflicts of interest which may arise, BCM has informed the Partnership that it intends to continue to exercise its best judgment as to what is fair and reasonable under the circumstances in accordance with applicable law.
Special Considerations Relating to Investments in Real Estate
The Partnership is subject to all of the risks incident to the ownership of real estate and interests therein, many of which relate to the general illiquidity of real estate investments. These risks include, changes in general or local economic conditions, changes in interest rates and the availability of permanent mortgage financing which may
ITEM 1. BUSINESS (Continued)
Special Considerations Relating to Investments in Real Estate (Continued)
render the sale or refinancing of a property difficult or unattractive and which may make debt service burdensome, changes in real estate and zoning laws, increases in real estate taxes, federal or local economic or rent controls, floods, earthquakes and other acts of God and other factors beyond the control of the Partnership. The illiquidity of real estate investments generally impairs the ability of the Partnership to respond promptly to changing circumstances. The Partnership believes that such risks are partially mitigated by the diversification by geographic region and property type of the Partnership's real estate portfolio.
ITEM 2.
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
In March 1994, the Partnership obtained new first mortgage financing secured by the Cross County Mall, a shopping center in Mattoon, Illinois. The Partnership can borrow up to $7.5 million under the loan, to repay the then existing mortgage debt and for the renovation of the shopping center as well as tenant improvements. At closing of the new loan, $4.7 million was advanced, of which $4.3 million was used to payoff the existing mortgage, including a $104,000 prepayment penalty. The remainder of the initial advance was used to pay various closing costs associated with the financing. The new first mortgage bears interest at 1.5% above the prime rate, currently 10.3% per annum, requires monthly payments of principal and interest based upon the outstanding balance of the loan and matures in March 1997 with an option to extend the maturity date to March 2002. As of December 31, 1994, $2.7 million of additional advances under the loan had been made. The additional advances were used for tenant improvements related to the expansion by a major tenant of the shopping center. The Partnership, in accordance with the Partnership Agreement, paid BCM a 1% loan arrangement fee of $75,000 based upon the new first mortgage financing of $7.5 million.
In July 1994, the Partnership completed the extension of the $2.3 million second lien mortgage secured by the Marina Playa Office Building in Santa Clara, California. The loan's maturity date was extended from July 1994 to January 1996, with all other terms of the loan remaining unchanged.
In September 1994, the Partnership sold the Creekwood Apartments in College Park, Georgia for $6.0 million. The Partnership has accounted for the sale as a financing transaction, due to the Partnership having provided financing of the purchaser's downpayment. On the date of sale, the purchaser obtained new first mortgage financing from an independent lending institution in the amount of $3.0 million. The Partnership received $1.3 million in excess proceeds from the new financing, after the payoff of the existing mortgage in the amount of $1.1 million and the funding of required repair escrows and closing costs associated with the financing. The Partnership has recorded the extinguishment of the then existing mortgage as well as the new first mortgage. The new first mortgage bears interest at a variable rate, currently 7.8% per annum, requires monthly payments of principal and interest, currently $24,000 and matures in September 1997. The Partnership, in accordance with the Partnership Agreement, paid BCM a 1% loan arrangement fee of $30,000 based upon the new first mortgage financing of $3.0 million.
In October 1994, the Partnership sold the Brandywine and Raintree Apartments, both located in Meridian Township, Michigan, to a single buyer for a total of $14.8 million. The Partnership received net cash of $4.5 million after the payoff of $9.4 million in existing mortgage debt, the payment of $82,000 in prepayment penalties and various other closing costs associated with the sales. The Partnership recognized gains totaling $8.3 million on the sales. The Partnership, in accor-
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
dance with the Partnership Agreement, paid real estate sales commissions totaling $444,000 to Carmel Realty based upon the $14.8 million total sales price of the properties.
In December 1994, the Partnership completed the extension of the $265,000 mortgage secured by Executive Court Office Building. The loan's maturity date was extended from December 1994 to December 1995, with all other terms of the loan remaining unchanged.
In March 1995, the Partnership purchased the Chalet II Apartments, a 72 unit apartment complex in Topeka, Kansas, for $1.6 million. The Partnership paid $439,000 in cash and obtained new first mortgage financing of $1.2 million. The mortgage bears interest at a rate of prime plus 1% per annum, requires monthly payments of principal and interest, currently $12,000, and matures in March 2002. The Partnership, in accordance with the Partnership Agreement, paid a real estate brokerage commission of $98,000 to Carmel Realty based on the $1.6 million purchase price of the property.
Mortgage Loans
In addition to real estate, a portion of the Partnership's assets consist of mortgage notes receivable, principally those originating from the sale of Partnership properties and secured by income-producing properties. The Partnership's mortgage notes consist of first and wraparound mortgage loans and participations in first and junior mortgage loans.
First Mortgage Loans. These loans generally provide for level periodic payments of principal and interest sufficient to substantially repay the loan prior to maturity, but may involve interest-only payments or moderate amortization of principal and a "balloon" principal payment at maturity. With respect to first mortgage loans, it is the Partnership's general policy to require that the borrower provide a mortgagee's title policy or an acceptable legal opinion of title as to the validity and the priority of the mortgage lien over all other obligations, except liens arising from unpaid property taxes and other exceptions normally allowed by first mortgage lenders in the relevant area.
Wraparound Mortgage Loans. A wraparound mortgage loan, sometimes called an all-inclusive loan, is a mortgage loan having an original principal amount equal to the outstanding balance under the prior existing mortgage loan(s) plus the amount actually advanced under the wraparound mortgage loan. Wraparound mortgage loans may provide for full, partial or no amortization of principal.
At December 31, 1994, the Partnership's mortgage notes and participations in mortgage notes had an aggregate face amount of $29.4 million and an aggregate net carrying value of $11.5 million, net of deferred gains ($16.2 million), discounts ($152,000) and allowance for estimated losses ($1.9 million).
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
The following table sets forth the percentage (based on the outstanding mortgage note balance at December 31, 1994), by property type and geographic region, of the properties that serve as collateral for the five mortgage notes receivable, excluding participations, in the Partnership's mortgage notes receivable portfolio at December 31, 1994. See Schedule IV to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" for further details of the Partnership's mortgage notes receivable portfolio.
In 1991, the Partnership and an insurance company entered into an Asset Sales Agreement to sell participations in certain of the Partnership's mortgage notes receivable in exchange for participations in other mortgage notes or assets and cash. The Partnership entered into the Asset Sales Agreement in an effort to develop a potential source for future financing and to generate cash from otherwise illiquid assets. The assets transferred by the Partnership pursuant to the Asset Sales Agreement included a $2.5 million senior participation in a wraparound mortgage note receivable secured by a shopping center in Las Vegas, Nevada, a $1.0 million senior participation in a wraparound mortgage note receivable secured by a shopping center in La Crosse, Wisconsin, and a first lien mortgage note with a carrying value of $1.2 million prior to transfer. In return, the Partnership received a $447,000 senior participation in a note secured by land in Granby, Colorado, a $1.5 million participation in a note secured by a country club in the Ka'u District of Hawaii, a 10% limited partner interest in the partnership owning the country club, valued at $1.5 million, a $213,000 first lien mortgage note secured by land in Denver, Colorado and $1.0 million in cash. The Asset Sales Agreement included put and guaranty provisions.
In March 1992, the insurance company was placed in receivership. In June 1992, the Partnership provided notice to the insurance company, under the terms of the put and guaranty provisions, of its desire to divest itself of all the assets received. The Receiver refused to allow the enforcement of the terms of the Asset Sales Agreement. In September 1992, the Court approved the Receivers' Petition for an Order of Liquidation for the insurance company. The Partnership has reached a settlement with the Receiver, which was approved by the court on February 15, 1995. Under the terms of the settlement, the insurance company will return to the Partnership the senior participations in the wraparound mortgage notes secured by the shopping centers in Las Vegas, Nevada and La Crosse, Wisconsin. In exchange, the Partnership will return all of the assets that it received from the insurance company
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
other than the first lien mortgage note secured by the land in Denver, Colorado, which had been foreclosed and sold by the Partnership, and $657,000 in cash. The Partnership has further agreed to purchase from the insurance company the first lien note secured by the land in Granby, Colorado and a second lien note secured by commercial condominiums also in Granby, Colorado for $550,000. The asset transfers and purchases are anticipated to occur in the second quarter of 1995. The settlement requires the Partnership to pay interest on the cash portion of the settlement from March 17, 1995 until the asset transfers and purchases are completed. Interest is payable monthly.
In 1992, the Partnership determined that the fair value of the underlying collateral securing one of the participations and a note receivable received from the insurance company was not sufficient to satisfy the Partnership's interests and accordingly, the Partnership recorded a $1.6 million provision for loss to provide for such deficiency.
In May 1993, the Partnership foreclosed on an assigned first lien secured by land in Denver, Colorado. The Partnership incurred no loss as a result of the foreclosure. In October 1993, this land was sold for its carrying value. The Partnership will incur no loss on the settlement beyond amounts previously provided.
Investment in Marketable Equity Securities of ART
At December 31, 1994, the Partnership owned 48,933 shares of common stock of ART, a real estate investment company, representing approximately 1% of ART's outstanding shares. Mr. Phillips, a general partner of SAMLP, the General Partner of the Partnership, served as Chairman of the Board and as a director of ART until November 16, 1992. Mr. Cashwell, the President and a director of SAMI, the Managing General Partner of SAMLP, is a director of ART. See ITEM 12. "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." At December 31, 1994, the market value of the ART common stock owned by the Partnership was $636,000. ART owns a 76.8% limited partner interest in SAMLP. In addition, as of March 17, 1995 ART owned 1,047,879 of National Realty's units of limited partner interest, approximately 49% of the units then outstanding.
ITEM 3.
ITEM 3. 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 Partner-
ITEM 3. LEGAL PROCEEDINGS (Continued)
Moorman Settlement (Continued)
ship 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, the General Partner of the Partnership, and Messrs. Phillips and Friedman, general partners of SAMLP at the time of the settlement, 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 the Partnership's Form 10-Q for the quarter ended March 31, 1990. The Moorman Settlement Agreement provides for a Settlement Plan (the "Moorman Settlement Plan") that if certain aggressive, annually increasing targets (the "Targets") relating to unit price are not met, may result in, among other things, withdrawal of the General Partner and the resulting required purchase of the General Partner's interest in the Partnership (the "Redeemable General Partner Interest"), required distributions to unitholders, and the Partnership's being required to use its best efforts to sell a portion of its assets and to distribute any resulting net proceeds to unitholders. The effects of some or all of these provisions could adversely affect the Partnership's liquidity.
The Targets for the first and second anniversary dates were not met. Since the Targets were not met for two successive years, the Moorman Settlement Agreement requires that SAMLP resign as General Partner, effective upon the election and qualification of its successor. On July 8, 1992, SAMLP notified the Oversight Committee of the failure to meet the Target for two successive years.
Upon, among other things, the withdrawal of SAMLP as General Partner and the due election and taking office of a successor, the Moorman Settlement Plan will terminate. Withdrawal of SAMLP as General Partner pursuant to the Moorman Settlement Agreement requires unitholders to elect a successor general partner by majority vote. Upon the withdrawal or removal of the General Partner without the selection of a successor, the Partnership would be dissolved.
The Moorman Settlement Agreement provides that between the date of the certification causing the General Partner's resignation and the date 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.
ITEM 3. LEGAL PROCEEDINGS (Continued)
Moorman Settlement (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 "Supervising Judge").
The withdrawal of the General Partner will require the Partnership to acquire 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 SAMLP's Redeemable General Partner Interest will be calculated, as of the time it withdraws as General Partner under the Partnership's governing documents. The Managing General Partner has calculated the fair value of the Redeemable General Partner Interest at December 31, 1994 to be $33.0 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 December 31, 1994) plus all accrued but unpaid interest ($4.3 million at December 31, 1994) on the note receivable from SAMLP for its capital contribution to the Partnership. In the accompanying Consolidated Balance Sheets, 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. Any dispute pertaining to the amount of Redeemable General Partner Interest upon withdrawal of SAMLP will be resolved by the Supervising Judge.
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. The Implementation Agreement is subject to receipt of a notice from the proposed successor general partner nominee that it consents to stand for election as the successor general partner.
The Implementation Agreement shall be 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,
ITEM 3. LEGAL PROCEEDINGS (Continued)
Moorman Settlement (Continued)
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 third or fourth quarter of 1995.
The 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 thirty months from the date the successor general partner takes office. In addition, the Supervising Judge shall make a determination of any amounts which National Realty may owe to SAMLP upon SAMLP's withdrawal as General Partner and any amounts which SAMLP or its affiliates may owe to National Realty. Any amounts which National Realty may be determined to owe to SAMLP may be paid by National Realty over a period of time to be determined by the parties on terms which shall not hinder National Realty's ability to meet its other financial obligations.
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 Implementation Agreement shall be voided.
Southmark Litigation
In December 1991, the Partnership and several other parties entered into a comprehensive settlement of litigation with Southmark, which settled all actions between Southmark and its affiliates and the Partnership and its affiliates.
In connection with the settlement, the Partnership was obligated to pay Southmark the net amount which it had recorded as due to Southmark ($1.8 million), on the date the settlement was entered into. The final installment of $265,000 was paid by the Partnership in July 1994.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNER INTEREST AND RELATED SECURITY HOLDER MATTERS
National Realty's units of limited partner interest are traded on the American Stock Exchange ("AMEX") using the symbol "NLP." National Realty does not meet certain of the criteria of the AMEX for continued listing and may continue to fail to meet such criteria. Although National Realty does not anticipate that the AMEX will seek to delist its units, there can be no assurance that the AMEX will not seek to do so.
The following table sets forth high and low sale prices of National Realty's units of limited partner interest as reported by the AMEX:
As of March 17, 1995, the closing price of National Realty's units of limited partner interest on the AMEX was $31.00 per unit.
As of March 17, 1995, National Realty's units of limited partner interest were held by 8,599 holders of record.
Pursuant to the Moorman Settlement Agreement, on February 14, 1992, the Partnership issued 2,692,773 warrants (the "Warrants") to purchase an aggregate of 673,193 of National Realty's 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 their February 14, 1992 date of issuance, or until earlier redemption.
Prior to 1989, the Partnership's policy was to distribute operating cash flow in excess of necessary reserves for property improvements and repairs. However, due to liquidity problems, on December 29, 1989 the Partnership announced a suspension of cash distributions. Pursuant to the terms of the Moorman Settlement Agreement, the Partnership has agreed to distribute to unitholders all of the Partnership's operating cash flow in excess of certain renovation costs, unless the Oversight
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNER INTEREST AND RELATED SECURITY HOLDER MATTERS (Continued)
Committee approves alternative uses for such operating cash flow. On October 7, 1993, the Partnership announced a resumption of regular quarterly distributions at the rate of $0.20 per unit. The Partnership paid distributions totaling $388,000 in 1993. In addition, to its regular quarterly distributions, in December 1994, the Partnership paid a special distribution of $0.50 per unit, resulting in total 1994 distributions of $2.8 million or $1.30 per unit.
The distributions paid by the Partnership in 1994 and 1993 were are follows:
In November 1987, the Board of Directors of the Managing General Partner approved the Partnership's purchase of up to 10% of National Realty's units of limited partner interest and on December 15, 1992, the Board of Directors of the Managing General Partner approved the repurchase of up to 100,000 additional units in open-market transactions. Through December 31, 1994, the Partnership had purchased a total of 134,320 units at an aggregate cost of $5.1 million. During 1994, the Partnership did not purchase any additional units under such repurchase program.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
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ITEM 6. SELECTED FINANCIAL DATA (Continued)
Units and per unit data have been restated to give effect to the one-for-four reverse unit split, effected January 1, 1991.
ITEM 7.
ITEM 7. 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 complexes 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. See Note 7. "NOTES PAYABLE."
Liquidity and Capital Resources
Cash and cash equivalents aggregated $3.7 million at December 31, 1994 as compared with $4.0 million at December 31, 1993.
The Managing 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 December 31, 1994, the aggregate loan-to-value ratio of the Partnership's real estate port-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
folio, computed on the basis of the ratio of total property-related debt to aggregate appraised values, was 47.9% compared to 52.1% at December 31, 1993.
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, 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 the Warrants which were issued to the class members included in the Moorman litigation settlement. The Partnership expects that cash flow from property operations together with externally generated funds will be sufficient to meet the Partnership's various cash needs in 1995, 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.
Currently, all but five of the Partnership's properties are encumbered by mortgage debt. In 1995, mortgage debt totaling $7.4 million comes due, including a $2.6 million mortgage underlying a $4.3 million wraparound mortgage note receivable, both of which mature in December 1995. It is the Partnership's intention to either pay the mortgages that mature in 1995 when due, or seek to extend the due dates one or more years while attempting to obtain long-term financing. The Partnership also intends to seek to refinance certain mortgages that mature in the next two years, and use excess financing proceeds for working capital purposes. The General Partner believes it will continue to be successful in obtaining at least the minimum amount of loan extensions or other proceeds to enable the Partnership to maintain ownership of all properties in which it has equity.
During 1994, the Partnership received $10.0 million from new mortgage financings or refinancings secured by one commercial property and one apartment complex, of which $5.4 million was used to payoff existing mortgage debt secured by the properties. In addition, the Partnership made scheduled principal paydowns on mortgage debt totaling $4.3 million.
As of March 17, 1994, the Partnership had one apartment complex under contract for sale, the Harbour Point Apartments in Miami, Florida. The Oversight Committee has approved the terms of the pending sale and the Partnership anticipates finalizing such sale during the second quarter of 1995. The asset has been reclassified as held for sale in the Partnership's accompanying December 31, 1994 Consolidated Balance Sheet. The Partnership, however, can give no assurance that it will successfully complete this property sale.
In March 1995, the Partnership, with the approval of the Oversight Committee, purchased the Chalet II Apartments, a 72 unit apartment complex in Topeka, Kansas, for $1.6 million. The Partnership paid $439,000 in cash, obtaining new mortgage financing of $1.2 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Also in March 1995, the Partnership reached a settlement with the receiver for an insurance company. As part of the settlement, the Partnership will pay the insurance company a total of $1.2 million in cash in exchange for the transfer of certain assets between the Partnership and the insurance company. See "NOTE 4. NOTES RECEIVABLE."
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 1994, the Partnership received distributions from GCLP totaling $3.0 million, an increase of $1.3 million from 1993. A total of $6.0 million of escrow and reserve deposits, excluding the tax and insurance reserve, are required to be funded by GCLP during 1995 in monthly installments. Such escrowed amounts are included in escrow deposits and other assets in the accompanying Consolidated Balance Sheets. GCLP is required to make monthly deposits, from the cash flow of its properties, for (i) a recurring replacement reserve, (ii) a credit enhancement reserve and (iii) a tax and insurance reserve. As a result of the restrictions placed on GCLP's use of its cash flow, excess cash of approximately $3.5 million is expected to be remittable to the Partnership during 1995.
On October 7, 1993, the Partnership announced a resumption of distributions at the initial rate of $0.20 per unit and in 1993 paid distributions totaling $388,000. In 1994, the Partnership continued the payment of regular quarterly distributions of $0.20 per unit. In the fourth quarter of 1994, in addition to the regular quarterly distribution of $0.20 per unit, the Partnership paid an extra distribution of $0.50 per unit. The Partnership made total distributions of $2.8 million in 1994 or $1.30 per unit.
The Partnership's rents collected increased from $99.0 million for 1993 to $105.4 million for 1994 due to the Partnership's successful effort of increasing and maintaining higher rental rates during 1994 as compared to 1993. Rental rates at the Partnership's apartment complexes, which account for over 80% of the Partnership's properties, increased an average of 4.4% as compared to 1993 rental rates. However, payments for property operating expenses increased from $58.2 million in 1993 to $63.4 million in 1994. This increase is primarily due to a $3.1 million increase in payments for tax and capital improvement escrows related to the GCLP properties.
As more fully discussed in NOTE 14. "COMMITMENTS AND CONTINGENCIES - Moorman Settlement," the Moorman litigation settlement agreement (the "Moorman Settlement Agreement") set forth certain aggressive, annually increasing targets relating to the price of the Partnership's units of limited partner interest which were not achieved, resulting in, among other things, the required withdrawal of the Partnership's General Partner upon election of a successor and the resulting required purchase
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
of the Redeemable General Partner Interest, as defined below. The effects of some or all of these provisions could adversely affect the Partnership's liquidity. However, the General Partner and the Oversight Committee have agreed in principle, as discussed below, to possible arrangements which would alleviate the adverse effect of such provisions.
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, 1994 to be $33.0 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 December 31, 1994) plus all accrued and unpaid interest ($4.3 million at December 31, 1994) 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 of Partners' Equity and the note receivable from the General Partner has been offset against the Redeemable General Partner Interest.
In conjunction 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. On May 14, 1994, the final payment on the promissory note of $631,000 including accrued interest was received.
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. The Implementation Agreement is subject to receipt of a notice from the proposed successor general partner nominee that it consents to stand for election as the successor general partner.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
The Implementation Agreement shall be 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 third or fourth quarter of 1995.
The 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 thirty months from the date the successor general partner takes office. In addition, the Supervising Judge shall make a determination of any amounts which National Realty may owe to SAMLP upon SAMLP's withdrawal as General Partner and any amounts which SAMLP or its affiliates may owe to National Realty. Any amounts which National Realty may be determined to owe to SAMLP may be paid by National Realty over a period of time to be determined by the parties on terms which shall not hinder National Realty's ability to meet its other financial obligations.
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 Implementation Agreement shall be voided.
In November 1987, the Board of Directors of the Managing General Partner approved the Partnership's purchase of up to 10% of National Realty's units of limited partner interest and on December 15, 1992, the Board of Directors of the Managing General Partner approved the repurchase of up to 100,000 additional units in open-market transactions. Through December 31, 1994, the Partnership had purchased a total of 134,320 units at an aggregate cost of $5.1 million. During 1994, the Partnership did not purchase any additional units under such repurchase program.
Results of Operations
1994 Compared To 1993. The Partnership reported net income of $5.0 million for 1994 as compared to net income of $1.3 million for 1993. Contributing to the Partnership's 1994 net income was an increase in operating income of $4.6 million, as more fully discussed below, and a gain on sale of real estate of $8.3 million. See NOTE 3. "REAL ESTATE AND DEPRECIATION." The Partnership's 1993 net income included an
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
extraordinary gain of $9.0 million related to the acquisition at a discount of a mortgage obligation. See NOTE 8. "ACCRUING MORTGAGE."
Rental income increased from $99.3 million in 1993 to $105.0 million in 1994. Of this increase, $1.4 million is due to the acquisition in June 1993 of the controlling partnership interest in Club Mar Realty Group, Ltd., which owns the Club Mar Apartments and obtaining the Whispering Pines Apartments in Canoga Park, California through insubstance foreclosure in December 1993. These increases are offset by a decrease of $515,000 due to the sale of Brandywine and Raintree Apartments in October 1994. The remaining net increase of $4.8 million is primarily attributable to a 4.4% increase in average rental rates at the Partnership's apartment complexes.
Property operating expenses increased from $60.4 million in 1993 to $60.8 million in 1994. Of this increase, $764,000 is due to the acquisition in June 1993 of the controlling partnership interest in Club Mar Apartments and obtaining the Whispering Pines Apartments through insubstance foreclosure in December 1993. These increases are offset by a decrease of $465,000 due to the sale of Brandywine and Raintree Apartments in October 1994.
Interest income decreased from $3.1 million in 1993 to $2.4 million in 1994. This decrease is primarily attributable to the nonaccrual of interest income on the loan secured by the Whispering Pines Apartments in Canoga Park, California, which was foreclosed in December 1993 and to a decrease in cash receipts in 1994 on a mortgage note receivable on which interest is recognized on a cash receipts basis. Interest income is anticipated to remain at the current level in 1995.
Interest expense decreased from $34.7 million in 1993 to $34.1 million in 1994. Of this decrease, $265,000 is due to the December 1993 Southern Palms debt modification in which the interest rate was reduced from 11.7% per annum to 8.9% per annum and $350,000 is due to achievement escrows of $1.8 million applied against the principal balances of three of the Partnership's mortgage loans in 1993 and the payment of $228,000 in related prepayment penalties which were included in interest expense in 1993. An additional decrease of $144,000 is due to the sale of the Brandywine and Raintree Apartments in October 1994. These decreases are offset in part by an increase in interest expense of $252,000 related to the acquisition of the controlling partnership interest in Club Mar Apartments in June 1993.
General and administrative expenses increased from $5.6 million in 1993 to $5.8 million in 1994. The increase is attributable to an increase in the Partnership's overhead reimbursements to Basic Capital Management, Inc. ("BCM").
In 1994, the Partnership recognized gains totaling $8.3 million on the sale of the Brandywine and Raintree Apartments. No gain on sale of real estate was recognized in 1993. See NOTE 3. "REAL ESTATE AND DEPRECIATION."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
In 1993, the Partnership recognized an extraordinary gain of $9.0 million from the acquisition at a discount of a mortgage obligation. No such gains were recognized in 1994. See NOTE 8. "ACCRUING MORTGAGE."
1993 Compared to 1992. The Partnership reported net income of $1.3 million for 1993 as compared to a net loss of $3.2 million for 1992. Included in the Partnership's 1993 net income is an increase in operating income of $3.2 million, as more fully discussed below, and an extraordinary gain of $9.0 million related to the acquisition at a discount of a mortgage obligation. See NOTE 8. "ACCRUING MORTGAGE."
Rental income increased $4.4 million in 1993 as compared to 1992 after reduction of reported 1992 rental income of $3.0 million for four Partnership properties which were either lost to foreclosure or sold during 1992. This increase is attributable to higher rental rates ($2.8 million) and improved occupancy levels ($1.6 million) related to the Partnership's apartment complexes in the Southwest and Southeast regions of the United States.
Property operating expenses increased from $56.9 million in 1992 (after reduction of operating expenses of $2.3 million related to four Partnership properties which were either lost to foreclosure or sold during 1992) to $60.4 million in 1993. Of this $3.4 million increase, $2.0 million is related to higher real estate taxes on Partnership apartment complexes in the Midwest, Pacific and Southwest regions of the United States. In addition, utility expenses were $598,000 higher in 1993 than in 1992 due to higher occupancy levels and repairs and maintenance expenses were also higher in 1993 as compared to 1992 by $913,000, as a result of the Partnership's continuing effort to maintain and increase occupancy levels. Apartment occupancy levels increased by 2.5% during 1993 with the largest increases being in the Southwest and Southeast regions of the United States, where approximately 59% of the Partnership's apartment units are located.
Interest income decreased from $3.9 million in 1992 to $3.1 million in 1993. This decrease is primarily due to nonperforming mortgage note participations as well as $222,000 related to one of the Partnership's mortgage notes receivable which became nonaccruing in June 1993. In December 1993, the Partnership recorded the insubstance foreclosure of the collateral property securing that note, the Whispering Pines Apartments in Canoga Park, California. The Partnership obtained title to the property in February 1994.
Interest expense decreased from $36.0 million in 1992 to $34.7 million in 1993. Interest expense related to the GCLP properties, refinanced in November 1992, increased by $4.0 million as compared to 1992. This increase, however, was more than offset by a decrease in interest expense associated with the Partnership's line of credit with Transcontinental Realty Investors, Inc., which was paid in full in December 1992 with the refinancing proceeds from the GCLP refinancing. Interest expense also declined as a result of the acquisition at a
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
discount of a mortgage obligation in March 1993 and from Partnership properties sold or lost to foreclosure in 1992. See NOTE 8. "ACCRUING MORTGAGE."
Depreciation and amortization in 1993 approximated that in 1992 after reduction of $275,000 related to four Partnership properties which were either lost to foreclosure or sold during 1992.
General and administrative expenses increased by $221,000 in 1993 as compared to 1992. Legal expenses decreased $144,000 for the year due primarily to 1992 litigation expenses related to the Moorman Settlement which were not incurred in 1993. See NOTE 14. "COMMITMENTS AND CONTINGENCIES." Also, the Partnership's overhead reimbursements to BCM decreased by $259,000 in 1993. Offsetting these decreases were increased overhead costs associated with GCLP totaling $729,000 in 1993, GCLP's first full year of operation. Overhead costs associated with GCLP in 1992 totaled $108,000.
The Partnership made no provision for losses in 1993 compared to $2.0 million in 1992. The 1992 provision includes a $416,000 write down of one of the Partnership's office buildings to the related nonrecourse debt, which property was subsequently lost to foreclosure, and $1.6 million related to the Partnership's mortgage notes receivable.
During 1992, the Partnership recorded the receipt of $1.0 million upon the settlement of litigation related to a lender's failure to honor a refinancing commitment for two of the Partnership's apartment complexes. In addition, the Partnership recognized a $375,000 gain on the sale of the Terrace View Apartments in Burlen, Washington. No such gains were recognized in 1993.
The Partnership recognized extraordinary gains of $9.0 million in 1993 and $6.4 million in 1992. The 1993 gain resulted from the acquisition at a discount of a mortgage obligation. See NOTE 8. "ACCRUING MORTGAGE." The 1992 gain is attributable to the foreclosure of the Hunters Glen Apartments in Kansas City, Missouri and the Lakes Apartments in Atlanta, Georgia and the forgiveness of the related nonrecourse mortgage debt.
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.
ITEM 7. 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.
Impact of Inflation
The effects of inflation on the Partnership's operations are not quantifiable. Revenues from property operations 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. Inflation also has an effect on the Partnership's earnings from short-term investments, and on its interest income and interest expense to the extent that such income and expense depend on floating interest rates.
Current Value Reporting
The Partnership believes that the historical cost basis financial statements prepared in accordance with generally accepted accounting principles are not representative of the economic value of the Partnership's real estate assets because most of the properties have appreciated in value over their historical cost basis. Nevertheless, generally accepted accounting principles require periodic depreciation charges.
In conjunction with the exchange transaction, by which the Partnership was formed, the Partnership retained independent appraisers to estimate the Current Appraised Value of the Partnership's properties as of March 31, 1987, based in part upon certain financial, lease and other information provided by the general partners of the exchange transaction partnerships. The Current Appraised Value of the Partnership's properties at March 31, 1987 was $758.0 million, and Revaluation Equity was $410.0 million at such date. Revaluation Equity is defined as the difference between the appraised value of the Partnership's real estate, adjusted to reflect the Partnership's estimate of disposition costs, and the face amount of the mortgage notes payable and accrued interest, if any, encumbering such real estate. The Current Appraised Value of the Partnership's properties at December 31, 1993, was $607.7 million, and Revaluation Equity was $258.4 million at such date.
In 1994, the Partnership retained an independent appraiser to determine the Current Appraised Value of the Partnership's properties as of December 31, 1994, in a manner consistent with the methodology used to determine Current Appraised Value as of December 31, 1993 and March 31, 1987. The Current Appraised Value of the Partnership's properties at December 31, 1994 was $644.3 million and Revaluation Equity was $301.3 million at such date.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Taxes
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.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has recently issued Statement of Financial Accounting Standards ("SFAS") No. 114 - "Accounting by Creditors for Impairment of a Loan" which amends SFAS No. 5 - "Accounting for Contingencies" and SFAS No. 15 - "Accounting by Debtors and Creditors for Troubled Debt Restructurings." The statement requires that notes receivable be considered impaired when "based on current information and events, it is probable that a creditor will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement". Impairment is to be measured either on the present value of expected future cash flows discounted at the note's effective interest rate or if the note is collateral dependent, on the fair value of the collateral. In October 1994, the FASB issued SFAS No. 118 - "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure" which amends SFAS No. 114. SFAS No. 118 eliminated the income recognition provisions of SFAS No. 114, substituting disclosure of the creditor's policy of income recognition on impaired notes. SFAS No. 114 and SFAS No. 118 are both effective for fiscal years beginning after December 15, 1994. The General Partner has not fully evaluated the effects of implementing these statements, but expects that they will not affect the Partnership's interest income recognition policy but may require the classification of otherwise performing loans as impaired.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
All other schedules are omitted because they are not required, are not applicable or the information required is included in the Consolidated Financial Statements or the notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Partners National Realty, L.P.
We have audited the accompanying consolidated balance sheets of National Realty, L.P., a limited partnership, as of December 31, 1994 and 1993, and the related consolidated statements of operations, partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1994. We have also audited the schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Partnership's Managing General Partner. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Realty, L.P. at December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
Also, in our opinion, the schedules present fairly, in all material respects, the information set forth therein.
As described in Note 14, "COMMITMENTS AND CONTINGENCIES - Moorman Settlement," the Oversight Committee, formed to oversee the implementation of the Moorman Settlement, previously has informed the Partnership that it calculates the amount of the Redeemable General Partner Interest to be less than what the Managing General Partner calculates. The outcome of this matter cannot presently be determined and the consolidated financial statements do not include any adjustments that might result from the outcome of this matter.
The accompanying consolidated financial statements have been prepared assuming that National Realty, L.P. will continue as a going concern. As described in Note 14, the Moorman Settlement Agreement provides that the Oversight Committee can require the Partnership to repurchase the General Partner's interest for either cash or the issuance of a secured note, payable over three years.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS (Continued)
The Partnership's liquidity and operating cash flow is not sufficient to repurchase the General Partner's interest without asset sales and further refinancings. These circumstances raise substantial doubt about the Partnership's ability to continue as a going concern. Management's plans in regard to this matter are described in Notes 14 and 15. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
BDO Seidman
Dallas, Texas March 23, 1995
NATIONAL REALTY, L.P. CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these Consolidated Financial Statements.
NATIONAL REALTY, L.P. CONSOLIDATED BALANCE SHEETS (Continued)
The accompanying notes are an integral part of these Consolidated Financial Statements.
NATIONAL REALTY, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these Consolidated Financial Statements.
NATIONAL REALTY, L.P. CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
The accompanying notes are an integral part of these Consolidated Financial Statements.
NATIONAL REALTY, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these Consolidated Financial Statements.
NATIONAL REALTY, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
The accompanying notes are an integral part of these Consolidated Financial Statements.
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, the most significant of which are described in NOTE 2. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES." These, along with the remainder of the Notes to Consolidated Financial Statements, are an integral part of the Consolidated Financial Statements. The data presented in the Notes to Consolidated Financial Statements are as of December 31 of each year or for the year then ended, unless otherwise indicated. Dollar amounts in tables are in thousands, except per unit amounts.
Certain balances for 1993 and 1992 have been reclassified to conform to the 1994 presentation.
NOTE 1. ORGANIZATION
General. National Realty, L.P. ("National Realty") is a Delaware limited partnership which commenced operations on September 18, 1987 when it acquired through National Operating, L.P. (the "Operating Partnership" or "NOLP") all of the assets, and assumed all of the liabilities, of 35 public and private limited partnerships.
National Realty is the sole limited partner of the Operating Partnership and owns 99% of the beneficial interest in the Operating Partnership. The general partner of, and owner of 1% of the beneficial interest in each of, National Realty and the Operating Partnership is Syntek Asset Management, L.P. (the "General Partner" or "SAMLP"). Gene E. Phillips is a general partner of SAMLP with a .95% general partner interest. Syntek Asset Management, Inc. ("SAMI") is the managing general partner of SAMLP, with a .10% general partner interest in SAMLP. SAMI, of which Mr. Phillips serves as a director, Chairman of the Board and Chief Executive Officer, is a company owned by Basic Capital Management, Inc. ("BCM"). American Realty Trust, Inc. ("ART"), a real estate investment company of which Mr. Phillips served as Chairman of the Board and director until November 16, 1992, owns a 76.8% limited partner interest in SAMLP. Southmark Corporation ("Southmark") owns a 19.2% limited partner interest in SAMLP. Mr. Phillips and William S. Friedman own the remaining 2.95% limited partner interest in SAMLP. Mr. Friedman was a general partner of SAMLP until March 4, 1994. See NOTE 14. "COMMITMENTS AND CONTINGENCIES -Southmark Litigation."
SAMI, as Managing General Partner of SAMLP, manages the affairs of the Partnership. In addition, SAMI's corporate parent, BCM, performs certain administrative functions such as accounting services, mortgage servicing and portfolio review and analysis for the Partnership on a cost reimbursement basis. Oscar W. Cashwell, the President and a director of SAMI, also serves as President of BCM and as a director of ART. BCM is a company owned by a trust for the benefit of the children of Mr. Phillips. Messrs. Phillips and Friedman served as directors of BCM until December 22, 1989 and as officers of BCM until September 1, 1992 and May 1, 1993, respectively. Since February 1, 1990 BCM or
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. ORGANIZATION (Continued)
affiliates of BCM have provided property management services for the Partnership. Currently, Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of BCM, performs such property management services for the Partnership. See NOTE 11. "GENERAL PARTNER FEES AND COMPENSATION."
In November 1992, the Partnership refinanced 52 of its apartment complexes and a wraparound note receivable with a financial institution. To facilitate the refinancing, the Operating Partnership transferred those assets to Garden Capital, L.P. ("GCLP"), a Delaware limited partnership. The Operating Partnership is the sole limited partner with a 99.3% limited partnership interest in GCLP. The Operating Partnership received its limited partnership interest in exchange for the transfer of the net assets of the 52 apartment complexes and the wraparound note receivable to GCLP. Garden Capital Management Incorporated ("GCMI"), a Nevada corporation, is the .7% managing general partner of GCLP. See NOTE 8. "ACCRUING MORTGAGE."
GCLP transferred the acquired net apartment assets, in exchange for a 99% limited partnership interest to each of 52 single asset limited partnerships which were formed for the purpose of operating, refinancing and holding title to the apartment complexes. The transfer of the 52 apartment complexes and the wraparound note receivable were effective November 25, 1992.
Each of the single asset limited partnerships has no significant assets other than an apartment complex encumbered by mortgage debt. Garden Capital Incorporated ("GCI"), a Nevada corporation, is the 1% managing general partner in each of the single asset limited partnerships.
Except as described under NOTE 14. "COMMITMENTS AND CONTINGENCIES - Moorman Settlement," all decisions relating to the Partnership, including all decisions with respect to the acquisition, disposition, improvement, financing or refinancing of the Partnership's properties or other investments, are made by the Managing General Partner. However, all decisions with respect to the acquisition, disposition, improvement, financing or refinancing of the GCLP properties are made by GCMI or GCI as managing general partner of GCLP or the single asset partnerships, respectively. BCM performs certain administrative functions for the Partnership, such as accounting services, mortgage servicing and portfolio review and analysis, on a cost reimbursement basis. In addition to property management services discussed above, BCM or affiliates of BCM also perform loan placement services, leasing services and real estate brokerage and acquisition services and other services for the Partnership for fees and commissions. GCMI performs administrative functions, similar to those performed for the Partnership by BCM, for GCLP on a cost reimbursement basis. The common stock of GCI and GCMI is owned by John A. Doyle (20%), Richard A. Green (40%) and Henry W. Simon (40%).
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. ORGANIZATION (Continued)
Participation in net income, net loss and distributions. The limited partners of National Realty have a 99% interest and the General Partner has an aggregate 1% interest in the net income or net loss and distributions of National Realty. National Realty has a 99% and the General Partner has a 1% interest in 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. The Operating Partnership has a 99.3% limited partnership interest and GCMI has a .7% general partnership interest in the net income or net loss and distributions of GCLP. GCLP has a 99% interest and GCI has a 1% interest in the net income or net loss and distributions of the 52 single asset partnerships that hold the apartment complexes. GCMI's .7% general partner interest in GCLP and GCI's 1% general partner interest in the single asset partnerships is equal to a 1.68% interest on a combined basis. For tax purposes limited partners are allocated their proportionate share of net income or net loss commencing with the calendar month subsequent to their entry into the Partnership. During the pendency of the Moorman Settlement Plan (as defined in NOTE 14. "COMMITMENTS AND CONTINGENCIES - Moorman Settlement"), the General Partner's base compensation, equal to 10% of the distributions to unitholders from the Partnership's cash from operations, is waived.
General Partner's capital contribution. In return for its 1% interest in National Realty, the General Partner was required to make aggregate capital contributions to the Partnership in an amount equal to 1.01% of the total initial capital contributions to the Partnership. The General Partner contributed $500,000 in cash with the remaining contribution evidenced by a promissory note bearing interest at the rate of 10% per annum compounded semi-annually payable on the earlier of September 18, 2007, liquidation of the Partnership or termination of the General Partner's interest in the Partnership. The principal balance of such promissory note was $4.2 million at December 31, 1994 and 1993.
In the accompanying Consolidated Balance Sheets, the note receivable from the General Partner is offset against the Redeemable General Partner Interest as described in NOTE 14. "COMMITMENTS AND CONTINGENCIES - Moorman Settlement." The General Partner received its 1% interest in the Operating Partnership in exchange for its agreement to serve as general partner of the Operating Partnership. If National Realty issues additional units of limited partner interest, the General Partner is entitled to maintain its aggregate 1% interest in each of National Realty and the Operating Partnership without payment of additional consideration.
GCMI contributed 100% of its economic interest in an apartment complex in Flagstaff, Arizona, to GCLP as its initial general partner capital contribution. In March 1993, GCMI contributed the Accruing Mortgage (as defined in NOTE 8. "ACCRUING MORTGAGE") as a substitute capital contri-
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. ORGANIZATION (Continued)
bution for its .7% general partner interest in GCLP. National Realty subsequently purchased the Accruing Mortgage for a $900,000 note payable. GCI received its 1% general partner interest in the single asset partnerships in exchange for agreeing to manage the property owned by each such partnership.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation. The Consolidated Financial Statements include the accounts of National Realty, the Operating Partnership, GCLP and consolidated entities. All significant intercompany balances and transactions have been eliminated. Minority interests (which are not significant) are included in other liabilities.
Revenue recognition on the sale of real estate. Sales of real estate are recognized when and to the extent permitted by Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No. 66"). Until the requirements of SFAS No. 66 for full profit recognition have been met, transactions are accounted for using either the deposit, the installment, the cost recovery or the financing method, whichever is appropriate.
Real estate and depreciation. Land, buildings and improvements are stated at the lower of cost or estimated net realizable value, except for foreclosed properties which are initially recorded at new cost as defined in "Foreclosed real estate held for sale," below. Properties held for sale are depreciated in accordance with the Partnership's established depreciation policies. The subsequent classification of property previously held for sale to held for investment does not result in a restatement of previously reported revenues, expenses or net income (loss).
Depreciation is provided on buildings and improvements using the straight-line method over estimated useful lives of 40 years for buildings and 7 to 25 years for improvements. Expenditures for renewals and betterments are capitalized and repairs and maintenance are charged against operations as incurred.
Allowance for estimated losses. A valuation allowance is provided for estimated losses on notes receivable to the extent that the Partnership's investment in the notes exceeds the Partnership's estimate of net realizable value of the collateral securing each such note, or fair value of the collateral if foreclosure is probable. In estimating net realizable value, consideration is given to the current estimated collateral value adjusted for costs to complete or improve, hold and dispose. The provision for losses on notes receivable is based on estimates, and actual losses may vary from current estimates. Such estimates are reviewed periodically and any additional provision determined to be necessary is charged against earnings in the period in which it becomes reasonably estimable.
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed real estate held for sale. Foreclosed real estate is recorded at new cost, defined as the lower of original cost or fair value minus estimated costs of sale.
Interest recognition on notes receivable. It is the Partnership's policy to cease recognizing interest income on notes receivable that have been delinquent for 60 days or more. In addition, accrued but unpaid interest income is only recognized to the extent that the net realizable value of underlying collateral exceeds the carrying value of the receivable.
Deferred financing costs. Deferred financing costs are capitalized and amortized on the interest-rate method over the term of the related loans.
Present value discounts. The Partnership provides for present value discounts on notes receivable or payable that have interest rates that differ substantially from prevailing market rates and amortizes such discounts by the interest method over the lives of the related notes. The factors considered in determining a market rate for receivables include the borrower's credit standing, nature of the collateral and payment terms of the note.
Marketable equity securities of affiliate. Marketable equity securities are considered to be available-for-sale and are carried at fair value, defined as period end closing market value. Net unrealized holding gains are reported as a separate component of partners' equity until realized.
Fair value of financial instruments. The Partnership used the following assumptions in estimating the fair value of its notes receivable, marketable equity securities and notes payable. For performing notes receivable, the fair value was estimated by discounting future cash flows using current interest rates for similar loans. For nonperforming notes receivable, the estimated fair value of the Partnership's interest in the collateral property was used. For marketable equity securities, fair value was the year end closing market price of each security. The estimated fair values presented do not purport to represent amounts to be ultimately realized by the Partnership. The amounts ultimately realized may vary significantly from the estimated fair values presented. For notes payable, the fair value was estimated using current rates for mortgages with similar terms and maturities, which, at December 31, 1993 and 1994, approximated carrying value.
Cash equivalents. For purposes of the Consolidated Statements of Cash Flows, the Partnership considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings per unit. Income (loss) per unit of limited partner interest is computed based upon the weighted average number of units outstanding during each year. Accordingly, net income (loss) per unit is derived by dividing 98.01% of the Partnership's net income (loss) by 2,139,524, 2,249,330 and 2,348,478 units for 1994, 1993 and 1992, respectively.
NOTE 3. REAL ESTATE AND DEPRECIATION
In October 1994, the Partnership sold the Brandywine and Raintree Apartments, both located in Meridian Township, Michigan, to a single buyer for a total of $14.8 million. The Partnership received net cash of $4.5 million after the payoff of $9.4 million in existing mortgage debt, the payment of $82,000 in prepayment penalties and various other closing costs associated with the sales. The Partnership recognized gains totaling $8.3 million on the sales.
In June 1993, a wholly-owned subsidiary of the Partnership acquired the 2.5% general partner interest in Club Mar Realty Group, Ltd. for $17,500. The Partnership also holds a senior preferred limited partner interest and receives 100% of the property's cash flow after debt service and is responsible for funding cash flow deficiencies. Club Mar Realty Group, Ltd. is a Florida limited partnership which owns the Club Mar Apartments in Sarasota, Florida. The Partnership recorded the purchase of the general partner interest and the acquisition of the apartments at their fair market value of $6.2 million and the assumption of $6.1 million in first mortgage debt.
Also in June 1993, a wraparound mortgage note receivable with an original principal balance of $5.8 million secured by the Whispering Pines Apartments in Canoga Park, California, became nonperforming. On February 4, 1994, the Partnership obtained, through foreclosure proceedings, title to the collateral property. The Partnership recorded an insubstance foreclosure of the collateral property as of December 31, 1993. No loss resulted from the foreclosure as the fair market value of the collateral property (minus estimated costs of sale) exceeded the carrying value, net of deferred gains, of the mortgage note receivable.
In March 1995, the Partnership purchased the Chalet II Apartments, a 72 unit apartment complex in Topeka, Kansas, for $1.6 million. The Partnership paid $439,000 in cash and obtained new mortgage financing of $1.2 million. The mortgage bears interest at a rate of prime plus 1% per annum, requires monthly payments of principal and interest, currently $12,000, and matures in March 2002.
As of March 17, 1995, the Harbour Point Apartments, a 182 unit apartment complex in Miami, Florida were under contract for sale. The Oversight Committee has approved the terms of the pending sale and the Partnership anticipates finalizing such sale during the second quarter of 1995. The apartment complex has been reclassified to real estate held for sale in the accompanying December 31, 1994, Consolidated Balance Sheet.
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. NOTES RECEIVABLE
Notes and interest receivable consisted of the following:
The Partnership does not recognize interest income on nonperforming notes receivable. Notes receivable are considered to be nonperforming when they become 60 days or more delinquent. For 1994, 1993 and 1992, unrecognized interest income on nonperforming notes totaled $372,000, $924,000 and $325,000, respectively.
The notes receivable mature from 1995 through 2000 with interest rates ranging from 8.0% to 11.5% with a weighted average interest rate of 10.2%. Discounts/premiums were based on interest rates at the time of origination. Notes receivable are nonrecourse and are generally collateralized by real estate. The majority of the notes receivable require monthly payments of interest only with "balloon" principal payments at the end of their respective terms.
Deferred gains result from property sales where the buyer has either made an inadequate down payment or has not met the continuing investment test of SFAS No. 66.
As discussed in NOTE 3. "REAL ESTATE AND DEPRECIATION," as of December 31, 1993, the Partnership recorded the insubstance foreclosure of Whispering Pines Apartments in Canoga, Park, California, the collateral property securing a wraparound mortgage note receivable.
In 1991, the Partnership and an insurance company entered into an Asset Sales Agreement to sell participations in certain of the Partnership's mortgage notes receivable in exchange for participations in other mortgage notes or assets and cash. The Partnership entered into the Asset Sales Agreement in an effort to develop a potential source for future financing and to generate cash from otherwise illiquid assets. The assets transferred by the Partnership pursuant to the Asset Sales Agreement included a $2.5 million senior participation in a wraparound mortgage note receivable secured by a shopping center in Las Vegas, Nevada, a $1.0 million senior participation in a wraparound mortgage note receivable secured by a shopping center in La Crosse, Wisconsin,
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. NOTES RECEIVABLE (Continued)
and a first lien mortgage note with a carrying value of $1.2 million prior to transfer. In return, the Partnership received a $447,000 senior participation in a note secured by land in Granby, Colorado, a $1.5 million participation in a note secured by a country club in the Ka'u District of Hawaii, a 10% limited partner interest in the partnership owning the country club, valued at $1.5 million, a $213,000 first lien mortgage note secured by land in Denver, Colorado and $1.0 million in cash. The Asset Sales Agreement included put and guaranty provisions.
In March 1992, the insurance company was placed in receivership. In June 1992, the Partnership provided notice to the insurance company, under the terms of the put and guaranty provisions, of its desire to divest itself of all the assets received. The Receiver refused to allow the enforcement of the terms of the Asset Sales Agreement. In September 1992, the Court approved the Receivers' Petition for an Order of Liquidation for the insurance company. The Partnership has reached a settlement with the Receiver, which was approved by the court on February 15, 1995. Under the terms of the settlement, the insurance company will return to the Partnership the senior participations in the wraparound mortgage notes secured by the shopping centers in Las Vegas, Nevada and La Crosse, Wisconsin. In exchange, the Partnership will return all of the assets that it received from the insurance company other than the first lien mortgage note secured by the land in Denver, Colorado, which had been foreclosed and sold by the Partnership, and $657,000 in cash. The Partnership has further agreed to purchase from the insurance company the first lien note secured by the land in Granby, Colorado and a second lien note secured by commercial condominiums also in Granby, Colorado for $550,000. The asset transfers and purchase are anticipated to occur in the second quarter of 1995. The settlement requires the Partnership to pay interest on the cash portion of the settlement from March 17, 1995 until the asset transfers and purchase are completed. Interest is payable monthly.
In 1992, the Partnership determined that the fair value of the underlying collateral securing one of the participations and a note receivable received was not sufficient to satisfy the Partnership's participation interests and accordingly, the Partnership recorded a $1.6 million provision for loss to provide for such deficiency.
In May 1993, the Partnership foreclosed on an assigned first lien secured by land in Denver, Colorado. The Partnership incurred no loss as a result of the foreclosure. In October 1993, this land was sold for its carrying value. The Partnership will incur no loss on the settlement beyond amounts previously provided.
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. ALLOWANCE FOR ESTIMATED LOSSES
Activity in the allowance for estimated losses was as follows:
In addition to the provision for losses in 1992, $416,000 was charged against earnings to write-down one of the Partnership's office buildings to the balance of the related nonrecourse mortgage debt. The property was subsequently foreclosed.
NOTE 6. INVESTMENTS IN MARKETABLE EQUITY SECURITIES OF AFFILIATE
The Partnership owns 48,933 shares of the common stock of ART, a real estate investment company, which the Partnership acquired in open market purchases in 1990. The Partnership considers the ART common shares as available-for-sale and they are therefore carried at fair value (period end market value). The market value of the ART common stock was $636,000 at December 31, 1994 and $593,000 at December 31, 1993.
NOTE 7. NOTES PAYABLE
Notes payable at December 31, 1994 and 1993 are collateralized by land, buildings and improvements and are generally nonrecourse to the partnership. The GCLP mortgage debt, as discussed below, is cross-collateralized and cross-defaulted among the apartment complexes and wraparound note receivable that serve as collateral for such debt. The notes payable outstanding at December 31, 1994 bear interest at stated rates ranging from 5.0% to 15.0% with a weighted average rate of 9.1% and such notes have maturities or call dates ranging from one to 29 years.
In March 1994, the Partnership obtained new first mortgage financing secured by the Cross County Mall, a shopping center in Mattoon, Illinois. The Partnership can borrow up to $7.5 million under the loan, to repay the then existing mortgage debt and for the renovation of the shopping center as well as tenant improvements. At closing of the new loan, $4.7 million was advanced, of which $4.3 million was used to payoff the existing mortgage, including a $104,000 prepayment penalty. The remainder of the initial advance was used to pay various closing costs associated with the financing. The new first mortgage bears interest at 1.5% above the prime rate, currently 10.3% per annum, requires monthly payments of principal and interest based upon the outstanding balance of the loan and matures in March 1997 with an option to extend the maturity date to March 2002. As of December 31, 1994, $2.7 million of additional advances under the loan had been made. The additional advances were used for tenant improvements related to the expansion by a major tenant of the shopping center.
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES PAYABLE (Continued)
In July 1994, the Partnership completed the extension of the $2.3 million second lien mortgage secured by the Marina Playa Office Building in Santa Clara, California. The loan's maturity date was extended from July 1994 to January 1996, with all other terms of the loan remaining unchanged.
In September 1994, the Partnership sold the Creekwood Apartments in College Park, Georgia for $6.0 million. The Partnership has accounted for the sale as a financing transaction, due to the Partnership having provided financing of the purchaser's down payment. On the date of sale, the purchaser obtained new first mortgage financing from an independent lending institution in the amount of $3.0 million. The Partnership received $1.3 million in excess proceeds from the new financing, after the payoff of the existing mortgage in the amount of $1.1 million and the funding of required repair escrows and closing costs associated with the financing. The Partnership has recorded the extinguishment of the then existing mortgage as well as the new first mortgage. The new first mortgage bears interest at a variable rate, currently 7.8% per annum, requires monthly payments of principal and interest, currently $24,000 and matures in September 1997.
In August 1993, the Partnership refinanced the Regency Pointe Shopping Center in Jacksonville, Florida receiving net cash of $788,000 after the payment of the then existing mortgage debt of $1.6 million, associated closing costs and funding of required repair and maintenance escrows. The Partnership has guaranteed 50% of the $3.0 million mortgage debt.
The Partnership has a 75% general partner interest in Southern Palms Associates, which owns Southern Palms Shopping Center. In August 1992, Southern Palms Associates filed a voluntary petition in bankruptcy, seeking, among other things, to restructure the $9.3 million nonrecourse mortgage secured by the shopping center. In connection with the bankruptcy, an agreement was reached with the lender to modify the $9.3 million first mortgage. The modification, which was effective as of December 31, 1993, reduced the mortgage's interest rate from 11.7% per annum to a variable rate, currently 8.9% per annum, and extended the maturity date of the mortgage to March 1998.
During 1993, achievement escrows totaling $1.8 million were applied against principal balances on three mortgage loans, $524,000 was applied to reduce the mortgage debt secured by the Granada Apartments in Bellevue, Nebraska, net of $66,000 of prepayment penalties, $924,000 was applied against the mortgage debt secured by the Vineyards Apartments in Broadview Heights, Ohio, net of $117,000 of prepayment penalties and $323,000 was applied against the mortgage debt secured by the Brookview Apartments in Smyrna, Georgia, net of $45,000 prepayment penalties. All prepayment penalties are included in interest expense in the accompanying Consolidated Statements of Operations.
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES PAYABLE (Continued)
In November 1992, the Partnership transferred the net assets of 52 apartment complexes and a wraparound note receivable to GCLP, which then refinanced such assets with a financial institution through the issuance of a $223 million blanket mortgage. GCLP used the refinancing proceeds to pay off the mortgage debt of the 52 properties and the wraparound note receivable of $175.1 million, after prepayment penalties and discounts, a line of credit of $21.9 million, including accrued but unpaid interest, and make a $8.5 million principal paydown on the Accruing Mortgage. (See NOTE 8. "ACCRUING MORTGAGE.") Refinancing proceeds of $3.8 million were deposited in four escrow accounts, as discussed below. After fees and other closing costs of $12.0 million were paid, net refinancing proceeds of $1.7 million remained. In 1992, the Partnership recorded an extraordinary loss of $614,000 as a result of prepayment penalties and deferred borrowing costs.
In conjunction with the refinancing, four escrow accounts were established and GCLP made an initial deposit totaling $3.8 million from the refinancing proceeds. The recurring replacement escrow requires monthly deposits of $232,000 and such funds will be used for capital repairs, replacements and improvements. The capital replacement escrow required monthly deposits which totaled $1.7 million in 1994 and $800,000 in 1993. These funds will also be used for capital replacement, repair work and environmental compliance as specified in the loan agreement. No capital replacement escrow deposits are required in 1995. The credit enhancement escrow requires monthly deposits totaling $3.3 million in 1995 ($3.0 million in each of 1993 and 1994), $3.5 million in 1996 and $2.0 million for each of 1997, 1998 and 1999 up to an aggregate maximum amount of $18.5 million. These funds will be used to fund any operating shortfalls. A tax and insurance escrow was also established which requires monthly payments based on projections of real estate taxes and insurance.
Also in conjunction with the GCLP refinancing, a letter of credit was provided by a financial institution for a term of not less than five years and in the amount of $12.5 million. The letter of credit may be drawn upon by GCLP to pay any operating shortfalls, provided such funds are not on deposit in the credit enhancement escrow, described above, which is to be used, first, to fund operating shortfalls. The letter of credit will be reduced by the amount of (i) each draw on the letter of credit, (ii) each credit enhancement escrow deposit and (iii) any additional deposits made to the credit enhancement escrow account in excess of the requirement. No amounts have been drawn under the letter of credit.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES PAYABLE (Continued)
Scheduled notes payable principal payments (including pension notes) are due as follows:
NOTE 8. ACCRUING MORTGAGE
In connection with its formation in January 1987, the Partnership restructured $12.7 million of obligations (including certain mortgages, payables and accrued interest) due to Southmark or its affiliates into an "Accruing Mortgage". The Accruing Mortgage had a maturity date of September 18, 1994 and was secured by Partnership properties. In November 1992, an affiliate of GCMI, the managing general partner of GCLP, a 99.3% owned limited partnership, acquired the Accruing Mortgage. In connection with the GCLP refinancing $8.5 million was paid against the principal balance and one of the Partnership's collateral apartment complexes was released and the recourse provisions of the Accruing Mortgage were canceled. In March 1993, the holder of the Accruing Mortgage merged into GCMI and GCMI contributed such mortgage at an agreed value of $900,000 as a substitute capital contribution for its .7% general partner interest in GCLP. In March 1993, the Partnership acquired the Accruing Mortgage from GCLP in exchange for a $900,000 noninterest bearing unsecured demand note in full satisfaction of principal and accrued but unpaid interest. As stated above, the Partnership owns a 99.3% limited partner interest in GCLP. In 1993, the Partnership recognized an extraordinary gain of $9.0 million from the discounted acquisition of the Accruing Mortgage.
NOTE 9. PENSION NOTES
In connection with its formation, the Partnership issued $4.7 million of 8% subordinated Pension Notes to certain investors in exchange for their interest in the net assets of certain of the "rolled-up" partnerships. The Pension Notes are issued under an Indenture between the Partnership and Bank of America Texas as successor Trustee. The Pension Notes are unsecured, subordinated obligations of the Partnership and bear interest at the rate of 8% compounded annually. Principal and interest are to be paid upon maturity on September 18, 1997 or earlier redemption. At December 31, 1994, such redemption amount was $10.8 million, including accrued but unpaid interest.
The Pension Notes are redeemable at the option of the Partnership at any time, in whole or in part, at 100% of the principal amount plus accrued
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. PENSION NOTES (Continued)
and unpaid interest to the date of redemption. The Pension Notes are also subject to mandatory redemption if the Partnership's current value net worth (as defined in such Indenture) on the last day of each of any two consecutive fiscal quarters is less than 175% of the aggregate redemption price of Pension Notes then outstanding.
The 8% stated interest rate on the Pension Notes is different than the assumed market rate at the time of issuance. Such discount is being amortized over the term of the Pension Notes using the interest method. Interest expense of $1,151,000, $1,028,000 and $918,000 was recognized on the Pension Notes for the years 1994, 1993 and 1992, respectively.
NOTE 10. WARRANTS
Pursuant to the Moorman Settlement Agreement, the Partnership issued on February 14, 1992, 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 are exercisable for five years from the February 14, 1992 date of issuance or until earlier redemption. See NOTE 14. "COMMITMENTS AND CONTINGENCIES - Moorman Settlement."
NOTE 11. GENERAL PARTNER FEES AND COMPENSATION
General. Mr. Phillips is a general partner of SAMLP, the Partnership's General Partner. Mr. Phillips serves as a director, Chairman of the Board and Chief Executive Officer of SAMI, the Partnership's Managing General Partner. Mr. Cashwell serves as a director and President of SAMI as well as President of BCM. Messrs. Phillips and Cashwell are also officers or directors of various real estate entities. These entities may have the same objectives and may be engaged in activities similar to those of the Partnership.
Property Management Fees. As compensation for providing property management services to the Partnership's properties, as provided in the Partnership Agreement, the General Partner or an affiliate of the General Partner is to receive a reasonable property management fee. Since February 1, 1990, affiliates of the Managing General Partner have provided property management services to the Partnership. Currently, Carmel Realty Services, Ltd. ("Carmel, Ltd.") provides such property management services for a fee of 5% or less of the monthly gross rents collected on the properties under its management. Carmel, Ltd. subcontracts with other entities for the property-level management services to the Partnership at various rates. The general partner of Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (i) Syntek West, Inc. ("SWI"), of which Mr. Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of the
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. GENERAL PARTNER FEES AND COMPENSATION (Continued)
children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level management and leasing of twelve of the Partnership's commercial properties to Carmel Realty, Inc. ("Carmel Realty") which is a company owned by SWI. Carmel Realty is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property- level management agreement with Carmel, Ltd. Carmel, Ltd. does not perform property management services for GCLP.
Leasing Commissions. As compensation for providing leasing and rent-up services for a Partnership property, as provided in the Partnership Agreement, the General Partner or an affiliate of the General Partner shall be paid a reasonable leasing commission.
Reimbursement of Administrative Expenses. To the extent that officers or employees of the general partners or any of their affiliates participate in the operation or administration of the Partnership or GCLP, the general partners and their affiliates are to be reimbursed under the partnership agreements for salaries, travel, rent, depreciation, utilities and general overhead items incurred and properly allocable to such services. Such amounts are included in General and Administrative expense in the accompanying Consolidated Statements of Operations.
General Partner Compensation. As base compensation for providing administrative and management services under the Partnership Agreement, the General Partner is entitled to receive from the Partnership an annual partnership management fee equal to 10% of distributions made in each calendar year of Cash from Operations, as defined in the Partnership Agreement, for the calendar year, payable within 90 days after the end of that calendar year. As additional incentive compensation, the General Partner is entitled to receive in each calendar year an amount equal to 1% of the Average Unit Market Price, as defined in the Partnership Agreement, for that calendar year. Provided, however, that no incentive compensation is payable unless distributions of cash from operations exceed 6% of the Exchange Value of the original assets, also as defined in the Partnership Agreement. The General Partner has waived its base compensation during the pendency of the Moorman Settlement Agreement.
Real Estate Brokerage Commissions. The General Partner or an affiliate of the General Partner may, pursuant to the Partnership Agreement, charge a reasonable real estate brokerage commission, payable at the time the Partnership acquires title to, or beneficial ownership in, an acquired property. Upon the sale of any Property by the Partnership, the General Partner or an affiliate of the General Partner may, pursuant to the Partnership Agreement, charge a reasonable real estate brokerage commission, payable at the time the Partnership transfers title to the property. In each case, such commissions are payable only if the General Partner or such affiliate actually performed brokerage services.
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. GENERAL PARTNER FEES AND COMPENSATION (Continued)
Incentive Disposition Fee. Under the Partnership Agreement, the General Partner or an affiliate of the General Partner is paid a fee equal to 10% of the amount, if any, by which the Gross Sales Price, as defined in the Partnership Agreement, of any property sold by the Partnership exceeds 110% of the Adjusted Cost, also as defined in the Partnership Agreement, of such property.
Acquisition Fees. As compensation under the Partnership Agreement for services rendered in structuring and negotiating the acquisition by the Partnership of any property, other than an Initial Property, as defined in the Partnership Agreement, the General Partner or an affiliate of the General Partner is paid a fee in an amount equal to 1% of the Original Cost, also as defined in the Partnership Agreement, of such property.
Fees For Additional Services. Under the Partnership Agreement the General Partner or an affiliate of the General Partner may provide services other than those set out above for the Partnership in return for reasonable compensation.
Fees and cost reimbursement to SAMLP, the General Partner of the Partnership and its affiliates:
* Net of property management fees paid to subcontractors, other than Carmel Realty.
Cost reimbursements to GCMI, the general partner of GCLP:
Rent. The office building which serves as headquarters for the Partnership, BCM and other entities managed by BCM or Mr. Phillips is located in Dallas, Texas. The office building is owned by Search/Lodges Diversified, L.P., in which BCM is a limited partner. The Partnership
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. GENERAL PARTNER FEES AND COMPENSATION (Continued)
leased its office space under a four-year lease which expired in October 1994 and which continued on a month to month basis through December 31, 1994. Total rent expense paid by the Partnership to BCM was $313,000 in 1994, $301,000 in 1993 and $288,000 in 1992.
NOTE 12. RENTALS UNDER OPERATING LEASES
The Partnership's rental operations include the leasing of office buildings and shopping centers. The leases thereon expire at various dates through 2013. The following is a schedule of minimum future rentals on non- cancelable operating leases as of December 31, 1994:
NOTE 13. INCOME TAXES
The Partnership's partners include their share of partnership income or loss in their respective tax returns and, accordingly, no income taxes have been provided in the accompanying Consolidated Statements of Operations.
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 for federal tax purposes until at least 1997, unless the Partnership adds a substantial new line of business, which would require approval of the Oversight Committee (see NOTE 14. "COMMITMENTS AND CONTINGENCIES - Moorman Settlement") 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 this qualification.
Under the legislation, Partnership losses are suspended for limited partners and carried forward to offset future income or gain from the Partnership's operations or gain upon a limited partner's disposition of all units held. Any remaining income will be taxed as portfolio income.
NOTE 14. COMMITMENTS AND CONTINGENCIES
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, Messrs.
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. COMMITMENTS AND CONTINGENCIES (Continued)
Moorman Settlement (Continued)
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. 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 through May 1995, relating to the price of the units of limited partner interest as decreased for certain distributions to unitholders, (iv) an agreement by SAMLP not to seek reimbursement of greater than $500,000 per year for Messrs. Phillips' and Friedman's salaries for serving as general partners of SAMLP, (Mr. Friedman resigned as general partner of SAMLP effective March 4, 1994) and a deferral of such payments until such time as a Target may be met, and, if SAMLP resigns as General Partner, a waiver of any compensation so deferred, (v) a deferral until such time as a Target may be met of certain future annual General Partner compensation payable, pursuant to the Partnership's governing documents, to SAMLP or its affiliates, and, if SAMLP resigns as General Partner, a waiver of any compensation so deferred, (vi) the required distribution to unitholders of all the Partnership's operating cash flow in excess of certain renovation costs, unless the Oversight Committee approves alternative uses for such operating cash flow, (vii) the issuance of Warrants to purchase an aggregate of up to 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
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. COMMITMENTS AND CONTINGENCIES (Continued)
Moorman Settlement (Continued)
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.
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 was paid in May 1994.
If Targets are not met for any two successive years of the Moorman Settlement Plan or for the final year of the Moorman Settlement Plan, SAMLP will be required to withdraw as General Partner effective at the time a successor general partner is elected. Upon, among other things, the withdrawal of SAMLP as General Partner and the due election and taking office of a successor, the Moorman Settlement Plan would terminate.
The Targets for the first and second anniversary dates were not met. Since the Targets were not met for two successive years, the Moorman Settlement Agreement requires that SAMLP resign as General Partner, effective upon the election and qualification of its successor. On July 8, 1992, SAMLP notified the Oversight Committee of the failure to meet the Target for two successive years.
Upon, among other things, the withdrawal of SAMLP as General Partner and the due election and taking office of a successor, the Moorman Settlement Plan will terminate. Withdrawal of SAMLP as General Partner pursuant to the Moorman Settlement Agreement requires unitholders to elect a successor general partner by majority vote. Upon the withdrawal or removal of the General Partner without the selection of a successor, the Partnership would be dissolved.
The Moorman Settlement Agreement provides that between the date of the certification causing the General Partner's resignation and the date a successor general partner takes office, the resigning General Partner shall limit its activities, as General Partner, to the conduct of the business of the Partnership in the ordinary course, shall not, without consent of the Oversight Committee, purchase or sell any real estate or other assets of the Partnership not in progress on said date, shall cooperate in the election of a successor general partner and shall coop-
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. COMMITMENTS AND CONTINGENCIES (Continued)
Moorman Settlement (Continued)
erate 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.
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 (the "Supervising 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, 1994 to be $33.0 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 December 31, 1994) plus all accrued but unpaid interest ($4.3 million at December 31, 1994) on the note receivable from SAMLP described in NOTE 1. "ORGANIZATION." 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. Any dispute pertaining to the amount of Redeemable General Partner Interest upon withdrawal of SAMLP, will be resolved by the Supervising Judge.
On January 27, 1995, National Realty, SAMLP and the Oversight Committee executed an Implementation Agreement which provides for the nomination
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. COMMITMENTS AND CONTINGENCIES (Continued)
Moorman Settlement (Continued)
of a successor general partner and for the resolution of all related matters under the Moorman Settlement. The Implementation Agreement is subject to receipt of a notice from the proposed successor general partner nominee that it consents to stand for election as the successor general partner.
The Implementation Agreement shall be 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 third or fourth quarter of 1995.
The 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 thirty months from the date the successor general partner takes office. In addition, the Supervising Judge shall make a determination of any amounts which National Realty may owe to SAMLP upon SAMLP's withdrawal as General Partner and any amounts which SAMLP or its affiliates may owe to National Realty. Any amounts which National Realty may be determined to owe to SAMLP may be paid by National Realty over a period of time to be determined by the parties on terms which shall not hinder National Realty's ability to meet its other financial obligations.
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 Implementation Agreement shall be voided.
Southmark Litigation
During 1990 and 1991, several adversary proceedings were initiated against the Partnership and others by Southmark and its affiliates. In December 1991, the Partnership and several other parties entered into a comprehensive settlement of litigation with Southmark, which settled all actions between Southmark and its affiliates and the Partnership and its affiliates.
NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. COMMITMENTS AND CONTINGENCIES (Continued)
Southmark Litigation (Continued)
Pursuant to the settlement, Southmark received $13.2 million from the various settling parties. The final installment of $1.3 million was paid by the settling parties in July 1994. Of the $13.2 million paid to Southmark, the Partnership paid $1.8 million, the net amount which it had recorded as due to Southmark as of the date the settlement was entered into. Southmark also received from ART a 19.2% limited partner interest in SAMLP, the General Partner of the Partnership. ART had an option to repurchase the SAMLP partnership interest from Southmark for $2.4 million, such option expired December 27, 1994.
Other Litigation
The Partnership is also involved in various other lawsuits arising in the ordinary course of business. Management of the Partnership is of the opinion that the outcome of these lawsuits will have no material impact on the Partnership's financial condition.
NOTE 15. LIQUIDITY
As discussed in NOTE 14. "COMMITMENTS AND CONTINGENCIES - Moorman Settlement," the Managing General Partner is required to resign upon the election and qualification of its successor. Under the Moorman Settlement Plan, payment for such Redeemable General Partner Interest, fees and other compensation may, at the Oversight Committee's option be paid either in cash or through the issuance of a secured note, payable over three years. The Partnership's operating cash flow is not expected to be sufficient to purchase the Redeemable General Partner Interest without asset sales and/or refinancings. However, National Realty, SAMLP and the Oversight Committee have executed an Implementation Agreement that provides, among other things, that amounts due SAMLP may be paid by National Realty over a period of time to be determined by the parties on terms which shall not hinder National Realty's ability to meet its other financial obligations. If the proposed successor general partner nominee does not stand for election, the existing Moorman Settlement Agreement shall remain in full force and all provisions of the Implementation Agreement shall be void.
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NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. QUARTERLY DATA
The following is a tabulation of the Partnership's quarterly results of operations for the years 1994 and 1993 (unaudited).
In October 1994, the Partnership sold two of its apartment complexes in Meridian Township, Michigan for a total gain of $8.3 million. See "NOTE 3. REAL ESTATE AND DEPRECIATION."
In the first quarter of 1993, the Partnership recorded a $9.0 million extraordinary gain as a result of its acquisition, at a discount, of the Accruing Mortgage. See NOTE 8. "ACCRUING MORTGAGE."
SCHEDULE III NATIONAL REALTY, L.P. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1994
SCHEDULE III (Continued) NATIONAL REALTY, L.P. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1994
SCHEDULE III (Continued) NATIONAL REALTY, L.P. (Continued) REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1994
SCHEDULE III (Continued)
NATIONAL REALTY, L.P. (Continued) REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1994
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(1) The aggregate cost for financial statement purposes approximates that for federal tax purposes. (2) Does not include discounts and mortgages payable totaling $16,483 on real estate which has been sold but for which the Partnership remains liable on the underlying mortgage note. (3) Write-down of property to estimated net realizable value. (4) Held for sale.
SCHEDULE III (Continued)
NATIONAL REALTY, L.P. REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE IV NATIONAL REALTY, L.P. MORTGAGE LOANS ON REAL ESTATE December 31, 1994
_________________________
(1) Represents mortgage participations sold.
SCHEDULE IV (Continued)
NATIONAL REALTY, L.P. MORTGAGE LOANS ON REAL ESTATE
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
_________________________________
PART III
ITEM 10.
ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER
As partnerships, neither National Realty, L.P. ("National Realty" or the "Registrant") nor National Operating, L.P. (the "Operating Partnership" or "NOLP") (collectively the "Partnership") has officers or directors. The General Partner of the Partnership is Syntek Asset Management, L.P. ("SAMLP"), whose general partners are Gene E. Phillips and Syntek Asset Management, Inc. ("SAMI"). SAMI serves as Managing General Partner. Mr. Phillips is associated with a number of entities which have business objectives that are similar in certain respects to those of the Partnership. The Managing General Partner manages the day-to-day affairs of the Partnership which includes all decisions with respect to the acquisition, disposition, improvement, financing or refinancing of the Partnership's properties, subject to the limitations of the Moorman Settlement Agreement. See ITEM 3. "LEGAL PROCEEDINGS - Moorman Settlement." In addition, SAMI's corporate parent, Basic Capital Management, Inc. ("BCM"), performs certain administrative functions and other services for the Partnership for cost reimbursements and fees as described in ITEM 1. "BUSINESS - Management and Operations." The individual general partner of SAMLP and the executive officers of SAMI are listed below, together with their ages, terms of service, their principal occupations, business experience, and directorships with other companies during the last five years or more.
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ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued)
GENE E. PHILLIPS: Age 57, General Partner (since 1987) of SAMLP; and Chairman of the Board, Director and Chief Executive Officer (since March 1989) of SAMI, the Managing General Partner of SAMLP and a company owned by BCM.
Director and Secretary (since 1982) and the sole shareholder of Syntek West, Inc. ("SWI"); Chairman of the Board (since 1982) and Secretary (1982 to 1990) of Syntek Investment Properties, Inc. ("SIPI"), which has invested in, developed and syndicated real estate through its subsidiaries and other related entities since 1973; Chairman of the Board (since 1978) of Hungry Bull, Inc., which owns mortgages on restaurant properties; Limited Partner (since January 1991) of Carmel Realty Services, Ltd. ("Carmel, Ltd."); Chief Executive Officer (February 1989 to September 1992) and Chairman of the Board and Director (February 1989 to December 1989) of BCM; Director and President (November 1989 to September 1992) of Carmel Realty Services, Inc. ("CRSI"); Chairman of the Board (1984 to November 1992), Director (1981 to November 1992), Chief Executive Officer (1982 to July 1991) and President (February 1989 to July 1991) of American Realty Trust, Inc. ("ART"); Trustee or Director (January 1989 to December 1992) of Transcontinental Realty Investors, Inc. ("TCI"), Vinland Property Trust ("VPT"), National Income Realty Trust ("NIRT"), Continental Mortgage and Equity Trust ("CMET") and Income Opportunity Realty Trust ("IORT"); Trustee (1988 to November 1989) of Wespac Investors Trust ("Wespac"); and Director of Pratt Hotel Corporation (1986 to April 1989). Until January 1989, Mr. Phillips served in the following positions: Chairman of the Board and Director (from 1980) and President and Chief Executive Officer (from 1981) of Southmark Corporation ("Southmark"); Chairman of the Board and Director of Integon Corporation (from 1982), Director of NACO Finance Corporation (from 1982), Pacific Standard Life Insurance Company (from 1984), Servico, Inc. (from 1986), Southmark San Juan, Inc. (from 1987), National Heritage, Inc. (from 1987), J. M. Peters Company, Inc. (1987) and San Jacinto Savings Association (1987); Director and Chairman of the Board of Thousand Trails, Inc. (from 1987) and MGF Oil Corporation (from 1988).
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ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued)
OSCAR W. CASHWELL: Age 67, Director (since March 1994) and President (since February 1994) of SAMI.
President (since February 1994) of CMET, IORT and TCI; President and Director of Property and Asset Management (since January 1994) and Assistant to the President, Real Estate Operations (July 1989 to December 1993) of BCM; Assistant to the President, Real Estate Operations (March 1982 to June 1989) of Southmark; and Director (since November 1992) of ART.
KARL L. BLAHA: Age 46, Executive Vice President and Director of Commercial Management (since April 1992) of SAMI.
President (since October 1993) and Executive Vice President and Director of Commercial Management (April 1992 to September 1993) of ART; Executive Vice President and Director of Commercial Management (since April 1992) of BCM, CMET, IORT and TCI; Executive Vice President (since October 1992) of Carmel Realty, Inc. ("Carmel Realty"), a company owned by SWI; Executive Vice President and Director of Commercial Management (April 1992 to February 1994) of NIRT and VPT; Partner - Director of National Real Estate Operations of First Winthrop Corporation (August 1988 to March 1992); Corporate Vice President of Southmark (April 1984 to August 1988); and President of Southmark Commercial Management (March 1986 to August 1988).
BRUCE A. ENDENDYK: Age 46, Executive Vice President (since January 1995).
President (since January 1995) of Carmel Realty; Executive Vice President (since January 1995) of BCM, ART, CMET, IORT and TCI; Management Consultant (November 1990 to December 1994); Executive Vice President (January 1989 to November 1990) of Southmark; President and Chief Executive Officer (March 1988 to January 1989) of Southmark Equities Corporation; and Vice President/Resident Manager (December 1975 to March 1988) of Coldwell Banker Commercial/Real Estate Services in Houston, Texas.
RANDALL M. PAULSON: Age 48, Executive Vice President (since January 1995).
Executive Vice President (since January 1995) of ART, CMET, IORT and TCI and (since October 1994) of BCM; Vice President (1993 to 1994) of GSSW, LP, a joint venture of Great Southern Life and Southwestern Life; Vice President (1990 to 1993) of Property Company of America Realty, Inc.; President (1990) of Paulson Realty Group; President (1983 to 1989) of Johnstown Management Company; and Vice President (1979 to 1982) of Lexton-Ancira.
ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued)
HAMILTON P. SCHRAUFF: Age 59, Executive Vice President and Chief Financial Officer (since October 1991) of SAMI.
Executive Vice President and Chief Financial Officer (since October 1991) of BCM, ART, CMET, IORT and TCI; Executive Vice President and Chief Financial Officer (October 1991 to February 1994) of NIRT and VPT; Executive Vice President - Finance of Partnership Investments, Hallwood Group (December 1990 to October 1991); Vice President - Finance and Treasurer (October 1980 to October 1990) and Vice President - Finance (November 1976 to September 1980) of Texas Oil & Gas Corporation; and Assistant Treasurer - Finance Manager (February 1975 to October 1976) of Exxon U.S.A.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Under the securities laws of the United States, the directors and executive officers of the Partnership's Managing General Partner, and any persons holding more than 10% of the Partnership's units of limited partner interest are required to report their ownership of the Partnership's units and any changes in that ownership to the Securities and Exchange Commission (the "Commission"). Specific due dates for these reports have been established and the Partnership is required to report any failure to file by these dates during 1994. All of these filing requirements were satisfied by the directors and executive officers of the Partnership's Managing General Partner and 10% holders. In making these statements, the Partnership has relied on the written representations of the directors and executive officers of the Partnership's Managing General Partner and its ten percent holders and copies of the reports that they have filed with the Commission.
Administrative Agent. Pursuant to an agreement, BCM, of which Mr. Phillips served as Chief Executive Officer until September 1, 1992, and of which Mr. Cashwell serves as President, performs certain administrative functions such as accounting services, mortgage servicing and real estate portfolio review and analysis for the Partnership on a cost reimbursement basis.
Affiliates of BCM perform property management, loan placement services, leasing services and real estate brokerage and acquisition services, and may perform other services, for the Partnership for fees and commissions. BCM's principal business activity is the providing of advisory services for real estate companies. See ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
The directors and principal officers of BCM are set forth below.
RYAN T. PHILLIPS: Director
OSCAR W. CASHWELL: President and Director of Property and Asset Management
ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued)
KARL L. BLAHA: Executive Vice President and Director of Commercial Management
BRUCE A. ENDENDYK: Executive Vice President
RANDALL M. PAULSON: Executive Vice President
HAMILTON P. SCHRAUFF: Executive Vice President and Chief Financial Officer
CLIFFORD C. TOWNS, JR.: Executive Vice President, Finance
STEPHEN R. YOUNG: Executive Vice President and Director of Acquisitions
THOMAS A. HOLLAND: Senior Vice President and Chief Accounting Officer
ROBERT A. WALDMAN: Senior Vice President, Secretary and General Counsel
DREW D. POTERA: Vice President, Treasurer and Securities Manager
Ryan T. Phillips is Gene E. Phillips' son.
Oversight Committee. As more fully described under ITEM 3. "LEGAL PROCEEDINGS - Moorman Settlement," the Partnership is a party to the Moorman Settlement Agreement that, among other things, established an Oversight Committee which will exist only until termination of the Moorman Settlement Plan. The current members of the Oversight Committee are Kenneth R. Kelly, Ronald T. Baker and Joseph S. Radovsky. Mr. Kelly is the current Chairman and Secretary of the Oversight Committee.
Unanimous consent of the Oversight Committee is required, during the term of the Moorman Settlement Plan, for the Partnership to adopt a new unit purchase rights plan, or for SAMLP, on behalf of the Partnership, to enter into or modify any transaction (other than certain transactions expressly permitted by the Partnership Agreement) with an affiliate (as defined below) of the Partnership, SAMLP, or Mr. Phillips or William S. Friedman, a general partner of SAMLP until March 4, 1994. Majority consent of the Oversight Committee is required, during the term of the Moorman Settlement Plan, for SAMLP, on behalf of the Partnership, to purchase securities of other issuers other than certain money market instruments and mortgages in the ordinary course of the Partnership's business, or to enter any new line of business. For purposes of the Moorman Settlement Agreement, an "Affiliate" of the Partnership, SAMLP, or Messrs. Phillips and Friedman (each, a "Specified Party") is any person or entity that (i) directly or indirectly through one or more intermediaries controls or is controlled by or is under common control with the Specified Party, (ii) owns or controls 10% or more of the out-
ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued)
standing voting securities of the Specified Party, or (iii) is an officer or director of, general partner in, or serves in a similar capacity to the Specified Party or of which the Specified Party is an officer, director, or general partner or with respect to which the Specified Party serves in a similar capacity.
On July 8, 1992, SAMLP notified the Oversight Committee of the failure to meet the Targets (as defined in ITEM 3. "LEGAL PROCEEDINGS - Moorman Settlement") for two successive years. 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 property 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. See ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
Pursuant to the Moorman Settlement Agreement, the Partnership pays each member of the Oversight Committee $50,000 per year. The Partnership's obligation to pay such compensation ceases May 9, 1995. The Partnership also pays the salary of an Oversight Committee employee, and reimburses certain of the Oversight Committee's expenses including legal fees.
The principal occupations and relevant affiliations of the Oversight Committee members, as furnished to the Partnership by such members, are as follows:
KENNETH R. KELLY: Age 48, Chairman (since January 1995) and Secretary (since July 1990) of the Oversight Committee.
Attorney practicing in Auburn, California and President (since 1986) of Proximity Research Corporation, a real estate consulting firm.
RONALD T. BAKER: Age 47, member (since July 1990) and Chairman (July 1990 to January 1995) of the Oversight Committee.
President of INVENEX (formerly known as Partnership Securities Exchange, Inc.) ("INVENEX") , a company engaged in the trading of partnership securities. INVENEX was one of the initial plaintiffs in the Moorman action discussed in ITEM 3. "LEGAL PROCEEDINGS - Moorman Settlement."
JOSEPH S. RADOVSKY: Age 51, member (since July 1992) of the Oversight Committee.
Partner with Greene, Radovsky, Maloney and Share, a law firm in San Francisco, California.
ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued)
Fairness Committee. National Realty's Fairness Committee periodically reviews certain transactions between the Partnership and its affiliates. The Partnership Agreement requires Fairness Committee approval of the interest rate to be paid on loans from the General Partner or its affiliates, the terms of any property sales to or purchases from the General Partner or its affiliates, the purchase of securities from the General Partner or its affiliates and, upon any withdrawal of the General Partner, the purchase price of the General Partner's interest in the Partnership and in the fees and other compensation to be paid under the Partnership Agreement.
The Partnership Agreement provides that the Fairness Committee shall consist of two or more natural persons, none of whom shall be affiliates (as defined in the Partnership Agreement) of the General Partner except as directors of the Managing General Partner or holders of not more than one percent of Southmark's outstanding capital stock.
The Fairness Committee consisted of two members until February 1995, when Raymond V. J. Schrag resigned. The remaining member of the Fairness Committee is Willie K. Davis, who is Chairman and 50% shareholder of Mid-South Financial Corporation, a holding company for Mid-South Mortgage Company and Gibbs Mortgage Company; Chairman, President and sole shareholder of FMS, Inc., a property management and real estate development firm; President of BVT Management Services, Inc., a real estate advisory and tax service firm; Director of SouthTrust Bank of Middle Tennessee; Trustee and Treasurer of Baptist Hospital, Inc., a Tennessee general welfare nonprofit corporation; and Trustee of National Income Realty Trust. Until March 7, 1995, Mr. Davis served as a trustee or director of CMET, IORT and TCI.
Audit Committee. National Realty's Audit Committee, which reviews certain matters relating to the Partnership's auditors and annual and quarterly financial statements, was established effective August 3, 1990, pursuant to the Moorman Settlement Agreement. The chairman and only member of the Audit Committee is Harry J. Reidler, an attorney in private practice in Englewood, New Jersey.
Mr. Reidler has performed legal services for the Partnership.
Litigation and Claims Involving Mr. Phillips
Southmark Bankruptcy. Until January 1989, Mr. Phillips, a director, Chairman of the Board and Chief Executive Officer of SAMI, served as Chairman of the Board and director (since 1980) and President and Chief Executive Officer (since 1981) of Southmark. As a result of a deadlock on Southmark's Board of Directors, Mr. Phillips, among others, reached an agreement whereby Mr. Phillips resigned his positions with Southmark and certain of Southmark's subsidiaries and affiliates. Southmark filed a voluntary petition in bankruptcy under Chapter 11 of the United States Bankruptcy Code on July 14, 1989.
San Jacinto Savings Association. On November 30, 1990, San Jacinto Savings Association ("SJSA"), a savings institution that was owned by
ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued)
Litigation and Claims Involving Mr. Phillips (Continued)
Southmark since 1983 and for which Mr. Phillips served as a director from 1987 to January 1989, was placed under conservatorship of the Resolution Trust Corporation ("RTC") by federal banking authorities. On December 14, 1990, SJSA was converted into a Federal Association and placed in receivership. On November 26, 1993, the RTC filed lawsuits in Dallas and New York City against Mr. Phillips, six former directors, auditors and lawyers of SJSA, alleging that the auditors and former directors could and should have stopped SJSA's poor lending practices during the period it was owned by Southmark and that the former directors abdicated their responsibility for reviewing loans during the same period. The Office of Thrift Supervision ("OTS") also conducted a formal examination of SJSA and its affiliates.
On November 21, 1994, Mr. Phillips entered into an agreement with the RTC and OTS settling all claims relating to his involvement with SJSA.
Litigation Against Southmark and its Affiliates Alleging Fraud or Mismanagement. There were several lawsuits filed against Southmark, its former officers and directors (including Mr. Phillips) and others, alleging, among other things, that such persons and entities engaged in conduct designed to defraud and mislead the investing public by intentionally misrepresenting the financial condition of Southmark. All such lawsuits have been settled or dismissed without any findings or admissions of wrongdoing by Mr. Phillips. NEITHER NATIONAL REALTY, THE OPERATING PARTNERSHIP, SAMLP NOR SAMI WAS A DEFENDANT IN ANY OF THESE LAWSUITS.
Litigation Relating to Lincoln Savings and Loan Association, F.A. In an action filed in the United States District Court for the District of Arizona on behalf of Lincoln Savings and Loan Association, F.A. ("Lincoln") and captioned RTC v. Charles H. Keating, Jr., et al, the RTC alleged that Charles H. Keating, Jr. and other persons, including Mr. Phillips, fraudulently diverted funds from Lincoln.
The RTC alleged that Mr. Phillips aided and abetted the insider defendants in a scheme to defraud Lincoln and its regulators; that Southmark, its subsidiaries and affiliates, including SJSA, facilitated and concealed the use of Lincoln funds to finance the sale, at inflated prices, of assets of Lincoln's parent, American Continental Corp. ("ACC"), in return for loans from Lincoln and participations in contrived transactions; and that the insider defendants caused Southmark to purchase ACC assets at inflated prices. The RTC alleged that Lincoln and/or ACC engaged in three illegal transactions with Southmark or its affiliates while Mr. Phillips was affiliated with Southmark. Southmark was not a defendant in this action.
The RTC alleged nine separate causes of action against Mr. Phillips, including aiding and abetting the violation of, and conspiracy to violate, federal and state Racketeer Influenced and Corrupt Organiza-
ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER (Continued)
Litigation and Claims Involving Mr. Phillips (Continued)
tions Act ("RICO") statutes, violations of Arizona felony statutes, common law fraud, civil conspiracy and breach of fiduciary duty. The RTC sought to recover from the defendants more than $1 billion, as well as treble damages under the federal RICO statute, punitive damages of at least $100 million and attorneys' fees and costs.
On November 21, 1994, Mr. Phillips entered into an agreement with the RTC settling all claims relating to his involvement with Lincoln.
Southmark Partnership Litigation. One of Southmark's principal businesses was real estate syndication and from 1981 to 1987 Southmark raised over $500 million in investments from limited partners in several hundred limited partnerships. The following two lawsuits related to and involved such activities.
In an action filed in May 1992 in a Texas state court captioned HCW Pension Real Estate Fund, et al. v. Phillips et al., the plaintiffs, fifteen former Southmark related public limited partnerships, alleged that the defendants violated the partnership agreements by charging certain administrative costs and expenses to the plaintiffs. The complaint alleged claims for breach of fiduciary duty, fraud and conspiracy to commit to fraud and sought to recover actual damages of approximately $12.6 million plus punitive damages, attorneys' fees and costs. The defendants included, among others, Mr.. Phillips. In October 1993, the court granted partial summary judgment in favor of Mr. Phillips on the plaintiffs' breach of fiduciary duty claims. Notice of non-suit in favor of Mr. Phillips was entered on March 9, 1994.
In an action filed in January 1993 in a Michigan state court captioned Van Buren Associates Limited Partnership, et al. v. Friedman, et al., the plaintiff, a former Southmark sponsored limited partnership, alleged a claim for breach of fiduciary duty in connection with the 1988 transfer of certain property by the partnership. The plaintiff sought damages in an unspecified amount, plus costs and attorneys' fees. The plaintiff also sought quiet title to the property at issue. The defendants included, among others, Mr. Phillips. The lawsuit was settled in November 1994.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Neither National Realty nor the Operating Partnership has any employees, payroll or benefit plans and pays no salary or other cash compensation directly to any person other than (i) $50,000 per year to each member of the Oversight Committee plus additional sums to an employee of the Oversight Committee, (ii) $4,000 per year to each member of the Fairness and Audit Committees and (iii) fees and expense reimbursements in accordance with the Partnership Agreement to the General Partner or its affiliates for services provided to the Partnership. See ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
ITEM 11. EXECUTIVE COMPENSATION (Continued)
SAMI has no employees, payroll or benefit plans and pays no compensation to its officers or directors.
The Moorman Settlement Agreement provides that effective May 1, 1990 the Partnership's future reimbursement of any salaries which may be paid to Messrs. Phillips and Friedman shall be limited to an aggregate of $500,000 per year, for any such reimbursement of salaries to be deferred until such time as a Target, as defined in the Moorman Settlement Agreement, may be met and, if SAMLP resigns as General Partner during the pendency of the Moorman Settlement Plan, for the waiver of any reimbursement of salary so deferred. Accordingly, no reimbursement for the salaries of Messrs. Phillips and Friedman was charged to or paid by the Partnership in 1994, 1993, 1992 or 1991. Mr. Friedman resigned as a general partner of SAMLP on March 4, 1994.
Mr. Phillips may indirectly benefit from other payments made by the Partnership to certain related parties.
Mr. Davis received $4,000 in 1994 for serving on the Partnership's Fairness Committee. Mr. Schrag, who served on the Fairness Committee until February 1995, also received $4,000 for serving on such committee in 1994. Mr. Reidler received $4,000 in 1994 for serving on the Partnership's Audit Committee. Messrs. Kelly, Baker and Radovsky each received $50,000 in 1994 for serving on the Oversight Committee. See ITEM 10. "GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER."
[THIS SPACE INTENTIONALLY LEFT BLANK.]
ITEM 11. EXECUTIVE COMPENSATION (Continued)
Performance Graph
The following performance graph compares the cumulative total unitholder return on the Partnership's units of limited partner interest with the Dow Jones Market Index ("DJ Market Index") and the Dow Jones Real Estate Index ("DJ Real Estate Index"). The comparison assumes that $100 was invested on December 31, 1989 in the Partnership's units of limited partner interest and in each of the indices and further assumes the reinvestment of all distributions. Past performance is not necessarily an indicator of future performance.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
[GRAPH]
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners. The following table sets forth the ownership of National Realty's units of limited partner interest, both beneficially and of record, both individually and in the aggregate, for those persons known by National Realty to be beneficial owners of more than 5% of its units of limited partner interest, as of the close of business on March 17, 1995.
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(1) Percentage is based upon 2,139,395 units of limited partner interest outstanding at March 17, 1995.
Security Ownership of Management. The following table sets forth the ownership of National Realty's units of limited partner interest, both beneficially and of record, both individually and in the aggregate, by SAMLP, the general partners of SAMLP, and the executive officers and directors of SAMI, as of the close of business on March 17, 1995.
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(1) Percentage is based upon 2,139,395 units of limited partner interest outstanding as of March 17, 1995.
(2) Includes 1,047,879 units owned by ART and 76,625 units owned by BCM, of which the general partners of SAMLP and executive officers of SAMI, ART and BCM may be deemed to be the beneficial owners by virtue of their positions as general partners of SAMLP and executive officers of SAMI, ART and BCM. SAMLP's general partners and the executive officers of SAMI, ART and BCM disclaim beneficial ownership of such units.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Business Relationships
National Realty is the sole limited partner of the Operating Partnership and owns 99% of the beneficial interest in the Operating Partnership. SAMLP is the general partner of, and owner of a 1% beneficial interest
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Certain Business Relationships (Continued)
in, each of National Realty and the Operating Partnership. Southmark Asset Management, Inc., a wholly-owned subsidiary of Southmark, was the managing general partner of SAMLP until January 17, 1989, when it transferred its 96% limited partnership interest to ART, a real estate investment company of which Messrs. Phillips and Friedman served as officers and directors until November 16, 1992 and December 31, 1992, respectively. As a result, Messrs. Phillips and Friedman became the sole general partners of SAMLP, and each owned 2% of the beneficial interest in SAMLP. On February 25, 1992, ART transferred a 19.2% limited partner interest in SAMLP to Southmark pursuant to the settlement of litigation with Southmark in December 1991. See ITEM 3. "LEGAL PROCEEDINGS - Southmark Litigation."
On July 18, 1989, Messrs. Phillips and Friedman each assigned .05% of their general partner interest in SAMLP to SAMI, a company of which Mr. Phillips serves as a director, Chairman of the Board and Chief Executive Officer and of which BCM is the sole shareholder. On March 4, 1994, Mr. Friedman resigned as a general partner of SAMLP. As a result, Mr. Phillips and SAMI are the general partners of SAMLP, with 1.95% and .10%, respectively, of the beneficial interest in SAMLP. Mr. Friedman's 1.95% interest in SAMLP is now a limited partner interest. SAMI was appointed Managing General Partner of SAMLP on June 18, 1990. Oscar W. Cashwell, President and director of SAMI, was Assistant to the President, Real Estate Operations of Southmark from March 1982 to June 1989. Karl Blaha, Executive Vice President and Director of Commercial Management of SAMI, was Corporate Vice President of Southmark from April 1984 to August 1988 and President of Southmark Commercial Management from March 1986 to August 1988. Bruce A. Endendyk, Executive Vice President of SAMI, was Executive Vice President from January 1989 to November 1990 of Southmark and President and Chief Executive Officer of Southmark Equities Corporation from March 1988 to January 1989. Thomas A. Holland, Senior Vice President and Chief Accounting Officer of SAMI, was Vice President and Controller of Southmark from December 1986 to June 1990.
Since February 1, 1990, affiliates of the Managing General Partner have provided property management services to the Partnership. Currently, Carmel, Ltd. provides property management services for a fee of 5% or less of the monthly gross rents collected on the properties under its management. Carmel, Ltd. subcontracts with other entities for the property-level management services to the Partnership at various rates. The general partner of Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (i) SWI, of which Mr. Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of Mr. Phillips' children. BCM is a company which is owned by a trust for the benefit of the children of Mr. Phillips. BCM performs certain administrative and other functions for the Partnership. See ITEM 1. "BUSINESS - Management and Operations" and ITEM 11. "EXECUTIVE COMPENSATION." Search/Lodges Diversified, L.P., in which BCM is a limited partner, served as landlord for the Partnership until December 31, 1994.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Certain Business Relationships (Continued)
Messrs. Cashwell, Blaha, Endendyk, Paulson and Schrauff serve as executive officers of BCM. Mr. Phillips served as a director until December 1989 and Chief Executive Officer until September 1, 1992, of BCM. Mr. Phillips is a limited partner of Carmel, Ltd., which since February 1, 1991 has performed property management services for the Partnership's properties. Messrs. Cashwell, Blaha, Endendyk, Paulson and Schrauff serve as executive officers or directors of CMET, IORT, TCI and ART. BCM serves as advisor to CMET, IORT, TCI and ART.
Mr. Davis, who serves on the Fairness Committee, and Mr. Schrag, who served on the Fairness Committee until February 1995, both served as trustees or directors of CMET, IORT and TCI until March 1995 and August 1994, respectively. Proximity Research Corporation, a company of which Mr. Kelly, who serves as Chairman and Secretary of the Oversight Committee, has provided professional services to the Partnership.
Related Party Transactions
The Partnership has engaged in business transactions with certain related parties and may continue to do so, subject to unanimous approval of the Oversight Committee during the term of the Moorman Settlement Plan as discussed under ITEM 10. "GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER - Oversight Committee." The Partnership believes that all of the related party transactions were at least as advantageous to the Partnership as could have been obtained from unrelated third parties.
In September 1994, the Partnership sold the Creekwood Apartments in College Park, Georgia to Minority and Elderly Housing Assistance Foundation, Inc. ("MEHAF") for $6.0 million. The Partnership has accounted for the sale as a financing transaction, having provided financing of the purchaser's down payment. On the date of sale, the purchaser obtained new first mortgage financing from an independent lending institution in the amount of $3.0 million. The Partnership received $1.3 million in excess proceeds from the new financing, after the payoff of the existing mortgage in the amount of $1.1 million and the funding of required repair escrows and closing costs associated with the financing. The Partnership has recorded the extinguishment of the then existing mortgage debt as well as the new first mortgage. Ted P. Stokely, a trustee or director and Chairman of the Board of CMET, IORT and TCI and the General Manager of MEHAF.
In November 1992, the Partnership refinanced 52 of its apartment complexes and a wraparound note receivable with a financial institution. Garden Capital, L.P. ("GCLP"), a Delaware limited partnership, was formed to facilitate such refinancing. The Operating Partnership is the sole limited partner with a 99.3% limited partnership interest in GCLP. The Operating Partnership received its limited partnership interest in exchange for the transfer of the 52 apartment complexes and the wraparound note receivable to GCLP. Garden Capital Management Incorporated ("GCMI"), a Nevada corporation, is the .7% managing general partner of GCLP.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Related Party Transactions (Continued)
GCLP transferred the acquired apartment assets in exchange for a 99% limited partner interest in each of 52 single asset limited partnerships which were formed for the purpose of operating, refinancing and holding title to the 52 apartment complexes previously owned by the Operating Partnership. The transfer of the 52 apartment complexes and the wraparound note receivable were effective November 25, 1992. The common stock of Garden Capital Incorporated ("GCI") and GCMI is owned by John A. Doyle (20%), Richard A. Green (40%) and Henry W. Simon (40%).
The Partnership has paid and pays cost reimbursements, property management fees or other cash compensation to BCM and its affiliates and other related parties as described in ITEM 11. "EXECUTIVE COMPENSATION" and ITEM 1. "BUSINESS - Management and Operations." BCM performs certain administrative functions for the Partnership on a cost reimbursement basis. The Fairness Committee has approved the formula for computing the Partnership's proportionate share of certain of BCM's reimbursable costs. GCMI performs administrative functions, similar to those performed for the Partnership by BCM, for GCLP on a cost reimbursement basis. Since February 1, 1990, affiliates of BCM have provided property management services to the Partnership. Currently, Carmel, Ltd., provides such property management services. Carmel, Ltd. subcontracts with other entities for the property-level management services to the Partnership. Carmel, Ltd. subcontracts the property-level management and leasing of twelve of the Partnership's commercial properties to Carmel Realty, which is a company owned by SWI. Carmel Realty is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Carmel, Ltd. Carmel, Ltd. does not perform property management services to the properties transferred to GCLP. Carmel, Ltd. and Carmel Realty also perform similar services for ART, CMET, IORT and TCI. See NOTE 11. "GENERAL PARTNER FEES AND COMPENSATION" included in Notes to Consolidated Financial Statements at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA," for a summary of fees paid and costs reimbursed by the Partnership.
The Partnership's Fairness Committee periodically reviews certain transactions between the Partnership and its affiliates. See ITEM 1. "BUSINESS - Management and Operations." The Fairness Committee has approved the terms of the Partnership's contracts and terms for services and reimbursements with affiliates.
The Partnership's Oversight Committee must approve certain types of transactions between the Partnership and SAMLP or its affiliates, as defined in the Moorman Settlement Agreement. See ITEM 3. "LEGAL PROCEEDINGS - Moorman Settlement."
Indebtedness of Management
In return for its 1% interest in National Realty, the General Partner was required to make aggregate capital contributions to National Realty in an amount equal to 1.01% of the total initial capital contributions
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Indebtedness of Management (Continued)
to the Partnership. The General Partner contributed $500,000 cash with the remaining portion evidenced by a promissory note in the principal amount of $4.2 million, bearing interest at the rate of 10% per annum compounded semi-annually and payable on the earlier of September 18, 2007, liquidation of the Partnership or a termination of the General Partner's interest in the Partnership. As of December 31, 1994, no payments had been received on such note. At December 31, 1994, accrued and unpaid interest on the note totaled $4.3 million.
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PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets - December 31, 1994 and 1993
Consolidated Statements of Operations - Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Changes in Partners' Equity (Deficit) - Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows - Years Ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation
Schedule IV - Mortgage Loans on Real Estate
All other schedules are omitted because they are not applicable or because the required information is shown in the Consolidated Financial Statements or the Notes thereto.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K (Continued)
3. Exhibits
The following documents are filed as Exhibits to this Report:
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K (Continued)
None
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 General Partners:
SYNTEK ASSET MANAGEMENT, INC.
By: /s/ Oscar W. Cashwell ------------------------------------------- Oscar W. Cashwell President and Director
/s/ Gene E. Phillips ------------------------------------------- Gene E. Phillips
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Syntek Asset Management, L.P., as General Partner of the Registrant and in the capacities and on the dates indicated.
NATIONAL REALTY, L.P.
EXHIBITS TO ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1994