Item 1. Business
The Partnership, Outlook Income Fund 9, was formed on August 29, 1986 as a limited partnership under the California Revised Limited Partnership Act. The Partnership's public offering commenced on January 12, 1987 and concluded on January 11, 1988, having raised a total of $40,971,400, of which $5,228,800 was raised from the sale of Participating Notes. These totals include the proceeds of the private sale of notes to the former general partner in the amount of $543,500. The Partnership's operations began on March 5, 1987, the date when impound requirements were met. The former general partner of the Partnership was Outlook Financial Partners, a California general partnership. On May 8, 1992, Glenborough Realty Corporation, as Managing General Partner, and Robert Batinovich, as co-General Partner, (collectively "Glenborough" or the "General Partner") were substituted as the general partners following the May 1, 1992 receipt of consents from limited partners owning a majority in interest of the outstanding limited partner units. With limited exceptions, Glenborough has exclusive control over the business of the Partnership, including the right to manage the Partnership's assets.
The Partnership's primary business is to invest in and operate existing income-producing properties (or interests therein), which are expected to generate cash from rentals in excess of that required to meet the operating expenses of the respective properties, as well as the expenses of the Partnership.
The Partnership sold units of limited partnership interest ("Equity Units") and Participating Notes with income deferred ("Notes"). The Notes are nonrecourse, unsecured obligations of the Partnership. The Notes bear stated interest at the rate of 12% per annum, noncompounded, and all payments of interest will be deferred until the date of maturity of the Notes (December 31, 1997, or a date not later than December 31, 1998 if the General Partner extends the maturity date) or the sale or refinancing of the Partnership's properties. The holders of the Notes are entitled to receive contingent interest if, after the sale of all of the Partnership's properties, the Partnership has met certain earnings tests. In addition to the proceeds from the sale of the Notes, the Partnership has borrowed funds from both affiliated and unrelated lenders. The total indebtedness of the Partnership, including the Notes and accrued interest to the latest possible maturity date (excluding contingent interest) and any third-party financing which is secured by liens on the Partnership's properties, may not exceed 85% of the aggregate purchase price of properties which have not been refinanced plus 85% of the aggregate fair market value as determined by the lender as to all properties which have been refinanced, plus certain reserves.
On June 15, 1993, the Partnership purchased the Participating Notes ($545,300) and accrued interest thereon ($309,800), held by
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the former general partner, for $425,000. The difference between the carrying value of the liabilities to the former general partner and the purchase price was recorded as an extraordinary gain in the Partnership's 1993 consolidated statement of operations. The Notes and accrued interest thereon are being held in trust for the benefit of the Partnership.
In January 1994, the Partnership sent a "Conditional Offer to Purchase 12% Participating Notes" ("the Offer") to all Note investors. The Offer was made to Noteholders in an effort to reduce the impact of the Notes' accrued interest on the value of the Equity Units. Buying back these notes provides a significant interest savings to the Partnership, which benefits the Equity Unit investors (whose returns are subordinated to the Noteholders' receiving a return of principal plus 12% simple deferred interest per annum).
Approximately 45% of the Noteholders accepted the offer and the repurchase occurred in March 1995. The repurchase totalled $2,102,000 in original Note principal. The related accrued interest on these Notes was $1,915,000, which was not paid and represented the discount the Partnership received in the buyback. The Partnership used the proceeds from a $2,000,000 short-term loan to fund the repurchase (further discussion follows). The forgiveness was recognized as an extraordinary gain on the Partnership's 1995 statement of operations. The Notes and accrued interest will be held in trust for the benefit of the Partnership.
On June 9, 1995, in accordance with the Participating Notes Indenture and as a result of the sale of Millwood Estates, the Partnership retired $637,000 in notes and $592,000 in related accrued interest. Of this amount, the Partnership paid $609,000 ($314,000 of Participating Notes principal and accrued interest of $295,000) to outside Noteholders, the remainder represented a retirement of notes held in trust for the Partnership.
In June 1995, the Partnership sent a second "Conditional Offer to Purchase 12% Participating Notes" (the "second Offer") to the remaining Noteholders. The second Offer is for the repurchase of the Notes for a price equal to 135% of the Noteholders original investment (i.e. the purchase price for each Note will be $1.35 compared to an approximate current Note and accrued interest value of $1.95). The second Offer expired October 31, 1995, but the Partnership extended the expiration to December 31, 1995. As of February 1996, 177 Noteholders accepted the offer. The result will be $1,104,000 in notes which will be bought at a purchase price of $1,491,000 in 1996. Through March 27, 1996, the partnership repurchased $863,000 in notes for a purchase price of $1,166,000. The Partnership borrowed an additional $1,100,000 on the $2,000,000 line of credit with an unaffiliated lender to fund the repurchase.
The General Partners have filed with the Securities and Exchange Commission a Registration Statement proposing a consolidation by merger of several entities, not including the Partnership.
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However, the Registration Statement discloses that, if the merger is completed, the merged entity intends to purchase from the Partnership the Memphis and Tempe hotel properties for a purchase price of $8.7 million, subject to the General Partners obtaining the approval of a majority of the limited partner voting interest in the Partnership. At December 31, 1995, this process has been delayed.
Competition
The Managing General Partner believes that characteristics influencing the competitiveness of a real estate project are the geographic location of the property, the professionalism of the property manager and the maintenance and appearance of the property, in addition to external factors such as general economic circumstances, trends, and the existence of new, competing properties in the vicinity. Additional competitive factors with respect to commercial and industrial properties are the ease of access to the property, the adequacy of related facilities, such as parking, and the ability to provide rent concessions and additional tenant improvements commensurate with local market conditions. Such competition may lead to rent concessions that could adversely affect the Partnership's cash flow. Although the Managing General Partner believes the Partnership Properties are competitive with comparable properties as to those factors within the Partnership's control, continued over-building and other external factors could adversely affect the ability of the Partnership to attract and retain tenants. The marketability of the Properties may also be affected (either positively or negatively) by these factors as well as by changes in general or local economic conditions, including prevailing interest rates. Depending on market and economic conditions, the Partnership may be required to retain ownership of its Properties for periods longer than anticipated at acquisition, or may need to sell earlier than anticipated or restructure a property, at a time or under terms and conditions that are less advantageous than would be the case if unfavorable economic or market conditions did not exist.
Working Capital
The Partnership's practice is to maintain cash reserves for normal repairs, replacements, working capital and other contingencies. The Partnership knows of no statistical information which allows comparison of its cash reserves to those of its competitors.
Other Factors
Federal, state and local statutes, ordinances and regulations which have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment do not presently have a material effect on the operations of the Properties nor on the capital expenditures, earnings or competitive position of the Partnership. Although asbestos was found in the acoustical
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ceiling spray in the offices at one of the Partnership's commercial properties, the level was within complete compliance with applicable law and management is in the process of removing it. There can be no assurance that such regulations will not change or have some material effect on the partnerships in the future.
The Partnership does not directly employ any individuals. All regular employees rendering services on behalf of the Partnership are employees of Glenborough or its affiliates.
The business of the Partnership to date has involved only one industry segment. The Partnership has no foreign operations and the business of the Partnership is not seasonal.
Item 2.
Item 2. Properties
At December 31, 1995, the Partnership had interests in the following properties:
Lake Mead Estates Apartments
On April 30, 1987, the Partnership acquired its first property, Lake Mead Estates, a 160-unit apartment complex located at 2068 North Nellis Boulevard, Las Vegas, Clark County, Nevada. The property is situated on one of Las Vegas's major north/south arteries providing a direct route between the city center and Nellis Air Force Base, southern Nevada's largest employer. Total consideration of $5,912,400 was paid in cash.
The property was completed in October 1986 and consists of ten wood frame and stucco two-story buildings. The property contains 40 one-bedroom, one-bath units of 633 square feet each, and 120 two-bedroom, two-bath units of 919 square feet. Each unit has a balcony, air conditioning, frost-free refrigerator, and washer/dryer. Common areas include: a swimming pool and spa, exercise room, picnic/barbecue area, basketball and volleyball courts, and a separate children's play area. Each unit is assigned a carport for parking.
The Clark County economy experienced a slow-down during the early 90's due to the effects of the recession. Lower interest rates attracted first time home buyers away from apartment renting and the local defense department has been down-sizing due to cut- backs. Despite these conditions, occupancy was maintained at or near mid-90% through 1994. In 1995, Nellis Air Force Base completed renovation on its base housing. Occupancy began to drop as military personnel returned to base housing or received military orders to be stationed overseas. At December 31, 1995 the occupancy was 88%. According to research conducted by the Partnership's property manager, during 1995, the average apartment complex occupancy in Clark County was 94%, and the average apartment complex occupancy for the property's competitive area was estimated at approximately 95%. Subsequent to the Partnership's year end, the occupancy has risen to 96%.
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The occupancy level at December 31, expressed as a percentage of the total apartments available for rent and the average rental rates for the apartments for the last five years were:
1995 1994 1993 1992 1991 Occupancy rate 88% 98% 94% 96% 96%
Rental rate: One bedroom /one bath units $503 $482 $476 $462 $457 Two bedroom /two bath units $612 $585 $564 $546 $546
In the opinion of management, the property is adequately covered by insurance.
In 1995, the annual real estate tax rate was approximately 2.60% based upon 100% of the assessed market value, resulting in annual taxes of approximately $54,000.
On September 19, 1988, the Partnership obtained a loan from American National Insurance Company in the original amount of $4,000,000, secured by a note and first deed of trust secured by the property. The note requires monthly principal and interest payments of $34,000 at an annual interest rate of 9.625% and matures on October 1, 2018. At December 31, 1995, the outstanding balance of the note was $3,764,000.
Bryant Lake Business Center - Phases I & II
On January 28, 1988, the Partnership acquired a ninety percent (90%) general partner interest in Bryant Lake Associates, Phases I and II, A California Limited Partnership (the "Joint Venture"), in order to acquire Phases I and II of the Bryant Lake Business Center, a business center located in Eden Prairie, Minnesota. Total consideration paid by the Partnership, in cash, was $4,890,000. On November 30, 1990, the Partnership purchased the 10% limited partnership interest for $180,000; $75,000 paid upon closing and $50,000 and $55,000 paid on January 31, 1991 and January 31, 1992, respectively. As a consequence of the purchase, the Joint Venture was dissolved and the assets and liabilities of the Joint Venture were transferred to the Partnership.
The property consists of three single-story buildings totalling 80,011 square feet of office/showroom and office/warehouse space located on approximately 6.375 acres on Valley View Road near the intersection of Interstate Highway 494 and U.S. Highway 169-212 in Eden Prairie, Minnesota, a southeastern suburb of Minneapolis.
The property was completed in two phases. Phase I, consisting of two buildings containing 60,757 rentable square feet, was completed in 1984. Phase II, consisting of one building containing 19,254 rentable square feet, was completed in 1985. The buildings each have brick facades with decorative metal
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accent features. All buildings have truck loading docks and are equipped with a fire sprinkler system.
According to research conducted by the Partnership's property manager, the Twin Cities area and its surrounding suburban economy has been characterized by diversity, stability and long term growth trends. Unemployment has been relatively low and industrial expansion has continued with moderation through the early 90's. Industrial and office market absorption had softened slightly since 1990 but tightened in 1992 after a recent wave of build-to-suit property construction.
The property was 100% leased at year end 1995 with a major tenant lease expiration occurring in December 1996. Management is in negotiations to renew, however the space will also be marketed for lease if necessary. The property is in excellent physical condition and no capital improvements are planned for 1996.
The occupancy level at December 31, expressed as a percentage of the total net rentable square feet, and the average annual effective rent per square foot for the last five years were:
Occupancy Level Average Annual Effective Year Percentage Rent Per Square Foot 1995 100% $6.81 1994 100% 6.48 1993 96% 6.67 1992 100% 6.48 1991 95% 6.04
At December 31, 1995, annual effective rental rates ranged from $4.40 to $11.33 per square foot.
Three tenants occupy greater than ten percent of the leasable space of the property. The principal provisions of their leases and the nature of the tenants' businesses are: Data Collection Zytec Vicom, Inc. Systems, Inc.
Nature of business Office/lab Office/ Office/ warehouse warehouse computer systems
Lease term 13 years 7 years 7 years
Expiration date 9/30/97 12/31/96 3/31/01
Square feet 25,796 13,815 19,300 (% of total) 32% 17% 24%
Annual effective rent $161,999 $113,877 $91,675
Rent increases CPI Fixed Fixed Increases Increases
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Renewal options 1-3 year None 1-5 year option option
In the opinion of management, the property is adequately covered by insurance.
In 1995, the annual real estate tax rate was approximately 6.31% based upon 100% of the assessed market value, resulting in annual taxes of approximately $186,000.
As part of the 1990 workout of the Bryant Lake Phase III mortgage (see further discussion which follows), the lender received as additional security a first lien on the Bryant Lake Phases I and II property, but at any time, the Partnership may furnish a letter of credit to the lender, and upon the lender's acceptance of the letter of credit, the lender will release its first lien on the Bryant Lake Phases I and II property.
Bryant Lake Business Center - Phase III
On January 28, 1988, the Partnership acquired a fifty percent (50%) general partnership interest in Bryant Lake Associates, Phase III, a California limited partnership ( the "Joint Venture"), in order to acquire Phase III of the Bryant Lake Business Center. Total consideration paid by the Partnership of $3,251,900 included $826,900 in cash and assumption of 50% of the existing $4,850,000 commercial development revenue bonds secured by a first deed of trust.
On November 30, 1990, the Partnership purchased the remaining 50% limited partnership interest. As consideration for the purchase, the sellers will be entitled to 25% of net cash flow, if any, from operations and ultimate disposition of the property, as provided in the purchase agreement. Through December 31, 1995, no net cash flow payments have been due or payable to the seller. As a consequence of the purchase, the Joint Venture was dissolved and the assets and liabilities of the Joint Venture were transferred to the Partnership.
The property consists of three single-story buildings totalling approximately 91,732 square feet of office/showroom and office/warehouse space located on approximately 8.038 acres on Valley View Road near the intersection of Interstate Highway 494 and U.S. Highway 169-212 in Eden Prairie, Minnesota, a southeastern suburb of Minneapolis.
The buildings, completed in 1986, have brick facades and decorative metal accent features. All buildings have truck loading docks and are equipped with fire sprinkler systems.
The occupancy level at December 31, expressed as a percentage of the total net rentable square feet, and the average annual effective rent per square foot for the last five years were:
Occupancy Level Average Annual Effective Rent Year Percentage Per Square Foot
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1995 100% $7.16 1994 96% 6.68 1993 97% 6.35 1992 91% 5.16 1991 82% 6.30
At December 31, 1995, annual effective rental rates ranged from $5.20 to $8.88 per square foot.
Three tenants occupy ten percent or more of the leasable square footage of the property. The principal provisions of their leases and the nature of the tenants' businesses are:
Seasonal Keomed, Specialties Inc. SalesForce
Nature of business Office Office/ Office/ warehouse warehouse
Lease term 8 years 6 years 6 years
Expiration date 12/31/00 5/31/97 3/31/97
Square feet 13,802 10,083 17,455 (% of total) 15% 11% 19%
Annual effective rent $64,036 $73,320 $155,040
Rent increases None None after None June 1994
Renewal options None None None
In the opinion of management, the property is adequately covered by insurance.
In 1995, the annual real estate tax rate was approximately 6.35% based upon 100% of the assessed market value, resulting in annual taxes of approximately $218,000.
The Partnership obtained a loan in the original amount of $4.850,000 secured by first deeds of trust on the Bryant Lake Phase III and Bryant Lake Phases I and II properties. The note requires monthly interest-only payment of $35,000 through November 1, 2000.
Country Suites By Carlson - Memphis
On August 1, 1988, the Partnership purchased the Country Suites By Carlson - Memphis, a 121-suite hotel located at 4300 American Way in Memphis, Tennessee. Total consideration paid of $5,502,700 included a cash payment of $4,131,700 and a note in the original amount of $1,371,000 to which the property is subject.
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The property is situated on the north side of American Way, west of the intersection of American Way & Cherry Road, approximately nine miles east of the Memphis Central Business District and 1- 1/2 miles northeast of Memphis International Airport. The property was completed in February 1988 and consists of four three-story buildings containing 121 hotel suites. Each suite is furnished and features a complete kitchen facility, except the mini suites, each of which contains a microwave and small refrigerator. Amenities include a centrally located swimming pool and spa, guest laundry facilities and conference rooms above the lobby area. An atrium located at the rear of the office/registration area, overlooks the courtyard area. An elevator located adjacent to the courtyard area, services the three-story hotel.
During 1993, the hotel underwent significant improvements including internal and external painting, landscaping and the installation of a new computer system at a total cost of $156,300 in order to meet the Country Suites By Carlson standards. By upgrading the hotel's physical and aesthetic appeal, management has not only met the Country Suites By Carlson franchise standards but also improved the potential average room rates which was apparent during 1994. In 1995, improvements included new mattresses, televisions, carpet, sleeper sofas, HVAC units and general room upgrades in some of the rooms. Similar improvements are proposed for 1996 in order to stay competitive with new hotels in the area.
The target market is small corporate business, larger contract accounts and government/military business; each of which provides a strong base of week-day revenues. In addition, transient business and discounted leisure groups provide on-going week-end revenues. Marketing efforts will continue to focus on new account development within the business and government sector to build a strong base of week-day clients. The franchise reservation system, which books the highest rated room rates, has matured and helps to aid the property in earning a higher average daily room rate. With a strengthening of the local economy, including the addition of nearby gaming hotels and boats, the supply has now outpaced the demand for hotel rooms and occupancy has begun to drop.
The 121 suites are summarized as follows:
Sq. Ft. Total No. Description Per Ste. Sq. Ft. 17 Twins 367 6,239 42 1 Bedroom 367 15,414 6 Kings 367 2,202 56 Studio 248 13,888 121 37,743
Atrium lounge and office 2,429 Laundry and storage 1,515 Meeting rooms 1,300 Total enclosed area 42,987
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The property's average occupancy level and average daily room rate for the past five years were:
1995 1994 1993 1992 Average occupancy level 72% 75% 75% 72% 69% Average daily room rate $52.68 $53.21 $49.40 $50.80 $51.75
The above rates are for 1-7 night stays and include any extended stay, corporate or military discounts.
Competing hotels in the area quoted average daily room rates from $55.00 for a weekday stay to $149.00 for a weekend stay, double occupancy, according to research conducted by Partnership's General Manager. Rates quoted include extended or commercial stays or senior or military discounts.
In the opinion of management, the property is adequately covered by insurance.
In 1995, the annual real estate tax rate was approximately 3.16% based upon 40% of the assessed market value, resulting in annual taxes of approximately $175,000.
The property is owned by the Partnership in fee, subject to a note and first deed of trust in the original amount of $1,371,000 payable to GLENFED Service Corporation. In July 1992, the Partnership negotiated a restructure of the original note. The new note bears interest at a fixed 9% rate, payable in monthly principal and interest installments of $29,000 until the note matures in July 1999, when all principal and interest is due and payable. The outstanding principal balance of the restructured note at December 31, 1995, was $3,504,000.
Country Suites By Carlson - Tempe
On August 1, 1988, the Partnership acquired an undivided seventy- five percent (75%) interest as Tenants in Common with Outlook Income Fund 10, A California Limited Partnership ("OIF 10"), in a 138-suite hotel known as Country Suites By Carlson - Tempe, located at 1660 East Elliot Road and Harl Avenue, in Tempe, Arizona. OIF 10 was an affiliate of the Partnership with similar investment objectives. Total consideration paid by the Tenancy in Common for the property was $7,786,800, which included a cash payment of $5,927,800 and a promissory note in the original amount of $1,859,000, to which the property was subject.
On November 4, 1993, the Partnership finalized the purchase of the minority interest in the consolidated joint venture from OIF 10 and Country Suites By Carlson - Tempe has since then been 100% owned by the Partnership. The total purchase price of $1,225,000 included a cash payment of $950,000 plus the cancellation of the
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$275,000 note receivable from OIF 10 originally owed to an affiliate of the former general partner which was purchased by the Partnership in June 1993.
The property contains 2.532 acres of level, irregularly shaped land, at the intersection of Elliot Road and Harl Road, with 468.94 feet of frontage along Harl Road and 175 feet of frontage along Elliot Road. It is located one quarter mile east of Interstate 10, south of Phoenix, in the I-10 Commerce Center. The property was completed in May 1988 and consists of five three-story buildings containing 138 hotel suites. Each suite is furnished and features a complete kitchen facility, except the studio units, each of which contains a microwave oven and refrigerator. Amenities include a centrally located swimming pool and spa; two guest laundry facilities; 1,000 square feet of meeting rooms and two heated pools including a constant depth child pool. An atrium located adjacent to the office/registration area, overlooks the courtyard area.
The hotel is well located within the high tech, government and business strip in the fourth largest and most progressive city in the valley (according to research conducted by the property's General Manager). Although the local economy is fairly strong, low visibility from the freeway and the effects of the recession on travel had curbed the hotel's profitability. Furthermore, city government will not approve a larger sign to improve visibility of the hotel, so management is considering other options to attract "walk-in" business. Despite these local factors, management used aggressive marketing and a strong reservations network which resulted in an improvement in average occupancy and room rates during the course of the year.
The target markets included tour groups which resulted in a good portion of revenues. Management also continued to develop commercial accounts to provide a base for non-tourist season. In addition, an account executive has been hired to focus on direct sales calls to maximize new account development. Furthermore, the franchise reservation system, which books the highest rated room rates, has matured and helps to aid the property in earning a higher average daily room rate. The discount segment constituted the largest base of revenues.
During 1993, a total of $81,700 was invested in capital improvements to enhance the interior and exterior building's physical appearance and comply with A.D.A. requirements. In addition, a new computer hardware and software package was installed to accommodate the industry's most sophisticated processing capabilities. A total of $111,600 in capital improvements was paid in 1994 to replace dated soft goods in the rooms as well as to complete major landscaping, replace carpeting, flooring and furniture. In 1995, $155,000 was spent on improvements necessary to upgrade some of the rooms and $103,000 is budgeted for similar improvements in 1996.
The 139 suites are summarized as follows:
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Sq. Ft. Total No. Description Per Ste. Sq. Ft. 29 Queens 361 10,469 24 1 Bedroom 361 8,664 13 Kings 418 5,434 71 Studio 196 13,916 2 Handicap 361 722 139 39,205
Office, laundry and storage, Elevator, meeting rooms 5,240 Total enclosed area 44,445
The property's average occupancy level and average daily room rate for the last five years were:
1995 1994 1993 1992 1991
Average occupancy level 87% 85% 70% 53% 54%
Average daily room rate $49.82 $44.60 $43.70 $45.80 $47.63
The above rates are for 1-7 night stays and include any extended stay, corporate or military discounts.
Competing hotels in the area quoted average daily room rates from $55.00 for a weekday stay to $140.00 for a weekend stay, double occupancy, according to research conducted by the Partnership's General Manager. Rates quoted include extended or commercial stays or senior or military discounts.
In the opinion of management, the property is adequately covered by insurance.
In 1995, the annual real estate tax rate was approximately 14.95% based upon 25% of the assessed market value, resulting in annual taxes of approximately $107,000.
The Partnership owns the property subject to a note and first deed payable to GLENFED Service Corporation. The note bears interest at a fixed 9% rate, payable in monthly principal and interest installments of $22,500 until the note matures in July 1999, when all principal and interest will be due and payable. The outstanding principal balance of the note at December 31, 1995, was $2,727,000.
Item 3.
Item 3. Legal Proceedings
The response to this item is incorporated by reference to Note 4 of the Notes to Consolidated Statements contained in Part II, Item 8.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
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During the fourth quarter of fiscal year 1995, no matters were submitted to a vote of security holders through the solicitation of proxies or otherwise.
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PART II
Item 5.
Item 5. Market for Partnership's Common Equity and Related Stockholders Matters
Market Information
The units of limited partnership interest in the Partnership (the "Units") have limited transferability. There is no public market for the Units and it is not expected that any will develop. There are restrictions upon the transferability of Units, including requirements as to the minimum number of Units which may be transferred, and that the General Partners must consent to any transferee becoming a substituted limited partner (which consent may be granted or withheld at the sole discretion of the General Partner). In addition, restrictions on transfer may be imposed under certain state securities laws. Consequently, holders of Units may not be able to liquidate their investments and the Units may not be readily acceptable as collateral.
Holders
As of December 31, 1995, 2,573 holders of record held 35,742,572 Equity Units and 409 holders of record held 4,591,000 Notes, including 2,329,000 Participating Notes purchased by the Partnership.
Cash Distributions
The Partnership paid distributions to the Equity Unit investors at a 9% annualized rate from inception through the quarter ended December 31, 1988 (except the quarter ended June 30, 1988, which was 8%), a 6% rate from January 1, 1989 through the quarter ended December 31, 1989 and a 3% rate for 1990. All such distributions paid to partners have represented return of capital.
In order to rebuild reserves and provide cash for capital and leasing expenses, distributions were suspended beginning with the first quarter of 1991. Management is unable to predict when distributions will be resumed.
Funds are not expected to become available for distribution to the owners of the Notes until the properties acquired by the Partnership are either refinanced or sold and all specified priority entitlements have been satisfied under the terms of the Notes. However, the Partnership may prepay principal and the accrued 12% per annum non-compounded interest at any time. Any partial prepayments must be made pro rata to Noteholders. At maturity, December 31, 1997, all remaining principal and interest, excluding contingent interest, must be paid in full, unless at the sole discretion of the General Partner, the due date is extended to a date no later than one year after stated maturity.
At December 31, 1995, holders of Equity Units had an original capital balance of $35,742,600 and cumulative priority returns of
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approximately $19,208,100. Holders of the Notes had a principal balance of $4,591,800 (including Participating Notes of $2,329,000 purchased by the Partnership and held in trust for the benefit of the Partnership) and accrued interest of approximately $4,582,000 (including accrued interest of $2,297,000 relating to the Participating Notes purchased by the Partnership). The capital accounts of the Equity Unitholders continue to accrue priority returns at a rate of 9% per annum. The cumulative priority returns of the Equity Unitholders do not represent obligations of the Partnership, but only represents amounts which must be paid before any distributions can be paid to other partners. The principal balance of the Notes continues to accrue interest at a rate of 12%. Reference should be made to the Partnership's partnership agreement for a more complete description of preferential distributions.
In January, 1995 and June, 1993, the Partnership purchased a portion of the original Participating Notes at a discounted rate for a total of $2,109,000 and $425,000, respectively, which resulted in a gain of $1,915,000 and $428,000, respectively (see the accompanying consolidated statements of operations).
Item 6.
Item 6. Selected Financial Data
The following is selected data for the five years ended December 31, 1995 (in thousands, except per Unit data).
The financial data should be read in conjunction with the financial statements and related notes contained elsewhere in this report. This financial data is not covered by the reports of the independent public accountants. 1995 1994 1993 1992 1991 Revenue $8,202 $10,061 $ 9,913 $ 9,642 $ 9,384
Net loss before extraordinary gain (1) $(1,134)$(2,893) $(3,949)$(2,646)$ (2,708)
Net loss before extraordinary gain per Unit $(0.03) $ (0.08) $ (0.11)$ (0.07)$ (0.08)
Net income (loss) $ 969 $(2,893) $(3,521)$(2,646)$ (2,708)
Net income (loss) per Unit $ 0.03 $ (0.08) $ (0.10)$ (0.07)$ (0.08)
Distributions per Unit: From net income $ --- $ --- $ --- $ --- $ --- Representing return of capital $ --- $ --- $ --- $ --- $ 0.01
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Total assets $24,047 $38,279 $41,761 $45,910 $47,795
Secured notes payable $15,345 $26,076 $27,223 $26,451 $26,740
Participating Notes $4,591 $ 5,229 $ 5,229 $ 5,229 $ 5,229
(1) Please see the discussion regarding the 1993 impairment writedown included in Note 3 of the Notes to Financial Statements and discussion regarding the extraordinary gain included in Note 7 of the Notes to Financial Statements.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
Outlook Income Fund 9 was formed to invest in improved, income- producing real estate with the following objectives: (i) preserve and protect capital, (ii) provide substantially tax- sheltered distributions to Equity Unitholders, and (iii) offer the potential for appreciation in value.
The Partnership's original plan was to pay 9% current distributions to the Equity Unit investors. The primary source for these distributions was to be two-fold: First, income warranties given by sellers to maintain property income at a high level while the properties were in their start-up phase; and second, deferred interest debt that allowed the Partnership to use borrowed money without having to make current loan payments. Most of the Partnership's debt, including the Notes, was of this type. Thus, the income warranties subsidized the property income, and the deferred interest debt allowed cash flow that would normally have been required for debt service to be used for distributions. By using these techniques, the Partnership was able to pay distributions at a high level in the hope that the actual property cash flow and value of the properties would increase enough that, (i) when the income warranties and interest deferrals expired, the property cash flow would be able to make the new loan payments without reducing distributions, and (ii) when the property was sold, the value would have increased enough to absorb the higher mortgage balance without eroding the original equity. It is now evident that the original overall plan will not be realized. All distributions made by the Partnership to its investors have represented return of capital.
The Partnership historically paid more in distributions than it earned, and had depleted its reserves. Additionally, all income warranties expired prior to December 31, 1991 and in 1992, the deferred interest debt was restructured and loan payments commenced (see Note 5 in notes to financial statements). During 1993, the Partnership paid approximately $768,700 in capital improvements, leasing expenses and loan fees and in 1994, $577,000 was paid for these costs. In light of these events and management's intent to rebuild reserves to a level of at least $2,000,000, the suspension of distributions was essential. The Partnership's December 31, 1995 cash balance was $591,000. For the year ended December 31, 1995, the Partnership realized
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positive cash flows from operations after capital improvements, leasing commissions and debt service. At this time, management is unable to predict when distributions will resume.
On May 6, 1993, Glenborough Corporation and certain of its affiliates entered into a settlement of a lawsuit that had been brought by the seller on November 13, 1991. The lawsuit alleged that, in connection with the prior general partner's termination of the seller as operator and franchisor of the Partnership's hotels, Glenborough and its affiliates had defamed the seller and interfered with its contractual relationship with the Partnership. A majority of the amount paid to the seller under the settlement was funded by Glenborough's insurance carriers, but a portion of the settlement amount was funded by Glenborough. Pursuant to Glenborough's indemnity rights as manager of the Partnership (and as general partner of other Outlook partnerships that own hotels), Glenborough was entitled to reimbursement of this portion of the settlement payment. The Partnership's share of this reimbursement together with the legal fees associated with this settlement was $64,900 representing litigation settlement expenses in the statements of operations.
When the Partnership was originally formed, the former general partner purchased a large block of the Participating Notes issued by the Partnership. In 1993, the Partnership negotiated a heavily discounted purchase of those Notes from the former general partner. On June 15, 1993, the Partnership purchased the Notes, representing a combined principal and accrued interest of $853,300, for a price of $425,000. The difference of $428,300 represented an extraordinary gain from the Participating Notes purchase in the 1993 statement of operations. These Notes continue to accrue interest thereon and are being held in trust for the benefit of the Partnership.
On October 29, 1993, the Partnership obtained a loan in the amount of $950,000 through a note and first deed of trust secured by Branford Business Park. The note bore interest at a rate of 8%; payable in monthly interest only installments of $6,500 until maturity on May 5, 1994. The note included an option to extend the loan term upon written agreement between the Partnership and the lender, and on April 8, 1994, the Partnership made a principal paydown in the amount of $250,000 as required by the lender in order to extend the maturity date of the note to November 7, 1994 to allow sufficient time to close the sale of the property. The remaining balance of $700,000 was paid off with the proceeds from the sale of the property on November 15, 1994 (see Note 3).
In December 1993, management determined that the carrying value of Branford Business Park had been permanently impaired due to conditions existing in the property's local market. As a result, the Partnership recorded a write-down of $1,697,400 to reduce the carrying value of the property. Subsequent to December 31, 1993, the Partnership became involved in activities related to the sale of the property. See Note 3 of the Notes to Financial Statements for a complete discussion.
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In January 1994, the Partnership sent a "Conditional Offer to Purchase 12% Participating Notes" ("the Offer") to all Note investors. The Offer was being made to Noteholders in an effort to reduce the impact of the Notes' accrued interest on the value of the Equity Units. The Offer was contingent upon selling one or more properties or otherwise obtaining financing to raise the cash needed to repurchase the Notes at a discount. The Offer originally expired December 1, 1994 but was extended an additional 60 days. Approximately 45% of the Noteholders accepted the offer. Buying back these notes will provide a significant interest savings to the Partnership, which will benefit the Equity Unit investors (whose returns are subordinated to the Noteholders' receiving a return of principal plus 12% simple deferred interest per annum).
In anticipation of the Regency Residence property being assigned to the bank by a deed-in-lieu of foreclosure in 1995 as discussed in Note 3 of the Notes to Financial Statements, the Partnership recorded a realizable value reserve in the amount of $835,900 at December 31, 1994. This brought the net book value of the property down to the amount outstanding (principal and accrued interest) on the note secured by the property.
On November 15, 1994, the Partnership sold Branford Business Park to an unaffiliated third party for $2,675,000, out of which $700,000 was used to payoff the outstanding note secured by the property. The Partnership financed a $2,000,000 note at 8.5% interest with interest-only payments due until maturity on November 11, 1999. Since the cash received from the transaction was used to payoff the outstanding note, the Partnership was responsible for paying $166,000 in closing costs. The Partnership incurred a loss on the sale in the amount of $257,000.
On March 28, 1995, the Partnership sold Millwood Estates Apartments to an unaffiliated third party for $10,400,000, out of which $7,572,400 was used to payoff the outstanding note secured by the property. In addition, sales proceeds were used to payoff the $2,000,000 note payable used to repurchase Participating Notes (as discussed in Note 9). The Partnership recognized a gain on sale on its 1995 Statement of Operations in the amount of $154,000. In anticipation of the sale of the property, management reclassified the net book value of Millwood Estates Apartments to "Property held for sale" on the Partnership's December 31, 1994 balance sheet.
The General Partners filed with the Securities and Exchange Commission a Registration Statement proposing a consolidation by merger of several entities, not including the Partnership. However, the Registration Statement discloses that, if the merger is completed, the merged entity intends to purchase from the Partnership the Memphis and Tempe hotel properties for a purchase price of $8.7 million, subject to the General Partners obtaining the approval of a majority of the limited partner voting interest in the Partnership. As of December 31, 1995, this process has been delayed.
In the fourth quarter of 1995, the Partnership adopted Statement of Financial Accounting Standards No. 121 (SFAS 121) "Accounting
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for Impairment of Long-Lived Assets and Long-Lived Asset to be Disposed of". There was no impact on the financial position or results of operations of the Partnership from the initial adoption of SFAS 121.
Management's ongoing business plan for the Partnership is to preserve capital and rebuild reserves. As previously discussed, management has restructured its deferred interest debt which has lowered interest expense and stabilized payments. By attempting to build reserves, suspending distributions, and prudent day to day management of income and expenditures, management is striving to maintain stable operations and endure the challenge of the market.
Results of Operations
1995 versus 1994
Rental revenues in 1995 decreased $2,214,000 or 23% compared to 1994 primarily as a result of the disposition of the Millwood and Regency Residence properties which accounted for a decrease of $1,369,000 and $911,000, respectively.
Interest and other revenues of $438,000 decreased by $56,000 in 1995 compared to 1994 due to lower prevailing interest rates and average invested cash balances during 1995.
1995 operating expenses decreased by $1,402,000 or 21% compared to 1994 primarily as a result of the disposition of the Millwood and Regency Residence properties which accounted for a decrease of $665,000 and $845,000, respectively.
The 1995 decrease in depreciation and amortization of $345,000 or 18% from 1994 is a result of the decrease in depreciable assets resulting from the disposition of the Millwood and Regency Residence properties.
The decrease in interest expense of $1,021,000 or 33% from 1995 to 1994 is a result of the disposition of the Millwood and Regency Residence properties and their related notes payable which accounted for a $554,000 and $214,000 decrease, respectively. In addition, $170,000 of the decrease relates to the combination of the repurchase and the paydown of the Participating Notes by the Partnership.
As discussed in Note 3 of the Notes to Financial Statements, the sale of Millwood Estates resulted in a gain of $154,000 and is included on the Partnership's 1995 statement of operations.
As discussed in Note 3 of the Notes to Financial Statements, the Regency Residence deed-in-lieu of foreclosure resulted in a gain of $188,000 and is included on the Partnership's 1995 statement of operations.
As discussed in Note 7 of the Notes to Financial Statements, the repurchase of Participating Notes and the forgiveness of the related accrued interest resulted in a gain of $1,915,000 and is included on the Partnership's 1995 statement of operations.
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1994 versus 1993
Rental revenues increased by $269,000, or 3%, in 1994 over 1993 primarily as a result of increased revenue at Country Suites by Carlson - Tempe, Country Suites by Carlson - Memphis and Lake Mead, partially offset by decreases in revenue at Branford Business Park and Regency Residence. The increase in revenues at the Tempe property was due to an increase in occupancy (85% in 1994 compared to 70% in 1993) and a slightly higher average daily room rate in 1994 (which is attributable to the franchise reservation system booking higher rated business). Although the average occupancy at the Memphis property remained unchanged from 1993 to 1994 at 75%, the benefit of the franchise reservation system was apparent, shown by the increase in the average daily room rate from $49.40 in 1993 to $53.21 in 1994. This rate increase was the reason for the increase in revenue in 1994 over 1993. Both increased occupancy and increased average rent resulted in increased revenues at Lake Mead. Average occupancy in the area continues to be high, mostly due to the shortage of housing on the local Air Force base forcing personnel to seek off-site housing. Branford Business Park revenues continued to decrease from 1993 to 1994, until the property was sold on November 15, 1994, as a result of a 57% occupancy rate at the time of the sale and rent concessions given in the current year to attract tenants. Regency Residence revenues decreased in 1994 compared to 1993 as a result of a decrease in occupancy from 86% in 1993 to 79% in 1994.
Interest and other revenues of $494,000 increased by $136,000 in 1994 over 1993 due primarily to the receipt of a non-refundable deposit formerly held in escrow in the amount of $100,200 relating to the original plan for the sale of Branford in April 1994 that did not close.
Operating expenses in 1994 increased by $234,000, or 4%, over 1993, primarily as a result of an increase in variable costs at the Country Suites by Carlson-Tempe property associated with the increase in occupancy.
General and administrative expenses decreased by $68,000, or 11% from $639,000 in 1993 to $571,000 in 1994. The 1993 expenses included an additional billing by an affiliate for underbilled 1992 general and administrative expenses.
Depreciation and amortization decreased by $161,000 from $2,042,000 in 1993 to $1,881,000 in 1994 as a result of acquisition items that have been fully depreciated since 1993 at the Memphis and Tempe properties and the December 1993 write-down of the carrying value of Branford Business Park.
In anticipation of the Regency Residence property being assigned to the bank by a deed-in-lieu of foreclosure in 1995 as discussed in Note 3 of the Notes to Financial Statements, the Partnership recorded a provision to reduce the carrying value of real estate in the amount of $835,900 at December 31, 1994. This brought the net book value of the property down to the amount outstanding (principal and accrued interest) on the note secured by the property.
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Item 8.
Item 8. Financial Statements and Supplementary Data
OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Report of Independent Public Accountants . . . . . . . . 24
Financial Statements: Consolidated Balance Sheets at December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . 25
Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993 . . . . . 26
Consolidated Statements of Partners' Equity for the years ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . 27
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 . . . . . 28
Notes to Consolidated Financial Statements . . . . . . 30
Financial Statement Schedules: Schedule III - Consolidated Real Estate Investments and Related Accumulated Depreciation and amortization at December 31, 1995 . . . . . . . . . . 45
Financial statement schedules not included have been omitted because of the absence of conditions under which they are required or because the information is included elsewhere in this report.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheets of OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP as of December 31, 1995 and 1994, 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, 1995. These consolidated financial statements and the schedule referred to below are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 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 OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the index to consolidated financial statements and schedule is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not a required part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
San Francisco, California, March 27, 1996
OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Balance Sheets (in thousands, except Unit amounts) December 31, 1995 and 1994
Assets 1995 1994 Real estate investments, at cost: Land $ 4,192 $ 4,192 Building and improvements 25,903 25,510 30,095 29,702 Less accumulated depreciation (9,543) (8,479) Net real estate investments 20,552 21,223 Property held for sale, net --- 9,282 Property held pending foreclosure, net --- 3,591 Cash and cash equivalents 591 801 Notes receivable 2,000 2,000 Accounts receivable, net 177 87 Prepaid expenses and other assets 159 280 Deferred financing costs and other fees, (net of accumulated amortization of $1,225 and $1,014 in 1995 and 1994, respectively) 568 1,015 Total assets $ 24,047 $ 38,279
Liabilities and Partners' Equity (Deficit) Notes payable - secured $ 15,345 $ 26,076 Participating notes: Notes issued 4,591 5,229 Accrued interest, thereon 4,582 4,582 Less: Notes held in trust (2,329) (544) Accrued interest, thereon (2,297) (413) Net due to outside holders 4,547 8,854
Note payable - unsecured --- 7 Accrued interest payable 719 785 Accounts payable --- 152 Accrued expenses 380 247 Deferred income and security deposits 63 134 Total liabilities 21,054 36,255
Partners' equity (deficit): General Partner (397) (407) Limited Partners, 35,742,572 Equity Units outstanding 3,390 2,431 Total partners' equity 2,993 2,024 Total liabilities and partners' equity $ 24,047 $ 38,279
The accompanying notes are an integral part of these consolidated financial statements.
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Operations (in thousands, except per unit amounts)
For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993 Revenues: Rental $ 7,610 $ 9,824 $ 9,555 Interest and other 438 494 358 Gain (loss) on sale of asset 154 (257) ---
Total revenues 8,202 10,061 9,913
Expenses: Operating (including $1,798, $2,618 and $2,525 paid to affiliates for the years ended December 31, 1995, 1994 and 1993, respectively) 5,183 6,585 6,351 General and administrative (including $458, $468 and $497 paid to affiliates in 1995, 1994, and 1993, respectively) 557 571 639 Depreciation and amortization 1,536 1,881 2,042 Interest 2,060 3,081 3,068 Litigation expense --- --- 65 Provision to reduce carrying value of real estate to estimated realizable value --- 836 1,697
Total expenses 9,336 12,954 13,862
Loss before extraordinary items (1,134) (2,893) (3,949)
Extraordinary items:
Gain on debt forgiveness 188 --- --- Gain from Participating Notes purchased 1,915 --- 428
Total extraordinary items 2,103 --- 428
Net income (loss) $ 969 $(2,893)$(3,521)
Net income (loss) per Equity Unit $ 0.03 $ (0.08)$ (0.10)
Distributions per Equity Unit $ --- $ --- $ ---
The accompanying notes are an integral part of these consolidated financial statements.
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Partners' Equity (Deficit) (in thousands)
For the Years Ended December 31, 1995, 1994 and 1993
Total General Limited Partners' Partner Partners Equity
Balance at December 31, 1992 $ (343) $ 8,781 $ 8,438
Net loss (35) (3,486) (3,521)
Balance at December 31, 1993 $ (378) $ 5,295 $ 4,917
Net loss (29) (2,864) (2,893)
Balance at December 31, 1994 $ (407) $ 2,431 $ 2,024
Net income 10 959 969
Balance at December 31, 1995 $ (397) $ 3,390 $ 2,993
The accompanying notes are an integral part of these consolidated financial statements.
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows (in thousands)
For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993 Cash flows provided by operating activities: Net income (loss) $ 969 $ (2,893) $(3,521) Adjustments to reconcile net loss to net cash provided by operating activities: Extraordinary gain from Participating Notes purchased --- --- (428) Provision for impairment 836 1,697 Depreciation and amortization 1,536 1,881 2,042 Loss on sale of property 257 --- Gain on sale of asset (154) --- --- Gain on debt forgiveness (188) --- --- Gain from Participating Notes purchased (1,915) --- --- Changes in certain assets and liabilities Accounts receivable (90) --- 94 Prepaid expenses and other assets 89 (47) 83 Deferred financing and other fees (121) (28) (74) Accounts payable (155) (33) 153 Accrued expenses 268 --- --- Accrued interest payable 358 633 705 Deferred income and security deposits (11) (70) (16)
Net cash provided by (used for) operating activities 586 536 735
Cash flows used for investing activities: Acquisitions of and additions to real estate (439) (496) (661) Proceeds for the sale of Millwood 9,557 --- --- Purchase of minority interest in consolidated joint venture (950) Closing costs on sale of Branford --- (166) ---
Net cash used for investing activities 9,118 (662) (1,611)
Cash flows provided by (used for) financing activities: Borrowings on secured notes payable --- --- 950 Notes payable principal payments (7,689) (448) (178) Repayment of unsecured note payable (2,007) --- --- Borrowings on unsecured notes payable 2,500 --- 10 Purchase of notes receivable --- --- (275) Payment of Participating Notes and accrued interest from Millwood sale (609) --- --- Buy-back of Participating Note units-discounted (2,109) --- (425) Distributions of minority interest on consolidated joint venture --- --- (50) Net cash used for financing activities (9,914) (448) 32
(Continued)
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows (in thousands) - continued For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
Net decrease in cash and cash equivalents (210) (574) (844)
Cash and cash equivalents at beginning of period 801 1,375 2,219
Cash and cash equivalents at end of period $ 591 $ 801 $1,375
Supplemental disclosure of cash flow information: Cash paid for interest $ 2,026 $2,247 $2,271
Supplemental disclosure of non-cash transactions: Reduction of accrued interest payable resulting from purchase of Participating Notes at discount $ 1,915 $ --- $---
Purchase of Participating Notes: Reduction of accrued interest payable resulting from purchase of Participating Notes at discount $ --- $ --- $310
Reduction of participating notes resulting from purchase of Participating Notes at discount $ --- $ --- $119 Purchase of minority interest in consolidated joint venture: Repayment of note receivable by reduction of cash proceeds for purchase of minority interest $ --- $ --- $275
Reduction of real estate investments resulting from purchase of minority interest in joint venture $ --- $ --- $123
Receipt of Notes receivable in sale of property $ --- $2,000 $---
Proceeds from sale used to paydown note payable $ --- $ 700 $---
The accompanying notes are an integral part of these consolidated financial statements.
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Outlook Income Fund 9, A California Limited Partnership, (the "Partnership") was organized on August 29, 1986 in accordance with the provisions of the California Revised Limited Partnership Act for the purpose of purchasing, holding, operating, leasing and selling various properties. The Partnership commenced operations on March 5, 1987. Through a registered public offering, 60,000,000 units of limited partnership interest (the "Equity Units") at $1.00 per unit, were authorized for sale. The sale of Equity Units was concluded on January 11, 1988, when 35,742,572 Equity Units had been sold. The Partnership also raised funds by selling $5,228,811 in non- recourse Participating Notes (the "Notes") (see Note 9). The former general partner of the Partnership was Outlook Financial Partners, a California general partnership. On May 8, 1992, Glenborough Realty Corporation and Robert Batinovich were substituted for Outlook Financial Partners, as the general partners (collectively, the "General Partner").
The Partnership Agreement provides for varying allocations of net income or net loss and distributions (see Note 10).
Reclassifications - Certain items in the 1993 financial statements have been reclassified to conform to the 1994 financial statement presentation.
Consolidation and Joint Venture - A joint venture in which the Partnership had an interest of greater than 50% has been consolidated in the accompanying consolidated financial statements. Transactions and balances between the Partnership and this joint venture have been eliminated in consolidation.
Pervasiveness of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported results of operations during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncement - In March, 1995, the Financial accounting Standards Board issued Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." The Partnership adopted SFAS 121 in the fourth quarter of fiscal 1995. SFAS 121 requires that an evaluation of
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
an individual property for possible impairment must be performed whenever events or changes in circumstances indicate that an impairment may have occurred. There was no impact from the initial adoption of SFAS 121.
Rental Property to be Held and Used - Rental properties are stated at cost and include the related land unless events or circumstances indicate that cost cannot be recovered in which case carrying value is reduced to estimated fair value. Estimated fair value: (i) is based upon the Partnership's plans for the continued operation of each property; (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized rental income based upon the age, construction and use of the building, and (iii) does not purport, for a specific property, to represent the current sales price that the Partnership could obtain from third parties for such property. The fulfillment of the Partnership's plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Partnership to continue to hold and operate the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, it is reasonably possible that the actual results of operating and disposing of the Partnership's properties could be materially different than current expectations.
Depreciation is provided using the straight line method over the useful lives of the respective assets (see Note 3).
Depreciation of buildings and their components is computed using the straight-line method over useful lives ranging from five to thirty years. Major replacements and improvements are capitalized, and repairs and maintenance are charged to operations as incurred.
Cash Equivalents - The Partnership considers short-term investments (including certificates of deposit) with a maturity of three months or less at the time of purchase to be cash equivalents.
Deferred Financing and Other Fees - Fees paid to the former general partner, its affiliates and the brokers in connection with the issuance of Notes have been capitalized and amortized using the straight-line method over the term of the related Notes. Wholesaling and underwriting commissions relating to Equity Units are charged directly to partners' equity. Other fees such as loan fees and leasing commissions are amortized using the straight-line method over the term of the related notes
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
payable or leases.
Revenues - All leases are classified as operating leases. Rental income is recognized on the straight-line basis over the terms of the leases. At December 31, 1995, no tenant's revenues represented greater than 10% of the Partnership's total revenues.
Net Loss and Distributions Per Equity Unit - Net loss and distributions per limited partnership unit are based on 35,742,572 weighted average Equity Units outstanding during all years presented.
Income Taxes - Federal and state income tax laws provide that income or loss of the Partnership is reportable by the partners in their tax returns. Accordingly, no provisions for such taxes have been made in the accompanying consolidated financial statements. The Partnership reports certain transactions differently for tax and financial reporting purposes.
Note 2. TRANSACTIONS WITH AFFILIATES
In accordance with the Limited Partnership Agreement, the Partnership paid the General Partner and its affiliates compensation for services provided to the Partnership. Glenborough Corporation provides property management services and has been compensated as follows:
1995 1994 1993 Property management fees $ 157,200 $ 235,900 $ 235,700 Property salaries (reimbursed) 177,400 333,600 335,500 Hotel management fees 234,500 269,500 251,700 Hotel salaries (reimbursed) 1,228,700 1,778,900 1,702,500
The Partnership reimbursed Glenborough Corporation for expenses incurred for services provided to the Partnership such as accounting, investor services, data processing, duplicating and office supplies, legal and administrative services, and the actual costs of goods and materials used for or by the Partnership. Glenborough was reimbursed $458,400, $467,600 and $496,600 for such expenses in 1995, 1994 and 1993, respectively.
In accordance with the Partnership Agreement, the General Partner or its affiliates are entitled to property disposition compensation equal to 3% of the gross sales price of the property. Glenborough Corporation was paid $312,000 in 1995 and $80,250 in 1994 associated with the sale of Millwood Estates and Branford Business Park, respectively.
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Note 3. REAL ESTATE INVESTMENTS
The cost and accumulated depreciation and amortization of real estate investments as of December 31, 1995 and 1994 are as follows (in thousands): Building and Land Improvements Total 1995: Lake Mead Estates Apartments $ 772 $ 5,230 $ 6,002 Bryant Lake Business Center-Phases I & II 945 4,587 5,532 Bryant Lake Business Center-Phase III 1,004 4,792 5,796 Country Suites By Carlson - Memphis 542 5,071 5,613 Country Suites By Carlson - Tempe 929 6,223 7,152 4,192 25,903 30,095 Less accumulated depreciation and amortization --- (9,543) (9,543) $ 4,192 $16,360 $20,552 Building and Land Improvements Total 1994: Lake Mead Estates Apartments $ 772 $ 5,230 $ 6,002 Bryant Lake Business Center-Phases I & II 945 4,578 5,523 Bryant Lake Business Center-Phase III 1,004 4,728 5,732 Country Suites By Carlson - Memphis 542 4,907 5,449 Country Suites By Carlson - Tempe 929 6,067 6,996 4,192 25,510 29,702 Less accumulated depreciation and amortization - (8,479) (8,479) $ 4,192 $ 17,031 $ 21,223
Property held pending foreclosure: Regency Residence Apartments, net $ 762 $ 2,829 $ 3,591 Property held for sale: Millwood Estates Apartments, net $ 1,859 $ 7,423 $ 9,282
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Lake Mead Estates Apartments
On April 30, 1987, the Partnership acquired Lake Mead Estates, an apartment complex located in Las Vegas, Nevada. The property is encumbered by an all-inclusive trust deed note in the original amount of $4,000,000 (see Note 5).
Branford Business Park
On June 10, 1987, the Partnership acquired two industrial office buildings collectively known as Branford Business Park, located in Arleta, California. The property was encumbered by a first deed of trust in the original amount of $950,000. On April 8, 1994, the Partnership made a principal payment in the amount of $250,000 as required by the lender in order to extend the maturity date from May 5, 1994 to November 7, 1994. The outstanding principal balance of $700,000 at that time was paid off with the proceeds from the sale of the property on November 15, 1994.
In March 1993, management listed Branford Business Park for sale with an asking price approximately equal to the book value of the property. Management wanted to test the market to determine if the sale of the property would provide sufficient proceeds to aid in the possible buyback of more Participating Notes (as discussed in Note 9). No offers were received in 1993 at the original asking price. In December 1993, based upon the deterioration of the local market as seen in the steady decline of occupancy, market rents and net operating income from 1991, and based on the unsuccessful attempt at generating interest in the Branford property at an asking price approximately equivalent to the book value of the property, management determined that the carrying value of Branford Business Park had been impaired. As a result, the Partnership recorded a writedown of $1,697,400 to reduce the carrying value of the property to its estimated net realizable value.
On November 15, 1994, the Partnership sold Branford Business Park to an unaffiliated third party for $2,675,000, out of which $700,000 was used to payoff the outstanding note secured by the property. The Partnership financed a $2,000,000 note at 8.5% interest with interest-only payments due until maturity on November 11, 1999. Since the cash received from the transaction was used to payoff the outstanding note, the Partnership was responsible for paying $166,000 in closing costs. The Partnership incurred a loss on the sale in the amount of $257,000.
Regency Residence Apartments
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
On September 30, 1987, the Partnership acquired Regency Residence, a retirement apartment complex located in Port Richey, Florida. The property is encumbered by an all-inclusive trust deed note to GLENFED Service Corporation in the original amount of $2,470,000 which was restructured during 1992 (see Note 6). The seller gave the Partnership an income warranty which covered the four-year period following closing. Under the terms of the income warranty agreement, the Partnership was guaranteed a specified minimum quarterly income from the property during the warranty period. The seller's obligations under the income warranty were satisfied in full as of December 31, 1991. The cost basis for the property was adjusted accordingly.
Based on the continued low occupancy due to market saturation, and on the property's inability to meet debt service payments, management is negotiated a deed-in-lieu of foreclosure with the lender on the Regency Residence property. The partnership paid all net cash flow (defined as all income collected less operating expenses) to the lender from November 1994 until title to the property passed on May 26, 1995. The principal balance of the note secured by the property on May 26, 1995 was $3,538,986, with a accrued interest in the amount of $98,700.
The Partnership recorded a write-down of $835,900 to reduce the carrying value of the property to the balance of the note payable and accrued interest at December 31, 1994.
The Partnership recognized a gain on deed-in-lieu of foreclosure in the amount of $188,000 primarily due to the write-off of accrued property taxes that the property was unable to pay. The gain is included on the Partnership's 1995 statement of operations.
Millwood Estates Apartments
On December 2, 1987, the Partnership acquired Millwood Estates Apartments, an apartment complex located in Lynnwood, Washington. The property is encumbered by an all-inclusive trust deed note to the seller in the original amount of $8,000,000 (see Note 5).
On March 28, 1995, the Partnership sold Millwood Estates Apartments to an unaffiliated third party for $10,400,000, out of which $7,572,400 was used to payoff the outstanding note secured by the property. In addition, sales proceeds were used to payoff the $2,000,000 note payable used to repurchase Participating Notes (as discussed in Note 9). The Partnership recognized a gain on sale on its 1995 Statement of Operations in the amount of $154,000. In anticipation of the sale of the property, management reclassified the net book value of Millwood Estates
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Apartments to "Property held for sale" on the Partnership's December 31, 1994 balance sheet.
Bryant Lake Business Center - Phases I & II
On January 28, 1988, the Partnership purchased a 90% general partnership interest in Bryant Lake Associates - Phases I & II, an unaffiliated California Limited Partnership (the "Joint Venture") which owned Bryant Lake Business Center - Phases I & II, a business center located in Eden Prairie, Minnesota. Under the terms of two of the agreements, the Partnership was guaranteed a minimum monthly gross income from certain spaces for a 12 and 24 month period from the date of purchase. Under the terms of the third agreement, the seller guaranteed that all rent and other amounts due under certain lease agreements would be paid on a timely basis. The seller's obligations under the income warranties were satisfied in full as of December 31, 1989.
On November 30, 1990, the Partnership purchased the 10% limited partnership interest for $180,000; $75,000 paid upon closing and $50,000 and $55,000 paid on January 31, 1991 and January 31, 1992, respectively. As a consequence of the purchase, the Joint Venture was dissolved and the assets and liabilities of the Joint Venture were transferred to the Partnership. Since the seller of the 10% limited partnership interest had a book value basis in the Joint Venture which exceeded the consideration paid by the Partnership,
the cost basis of the related land and buildings and improvements were reduced pro rata upon transfer to the Partnership.
Bryant Lake Business Center - Phase III
On January 28, 1988, the Partnership purchased a 50% general partnership interest in Bryant Lake Associates - Phase III, an unaffiliated California Limited Partnership, (the "Joint Venture") which owned Bryant Lake Business Center--Phase III, a business center located in Eden Prairie, Minnesota, for a purchase price of $3,225,000. Total consideration of $3,251,900 included a cash investment of $826,900 and the assumption of 50% of existing $4,850,000 commercial development revenue bonds secured by a first deed of trust and a security agreement.
On November 30, 1990, the Partnership purchased the remaining 50% limited partnership interest. As consideration for the purchase, the sellers will be entitled to 25% of net cash flow from the operation and ultimate disposition of the property, if any, as provided in the purchase agreement. Through December 31, 1995,
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
no net cash flow payments have been due or payable to the seller. As a consequence of the purchase, the Joint Venture has been dissolved and the assets and liabilities of the Joint Venture have been transferred to the Partnership.
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Country Suites By Carlson - Memphis
On August 1, 1988, the Partnership acquired a 121-unit hotel known as Country Suites By Carlson - Memphis, located in Memphis, Tennessee. A promissory note secured by a first deed of trust in the original amount of $1,371,000, payable to GLENFED Service Corporation encumbered the property. The original note was restructured during 1992 (see Note 5).
Country Suites By Carlson - Tempe
On August 1, 1988, the Partnership purchased an undivided 75% Tenancy in Common interest in Country Suites By Carlson - Tempe, a 138-unit hotel located in Tempe, Arizona. The Partnership originally purchased its 75% interest as part of a joint venture with Outlook Income Fund 10 ("OIF 10"), A California Limited Partnership, an affiliated partnership with similar investment objectives and the same General Partner as the Partnership. The property was encumbered by a promissory note and first deed of trust in the original amount of $1,859,000 secured by a deed of trust and assignment of rents and payable to GLENFED Service Corporation. The note payable was restructured during 1992 (see Note 5).
On November 4, 1993, the Partnership finalized the purchase of the minority interest in the consolidated joint venture from OIF 10 and Country Suites By Carlson - Tempe is now 100% owned by the Partnership. The total purchase price of $1,225,000 included a cash payment of $950,000 plus the cancellation of the $275,000 note receivable from OIF 10 originally owed to an affiliate of the former general partner which was purchased by the Partnership in June 1993.
The Partnership leases its commercial and industrial property under noncancellable operating lease agreements. Future minimum rents to be received under operating leases as of December 31, 1995 are as follows:
1996 $ 1,224,000 1997 817,000 1998 538,000 1999 305,000 2000 299,000 Thereafter 35,000 Total $ 3,218,000
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Note 4. LITIGATION SETTLEMENT EXPENSE
On May 6, 1993, Glenborough Corporation and certain of its affiliates entered into a settlement of a lawsuit that had been brought by the seller and former manager of the hotels on November 13, 1991. The lawsuit alleged that, in connection with the prior general partner's termination of the seller as operator and franchisor of the Partnership's hotels, Glenborough and its affiliates had defamed the seller and interfered with its contractual relationship with the Partnership. A majority of the amount paid to the seller under the settlement was funded by Glenborough's insurance carriers, but a portion of the settlement amount was funded by Glenborough. Pursuant to Glenborough's indemnity rights as General Partner of the Partnership (and as general partner of other Outlook partnerships that own hotels), Glenborough is entitled to reimbursement of this portion of the settlement payment. The Partnership's share of this reimbursement together with the legal fees associated with this settlement was $64,900.
Note 5. NOTES PAYABLE
A summary of notes payable at December 31, 1995 and 1994 follows (in thousands):
1995 1994 9.625% note payable related to Lake Mead Estates Apartments, secured by a first deed of trust; payable in monthly principal and interest installments of $34,000 through October 1, 2018, at which time all remaining principal and interest will be due and payable. $ 3,764 $ 3,807
10.75% note payable, secured by the assignment of a $2,000,000 note and deed of trust on 12970-12990 Branford, payable in monthly interest only installments of Prime plus 2% through May 28, 1996, at which time all remaining principal and interest will be due and payable. 500 ---
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
1995 1994 9.0% note payable to GLENFED Service Corporation, related to the Regency Residence Apartments and secured by a first deed of trust; payable in monthly principal and interest installments of $26,900 through July 1, 1999, at which time all remaining principal and interest will be due and payable. --- 3,539
9.625% note payable related to Millwood Estates Apartments, secured by a first deed of trust; payable in monthly principal and interest installments of $68,000 through July 1, 2018, at which time all remaining principal and interest will be due and payable. --- 7,594
8.652% bonds payable related to Bryant Lake-Phase III, secured by first deeds of trust on Bryant Lake-Phase III and Bryant Lake- Phases I and II; payable in monthly interest only installments of $35,000 through October 1, 2015, at which time all remaining principal and interest will be due and payable. The interest rate adjusts to market
at November 1, 2000. 4,850 4,850
9.0% note payable to GLENFED Service Corporation, related to the Country Suites by Carlson-Memphis and secured by a first deed of trust; payable in monthly principal and interest installments of $26,800 through July 1, 1999, at which time all principal will be due and payable. 3,504 3,535
9.0% note payable to GLENFED Service Corporation, related to the Country Suites By Carlson - Tempe
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
and secured by a first deed of trust; payable in monthly principal and interest installments of $22,500 through July 1, 1999, at which time
1995 1994
all principal and interest will be due and payable. 2,727 2,751
Total notes payable. $ 15,345 $ 26,076
On April 8, 1994, the Partnership made a principal payment in the amount of $250,000 on the note secured by the Branford property as required by the lender in order to extend the maturity date from May 5, 1994 to November 7, 1994. On November 15, 1994, using the proceeds from the sale of Branford, the remaining note payable in the amount of $700,000 was paid off.
Principal maturities of these notes payable are as follows:
1996 $ 607,000 1997 118,000 1998 129,000 1999 6,099,000 2000 70,000 Thereafter 8,322,000 Total $15,345,000
Note 6. TAXABLE INCOME
The Partnership's tax returns, the qualification of the Partnership as a partnership for Federal income tax purposes, and the amount of income or loss are subject to examination by Federal and state taxing authorities. If such examinations result in changes to Partnership profits or losses, the tax liability of the partners could be changed accordingly.
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
The following is a reconciliation for the years ended December 31, 1995, 1994 and 1993, of the net income for financial reporting purposes to the taxable income determined in accordance with accounting practices used in preparation of Federal income tax returns (in thousands).
1995 1994 1993 Net loss per financial statements $ 969 $(2,893) $(3,521) Amortization and depreciation 20 (60) 77 Interest income --- 70 101 Gain from note repurchase (241) Guaranteed income --- --- 950 Prepaid income --- --- 35 Bad debt expense/reserve 3 (4) 26 Property tax expense 7 5 8 Interest expense (60) (133) 25 Management fee --- --- 100 Partnership income adjustment --- --- 75 Loss on sale of assets (3,837) (1,870) --- Valuation reserve --- 836 --- Net loss for Federal income tax purposes $ (3,139) $ (4,049) $ (2,124)
The following is a reconciliation as of December 31, 1995 and 1994 of partners' capital for financial reporting purposes to partners' equity for Federal income tax purposes (in thousands):
1995 1994 Partner's Equity per financial statements $ 2,993 $ 2,024 Amortization and depreciation 887 (455) Provision for doubtful accounts 5 2 Interest accrued 211 509 Income from joint ventures --- --- Basis adjustments 1,801 6,144 Valuation allowance --- 836 Other 76 53 Partner's Equity for Federal income tax purposes $ 5,973 $ 9,113
Note 7. PARTICIPATING NOTES
The Partnership was authorized to offer up to $40,000,000 in Equity Units and non-recourse unsecured Participating Notes (the "Notes"). The Partnership had sold $5,228,800 in Notes, of which $543,500 were acquired in 1988 by GLENFED Service Corporation ("Glenfed"). The Notes bear stated interest at the rate of 12% per annum, non-compounded, with payment of principal and stated interest deferred until the earlier of the maturity date of the
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Notes or the sale or refinancing of Partnership properties. At both December 31, 1995 and 1994, $4,582,000 of interest was accrued on the Notes. The Noteholders will also receive payments of contingent interest if, following the sale of all of the Partnership properties, the Partnership realizes net profits after the payment of all Partnership obligations and the distribution of certain base amounts to the Limited Partners. The amount of the Noteholders' contingent interest participation in net profits varies between 0% and 24%, depending upon the relative amounts invested in Notes and Equity Units and the total amount of interest received by Noteholders as defined in the Partnership Agreement. In no event, however, will the aggregate amount of all interest, including contingent interest, paid on the Notes exceed simple interest at the rate of 18% per annum on the original principal balance of the Notes from date of issuance until the date that all principal on the Notes is paid in full.
The Partnership may prepay principal and stated interest at any time. Partial prepayments must be made pro rata to all noteholders. Upon the sale or refinancing of a Partnership property, the Partnership will pay or prepay some or all of the principal and interest allocated to that property under the terms of the Notes. If not previously paid, the Notes mature and all remaining principal and interest, excluding contingent interest, must be paid in full on December 31, 1997, unless the General Partner extends the due date of the Notes, in its sole discretion, to a date which is not later than December 31, 1998. The payment of all principal and stated interest does not extinguish the right to contingent interest which may accrue or become payable following the sale of all of the Partnership properties.
On June 15, 1993, the Partnership purchased the Participating Notes ($545,300) and accrued interest thereon ($309,800), held by the former general partner, for $425,000. The difference between the carrying value of the liabilities to the former general partner and the purchase price was recorded as an extraordinary gain in the Partnership's 1993 consolidated statement of operations. The Notes and accrued interest thereon are being held in trust for the benefit of the Partnership.
In January 1994, the Partnership sent a "Conditional Offer to Purchase 12% Participating Notes" ("the Offer") to all Note investors. The Offer was made to Noteholders in an effort to reduce the impact of the Notes' accrued interest on the value of the Equity Units. Buying back these notes provides a significant interest savings to the Partnership, which benefits the Equity Unit investors (whose returns are subordinated to the Noteholders' receiving a return of principal plus 12% simple deferred interest per annum).
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Approximately 45% of the Noteholders accepted the offer and the repurchase occurred in March 1995. The repurchase totalled $2,102,000 in original Note principal. The related accrued interest on these Notes was $1,915,000, which was not paid and represented the discount the Partnership received in the buyback. The Partnership used the proceeds from a $2,000,000 short-term loan to fund the repurchase (further discussion follows). The forgiveness was recognized as an extraordinary gain on the Partnership's 1995 statement of operations. The Notes and accrued interest will be held in trust for the benefit of the Partnership.
On January 27, 1995, the Partnership borrowed $2,000,000 from an unaffiliated lender to facilitate the repurchase of Notes as discussed above. Since the Partnership was relying on the proceeds from the sale of a property to fund the purchase of the Notes, which would not be available until the sale of Millwood Estates, the Partnership borrowed the money necessary to facilitate the purchase in order to meet the deadline required by the offer. The loan requires interest-only payments at a variable interest rate (11% at March 28, 1995) and matures June 26, 1995. However, the loan was paid off on March 28, 1995 with a portion of the proceeds from the sale of Millwood Estates Apartments (discussed in Note 4).
On June 9, 1995, in accordance with the Participating Notes Indenture and as a result of the sale of Millwood Estates, the Partnership retired $637,000 in notes and $592,000 in related accrued interest. Of this amount, the Partnership paid $609,000 ($314,000 of Participating Notes principal and accrued interest of $295,000) to outside Noteholders, the remainder represented a retirement of notes held in trust for the Partnership.
In June 1995, the Partnership sent a second "Conditional Offer to Purchase 12% Participating Notes" (the "second Offer") to the remaining Noteholders. The second Offer is for the repurchase of the Notes for a price equal to 135% of the Noteholders original investment (i.e. the purchase price for each Note will be $1.35 compared to an approximate current Note and accrued interest value of $1.95). The second Offer expired October 31, 1995, but the Partnership extended the expiration to December 31, 1995. As of February 1996, 177 Noteholders accepted the offer. The result will be $1,104,000 in notes which will be bought at a purchase price of $1,491,000 in 1996. Through March 27, 1996, the partnership repurchased $863,000 in notes for a purchase price of $1,166,000. The Partnership borrowed an additional $1,100,000 on the $2,000,000 line of credit with an unaffiliated lender to fund the repurchase.
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Note 8. PARTNERSHIP ALLOCATIONS AND DISTRIBUTIONS
The Partnership Agreement provides generally that losses are allocated 1% to the General Partner and 99% to the Limited Partners. Net income will be allocated among the Partners first to restore negative capital accounts and then in accordance with their rights to future cash distributions.
The source and amount of all Partnership distributions is determined by the General Partner at its sole discretion. Distributions may not be made if the cash reserves of the Partnership have fallen below 3% of the capital raised from the sale of Equity Units and Notes.
The Partnership Agreement provides that cash available for distributions shall be distributed 97% to the Limited Partners and 3% to the General Partner until the Limited Partners have received aggregate distributions equal to a cumulative non- compounded return of 9% on their adjusted capital investment. Thereafter, distributions from operational cash flow shall be distributed to the General Partner until the General Partner has received the full amount of its deferred subordinated partnership incentive fee as defined in the Partnership Agreement, and thereafter 10% to the General Partner and 90% to the Limited Partners.
Distributions of net cash from sources other than operational cash flow shall be distributed 1% to the General Partner and 99% to the Limited Partners until the amounts distributed to the Limited Partners from all sources equal a complete return of their adjusted capital investment and a 9% per annum cumulative non-compounded return on their capital investment. Thereafter, distributions from sources other than operational cash flow shall be distributed to the General Partner until the General Partner has received the full amount of its deferred subordinated partnership incentive fee as defined in the Partnership Agreement, and thereafter 10% to the General Partner and 90% to a net profits account. Distributions from the net profits account will be made to the Limited Partners and Noteholders (see Note 6) based on amounts invested in Equity Units and Notes pursuant to the Partnership Agreement.
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Schedule III insert
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
General Partners
The Partnership has no directors or executive officers. The general partners of the Partnership are Glenborough Corporation ("GC", the "Managing General Partner", formerly known as Glenborough Realty Corporation) and Robert Batinovich.
Robert Batinovich was the President, Chief Executive Officer and Chairman of Glenborough Corporation from its inception in 1987 until his resignation effective January 10, 1996. On August 31, 1994, Mr. Batinovich was elected Chairman, President and Chief Executive Officer of Glenborough Realty Trust Incorporated ("GRT"), a newly created Real Estate Investment Trust, which began trading on the New York Stock Exchange on January 31, 1996. He was a member of the Public Utilities Commission from 1975 to January 1979 and served as it President from January 1977 to January 1979. He is a member of the Board of Directors of Farr Company, a publicly held company that manufactures industrial filters. He has extensive real estate investment experience. Mr. Batinovich's business background includes managing and owning manufacturing, vending and service companies and a national bank.
For informational purposes, the following are the names and a brief description of the background and experience of each of the controlling persons, directors and executive officers of the Managing General Partner as of March 1, 1996:
Name Age Position
Andrew Batinovich 37 Chief Executive Officer and Chairman of the Board
Robert E. Bailey 34 Secretary and Corporate Counsel
Sandra L. Boyle 47 President and Chief Operating Officer
June Gardner 44 Director
Terri Garnick 35 Chief Financial Officer
Judy Henrich 50 Vice President
Wallace A. Krone Jr. 64 Director
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Andrew Batinovich was elected Chairman of the Board and Chief Executive Officer of GC on January 10, 1996. He has been employed by GC since 1983, and had functioned since 1987 as Chief Operating Officer and Chief Financial Officer. Mr. Batinovich also serves as Executive Vice President, Chief Operating Officer, Chief Financial Officer and Director of GRT. He holds a California real estate broker's license and is a Member of the National Advisory Council of BOMA International. He received his B.A. in International Finance from the American University of Paris. Prior to joining Glenborough, Mr. Batinovich was a lending officer with the International Banking Group and the Corporate Real Estate Division of Security Pacific National Bank.
Robert E. Bailey joined GC in 1989 as Associate Counsel and was elected Secretary of GC on May 15, 1995. He is responsible for all landlord/tenant documentation, tenant litigation, corporate and partnership matters and employment matters. In 1984, he received his Bachelor of Arts degree from the University of California at Santa Barbara and his Juris Doctor degree from Vermont Law School in 1987. From 1987 to 1989, Mr. Bailey was an associate with the law firm of Pedder, Stover, Hesseltine & Walker, where he specialized in business litigation. He is a member of the State Bar of California.
Sandra L. Boyle has been associated with GC or its associated entities since 1984 and has served as President and Chief Operating Officer of GC since January 10, 1996. She was originally responsible for residential marketing, and her responsibilities were gradually expanded to include residential leasing and management in 1985, and commercial leasing and management in 1987. She was elected Vice President in 1989, and continues to supervise marketing, leasing, property management operations and regional offices. Ms. Boyle also serves as a Senior Vice President of GRT. Ms. Boyle holds a California real estate broker's license and a CPM designation, and is a member of the National Advisory Council and Finance Committee of BOMA International; and Board of Directors of BOMA San Francisco and BOMA California.
June Gardner was elected a director of GC on January 10, 1996. She was associated with GC from 1984 through 1995, as Senior Vice President, Corporate Controller with responsibilities in the areas of corporate financial planning, reporting, accounting and banking relationships. Before joining GC, Ms. Gardner was Assistant Vice President of JMB Realty Corporation from 1977 to 1984, with responsibilities in the areas of financial management and reporting.
Terri Garnick has served as Chief Financial Officer of GC since
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
January 10, 1996. She is also Senior Vice President, Chief Accounting Officer and Treasurer of GRT. Ms. Garnick is responsible for property management accounting, financial statements, audits, Securities and Exchange Commission reporting, and tax returns. Prior to joining GBC in 1989, Ms. Garnick was a controller at August Financial Corporation from 1986 to 1989 and was a Senior Accountant at Deloitte, Haskins and Sells from 1983 to 1986. She is a Certified Public Accountant and has a Bachelor of Science degree from San Diego State University.
Judy Henrich is a Vice President of GC, effective January 10, 1996 and is responsible for the coordination of all due broker- dealer and investor communications for partnerships managed by GC. Prior to joining GC, Ms. Henrich, was associated with Rancon Financial Corporation from 1981 through early 1995, as Senior Vice President since 1985, with responsibilities similar to those at GC. Ms. Henrich also served as Executive Vice President of Rancon Securities Corporation from 1988 to 1991, and thereafter as its Chief Executive Officer. Prior to joining Rancon, Ms. Henrich was manager of public relations and advertising for Kaiser Development Company, a diversified real estate holding company.
Wallace A. Krone has been an entrepreneur in the restaurant business since 1965, and owns a number of Burger King restaurants in the San Francisco area. Mr. Krone has been associated with GC since 1982 as an investor in one or more partnerships, and has been a member of the board of directors of GC since 1989.
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Item 11.
Item 11. Executive Compensation
The Partnership has no executive officers. For information relating to fees, compensation, reimbursements and distributions paid to related parties, reference is made to Item 13 below.
Item 12.
Item 12. Security Ownership of Certain Owners and Management
To the best knowledge of the Partnership, no person owned of record or beneficially more than five percent (5%) of the outstanding Units at December 31, 1995.
The Partnership, as an entity, does not have any directors or officers. At December 31, 1995, no Units were owned of record or beneficially by any officers or directors of the General Partner.
Item 13.
Item 13. Certain Relationships and Related Transactions
(a) AFC, an affiliate of the former general partner, had made loans to the Partnership to fund working capital and investment needs. Until July 1, 1992, the notes payable bore interest at a rate of prime (6% at December 31, 1993) plus 1-1/2% and were due on demand. The unpaid aggregate principal balance of the notes was $2,090,000 at June 30, 1992. Effective July 1, 1992, the note was added to the principal balances of the restructured notes as discussed below.
Additionally, the Partnership is indebted to GLENFED Service Corporation, a California corporation and a wholly owned subsidiary of Glendale Federal Savings and Loan Association and parent-company of August Financial Corporation, for three deferred interest loans secured by first deeds of trust on three of the Partnership's properties as follows:
Original December 31, 1995 Principal Principal Balance Balance Note payable related to the: Regency Resident Apartments $ 2,470,000 $ --- Country Suites By Carlson-Memphis 1,371,000 3,504,000 Country Suites By Carlson-Tempe 1,859,000 2,727,000 $ 5,700,000 $ 6,231,000
The secured notes bear interest at 9% compounded monthly with equal monthly payments of principal and interest commencing on August 1, 1992 in an amount necessary to fully amortize the principal and accrued interest over a 30-year period, with the entire unpaid principal and interest due and payable on July 1, 1999. In 1995, the Partnership paid $625,000 for interest on
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
these notes.
(b) An affiliate of the General Partner earned compensation for specific services provided to the Partnership. The Partnership reimbursed Glenborough Corporation for expenses incurred for services provided to the Partnership such as accounting, investor services, data processing, duplicating and office supplies, legal and administrative services, and the actual costs of goods and materials used for or by the Partnership. Glenborough was reimbursed $458,400, $467,600 and $496,600 for such expenses in 1995, 1994 and 1993, respectively.
In accordance with the Limited Partnership Agreement, the Partnership paid the General Partner and its affiliates compensation for services provided to the Partnership. Glenborough Corporation provides property management services and has been compensated as follows:
1995 1994 1993 Management fees $ 391,700 $ 505,400 $ 487,400 Property management salaries (reimbursed) 177,400 333,600 335,500 Hotel salaries (reimbursed) 1,228,700 1,778,900 1,702,500
In accordance with the Partnership Agreement, Glenborough Corporation was paid $312,000 in 1995 and $80,250 in 1994 as a 3% property disposition compensation associated with the sales of Millwood Estates and Branford Business Park, respectively (as discussed in Note 7).
(c) None of the members of the General Partner were indebted to the Partnership during this fiscal year.
(d) Compensation received by the General Partner and affiliates is disclosed under Item 11.
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements - See Index to Financial Statements contained in Item 8.
(2) Financial Statement Schedules - See Item 14(d) below.
(3) Exhibits - No exhibits necessary.
(b) Reports on Form 8-K - No reports on Form 8-K were filed by the registrant in the fourth quarter of 1995.
(c) Financial Statement Schedules - The following financial statement schedules of the Partnership are included in Item 8:
Schedule III - Real Estate Investments and Related Accumulated Depreciation and Amortization.
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
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OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of l934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
By: By: Glenborough Corporation, Robert Batinovich a California corporation, General Partner (formerly knows as Glenborough Realty Corporation, a California Corporation)
Date: By: Andrew Batinovich Chief Executive Officer and Chairman of the Board
Date:
By: Terri Garnick Chief Financial Officer
Date:
By: June Gardner Director
Date:
OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(A Majority of the Board of Directors of the General Partner)
OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of l934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
By: /s/ Robert Batinovich By:Glenborough Corporation, Robert Batinovich a California corporation, General Partner (formerly knows as Glenborough Realty Corporation, a California Corporation)
Date: By: /s/ Andrew Batinovich Andrew Batinovich Chief Executive Officer and Chairman of the Board
Date:
By: /s/ Terri Garnick Terri Garnick Chief Financial Officer
Date:
By: /s/ June Gardner June Gardner Director
Date:
OUTLOOK INCOME FUND 9, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(A Majority of the Board of Directors of the General Partner)