<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31,1996
-------------
Commission File Number 1-9948
------
AMERICAN REALTY TRUST, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Georgia 54-0697989
------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas 75231
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(214) 692-4700
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, $.01 par value 6,740,328
- ---------------------------- -------------------------------
(Class) (Outstanding at April 30, 1996)
1
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements have not been examined by
independent certified public accountants but in the opinion of the management
of American Realty Trust, Inc. (the "Company"), all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of consolidated
results of operations, consolidated financial position and consolidated cash
flows at the dates and for the periods indicated, have been included.
AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------------- --------------
(dollars in thousands)
<S> <C> <C>
Assets
------
Notes and interest receivable
Performing.......................................... $ 51,530 $ 51,840
Nonperforming, nonaccruing.......................... 1,827 1,827
--------------- --------------
53,357 53,667
Less - allowance for estimated losses............... (3,926) (3,926)
--------------- --------------
49,431 49,741
Real estate held for sale, net of accumulated
depreciation ($5,098 in 1996 and 1995)............ 32,314 32,627
Less - allowance for estimated losses............... (3,328) (3,328)
--------------- --------------
28,986 29,299
Real estate held for investment, net of accumulated
depreciation ($2,982 in 1996 and $2,646 in 1995).. 30,061 30,125
Marketable equity securities, at market value....... 1,831 2,093
Cash and cash equivalents........................... 326 1,054
Investments in real estate entities................. 41,344 41,072
Other assets...................................... 4,601 8,649
--------------- --------------
$ 156,580 $ 162,033
=============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
2
<PAGE> 3
AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS - Continued
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------------- ---------------
(dollars in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable......................... $ 62,311 $ 61,163
Margin borrowings.................................. 31,983 34,017
Accounts payable and other liabilities (including
$1,586 in 1996 and $4,584 in 1995 to affiliate).. 8,346 12,698
--------------- --------------
102,640 107,878
Minority interest.................................. 1,097 1,097
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value; authorized
16,667,000 shares, issued and outstanding
5,858,328 shares in 1996 and 1995................ 59 59
Paid-in capital.................................... 66,719 66,719
Accumulated (deficit).............................. (13,935) (13,720)
--------------- --------------
52,843 53,058
--------------- --------------
$ 156,580 $ 162,033
=============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
3
<PAGE> 4
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------------------
1996 1995
--------------- ---------------
(dollars in thousands,
except per share)
<S> <C> <C>
Income
Rents.......................................... $ 5,310 $ 5,407
Interest ...................................... 1,138 1,323
Other.......................................... 342 (650)
--------------- --------------
6,790 6,080
Expenses
Property operations............................ 3,710 3,879
Interest....................................... 3,146 1,757
Advisory and servicing fees to affiliate....... 320 304
General and administrative..................... 642 560
Depreciation and amortization.................. 437 440
Equity in losses of investees.................. 890 1,260
--------------- --------------
9,145 8,200
--------------- --------------
(Loss) before gain on sale of real estate and
extraordinary gain............................. (2,355) (2,120)
Gain on sale of real estate...................... 2,127 924
Extraordinary gain............................... 13 315
--------------- --------------
Net (loss)....................................... $ (215) $ (881)
=============== ==============
Earnings per share
(Loss) before extraordinary gain............... $ (.04) $ (.20)
Extraordinary gain............................. - .05
--------------- --------------
Net (loss)..................................... $ (.04) $ (.15)
=============== ==============
Weighted average Common shares used in computing
earnings per share............................. 5,858,328 5,858,328
=============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
4
<PAGE> 5
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1996
<TABLE>
<CAPTION>
Common Stock
---------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital (Deficit) Equity
----------- ------------ -------------- -------------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance,
January 1, 1996........ 5,858,328 $ 59 $ 66,719 $ (13,720) $ 53,058
Net (loss)............. - - - (215) (215)
------------ ------------- ------------- -------------- --------------
Balance, March 31, 1996.. 5,858,328 $ 59 $ 66,719 $ (13,935) $ 52,843
============ ============= ============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
5
<PAGE> 6
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
------------------------------------
1996 1995
-------------- ---------------
(dollars in thousands)
<S> <C> <C>
Cash Flows From Operating Activities
Rents collected................................... $ 5,384 $ 5,996
Interest and dividends collected.................. 1,123 1,512
Distributions received from equity investees'
operating cash flow........................... 3,986 421
Payments for property operations.................. (4,942) (4,733)
Interest paid..................................... (2,438) (1,562)
Advisory and servicing fees paid to affiliate..... (320) (304)
General and administrative expenses paid.......... (672) (651)
Other......................................... 207 (5)
--------------- --------------
Net cash provided by operating activities..... 2,328 674
Cash Flows From Investing Activities
Collections on notes receivable................... 261 958
Proceeds from sale of real estate................. 891 9,668
Proceeds from sale of marketable equity
securities.................................... 8,830 570
Purchase of marketable equity securities.......... (7,939) (6,302)
Investment in real estate entities............ (210) (2,214)
Real estate improvements.......................... (273) (652)
--------------- --------------
Net cash provided by investing activities..... 1,560 2,028
Cash Flows From Financing Activities
Proceeds from notes payable....................... 12,000 -
Payments on notes payable......................... (10,912) (8,003)
Deferred borrowing costs.......................... (672) -
Net repayment of advances from affiliates......... (2,998) (507)
Margin borrowings (repayments), net............... (2,034) 6,093
--------------- --------------
Net cash (used in) financing activities....... (4,616) (2,417)
Net increase (decrease) in cash and cash
equivalents................................ (728) 285
Cash and cash equivalents, beginning of period......... 1,054 193
--------------- --------------
Cash and cash equivalents, end of period............... $ 326 $ 478
=============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
6
<PAGE> 7
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------------------
1996 1995
--------------- ----------------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net (loss) to net cash provided
by operating activities
Net (loss).......................................... $ (215) $ (881)
Adjustments to reconcile net (loss) to net cash
provided by operating activities
Extraordinary gain............................... (13) (315)
Depreciation and amortization.................... 437 440
Gain on sale of real estate...................... (2,127) (924)
Distributions from equity investees' operating
cash flow.................................. 3,986 421
Equity in losses of investees.................... 890 1,260
Unrealized loss (gain) on marketable equity
securities................................. (629) 996
(Increase) decrease in accrued interest
receivable................................. 49 (81)
Decrease in other assets......................... 536 511
Increase in accrued interest payable............. 60 83
(Decrease) in accounts payable and
other liabilities.......................... (902) (931)
Other............................................ 256 95
--------------- --------------
Net cash provided by operating activities.. $ 2,328 $ 674
=============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
7
<PAGE> 8
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements of American Realty Trust,
Inc. and consolidated entities (the "Company") have been prepared in conformity
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
Operating results for the three month period ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. For further information, refer to the Consolidated
Financial Statements and Notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K").
Shares and per share data have been restated for the two for one forward share
split effected January 2, 1996.
NOTE 2. SYNTEK ASSET MANAGEMENT, L.P.
The Company owns 76.8% limited partner interest in Syntek Asset Management,
L.P. ("SAMLP"), the general partner of National Realty, L.P. ("NRLP") and
National Operating, L.P. ("NOLP"), the operating partnership of NRLP. Gene E.
Phillips, a Director and Chairman of the Board of the Company until November
16, 1992, is a general partner of SAMLP, and until March 4, 1994, William S.
Friedman, a Director and President of the Company until December 31, 1992, was
also general partner of SAMLP.
NRLP, SAMLP and Messrs. Phillips and Friedman were among the defendants in a
class action lawsuit arising from the formation of NRLP. An agreement settling
such lawsuit for the above mentioned defendants became effective on July 5,
1990. The settlement agreement provided for, among other things, the
appointment of an NRLP oversight committee; the establishment of specified
annually increasing targets for five years relating to the price of NRLP's
units of limited partner interest; a limitation and deferral or waiver of
NRLP's reimbursement to SAMLP of certain future salary costs; a deferral or
waiver of certain future compensation to SAMLP; the required distribution to
unitholders of all of NRLP's cash from operations in excess of certain
renovation costs unless the NRLP oversight committee approves alternative uses
for such cash from operations; the issuance of unit purchase warrants to
members of the plaintiff class; and the contribution by the then individual
general partners of $2.5 million to NRLP over a four-year period. In
accordance with the indemnification provisions of SAMLP's agreement of limited
partnership, SAMLP agreed to indemnify Messrs. Phillips and Friedman, the
individual general partners, at the time, of SAMLP, for the $2.5 million
payment to NRLP. The final annual installment of principal and interest was
paid by SAMLP in May 1994.
The settlement agreement provides for the resignation and replacement of SAMLP
as general partner if the unit price targets are not met for two consecutive
anniversary dates. NRLP did not meet the unit price targets for the first and
second anniversary dates. On July 8, 1992, SAMLP
8
<PAGE> 9
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. SYNTEK ASSET MANAGEMENT, L.P. (Continued)
notified the NRLP oversight committee of the failure of NRLP to meet the unit
price targets for two successive years and that it expects to resign as general
partner of NRLP and NOLP.
The withdrawal of SAMLP as general partner would require NRLP to purchase
SAMLP's general partner interest (the "Redeemable General Partner Interest") at
its then fair value, and to pay certain fees and other compensation as provided
in the partnership agreement. Syntek Asset Management, L.P. ("SAMI"), the
managing general partner of SAMLP, has calculated the fair value of such
Redeemable General Partner Interest to be $36.2 million at March 31, 1996,
before reduction for the principal balance ($4.2 million at March 31, 1996) and
accrued interest ($5.4 million at March 31, 1996) on the note receivable from
SAMLP for its original capital contribution to the partnership.
In January 1995, NRLP, SAMLP and the NRLP oversight committee executed an
Implementation Agreement which provides for the nomination of a successor
general partner to succeed SAMLP and for the resolution of all related matters
under the class action settlement. On February 20, 1996, the parties to the
Implementation Agreement executed an Amended and Restated Implementation
Agreement.
Provided that the successor general partner is elected pursuant to the terms of
the amended and restated Implementation Agreement, SAMLP shall receive
$12,471,500 from NRLP. This amount represents a compromise settlement of the
net amounts owed by NRLP to SAMLP upon SAMLP's withdrawal as general partner
and any amounts which SAMLP and its affiliates may owe to NRLP. This amount
shall be paid to SAMLP pursuant to a promissory note in accordance with the
terms set forth in the Amended and Restated Implementation Agreement.
The Amended and Restated Implementation Agreement has been submitted to the
Judge appointed to supervise the class action settlement (the "Supervising
Judge") for tentative approval and approval of the notice to be sent to the
original class members. Upon final approval by the Supervising Judge, the
proposal to elect the successor general partner will be submitted to the NRLP
unitholders for a vote. In addition, the unitholders will vote upon amendments
to NRLP's partnership agreement which relate to the proposed compensation of
the successor general partner and other related matters.
The Amended and Restated Implementation Agreement provides that SAMLP, and its
affiliates owning units in NRLP, shall not vote to remove the successor general
partner, except for removal with cause, for a period of 36 months from the date
the successor general partner takes office.
Upon approval by NRLP's unitholders, SAMLP shall resign as general partner of
NRLP and NOLP and the successor general partner shall take office. If the
required approvals are obtained, it is anticipated that the successor general
partner may be elected and take office during the fourth quarter of 1996.
9
<PAGE> 10
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. SYNTEK ASSET MANAGEMENT, L.P. (Continued)
Upon the election and taking office of the successor general partner, the class
action settlement and the NRLP oversight committee shall be terminated. If the
successor general partner nominee is not elected, the existing settlement shall
remain in full force and effect and all of the provisions of the Amended and
Restated Implementation Agreement shall be voided, including the compromise
settlement referred to above.
NOTE 3. NOTES AND INTEREST RECEIVABLE
In February 1996, the Company refinanced the $7.8 million of debt
collateralized by a mortgage note receivable with a balance of $18.4 million at
March 31, 1996, which is secured by the Las Vegas Shopping Center in Las Vegas,
Nevada, for $12.0 million. The Company received net refinancing proceeds of
$2.3 million after the payoff of the existing debt, payment of closing costs
associated with the refinancing and making a $1.5 million paydown on the term
loan secured by land in Las Colinas, in exchange for that lender's release of
its participation interest in the note receivable. The new loan bears interest
at 15% per annum, requires monthly principal and interest payments of $152,000
and matures February 6, 1998. The Company paid Basic Capital Management, Inc.
("BCM"), the Company's advisor, a mortgage brokerage and equity refinancing fee
of $120,000 based upon the $12.0 million refinancing.
In August 1990, the Company foreclosed on its fourth lien note receivable
secured by the Continental Hotel and Casino in Las Vegas, Nevada. The Company
acquired the hotel and casino property at foreclosure subject to first and
second lien mortgages totaling $10.0 million and a disputed third lien
mortgage. In June 1992, the Company sold the hotel and casino to the third
lien holder accepting as partial payment a $22.0 million wraparound mortgage
note receivable. The Company's wraparound mortgage note receivable had a
principal balance of $22.7 million at March 31, 1996 and the principal balance
of the underlying liens totaled $3.1 million at such date.
In April 1996, the underlying liens relating to this wraparound mortgage note
receivable were refinanced for $16.8 million. The Company received net cash of
$11.2 million after the payoff of the two underlying liens then totaling $2.9
million, the payment of various closing costs associated with the refinancing
and making a $1.4 million paydown on the term loan secured by land in Las
Colinas, Texas, in exchange for that lender's release of its participation
interest in the wraparound note receivable. The new loan bears interest at
16.5% per annum, requires monthly interest only payments at a rate of 12.5%
with the remaining 4% being deferred and added to principal. The loan matures
April 16, 1998. The Company paid BCM a mortgage brokerage and equity
refinancing fee of $168,000 based upon the $16.8 million refinancing.
At March 31, 1996, the Company held a mortgage note receivable secured by a
third lien on a commercial property in South Carolina and personal guaranties
of several individuals. The borrower had failed to make the required payments
of principal and interest since December 1, 1994. The Company accelerated the
note and instituted foreclosure proceedings, as
10
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued)
well as actions against the guarantors of the note. Effective September 1,
1995, the note was extended to September 1, 1996, requiring a $68,000 principal
reduction payment with the monthly interest, quarterly principal payments and
all other terms remaining the same. The Company received $43,000 of the
required principal reduction payment in 1995 and received the remaining $25,000
in March 1996 as well as the required first quarter principal payment. The
principal balance of the note was $229,000 at March 31, 1996 and the note is
now performing in accordance with its terms.
NOTE 4. REAL ESTATE
In March 1996, the Company sold 2.3 acres of the 74.9 acre Las Colinas land
parcel for $961,000 in cash. In accordance with the provisions of the term
loan secured by such parcel, the Company applied the net proceeds of the sale,
$891,000 to pay down the term loan, $400,000 being applied to pay off the
remaining balance owing on the $3.0 million principal payment due March 31,
1996, with the remaining $491,000 being applied against the principal payment
of $1.5 million due in May 1996. The Company recognized a gain of $538,000 on
the sale.
In October 1995, the Company purchased an additional 92.6 acre tract of
partially developed land in Las Colinas, Texas. In February 1996, the Company
entered into a contract to sell 72.5 acres for $12.9 million in cash. The
contract calls for the sale to close in two phases. The first phase is
scheduled to close on or before May 1996 but may be extended to July 1996, and
the second phase is to close on or before December 1996.
In April 1996, the Company issued 250,000 shares of common stock to ND
Investments, Inc., a wholly-owned subsidiary of the Company, which pledged the
shares as additional collateral for the loan secured by the 92.6 acres of
partially developed land in Las Colinas, Texas.
NOTE 5. INVESTMENT IN REAL ESTATE ENTITIES
The Company's investment in real estate entities at March 31, 1996, includes
(i) equity securities of three publicly traded real estate investment trusts
(collectively the "Trusts"), Continental Mortgage and Equity Trust ("CMET"),
Income Opportunity Realty Investors, Inc., formerly Income Opportunity Realty
Trust (collectively "IORI") and Transcontinental Realty Investors, Inc.
("TCI"), (ii) units of limited partner interest of NRLP, (iii) a general
partnership interest in NRLP and NOLP, the operating partnership of NRLP,
through the Company's 76.8% limited partner interest in SAMLP and (iv)
interests in real estate joint venture partnerships. BCM, the Company's
advisor, serves as advisor to the Trusts, and performs certain administrative
and management functions for NRLP and NOLP on behalf of SAMLP.
11
<PAGE> 12
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN REAL ESTATE ENTITIES (Continued)
The Company accounts for its investment in the Trusts, NRLP and the joint
venture partnerships under the equity method. The Company continues to account
for its investment in NRLP under the equity method due to the pending
resignation of SAMLP as general partner of NRLP. See NOTE 2. "SYNTEK ASSET
MANAGEMENT, L.P." Substantially all of the Company's equity securities of the
Trusts and NRLP are pledged as collateral for borrowings. See NOTE 7. "NOTES
AND INTEREST PAYABLE."
The Company's investment in real estate entities, accounted for using the
equity method, at March 31, 1996 was as follows:
<TABLE>
<CAPTION>
Equivalent
Percentage Carrying Investee
of the Company's Value of Book Value Market Value
Ownership at Investment at at of Investment at
Investee March 31, 1996 March 31, 1996 March 31, 1996 March 31, 1996
- -------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
NRLP 52.1% $ 12,329 $ * $ 35,075
CMET 38.4 12,545 28,800 15,681
IORI 26.6 2,684 6,087 3,974
TCI 28.5 9,950 17,827 11,460
------------- -------------
37,508 $ 66,190
=============
General partner interest in
NRLP and NOLP 7,232
Other (3,396)
-------------
$ 41,344
=============
</TABLE>
- --------------------
* At March 31, 1996, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity at December 31, 1995,
was $161.5 million. Revaluation equity is defined as the difference
between the appraised value of the partnership's real estate,
adjusted to reflect the partnership's estimate of disposition costs,
and the amount of the mortgage notes payable and accrued interest
encumbering such property as reported in NRLP's Annual Report on Form
10-K for the year ended December 31, 1995.
The difference between the carrying value of the Company's investment and the
equivalent investee book value is being amortized over the life of the
properties held by each investee.
The Company's management continues to believe that the market value of each of
the Trusts and NRLP undervalues their assets and the Company may, therefore,
continue to increase its ownership in these entities in 1996.
12
<PAGE> 13
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN REAL ESTATE ENTITIES (Continued)
Set forth below is summarized combined results of operations for the real
estate entities the Company accounts for using the equity method for the three
months ended March 31, 1996:
<TABLE>
<S> <C>
Revenues.................................................... $ 52,398
Equity in (loss) of Partnerships............................ (21)
Property operating expenses................................. (34,203)
Depreciation................................................ (5,977)
Interest expense............................................ (15,604)
Gain on sale of real estate................................. 3,095
Extraordinary gain.......................................... 48
----------
Net (loss).................................................. $ (264)
==========
</TABLE>
The Company's cash flow from the Trusts and NRLP is dependent on the ability of
each of the entities to make distributions. In the first quarter of 1993, CMET
and IORI resumed regular quarterly distributions, NRLP in the fourth quarter of
1993 and TCI in the fourth quarter of 1995. In the first three months of 1996,
the Company received aggregate distributions of $4.0 million from the Trusts
and NRLP.
In the first three months of 1996, the Company purchased a total of $210,000 of
equity securities of the Trusts and NRLP.
IORI was scheduled to begin liquidation of its assets prior to October 24,
1996. However, on March 15, 1996, IORI's stockholders approved a proposal to
convert IORI from a finite life business trust to a perpetual life corporation.
In January 1992, the Company entered into a partnership agreement with an
entity affiliated with the owner, at the time, of in excess of 14% of the
Company's outstanding shares of Common Stock, to acquire 287 developed
residential lots adjacent to the Company's other residential lots in Fort
Worth, Texas. The partnership agreement designates the Company as managing
general partner. The partnership agreement also provides each of the partners
with a guaranteed 10% return on their respective investments. Through December
31, 1995, 145 residential lots had been sold. In the first three months of
1996 an additional 21 lots were sold. At March 31, 1996, 121 lots remained to
be sold.
NOTE 6. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO
In the first quarter of 1994, the Company began purchasing equity securities of
entities other than those of the Trusts and NRLP to diversify and increase the
liquidity of its margin accounts. In the first three months of 1996, the
Company purchased $7.9 million and sold $8.8 million of such securities. These
equity securities are considered a trading portfolio and are carried at market
value. At March 31, 1996, the Company recognized an unrealized increase in the
market value of its
13
<PAGE> 14
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO (Continued)
trading portfolio securities of $629,000. Also in the first three months of
1996, the Company realized a net loss of $348,000 from the sale of trading
portfolio securities and received $10,000 in dividends. Unrealized and
realized gains and losses on trading portfolio securities are included in other
income in the accompanying Consolidated Statements of Operations.
NOTE 7. NOTES AND INTEREST PAYABLE
The Company has margin arrangements with various brokerage firms which provide
for borrowing of up to 50% of the market value of the Company's marketable
equity securities. The borrowings under such margin arrangements are secured
by equity securities of the Trusts, NRLP and the Company's trading portfolio
and bear interest rates ranging from 7.0% to 11.0%. Margin borrowing totaled
$32.8 million at March 31, 1996.
NOTE 8. INCOME TAXES
Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated
losses. The Company had no taxable income or provision for income taxes in the
three months ended March 31, 1996.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Litigation. The Company is involved in various lawsuits arising in the
ordinary course of business. In the opinion of the Company's management, the
outcome of these lawsuits will not have a material impact on the Company's
financial condition, results of operations or liquidity.
NOTE 10. SUBSEQUENT EVENTS
In April 1996, the Company purchased for $10.7 million in cash, 80% of the
common stock of an entity formed to acquire 26 operating pizza parlors in
various communities in California's San Joaquin Valley.
In April 1996, the Company purchased a 28% general partner interest in Campbell
Center Associates, Ltd. which in turn has a 56.25% interest in Campbell Centre
I, which owns a 413,175 square foot office building in Dallas, Texas. The
purchase price of the general partner interest was $550,000 in cash and a
$500,000 note, which bears interest at 8% per annum, requires monthly interest
only payments and matures April 2000.
14
<PAGE> 15
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 10. SUBSEQUENT EVENTS (Continued)
Also in April 1996, the Company refinanced the $5.1 million first and second
lien debt related to the Denver Merchandise Mart in Denver, Colorado for $15.0
million. The new loan is secured by a first lien mortgage against the Denver
Merchandise Mart and a pledge of 632,000 newly issued shares of the Company's
common stock. The Company received net refinancing proceeds of $4.8 million
after the payoff of the first and second lien debt totaling $5.1 million, a
$3.0 million holdback pending the lender's receipt of the collateral shares,
scheduled to be funded to the Company in May 1996, purchasing the ground lease
on Denver Merchandise Mart for $678,000 and payment of various closing costs
associated with the refinancing. The new loan bears interest at the prime rate
plus 2.25%, currently 10.5% per annum, requires monthly principal and interest
payments of $142,000 and matures October 31, 1997. The Company paid BCM a
mortgage brokerage and equity refinancing fee of $150,000 based upon the $15.0
million refinancing.
_______________________
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
American Realty Trust, Inc. (the "Company") was organized in 1961 to provide
investors with a professionally managed, diversified portfolio of equity real
estate and mortgage loan investments selected to provides opportunities for
capital appreciation as well as current income.
Liquidity and Capital Resources
General. Cash and cash equivalents at March 31, 1996 aggregated $326,000,
compared with $1.1 million at December 31, 1995. Although the Company
anticipates that during the remainder of 1996 it will generate excess cash flow
from operations, as discussed below, such excess cash is not expected to be
sufficient to discharge all of the Company's debt obligations as they mature.
The Company will therefore continue to rely on externally generated funds,
including borrowings against its investments in various real estate entities,
mortgage notes receivable, the sale or refinancing of properties and, to the
extent available or necessary, borrowings from its advisor to meet its debt
service obligations, pay taxes, interest and other non-property related
expenses.
At December 31, 1995, notes payable totaling $26.4 million had scheduled
maturities during 1996. Through April 30, 1996 the Company has paid a total of
$4.6 million of such debt and refinanced an additional $15.7 million. The
Company intends to either pay off, extend the maturity dates or obtain
alternate financing for the remaining $6.1 million debt obligations that mature
during the remainder of 1996. There can be no assurance, however, that these
efforts to obtain alternative financing or debt extensions will be successful.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
The Company expects an increase in cash flow from property operations during
the remainder of 1996. Such increase is expected to be derived from operations
of the Denver Merchandise Mart, the Inn at the Mart and the Oak Tree Village
Shopping Center. The Company also expects continued lot sales at its Texas
residential subdivisions and substantial sales of the Las Colinas, Texas land
to generate additional cash flow. See NOTE 4. "REAL ESTATE."
In October 1995, the Company purchased 92.6 acres of partially developed land
in Las Colinas, Texas. In February 1996, the Company entered into a contract
to sale 72.5 of the 92.6 acres for $12.9 million in cash. The contract calls
for the sale to close in two phases. The first phase is scheduled to close on
or before May 1996 but may be extended to July 1996, and the second phase is to
close on or before December 1996.
In March 1996, the Company sold 2.3 acres of the 74.9 acre parcel in Las
Colinas, Texas for $961,000 in cash. In accordance with the provisions of the
term loan, the Company applied the $891,000 net proceeds of the sale to pay
down the term loan.
In April 1996, the Company purchased for $10.7 million 80% of the common stock
of an entity formed to acquire 26 operating pizza parlors in various
communities in California's San Joaquin Valley.
Also in April 1996, the Company purchased a 28% general partner interest in
Campbell Center Associates, Ltd. for $550,000 in cash and a $500,000 four-year
note.
The Company expects that funds from existing cash resources, collections on
mortgage notes receivable, sales or refinancing of real estate and/or mortgage
notes receivable, and borrowings against its investments in marketable equity
securities, mortgage notes receivable and to the extent available, borrowings
from the Company's advisor, totaling $1.6 million at March 31, 1996, will be
sufficient to meet the cash requirements associated with the Company's current
and anticipated level of operations, maturing debt obligations and existing
commitments in the foreseeable future. To the extent that the Company's
liquidity permits or financing sources are available, the Company may make
investments in real estate, additional investments in real estate entities and
marketable equity securities and fund or acquire mortgage notes.
Notes Receivable. The Company has received $261,000 in principal payments in
the three months ended March 31, 1996, including a $51,000 payoff of a note
prior to its scheduled maturity.
Loans Payable. In February 1996, the Company refinanced $7.8 million of debt
collateralized by a mortgage note receivable with a balance of $18.4 million
which is secured by the Las Vegas Shopping Center in Las Vegas, Nevada, for
$12.0 million. The Company received net cash of $2.3 million after the payoff
of the existing debt, payment of closing costs
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
associated with the refinancing and making a $1.5 million paydown on the term
loan secured by land in Las Colinas, Texas in exchange for that lender's
release of its participation interest in the note receivable. See NOTE 3.
"NOTES AND INTEREST RECEIVABLE."
In April 1996, the Company refinanced the first and second lien mortgage debt
on its $22.0 million wraparound mortgage note receivable secured by the
Continental Hotel and Casino in Las Vegas, Nevada for $16.8 million. See NOTE
3. NOTES AND INTEREST RECEIVABLE. The Company received net cash of $11.2
million after the payoff of the two underlying liens totaling $2.9 million,
various closing costs associated with the refinancing and making a $1.4 million
paydown on the term loan secured by land in Las Colinas, Texas in exchange for
that lender's release of its participation interest in the note receivable.
Also in April 1996, the Company refinanced $5.1 million of first and second
lien debt secured by the Denver Merchandise Mart for $15.0 million. The
Company received net refinancing proceeds of $4.8 million after the payoff of
the first and second lien debt, a $3.0 million holdback by the lender pending
its receipt of 632,000 newly issued shares of the Company's Common Stock which
is scheduled to be funded in May 1996, purchasing the ground lease on Denver
Merchandise Mart for $678,000 and payment of various closing costs associated
with the refinancing.
The Company has margin arrangements with various brokerage firms which provide
for borrowing up to 50% of the market value of the Company's marketable equity
securities. The borrowing under such margin arrangements are secured by equity
securities of the Trusts, NRLP and the Company's trading portfolio and bear
interest rates ranging from 7.0% to 11.0%. Margin borrowing totaled $32.8
million at March 31, 1996.
Equity Investments. During the fourth quarter of 1988, the Company began
purchasing shares of various real estate investment trusts having the same
advisor as the Company, and units of limited partner interest in National
Realty, L.P. ("NRLP"). It is anticipated that additional equity securities of
NRLP and the Trusts, Continental Mortgage and Equity Trust ("CMET"), Income
Opportunity Realty Investors, Inc., formerly Income Opportunity Realty Trust
(collectively "IORI") and Transcontinental Realty Investors, Inc. ("TCI"), will
be acquired in the future through open-market and negotiated transactions to
the extent the Company's liquidity permits.
Equity securities of the Trusts and NRLP held by the Company may be deemed to
be "restricted securities" under Rule 144 of the Securities Act of 1933
("Securities Act"). Accordingly, the Company may be unable to sell such equity
securities other than in a registered public
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
offering or pursuant to an exemption under the Securities Act for a period of
two years after they are acquired. Such restrictions may reduce the Company's
ability to realize the full fair market value of such investments if the
Company attempted to dispose of such securities in a short period of time.
The Company's cash flow from these investments is dependent on the ability of
each of the entities to make distributions. In the first quarter of 1993, CMET
and IORI resumed quarterly distributions, NRLP in the fourth quarter of 1993
and TCI in the fourth quarter of 1995. The Company received distributions
totaling $4.0 million in the first three months of 1996 from the Trusts and
NRLP.
On a quarterly basis, the Company's management reviews the carrying value of
the Company's mortgage notes receivable, properties held for sale and
periodically, but no less than annually its properties held for investment.
Generally accepted accounting principles require that the carrying value of
such assets cannot exceed the lower of their respective carrying amounts or
estimated net realizable value. In the initial instance when the estimated net
realizable value of a mortgage note receivable or a property held for sale is
less than the carrying amount at the time of evaluation, a reserve is
established and a corresponding provision for loss is recorded by a charge
against earnings. A subsequent revision to estimated net realizable value
either increases or decreases such reserve with a corresponding charge against
or credit to earnings. In the case of properties held for investment the
carrying value of the property is written down and a provision for loss is
recorded. The estimate of net realizable value of the Company's mortgage note
receivable is based on management's review and evaluation of the collateral
property securing the mortgage note. The property review generally includes
selective property inspections, a review of the property's current rents
compared to market rents, a review of the property's expenses, a review of
maintenance requirements, discussions with the manager of the property and a
review of the surrounding area. See "Recent Accounting Pronouncement," below.
Commitments and Contingencies
In January 1995, NRLP, Syntek Asset Management, L.P. ("SAMLP") and the NRLP
oversight committee executed an Implementation Agreement which provides for the
nomination of a successor general partner to succeed SAMLP as general partner
of NRLP and National Operating, L.P. ("NOLP"), the operating partnership of
NRLP and for the resolution of all related matters under the 1990 settlement of
a class action lawsuit. On February 20, 1996, the parties to the
Implementation Agreement executed an Amended and Restated Implementation
Agreement.
Provided that the successor general partner is elected pursuant to the terms of
the Amended and Restated Implementation Agreement, SAMLP shall receive
$12,471,500 from the Partnership. This amount represents a
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Commitments and Contingencies (Continued)
compromise settlement of the net amounts owed by the Partnership to SAMLP upon
SAMLP's withdrawal as general partner and any amounts which SAMLP and its
affiliates may owe to the Partnership. This amount shall be paid to SAMLP
pursuant to a promissory note in accordance with the terms set forth in the
Amended and Restated Implementation Agreement.
The Amended and Restated Implementation Agreement has been submitted to the
Judge appointed to supervise the class action settlement (the "Supervising
Judge") for tentative approval and approval of the notice to be sent to the
original class members. Upon final approval by the Supervising Judge, the
proposal to elect the successor general partner will be submitted to the NRLP's
unitholders for a vote. In addition, the unitholders will vote upon amendments
to the NRLP's Partnership Agreement which relate to the proposed compensation
of the successor general partner and other related matters.
Upon approval by NRLP's unitholders, SAMLP shall withdraw as General Partner
and the successor general partner shall take office. If the required approvals
are obtained, it is anticipated that the successor general partner will be
elected and take office during the fourth quarter of 1996.
The Amended and Restated Implementation Agreement provides that SAMLP, and its
affiliates owning units in NRLP shall not vote to remove the successor general
partner, except for removal with cause, for a period of 36 months from the date
the successor general partner takes office.
Upon election and taking office of the successor general partner, the class
action settlement and the NRLP oversight committee shall be terminated. If the
successor general partner is not elected, the existing class action settlement
shall remain in full force and effect and all of the provisions of the Amended
and Restated Implementation Agreement shall be voided, including the compromise
settlement of amounts owed by SAMLP and NRLP to each other. See NOTE 2.
"SYNTEK ASSET MANAGEMENT, L.P."
Results of Operations
For the three months ended March 31, 1996, the Company reported a net loss of
$215,000, compared to a net loss of $881,000 for the three months ended March
31, 1995. The primary factors contributing to the Company's increased net loss
are discussed in the following paragraphs.
Net rental income (rents less property operating expenses) increased from $1.5
million for the three months ended March 31, 1995 to $1.6 million in 1996.
The increase is principally due to the Company obtaining the Oak Tree Village
Shopping Center in November 1995 combined with an increase in the net rental
income at the Denver Merchandise Mart due to an increase in rental income and a
decrease in operating costs.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Interest income from mortgage notes receivable decreased from $1.3 million for
the three months ended March 31, 1995 to $1.1 million in 1996. The decrease
is due to the payoff of a mortgage note receivable in February 1995. Interest
income in 1996 is expected to approximate that of 1995.
Equity in losses of investees decreased from a loss of $1.3 million for the
three months ended March 31, 1995 to a loss of $860,000 in the comparable
period of 1996. The decrease in equity losses is attributable to a decrease in
the combined operating losses of the Trusts and NRLP from a combined operating
loss of $2.8 million for the three months ended March 31, 1995 to a combined
operating loss of $264,000 in 1996. Such improvement is generally attributable
to improved occupancy and increased rental rates.
Other income improved from a loss of $650,000 for the three months ended March
31, 1995 to income of $342,000 in 1996. The increase is primarily due to a
$629,000 unrealized gain on the Company's trading portfolio securities. See
NOTE 6. "MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO."
Interest expense increased from $1.8 million for the three months ended March
31, 1995 to $3.1 million in 1996. The increase is primarily attributable to
debt refinancings and the debt incurred related to the acquisition of two
parcels of land and one commercial property subsequent to March 1995. These
increases were offset in part by a decrease of $161,000 in interest expense due
to the sale of Boulevard Villas Apartments in February 1995.
Depreciation and amortization expense of $437,000 and advisory and mortgage
servicing fees of $320,000 for the three months ended March 31, 1996
approximated those in 1995.
General and administrative expenses increased from $560,000 for the three
months ended March 31, 1995 to $642,000 in 1996. The increase is primarily
attributable to legal fees and travel expenses incurred in 1996 relating to
pending acquisitions and refinancings.
In the three months ended March 31, 1996, the Company recognized a $538,000
gain on the sale of 2.3 acres of Las Colinas land. In addition, the Company
reported a $1.6 million gain representing the Company's share of the Trust's
gain on the sale of real estate. In the three months ended March 31, 1995, the
Company recognized a $924,000 gain on the sale of the Boulevard Villas
Apartments.
The Company reported a $13,000 extraordinary gain for the three months ended
March 31, 1996 representing the Company's share of an equity investee's
extraordinary gain from the early payoff of debt compared to $315,000 reported
in 1995, also representing the Company's share of an equity investee's
extraordinary gain from the early payoff of debt.
20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, the Company may be potentially liable for removal or remediation
costs, as well as certain other potential costs relating to hazardous or toxic
substances (including governmental fines and injuries to persons and property)
where property-level managers have arranged for the removal, disposal or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the
air, and third parties may seek recovery from the Company for personal injury
associated with such materials.
The Company's management is not aware of any environmental liability relating
to the above matters that would have a material adverse effect on the Company's
business, assets or results of operations.
Inflation
The effects of inflation on the Company's operations are not quantifiable.
Revenues from property operations fluctuate proportionately with inflationary
increases and decreases in housing costs. Fluctuations in the rate of
inflation also affect the sales values of properties and, correspondingly, the
ultimate gains to be realized by the Company from property sales.
Recent Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of".
The statement requires that long-lived assets be considered impaired "...if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset." If impairment exists,
an impairment loss shall be recognized, by a charge against earnings, equal to
"...the amount by which the carrying amount of the asset exceeds the fair value
of the asset." If impairment of a long-lived asset is recognized, the carrying
amount of the asset shall be reduced by the amount of the impairment, shall be
accounted for as the asset's "new cost" and such new cost shall be depreciated
over the asset's remaining useful life.
SFAS No. 121 further requires that long-lived assets held for sale "...be
reported at the lower of carrying amount or fair value less cost to sell." If
a reduction in a held for sale asset's carrying amount to fair value less cost
to sell is required, a provision for loss shall be recognized by a charge
against earnings. Subsequent revisions, either upward or downward, to a held
for sale asset's fair value less cost to sell shall be recorded as an
adjustment to the asset's carrying amount, but not in excess of the asset's
carrying amount when originally classified or held for sale. A corresponding
charge or credit to earnings is to be recognized. Long-lived assets held for
sale are not
21
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Recent Accounting Pronouncement (Continued)
to be depreciated. The Company adopted SFAS No. 121 effective January 1, 1996.
The adoption of SFAS had no effect on the Company's reported net loss for the
three months ended March 31, 1996, as the Company's one depreciable asset
classified as held for sale is fully depreciated.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
22
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
- ------- -----------------------
27.0 Financial Data Schedule
(b) Reports on Form 8-K as follows:
None.
23
<PAGE> 24
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN REALTY TRUST, INC.
Date: May 15, 1996 By: /s/ Karl L. Blaha
------------------------- ----------------------------------
Karl L. Blaha
President
Date: May 15, 1996 By: /s/ Thomas A. Holland
-------------------------- ----------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
24
<PAGE> 25
AMERICAN REALTY TRUST, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Quarter ended March 31, 1996
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- --------------------------------------------------- ------
<S> <C> <C>
27.0 Financial Data Schedule 26
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 326
<SECURITIES> 1,831
<RECEIVABLES> 53,357
<ALLOWANCES> 7,254
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 70,455
<DEPRECIATION> 8,080
<TOTAL-ASSETS> 156,580
<CURRENT-LIABILITIES> 0
<BONDS> 62,311
<COMMON> 59
0
0
<OTHER-SE> 52,784
<TOTAL-LIABILITY-AND-EQUITY> 156,580
<SALES> 0
<TOTAL-REVENUES> 5,310
<CGS> 0
<TOTAL-COSTS> 3,710
<OTHER-EXPENSES> 437
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,146
<INCOME-PRETAX> (2,355)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,355)
<DISCONTINUED> 0
<EXTRAORDINARY> 13
<CHANGES> 0
<NET-INCOME> (215)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
