<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, 1998
----------------
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 10,711,921
- ---------------------------- -------------------------------
(Class) (Outstanding at April 30, 1998)
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,
1998 1997
---------- ----------
(dollars in thousands)
<S> <C> <C>
Assets
Notes and interest receivable
Performing (including $1,307 in 1997 from
affiliates) ......................................... $ 268 $ 9,300
Nonperforming, nonaccruing .............................. 18,779 18,624
---------- ----------
19,047 27,924
Less - allowance for estimated losses ...................... (2,398) (2,398)
---------- ----------
16,649 25,526
Real estate held for sale, net of accumulated
depreciation ($5,098 in 1997) ........................... 200,910 178,938
Real estate held for investment, net of accumulated
depreciation ($6,265 in 1998 and $5,380 in 1997) ........ 132,692 123,515
Pizza parlor equipment, net of accumulated
depreciation ($1,085 in 1998 and $905 in 1997) .......... 7,183 6,693
Marketable equity securities, at market value .............. 5,018 6,205
Cash and cash equivalents .................................. 974 5,347
Investments in equity investees ............................ 48,598 45,851
Intangibles, net of accumulated amortization,
($737 in 1998 and $704 in 1997) ......................... 15,152 15,230
Other assets ............................................... 24,019 26,494
---------- ----------
$ 451,195 $ 433,799
========== ==========
</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,
1998 1997
---------- ----------
(dollars in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable ($11,700 in 1998 and
$11,400 in 1997 to affiliates) .......................... $ 292,301 $ 261,986
Margin borrowings .......................................... 53,775 53,376
Accounts payable and other liabilities (including
$21,200 in 1998 and $22,825 in 1997 to
affiliate) .............................................. 30,825 34,442
---------- ----------
376,901 349,804
Minority interest .......................................... 20,542 20,542
Commitments and contingencies
Stockholders' equity
Preferred Stock, $2.00 par value, authorized
20,000,000 shares, issued and outstanding
Series B, 4,000 shares in 1998 and 1997
(liquidation preference $400) ..................... 8 8
Series C, 16,681 shares in 1998 and 1997
(liquidation preference $1,668) ................... 33 33
Series F, 2,000,000 shares in 1998 and 1997
(liquidation preference $20,000) .................. 4,000 4,000
Common stock, $.01 par value; authorized
100,000,000 shares, issued 13,479,348 shares
in 1998 and 1997 ........................................ 135 135
Paid-in capital ............................................ 84,943 84,943
Accumulated (deficit) ...................................... (35,339) (25,638)
Treasury stock at cost, 2,767,427 shares in 1998
and 1997 ................................................ (28) (28)
---------- ----------
53,752 63,453
---------- ----------
$ 451,195 $ 433,799
========== ==========
</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,
--------------------------------
1998 1997
------------- -------------
(dollars in thousands,
except per share)
<S> <C> <C>
Income
Sales ................................................... $ 6,753 $ --
Rents ................................................... 11,567 5,908
Interest ................................................ 138 1,121
Other ................................................... (209) 470
------------- -------------
18,249 7,499
Expenses
Cost of sales ........................................... 5,780 --
Property operations ..................................... 9,663 4,453
Interest ................................................ 9,536 5,204
Advisory and servicing fees to affiliate ................ 760 424
General and administrative .............................. 2,285 795
Depreciation ............................................ 1,232 547
Minority interest ....................................... 488 372
------------- -------------
29,744 11,795
------------- -------------
(Loss) from operations ..................................... (11,495) (4,296)
Equity in income of investees .............................. 2,387 280
Gain on sale of real estate ................................ -- 4,287
------------- -------------
Net income (loss) .......................................... (9,108) 271
Preferred dividend requirement ............................. (51) (50)
------------- -------------
Net income (loss) applicable to Common shares .............. $ (9,159) $ 221
============= =============
Earnings per share
Net income (loss) ....................................... $ (.86) $ .02
============= =============
Weighted average Common shares used in computing
earnings per share ...................................... 10,711,921 12,194,644
============= =============
</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, 1998
<TABLE>
<CAPTION>
Series B Series C Series F
Preferred Preferred Preferred Common Treasury Paid-in Accumulated Stockholders'
Stock Stock Stock Stock Stock Capital (Deficit) Equity
--------- --------- --------- -------- -------- --------- ----------- ------------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1998 ................. $ 8 $ 33 $ 4,000 $ 135 $ (28) $ 84,943 $(25,638) $ 63,453
Dividends
Common Stock ($.05
per share) ........ -- -- -- -- -- -- (541) (541)
Series B Preferred
Stock ($2.50 per
share) ............ -- -- -- -- -- -- (10) (10)
Series C Preferred
Stock ($2.50 per
share) ............ -- -- -- -- -- (42) (42)
Net (loss) .............. -- -- -- -- -- (9,108) (9,108)
-------- -------- -------- -------- -------- -------- -------- --------
Balance, March 31,
1998 ................. $ 8 $ 33 $ 4,000 $ 135 $ (28) $ 84,943 $(35,339) $ 53,752
======== ======== ======== ======== ======== ======== ======== ========
</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,
--------------------------
1998 1997
---------- ----------
(dollars in thousands)
<S> <C> <C>
Cash Flows From Operating Activities
Pizza parlor sales collected ....................... $ 6,614 $ --
Rents collected .................................... 11,500 5,128
Interest collected ................................. 203 1,127
Distributions received from equity investees'
operating cash flow ............................. 7,010 568
Payments for property operations ................... (10,334) (5,386)
Payments from pizza parlor operations .............. (6,779) --
Interest paid ...................................... (6,383) (3,533)
Advisory and servicing fees paid to affiliate ...... (760) (424)
Purchase of marketable equity securities ........... (1,114) (1,789)
Proceeds from sale of marketable equity
securities ...................................... 2,044 469
General and administrative expenses paid ........... (2,285) (870)
Other .............................................. (1,208) 437
---------- ----------
Net cash (used in) operating activities ......... (1,492) (4,273)
Cash Flows From Investing Activities
Collections on notes receivable .................... 7,600 1,931
Proceeds from sale of real estate .................. -- 1,219
Acquisition of real estate ......................... (26,206) (1,421)
Pizza parlor equipment purchased ................... (670) --
Notes receivable funded ............................ (432) (150)
Earnest money deposits ............................. (474) (2,557)
Investment in real estate entities ................. (177) (463)
Real estate improvements ........................... (1,652) (769)
---------- ----------
Net cash (used in) investing activities ......... (22,011) (2,210)
Cash Flows From Financing Activities
Proceeds from notes payable ........................ 51,419 5,867
Payments on notes payable .......................... (25,194) (5,138)
Deferred borrowing costs ........................... (3,514) (707)
Net advances (payments) to/from affiliates ......... (1,679) 5,125
Common dividends paid .............................. (541) (506)
Preferred dividends paid ........................... (52) (10)
Minority interest .................................. (488) (372)
Margin borrowings (repayments), net ................ (821) 1,683
---------- ----------
Net cash provided by financing activities ....... 19,130 5,942
Net (decrease) in cash and cash equivalents ..... (4,373) (541)
Cash and cash equivalents, beginning of period ........ 5,347 1,254
---------- ----------
Cash and cash equivalents, end of period .............. $ 974 $ 713
========== ==========
</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,
--------------------------
1998 1997
---------- ----------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net income (loss) to net cash
(used in) operating activities
Net income (loss) ....................................... $ (9,108) $ 271
Adjustments to reconcile net income (loss) to net
cash (used in) operating activities
Depreciation and amortization ....................... 1,232 547
Gain on sale of real estate ......................... -- (4,287)
Distributions from equity investees' operating
cash flow ........................................ 7,010 568
Equity in (income) of investees ..................... (2,387) (280)
(Increase) decrease in marketable equity
securities ....................................... 1,187 (1,676)
Decrease in accrued interest receivable ............. 128 35
Decrease in other assets ............................ 2,535 2,301
Increase in accrued interest payable ................ 51 48
(Decrease) in accounts payable and other
liabilities ...................................... (1,937) (1,619)
Other ............................................... (203) (181)
---------- ----------
Net cash (used in) operating activities .......... $ (1,492) $ (4,273)
========== ==========
Schedule on noncash investing and financing
activities
Notes payable from acquisition of real estate ........... $ 3,614 $ 5,125
Stock dividends on Series C Preferred Stock ............. -- 40
</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, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. 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, 1997 (the "1997 Form 10-K").
Certain balances for 1997 have been reclassified to conform to the 1998
presentation.
NOTE 2. SYNTEK ASSET MANAGEMENT, L.P.
The Company owns a 96% limited partner interest in Syntek Asset Management, L.P.
("SAMLP"). SAMLP is 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 also a general partner of SAMLP. As of March 31, 1998, the Company
owned approximately 54% of the outstanding limited partner units of NRLP.
NRLP, SAMLP and Mr. Phillips were among the defendants in a class action lawsuit
arising from the formation of NRLP. An agreement settling such lawsuit (the
"Settlement Agreement") 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 and the establishment of specified
annually increasing targets for five years relating to the price of NRLP's units
of limited partner interest.
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 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, Inc. ("SAMI"), the
managing general partner of SAMLP, has calculated the fair value of such
Redeemable General Partner Interest to be $49.6 million at March 31, 1998,
before reduction for the
8
<PAGE> 9
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. SYNTEK ASSET MANAGEMENT, L.P. (Continued)
principal balance ($4.2 million at March 31, 1998) and accrued interest ($7.5
million at March 31, 1998) on the note receivable from SAMLP for its original
capital contribution to the partnership.
On December 15, 1997, NRLP, SAMLP, the NRLP oversight committee, Joseph B.
Moorman, Invenex and the Counsel for the plaintiff class members executed an
Agreement for Establishment of a Class Distribution Fund and provides for the
nomination of an entity affiliated with SAMLP to be the successor general
partner of NRLP and NOLP. For the establishment of a fund for the benefit of the
plaintiff class members consisting of cash and properties owned by NOLP and for
the resolution of all related matters under the Settlement Agreement.
The Resolution Agreement was submitted to the Judge appointed to supervise the
class action settlement (the "Supervising Judge") and on February 11, 1998, the
Supervising Judge entered an order granting preliminary approval of the
Resolution Agreement and scheduled a hearing to be held on June 8, 1998, for
consideration of preliminary approval of a business plan for the operation of
the entity which will receive the cash and properties and to consider a form of
notice to be distributed to the plaintiff class members describing the
Resolution Agreement and the business plan.
Upon the election and taking office of the successor general partner and the
transfer of the cash and properties to the fund established for the benefit of
the plaintiff class members, the Settlement Agreement and the NRLP oversight
committee shall be terminated.
NOTE 3. NOTES AND INTEREST RECEIVABLE
In December 1997, the Company sold Pin Oak land, a 567.6 acre parcel of
undeveloped land in Houston, Texas, for $11.4 million. The Company received net
cash of $3.5 million, and provided an additional $6.9 million in short term
purchase money financing that was paid in full in January 1998. On the payoff of
the purchase money financing the Company received net cash of $1.5 million after
the payoff of $5.2 million in underlying mortgage debt and the payment of
various closing costs associated with the sale.
In August 1990, the Company obtained the Continental Hotel and Casino in Las
Vegas, Nevada, through foreclosure subject to first and second lien mortgages
totaling $10.0 million. In June 1992, the Company sold the hotel and casino for,
among other consideration, a $22.0 million wraparound mortgage note receivable.
In March 1997, the wraparound note was modified and extended in exchange for,
among other things, the borrower's commitment to invest $2.0 million in
improvements to the hotel and casino within four months of the March 1997
modification and an additional $2.0 million prior to December 1997. The borrower
has not made the required note payments since April 1997, nor the required
9
<PAGE> 10
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued)
improvements. In December 1997, the borrower filed for bankruptcy protection. In
February 1998, a hearing was held to allow the Company to foreclose on the hotel
and casino. At the hearing, the court ruled that the borrower had 90 days to
submit a reorganization plan and beginning March 2, 1998, required the borrower
to make monthly payments of $175,000 to the Company. The Company received the
first such payment on March 2, 1998. The Company's wraparound mortgage note
receivable had a principal balance of $22.7 million at March 31, 1998. In April
1998, the bankruptcy court allowed the Company to foreclose on its mortgage note
receivable. The Company will incur no loss on foreclosure as the fair value of
the property exceeds the carrying value of the Company's mortgage note
receivable.
NOTE 4. REAL ESTATE
In January 1998, the Company purchased El Dorado Parkway land, a 8.5 acre parcel
of undeveloped land in McKinney, Texas, for $952,000. The Company paid $307,000
in cash, assumed the existing mortgage of $164,000 and obtained seller financing
of the remaining $481,000 of the purchase price. The mortgage bears interest at
10% per annum, requires semiannual payments of principal and interest of $18,000
and matures in May 2005. The financing bears interest at 8% per annum, requires
semiannual payments of principal and interest of $67,000 and matures in January
2002. The Company paid a real estate brokerage commission of $57,000 to Carmel
Realty, Inc. ("Carmel Realty"), an affiliate of Basic Capital Management, Inc.
("BCM"), the Company's advisor, based on the $952,000 purchase price of the
property.
Also in January 1998, the Company purchased Valley Ranch IV land, a 12.3 acre
parcel of undeveloped land in Irving, Texas, for $2.0 million. The Company paid
$500,000 in cash and obtained seller financing of the remaining $1.5 million of
the purchase price. The financing bears interest at 10% per annum, requires
quarterly payments of interest only and matures in December 2000. The Company
paid a real estate brokerage commission of $123,000 to Carmel Realty based on
the $2.0 million purchase price of the property.
Further in January 1998, the Company purchased JHL Connell land, a 7.7 acre
parcel of undeveloped land in Carrollton, Texas, for $1.3 million in cash. The
Company paid a real estate brokerage commission of $39,000 to Carmel Realty
based on the $1.3 million purchase price of the property.
In February 1998, the Company purchased Scoggins land, a 314.5 acre parcel of
undeveloped land in Tarrant County, Texas, for $3.0 million. The Company paid
$1.5 million in cash and obtained new mortgage financing of $1.5 million. The
mortgage bears interest at 14% per annum, requires quarterly payments of
interest only, requires a
10
<PAGE> 11
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
principal reduction payment of $300,000 in May 1998, and matures in February
1999. The Company paid a real estate brokerage commission of $91,000 to Carmel
Realty based on the $3.0 million purchase price of the property.
Also in February 1998, the Company purchased Bonneau land, a 8.4 acre parcel of
undeveloped land in Dallas County, Texas, for $1.0 million. The Company obtained
new mortgage financing of $1.0 million. The mortgage bears interest at 18.5% per
annum with principal and interest due at the maturity in February 1999. The
Company's JHL Connell land is pledged as additional collateral for this loan.
The Company paid a real estate brokerage commission of $30,000 to Carmel Realty
based on the $1.0 million purchase price of the property.
Further in February 1998, the Company financed the unencumbered Kamperman land
in the amount of $1.6 million. The Company received net financing proceeds of
$1.5 million after the payment of various closing costs associated with the
financing. The mortgage bears interest at 9.0% per annum, requires monthly
payments of interest only and matures in February 2000. The Company paid a
mortgage brokerage and equity refinancing fee of $16,000 to BCM based on the
$1.6 million mortgage.
In February 1998, the Company refinanced the Vineyards land in the amount of
$3.4 million. The Company received net refinancing proceeds of $2.9 million,
after the payoff of existing mortgage debt of $540,000. The new mortgage bears
interest at 9.0% per annum, requires monthly payments of interest only and
matures in February 2000. The Company paid a mortgage brokerage and equity
refinancing fee of $34,000 to BCM based on the new $3.4 million mortgage.
Also in February 1998, the Company financed the unencumbered Valley Ranch land
in the amount of $4.3 million. The Company received net financing proceeds of
$4.1 million after the payment of various closing costs associated with the
financing. The mortgage bears interest at 9.0% per annum, requires monthly
payments of interest only and matures in February 2000. The Company paid a
mortgage brokerage and equity refinancing fee of $43,000 to BCM based on the
$4.3 million mortgage.
In November 1994, the Company and an affiliate of BCM, sold five apartment
complexes to a newly formed limited partnership in exchange for $3.2 million in
cash, a 27% limited partner interest in the partnership and two mortgage notes
receivable, secured by one of the properties sold. The Company had the option to
reacquire the properties at any time after September 1997 for their original
sales prices, after the buyer received a 12% return on its investment.
Accordingly, the Company recorded a deferred gain of $5.6 million which was
offset against the Company's investment in the partnership. In February 1998,
the Company reacquired three of the properties for $7.7 million. The Company
paid $4.0 million in cash and assumed the existing mortgage of $3.7 million.
Simultaneously the Company refinanced the three
11
<PAGE> 12
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
properties for a total of $7.8 million, the Company receiving net cash of $3.9
million after the payoff of $3.7 million in existing mortgage debt and the
payment of various costs associated with the financing. The new mortgages bear
interest at 9.5% per annum, require monthly principal and interest payments of a
total of $66,000 and mature in February 2008. In addition, the Company received
a refund of $230,000 from Carmel Realty, representing the commission the Company
had paid on the sale of the three reacquired properties in 1994.
In March 1998, the Company financed the unencumbered Stagliano and Dalho land in
the amount of $800,000 with the lender on the Bonneau land, described above. The
mortgage bears interest at 18.5% per annum with principal and interest due at
maturity in February 1999. The Company's JHL Connell land is also pledged as
additional collateral for this loan. The Company paid a mortgage brokerage and
equity refinancing fee of $8,000 to BCM based on the $800,000 mortgage.
Also in March 1998, the Company purchased Desert Wells land, a 420 acre parcel
of undeveloped land in Palm Desert, California, for $12.0 million. The Company
paid $400,000 in cash, obtained new mortgage financing of $10.0 million and
obtained seller financing of the remaining $1.6 million of the purchase price.
The mortgage bears interest at 4.5% above the prime rate, currently 13% per
annum, requires monthly payments of interest only and matures in March 1999. The
financing bears interest at 10% per annum, requires monthly payments of interest
only and matures in July 1998. The Company paid a real estate brokerage
commission of $720,000 to Carmel Realty based on the $12.0 million purchase
price of the property.
Further in March 1998, the Company refinanced the mortgage debt secured by the
McKinney Corners and Dowdy land in the amount of $20.7 million. The Company
received net cash of $5.9 million after the payoff of $2.5 million in existing
mortgage debt, the paydown of $10.2 million on the Las Colinas I mortgage and
the payment of various closing costs associated with the financing. The new
mortgage bears interest at 12% per annum, requires monthly payments of interest
only and matures in March 1999. The Company paid a mortgage brokerage and equity
refinancing fee of $207,000 to BCM based on the new $20.7 million mortgage.
NOTE 5. INVESTMENTS IN EQUITY INVESTEES
Real estate entities. The Company's investment in real estate entities at March
31, 1998, includes (i) equity securities of three publicly traded Real Estate
Investment Trusts (collectively the "REITs"), Continental Mortgage and Equity
Trust ("CMET"), Income Opportunity Realty Investors, Inc. ("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
12
<PAGE> 13
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENTS IN EQUITY INVESTEES (Continued)
of NRLP, through the Company's 96% limited partner interest in SAMLP and (iv)
interests in real estate joint venture partnerships. BCM, the Company's advisor,
serves as advisor to the REITs, and performs certain administrative and
management functions for NRLP and NOLP on behalf of SAMLP.
The Company accounts for its investment in the REITs, 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 REITs and NRLP are
pledged as collateral for borrowings. See NOTE 8. "MARGIN BORROWINGS."
The Company's investment in real estate entities, accounted for using the equity
method, at March 31, 1998 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, 1998 March 31, 1998 March 31, 1998 March 31, 1998
- -------- ------------------ ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
NRLP 54.4% $ 11,772 $ * $ 69,254
CMET 40.6 17,258 36,821 27,369
IORI 29.8 3,477 7,394 5,208
TCI 30.8 7,871 26,346 21,193
------------ --------------
40,378 $ 123,024
==============
General partner interest in
NRLP and NOLP 6,135
Other 2,085
------------
$ 48,598
============
</TABLE>
- -----------------
* At March 31, 1998, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity at December 31, 1997, was
$198.9 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, 1997.
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 REITs and NRLP undervalues their assets and the Company may, therefore,
continue to increase its ownership in these entities in 1998.
13
<PAGE> 14
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN EQUITY INVESTEES (Continued)
Set forth below is summarized results of operations for the Company's equity
investees for the three months ended March 31, 1998:
Equity investee owned over 50%:
<TABLE>
<S> <C>
Revenues ................................................... $ 29,483
Property operating expenses ................................ 17,771
Depreciation ............................................... 2,523
Interest expense ........................................... 8,733
----------
Net income ................................................. $ 456
==========
</TABLE>
The Company's share of over 50% owned equity investees' income was $300,000 for
the three months ended March 31, 1998.
Equity investees owned less than 50%:
<TABLE>
<CAPTION>
<S> <C>
Revenues ....................................................................... $ 38,237
Equity in income of partnerships ............................................... 11
Property operating expenses .................................................... 21,498
Depreciation ................................................................... 5,129
Interest expense ............................................................... 12,157
----------
(Loss) before gains on sale of real estate and extraordinary
gains ........................................................................ (536)
Gain on sale of real estate .................................................... 5,616
Extraordinary gain ............................................................. --
----------
Net income ..................................................................... $ 5,080
==========
</TABLE>
The Company's share of less than 50% owned equity investees' loss before gain on
the sales of real estate was $500,000 for the three months ended March 31, 1998.
The Company's share of equity investees' gains on sale of real estate was $3.2
million for the three months ended March 31, 1998.
The Company's cash flow from the REITs and NRLP is dependent on the ability of
each of the entities to make distributions. In the first three months of 1998
the Company received aggregate distributions of $7.0 million from the REITs and
NRLP including $6.7 million in distributions that were accrued at December 31,
1997.
In the first three months of 1998, the Company purchased a total of $38,000 of
equity securities of the REITs and NRLP.
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
14
<PAGE> 15
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN EQUITY INVESTEES (Continued)
respective investments. Through December 31, 1997, 214 residential lots had been
sold. In the first three months of 1998 3 additional lots were sold. At March
31, 1998, 70 lots remained to be sold. The partnership recorded a gain of
$25,000 on such sales.
In June 1996, a newly formed limited partnership, of which the Company is the
general partner, purchased a 580 acre parcel of undeveloped land in Collin
County, Texas. In January 1998, the partnership sold a 155.4 acre tract of such
land parcel for $2.9 million. The partnership received $721,000 in cash and
provided purchase money financing of an additional $2.2 million. Of the net
sales proceeds, $300,000 was distributed to the limited partner and $300,000 was
distributed to the Company as general partner in accordance with the partnership
agreement. The purchase money financing bears interest at 12% per annum,
requires monthly payments of interest only and matures in July 1998. The
partnership recognized a gain of $1.2 million on the sale.
NOTE 6. INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
Real Pizza
1998 Estate Parlor Total
- ------ -------- --------- -------
<S> <C> <C> <C>
Revenues ............................... $ 11,455 $ 6,794 $ 18,249
Income (loss) before income
taxes ............................. (9,124) 16 (9,108)
Identifiable assets .................... 428,955 22,240 451,195
Depreciation and amortization .......... 1,000 232 1,232
Capital expenditures ................... 1,672 670 2,342
</TABLE>
NOTE 7. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO
Since 1994, the Company has been purchasing equity securities of entities other
than those of the REITs and NRLP to diversify and increase the liquidity of its
margin accounts. In the first three months of 1998, the Company purchased $1.1
million and sold $1.8 million of such securities. These equity securities are
considered a trading portfolio and are carried at market value. At March 31,
1998, the Company recognized an unrealized decrease in the market value of its
trading portfolio securities of $430,000. Also in the first three months of
1998, the Company realized a net gain of $113,000 from the sale of trading
portfolio securities and received $11,000 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 8. MARGIN BORROWINGS
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
15
<PAGE> 16
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 8. MARGIN BORROWINGS (Continued)
marketable equity securities. The borrowings under such margin arrangements are
secured by equity securities of the REITs, NRLP and the Company's trading
portfolio and bear interest rates ranging from 7.0% to 11.0%. Margin borrowing
totaled $53.8 million at March 31, 1998.
In January 1998, the Company obtained a $2.0 million loan secured by a pledge of
Common Stock of the Company owned by the Company's advisor with a market value
of $4.7 million at March 31, 1998. The Company received $2.0 million in net
cash.
NOTE 9. 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, 1998 or 1997.
NOTE 10. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May, June and July 1997, the Company obtained a total of $8.0 million in
mortgage loans from entities and trusts affiliated with the limited partner in a
partnership that owns approximately 15.6% of the Company's outstanding shares of
Common Stock. In January 1998, one of the loans in the amount of $2.0 million
was paid in full and in April 1998, a second loan in the amount of $3.0 million
was also paid in full. In April 1998, the Company obtained an additional $2.0
million mortgage loan from such entities. See NOTE 4. "REAL ESTATE."
NOTE 11. 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 12. SUBSEQUENT EVENTS
In April 1998, the Company purchased Yorktown land, a 325.8 acre parcel of
undeveloped land in Harris County, Texas, for $7.4 million. The Company paid
$3.0 million in cash and obtained seller financing of the remaining $4.4 million
of the purchase price. The financing bears interest at 8.5% per annum, requires
monthly payments of interest only and matures in November 1998. The Company paid
a real estate brokerage commission of $223,000 to Carmel Realty based on the
$7.4 million purchase price of the property.
16
<PAGE> 17
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 12. SUBSEQUENT EVENTS
Also in April 1998, the Company sold a 77.7 acre tract of the Lewisville land
parcel, for $6.8 million in cash. The Company received net cash of $358,000
after the payoff of first and second lien mortgages totaling $5.5 million
secured by such land parcel. The Company paid a real estate brokerage commission
of $203,000 to Carmel Realty based on the $6.8 million sales price of the
property. The Company will recognize a gain of approximately $2.1 million on the
sale. See NOTE 10. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Further in April 1998, the Company obtained a second lien mortgage of $2.0
million secured by BP Las Colinas land from the limited partner in a partnership
that owns approximately 15.6% of the outstanding shares of the Company's Common
Stock. The mortgage bears interest at 12% per annum, with principal and interest
due at maturity in October 1998. See NOTE 10. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
In April 1998, the Company refinanced the mortgage debt secured by Parkfield
land in the amount of $7.3 million. The Company received net cash of $1.2
million after the payoff of $5.0 million in existing mortgage debt and the
payment of various closing costs associated with the financing. The new mortgage
bears interest at 9.5% per annum, requires monthly payments of interest only and
matures in April 2000. The Company paid a mortgage brokerage and equity
refinancing fee of $73,000 to BCM based on the new $7.3 million mortgage.
------------------------
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 provide opportunities for
capital appreciation as well as current income.
Liquidity and Capital Resources
General. Cash and cash equivalents at March 31, 1998 aggregated $974,000,
compared with $5.3 million at December 31, 1997. Although the Company
anticipates that during the remainder of 1998 it will generate excess cash flow
from property 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
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
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, 1997, notes payable totaling $89.0 million had either scheduled
maturities or required principal reduction payments during 1998. The Company had
the option of extending the maturity dates of $18.3 million of that amount. In
April 1998, the Company paid off $5.0 million of this amount and refinanced the
remaining $13.3 million with the same lender, increasing the loan's principal
balance by $1.7 million and established a new maturity date of April 2000. The
lender on an additional $19.5 million has extended the loan's maturity date to
February 2000. In March 1998, the Company made a $10.2 million paydown on this
loan. In addition, through April 30, 1998 the Company has paid down or paid off
a total of $15.0 million of the remainder of such maturing debt. The Company
intends to either pay off, extend the maturity dates or obtain alternate
financing for the remaining $39.3 million of debt that matures during the
remainder of 1998. There can be no assurance, however, that these efforts to
obtain alternative financing or complete land sales will be successful.
The Company expects an increase in cash flow from property operations during the
remainder of 1998. Such increase is expected to be derived from operations of
the Inn at the Mart, Best Western Oceanside Hotel, Piccadilly Hotels and
Williamsburg Hospitality House.
In January 1998, the Company purchased El Dorado Parkway land, a 8.5 acre parcel
of undeveloped land in McKinney, Texas, for $952,000. The Company paid $307,000
in cash, assumed the existing mortgage of $164,000 and obtained seller financing
of the remaining $481,000 of the purchase price.
Also in January 1998, the Company purchased Valley Ranch IV land, a 12.3 acre
parcel of undeveloped land in Irving, Texas, for $2.0 million. The Company paid
$500,000 in cash and obtained seller financing of the remaining $1.5 million of
the purchase price.
Further in January 1998, the Company purchased JHL Connell land, a 7.7 acre
parcel of undeveloped land in Carrollton, Texas, for $1.3 million in cash.
In February 1998, the Company purchased Scoggins land, a 314.5 acre parcel of
undeveloped land in Tarrant County, Texas, for $3.0 million. The Company paid
$1.5 million in cash and obtained new mortgage financing of $1.5 million.
Also in February 1998, the Company purchased Bonneau land, a 8.4 acre parcel of
undeveloped land in Dallas County, Texas, for $1.0 million. The Company obtained
new mortgage financing of $1.0 million.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Further in February 1998, the Company financed the unencumbered Kamperman land
in the amount of $1.6 million. The Company received net financing proceeds of
$1.5 million after the payment of various closing costs associated with the
financing.
In February 1998, the Company refinanced the Vineyards land in the amount of
$3.4 million. The Company received net refinancing proceeds of $2.9 million,
after the payoff of $540,000 in existing mortgage debt.
Also in February 1998, the Company financed the unencumbered Valley Ranch land
in the amount of $4.3 million. The Company received net financing proceeds of
$4.1 million after the payment of various closing costs associated with the
financing.
In November 1994, the Company and an affiliate of BCM, sold five apartment
complexes to a newly formed limited partnership in exchange for $3.2 million in
cash, a 27% limited partner interest in the partnership and two mortgage notes
receivable, secured by one of the properties sold. The Company had the option to
reacquire the properties at any time after September 1997 for their original
sales prices. In February 1998, the Company reacquired three of the properties
for $7.7 million. The Company paid $4.0 million in cash and assumed the existing
mortgage of $3.7 million. Simultaneously the Company refinanced the three
properties for a total of $7.8 million, the Company receiving net financing
proceeds of $3.9 million after the payoff of $3.7 million in existing mortgage
debt and the payment of various costs associated with the financing.
In March 1998, the Company financed the unencumbered Stagliano and Dalho land in
the amount of $800,000 with the lender on the Bonneau land, described above. The
Company received net financing proceeds of $790,000 after the payment of various
closing costs associated with the financing.
Also in March 1998, the Company purchased Desert Wells land, a 420 acre parcel
of undeveloped land in Palm Desert, California, for $12.0 million. The Company
paid $400,000 in cash, obtained new mortgage financing of $10.0 million and
obtained seller financing of the remaining $1.6 million of the purchase price.
Further in March 1998, the Company refinanced the mortgage debt secured by the
McKinney Corners and Dowdy land in the amount of $20.7 million. The Company
received net cash of $5.9 million after the payoff of $2.5 million in existing
mortgage debt, paydown of $10.2 million of debt on the Las Colinas I loan and
various closing costs associated with the financing.
In April 1998, the Company purchased Yorktown land, a 325.8 acre parcel of
undeveloped land in Harris County, Texas, for $7.4 million. The Company paid
$3.0 million in cash and obtained seller financing of the remaining $4.4 million
of the purchase price.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Also in April 1998, the Company sold a 77.7 acre tract of the Lewisville land
parcel for $6.8 million in cash. The Company received net cash of $358,000 after
the payoff of first and second lien mortgages secured by such land parcel. The
Company will recognize a gain of approximately $2.1 million on the sale. See
NOTE 10. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Further in April 1998, the Company obtained a second lien mortgage of $2.0
million secured by the BP Las Colinas land from the limited partner in a
partnership that owns approximately 15.6% of the outstanding shares of the
Company's Common Stock. See NOTE 10. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
In April 1998, the Company refinanced the mortgage debt secured by the Parkfield
land in the amount of $7.3 million. The Company received net cash of $1.2
million after the payoff of $5.0 million in existing mortgage debt and the
payment of various closing costs associated with the financing.
Notes Receivable. The Company has received $7.6 million in principal
payments in the three months ended March 31, 1998.
In December 1997, the Company sold Pin Oak land, a 567.6 acre parcel of
undeveloped land in Houston, Texas, for $11.4 million. The Company received net
cash of $3.5 million, and provided an additional $6.9 million in short term
purchase money financing that was paid in full in January 1998. On the payoff of
the purchase money financing the Company received net cash of $1.5 million after
the payoff of $5.2 million in underlying mortgage debt and the payment of
various closing costs associated with the sale.
In August 1990, the Company obtained the Continental Hotel and Casino in Las
Vegas, Nevada, through foreclosure subject to first and second lien mortgages
totaling $10.0 million. In June 1992, the Company sold the hotel and casino for,
among other consideration, a $22.0 million wraparound mortgage note receivable.
In March 1997, the wraparound note was modified and extended in exchange for,
among other things, the borrower's commitment to invest $2.0 million in
improvements to the hotel and casino within four months of the March 1997
modification and an additional $2.0 million prior to December 1997. The borrower
has not made the required note payments since April 1997, nor the required
improvements. In December 1997, the borrower filed for bankruptcy protection. In
February 1998, a hearing was held to allow the Company to foreclose on the hotel
and casino. At the hearing, the court ruled that the borrower had 90 days to
submit a reorganization plan and beginning March 2, 1998, required the borrower
to make monthly payments of $175,000 to the Company. The Company received the
first such payment on March 2, 1998. In April 1998, the bankruptcy court allowed
the Company to foreclose on its mortgage note receivable. The Company will incur
no loss on foreclosure as the fair value of the property exceeds the carrying
value of the Company's note receivable.
20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Equity Investments. During the fourth quarter of 1988, the Company began
purchasing shares of various Real Estate Investment Trusts (collectively, the
"REITs") 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 REITs, Continental Mortgage and Equity Trust
("CMET"), Income Opportunity Realty Investors, Inc. ("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 REITs 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 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 resumed distributions in the
fourth quarter of 1993 and TCI resumed distributions in the fourth quarter of
1995. The Company received distributions totaling $7.0 million in the first
three months of 1998 from the REITs and NRLP including $6.7 million in
distributions accrued at December 31, 1997.
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 borrowings under such margin arrangements are secured by equity
securities of the REITs, NRLP and the Company's trading portfolio and bear
interest rates ranging from 7.0% to 11.0%. Margin borrowing totaled $53.8
million at March 31, 1998.
The Company's management reviews the carrying values of the Company's properties
and mortgage note receivable at least annually and whenever events or a change
in circumstances indicate that impairment may exist. Impairment is considered to
exist if, in the case of a property, the future cash flow from the property
(undiscounted and without interest) is less than the carrying amount of the
property. For notes receivable impairment is considered to exist if it is
probable that all amounts due under the terms of the note will not be collected.
In those instances where impairment is found to exist, a provision for loss is
recorded by a charge against earnings. The Company's mortgage note receivable
review includes an evaluation of the collateral property securing such 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
21
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
requirements, a review of the property's cash flow, discussions with the manager
of the property and a review of properties in the surrounding area.
Commitments and Contingencies
The Company owns a 96% limited partner interest in Syntek Asset Management, L.P.
("SAMLP"). SAMLP is the general partner of 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 also a general
partner of SAMLP. At December 31, 1997, the Company owned approximately 54% of
the outstanding limited partner units of NRLP.
NRLP, SAMLP and Mr. Phillips were among the defendants in a class action lawsuit
arising from the formation of NRLP. An agreement settling such lawsuit (the
"Settlement Agreement") 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 and the establishment of specified
annually increasing targets for five years relating to the price of NRLP's units
of limited partner interest.
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 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 $49.6 million at March 31, 1998,
before reduction for the principal balance ($4.2 million at March 31, 1998) and
accrued interest ($7.5 million at March 31, 1998) on the note receivable from
SAMLP for its original capital contribution to the partnership.
On December 15, 1997, NRLP, SAMLP, the NRLP oversight committee, Joseph B.
Moorman, Invenex and the Counsel for the plaintiff class members executed an
Agreement for Establishment of a Class Distribution of Fund and Election of
Successor General Partner (the "Resolution Agreement") which provides for the
nomination of an entity affiliated with SAMLP to be the successor general
partner of NRLP and NOLP, for the establishment of a fund for the benefit of the
plaintiff class members consisting of cash and properties owned by NOLP and for
the resolution of all related matters under the Settlement Agreement.
22
<PAGE> 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Commitments and Contingencies (Continued)
The Resolution Agreement was submitted to the Judge appointed to supervise the
class action settlement (the "Supervising Judge") and on February 11, 1998, the
Supervising Judge entered an order granting preliminary approval of the
Resolution Agreement and scheduled a hearing to be held on June 8, 1998, for
consideration of preliminary approval of a business plan for the operation of
the entity which will receive the cash and properties and to consider a form of
notice to be distributed to the plaintiff class members describing the
Resolution Agreement and the business plan.
Upon the election and taking office of the successor general partner and the
transfer of the cash and properties to the fund establish for the benefit of the
plaintiff class members, the Settlement Agreement and the NRLP oversight
committee shall be terminated.
Results of Operations
For the three months ended March 31, 1998, the Company reported a net loss of
$9.1 million, compared to net income of $271,000 for the three months ended
March 31, 1997. The Company's 1997 net income included gains on the sale of real
estate of $4.3 million, the Company reported no such gains in 1998. Fluctuations
in these and other components of the Company's revenues and expenses between the
1997 and 1998 periods are described below. The Company expects to continue to
report losses, until its land sales program generates significant gains to cover
the interest incurred on borrowings secured by such land. Land sales proceeds
are anticipated to be used to retire debt secured by land and accordingly reduce
future interest expense.
Sales and cost of sales were $6.8 million and $5.8 million, respectively, for
the three months ended March 31, 1998. The Company had no sales or cost of sales
for the three months ended March 31, 1997. These items of revenue and cost
relate to Pizza World Supreme, Inc. ("PWSI"), consolidated in May 1997.
Net rental income (rents less property operating expenses) increased from $1.5
million for the three months ended March 31, 1997 to $1.9 million in the three
months ended March 31, 1998. This increase is principally due to the acquisition
of the four Piccadilly Hotels and the Collection Retail Center acquired in 1997
and the foreclosure of the mortgage note receivable secured by the Williamsburg
Hospitality House also in 1997. Net rental income is expected to continue to
increase as the Company benefits from a full year of operations of the
properties it acquired in 1997.
Interest income from mortgage notes receivable was $138,000 for the three months
ended March 31, 1998 and $1.1 million for the three months ended March 31, 1997.
This decrease is primarily attributable to the sale of two notes receivable and
the payoff of a third note receivable in 1997. Interest income for the remaining
quarters of 1998 is expected to approximate that of the first quarter of 1998.
23
<PAGE> 24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Other income decreased from $470,000 for the three months ended March 31, 1997
to negative $209,000 in the three months ended March 31, 1998. The decrease is
primarily due to a $430,000 unrealized loss on the Company's trading portfolio
securities. See NOTE 7. "MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO."
Interest expense increased from $5.2 million for the three months ended March
31, 1997 to $9.5 million in the three months ended March 31, 1998. The increase
is primarily attributable to the debt incurred related to the acquisition of 22
parcels of land, five hotels and one commercial property subsequent to March 31,
1997. These increases were offset in part by a decrease of $491,000 due to the
sale of 40.2 acres of the BP Las Colinas land in February 1997. Interest expense
for the remaining quarters of 1998, is expected to decrease as the Company
accelerates its land sales program.
Depreciation expense increased from $547,000 for the three months ended March
31, 1997 to $1.2 million in the three months ended March 31, 1998. The increase
is primarily attributable to the purchase of seven properties and PWSI in 1997.
Depreciation for the remaining quarters of 1998 is expected to approximate that
of the first quarter of 1998.
Advisory and mortgage servicing fees increased from $424,000 for the three
months ended March 31, 1997 to $760,000 in the three months ended March 31,
1998. The increase is primarily attributable to the Company's increase in gross
assets, the basis for such fees. Such fees are expected to increase as the
Company's gross assets increase.
General and administrative expenses increased from $795,000 for the three months
ended March 31, 1997 to $2.2 million in the three months ended March 31, 1998.
The increase is primarily attributable to $347,000 in legal fees incurred in
1998 relating to pending acquisitions and refinancings, a $320,000 increase in
advisor cost reimbursements and $693,000 from the operations of PWSI.
Equity in income of investees increased from $280,000 for the three months ended
March 31, 1997 to $2.4 million in the three months ended March 31, 1998. The
increase in equity income is attributable to an increase in the Company's equity
share of equity investees' gain on sale of real estate of $3.2 million compared
to $979,000 in the three months ended March 31, 1997, offset in part, by an
increase in the Company's share of the combined operating losses of the
Company's equity investees of $813,000 as compared to the three months ended
March 31, 1997.
In the three months ended March 31, 1998, the Company recognized no gains on the
sale. For the three months ended March 31, 1997, the Company recognized a
$697,000 gain on the sale of a 3.0 acre tract of Las Colinas I land and a $3.4
million gain on the sale of a 40.2 acre tract of BP Las Colinas land.
24
<PAGE> 25
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.
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.
Year 2000
The Company's advisor has advised the Company that its current computer software
has been certified by the Information Technology Association of America ("ITAA")
as year 2000 compliant. The Company's advisor has also advised the Company that
it has recently received and plans to install in 1998 the ITAA certified year
2000 compliant operating system for its computer hardware.
--------------------------------------
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ---------------------------------------------------
<S> <C>
27.0 Financial Data Schedule, filed herewith.
</TABLE>
(b) Reports on Form 8-K as follows:
None.
25
<PAGE> 26
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 14, 1998 By: /s/ Karl L. Blaha
--------------------- -----------------------------------
Karl L. Blaha
President
Date: May 14, 1998 By: /s/ Thomas A. Holland
--------------------- -----------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
26
<PAGE> 27
AMERICAN REALTY TRUST, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Quarter ended March 31, 1998
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- -------------------------------------------- ------
<S> <C> <C>
27.0 Financial Data Schedule. 28
</TABLE>
27
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 974
<SECURITIES> 5,018
<RECEIVABLES> 19,047
<ALLOWANCES> 2,398
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 339,867
<DEPRECIATION> 6,265
<TOTAL-ASSETS> 451,195
<CURRENT-LIABILITIES> 0
<BONDS> 293,301
0
4,041
<COMMON> 135
<OTHER-SE> 49,576
<TOTAL-LIABILITY-AND-EQUITY> 451,195
<SALES> 6,753
<TOTAL-REVENUES> 11,567
<CGS> 5,780
<TOTAL-COSTS> 9,663
<OTHER-EXPENSES> 1,232
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,536
<INCOME-PRETAX> (9,108)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,108)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,108)
<EPS-PRIMARY> (.86)
<EPS-DILUTED> (.86)
</TABLE>
