<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 SEPTEMBER 30, 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 10,756,308
- ---------------------------- --------------------------------
(Class) (Outstanding at October 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>
September 30, December 31,
1998 1997
---- ----
(dollars in thousands)
Assets
<S> <C> <C>
Notes and interest receivable
Performing ............................................ $ 466 $ 9,300
Nonperforming ......................................... 499 18,624
-------- --------
965 27,924
Less - allowance for estimated losses .................... (667) (2,398)
-------- --------
298 25,526
Real estate held for sale, net of accumulated
depreciation ($5,098 in 1997) ......................... 255,836 178,938
Real estate held for investment, net of accumulated
depreciation ($9,199 in 1998 and $5,380 in 1997) ...... 216,141 123,515
Pizza parlor equipment, net of accumulated
depreciation ($1,439 in 1998 and $905 in 1997) ........ 7,401 6,693
Marketable equity securities, at market value ............ 7,734 6,205
Cash and cash equivalents ................................ 2,021 5,347
Investments in equity investees .......................... 66,097 45,851
Intangibles, net of accumulated amortization
($1,049 in 1998 and $704 in 1997) ..................... 15,020 15,230
Other assets ............................................. 25,864 26,494
-------- --------
$596,412 $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>
September 30, December 31,
1998 1997
------------- ------------
(dollars in thousands)
Liabilities and Stockholders' Equity
<S> <C> <C>
Liabilities
Notes and interest payable ($12,200 in 1998
and $11,400 in 1997 to affiliates) ................... $384,096 $261,986
Margin borrowings ....................................... 42,212 53,376
Accounts payable and other liabilities (including
$38,209 in 1998 and $22,825 in 1997 to affiliate) .... 51,615 34,442
-------- --------
477,923 349,804
Minority interest ....................................... 52,268 20,542
Redeemable Preferred Stock
Series C, 16,681 shares in 1998 (at liquidation
preference) .................................. 1,668 --
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 1997 ................... -- 8
Series C, 16,681 shares in 1997 .................. -- 33
Series F, 3,350,000 shares in 1998 and
2,000,000 in 1997 (liquidation preference
$33,500) ....................................... 6,100 4,000
Series G, 1,000 shares in 1998 (liquidation
preference $100) ............................... 2 --
Common stock, $.01 par value; authorized
100,000,000 shares, issued 13,492,800 shares
in 1998 and 13,479,348 in 1997 ....................... 135 135
Paid-in capital ......................................... 84,185 84,943
Accumulated (deficit) ................................... (25,841) (25,638)
Treasury stock at cost, 2,737,216 shares in 1998
and 2,767,427 shares in 1997 ......................... (28) (28)
-------- --------
64,553 63,453
-------- --------
$596,412 $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 For the Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Revenues
Sales ........................ $ 7,259 $ 8,647 $ 21,344 $ 10,828
Rents ........................ 15,531 7,804 45,098 18,725
Interest ..................... 15 471 169 2,769
Other ........................ 486 (1,883) (454) (117)
----------- ----------- ----------- -----------
................................. 23,291 15,039 66,157 32,205
Expenses
Cost of sales ................ 6,324 6,984 18,329 8,672
Property operations .......... 12,032 5,030 34,192 13,501
Interest ..................... 12,396 8,351 35,676 20,425
Advisory and servicing fees
to affiliate .............. 1,058 630 2,767 1,639
Incentive compensation to
affiliate ................. -- -- -- 299
General and administrative ... 1,712 2,303 5,939 4,654
Depreciation and
amortization .............. 1,496 755 4,683 1,902
Provision for loss ........... 3,000 -- 3,000 --
Minority interest ............ 658 243 1,591 959
----------- ----------- ----------- -----------
................................. 38,676 24,296 106,177 52,051
----------- ----------- ----------- -----------
(Loss) from operations .......... (15,385) (9,257) (40,020) (19,846)
Equity in income (losses) of
investees .................... 6,099 (145) 27,429 5,106
Gain on sale of real estate ..... 5,718 3,205 14,692 11,354
----------- ----------- ----------- -----------
Net income (loss) ............... (3,568) (6,197) 2,101 (3,386)
Preferred dividend requirement... (502) (49) (595) (151)
----------- ----------- ----------- -----------
Net income (loss) applicable
to Common shares ............. $ (4,070) $ (6,246) $ 1,506 $ (3,537)
=========== =========== =========== ===========
Earnings per share
Net income (loss) applicable
to Common shares .......... $ (38) $ (.52) $ .14 $(.29)
=========== =========== =========== ===========
Weighted average Common shares
used in computing earnings
per share .................... 10,755,584 11,975,921 10,741,137 12,041,252
=========== =========== =========== ===========
</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 Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Series B Series C Series F Series G
Preferred Preferred Preferred Preferred Common
Stock Stock Stock Stock Stock
---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1998 ........................ $ 8 $ 33 $ 4,000 $ -- $ 135
Dividends
Common Stock ($.15 per
share) ................... -- -- -- -- --
Series B Preferred
Stock ($2.50 per
share) .................. -- -- -- -- --
Series C Preferred
Stock ($7.50 per
share) .................. -- -- -- -- --
Series F Preferred
Stock ($.50 per
share) .................. -- -- -- -- --
Series G Preferred
Stock ($5.00 per
share) .................. -- -- -- -- --
Issuance of Series G
Preferred Stock ........... -- -- -- 2 --
Issuance of Series F
Preferred Stock ........... -- -- 2,100 -- --
Sale of Common Stock
under dividend
reinvestment plan ......... -- -- -- -- --
Conversion of Series B
Preferred Stock to
Common Stock .............. (8) -- -- -- --
Preferred Stock called
for redemption ............ -- (33) -- -- --
Net income ................... -- -- -- -- --
---------- --------- ---------- ---------- ----------
Balance, September 30,
1998 ...................... $ -- $ -- $ 6,100 $ 2 $ 135
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Treasury Paid-in Accumulated Stockholders'
Stock Capital (Deficit) Equity
---------- ---------- ----------- -------------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Balance, January 1,
1998 ........................ $ (28) $ 84,943 $(25,638) $ 63,453
Dividends
Common Stock ($.15 per
share) ................... -- -- (1,710) (1,710)
Series B Preferred
Stock ($2.50 per
share) .................. -- -- (54) (54)
Series C Preferred
Stock ($7.50 per
share) .................. -- -- (125) (125)
Series F Preferred
Stock ($.50 per
share) .................. -- -- (411) (411)
Series G Preferred
Stock ($5.00 per
share) .................. -- -- (5) (5)
Issuance of Series G
Preferred Stock ........... -- 98 -- 100
Issuance of Series F
Preferred Stock ........... -- 529 -- 2,629
Sale of Common Stock
under dividend
reinvestment plan ......... -- 197 -- 197
Conversion of Series B
Preferred Stock to
Common Stock .............. -- 53 1 46
Preferred Stock called
for redemption ............ -- (1,635) -- (1,668)
Net income ................... -- -- 2,101 2,101
---------- ---------- -------- ----------
Balance, September 30,
1998 ...................... $ (28) $ 84,185 $(25,841) $ 64,553
========== ========== ======== ==========
</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 Nine Months
Ended September 30,
-----------------------
1998 1997
-------- --------
(dollars in thousands)
<S> <C> <C>
Cash Flows From Operating Activities
Pizza parlor sales collected .................... $ 21,252 $ 10,828
Rents collected ................................. 44,350 16,972
Interest collected .............................. 381 2,624
Distributions from equity investees' operating
cash flow ................................... 9,246 1,905
Payments for pizza parlor operations ............ (20,045) (8,672)
Payments for property operations ................ (31,325) (9,025)
Interest paid ................................... (23,928) (12,723)
Advisory and servicing fees paid to affiliate.... (2,767) (1,938)
General and administrative expenses paid ........ (5,856) (4,765)
Other ........................................... (3,071) (717)
--------- --------
Net cash (used in) operating activities ..... (11,763) (5,511)
Cash Flows From Investing Activities
Collections on notes receivable ................. 7,901 3,062
Funding of notes receivable ..................... (381) (3,688)
Proceeds from sale of real estate ............... 44,140 18,567
Proceeds from sale of marketable equity
securities .................................. 4,570 6,019
Proceeds from sale of notes receivable .......... -- 18,342
Purchases of marketable equity securities ....... (7,605) (11,779)
Investment in real estate entities .............. (5,034) (3,523)
Distributions from equity investees' investing
activities .................................. 16,427 --
Acquisition of real estate ...................... (91,308) (67,620)
Earnest money deposits .......................... 565 (12,277)
Real estate improvements ........................ (7,267) (5,505)
Fixed assets purchased .......................... (787) (5,809)
--------- ---------
Net cash (used in) investing activities .... (38,779) (64,211)
</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 Nine Months
Ended September 30,
-----------------------
1998 1997
-------- --------
(dollars in thousands)
<S> <C> <C>
Cash Flows From Financing Activities
Proceeds from notes payable ....................................... $ 135,696 $ 91,141
Payments on notes payable ......................................... (77,077) (47,150)
Deferred borrowing costs .......................................... (8,214) (3,294)
Net advances from affiliates ...................................... 15,330 23,632
Margin borrowings, net ............................................ (14,998) 8,890
Common dividends paid ............................................. (1,710) (1,520)
Preferred dividends paid .......................................... (418) (72)
Distributions to minority interest holders ........................ (1,590) (1,128)
Sale of Common Stock under dividend reinvestment plan ............. 197 --
--------- ---------
Net cash provided by financing activities ..................... 47,216 70,499
Net increase (decrease) in cash and cash equivalents .......... (3,326) 777
Cash and cash equivalents, beginning of period ....................... 5,347 1,254
--------- ---------
Cash and cash equivalents, end of period ............................. $ 2,021 $ 2,031
========= =========
Reconciliation of net income (loss) to net cash
(used in) operating activities
Net income (loss) ................................................. $ 2,101 $ (3,386)
Adjustments to reconcile net income (loss) to
net cash (used in) operating activities
Depreciation and amortization ................................. 4,683 1,570
Amortization of deferred borrowing cost ....................... 5,471 332
Provision for loss ............................................ 3,000 --
Gain on sale of real estate ................................... (14,692) (11,354)
Distributions from equity investees' operating cash flow ...... 9,246 1,905
Equity in (income) losses of investees ........................ (27,430) (5,106)
(Increase) decrease in marketable equity securities ........... (1,529) 470
Decrease in interest receivable ............................... 333 3
Decrease in other assets ...................................... 3,336 9,681
Increase in accrued interest payable .......................... 1,179 520
Increase (decrease) in accounts payable and other
liabilities ................................................. 1,760 (205)
Other ......................................................... 779 59
--------- ---------
Net cash (used in) operating activities ..................... $ (11,763) $ (5,511)
========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
7
<PAGE> 8
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------
1998 1997
-------- -------
(dollars in thousands)
<S> <C> <C>
Schedule of noncash investing and financing
activities
Stock dividends on Series C Preferred Stock ........... $ -- $ 82
Notes payable from acquisition of real estate ......... 17,119 33,746
Notes payable from acquisition of minority
interest ........................................... -- 5,000
Notes receivable canceled on reacquisition of
property ........................................... 1,300 --
Notes receivable from sale of real estate ............. -- 800
Issuance of Series F Preferred Stock .................. 2,100 --
Dividend obligation on conversion of Series F
Preferred Stock .................................... 134 --
Current value of properties acquired through
foreclosure on notes receivable with a carrying
value of $22,715 in 1998 and $14,485 in 1997 ....... 22,715 20,226
Notes payable from property acquired through
foreclosure ........................................ 11,867
Issuance of Series G Preferred Stock .................. 100 --
Investment in properties reacquired ................... 5,270 --
Dividend obligation discharged on conversion of
Series B Preferred Stock ........................... 44 --
Acquisition of Pizza World Supreme, Inc. ..............
Carrying value of intangibles ...................... -- 15,641
Carrying value of pizza parlor equipment ........... -- 3,998
Carrying value of note receivable retired .......... -- 13,387
Carrying value of accounts payable and other
liabilities .................................... -- 1,314
Acquisition of IGI Properties
Carrying value of mortgages assumed ................ 43,421 --
Issuance of Class A partnership units .............. 6,568 --
Carrying value of other assets ..................... (441) --
Carrying value of accounts payable and other
liabilities .................................... 292 --
Investment in partnerships ......................... 1,980 --
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
8
<PAGE> 9
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 nine month period ended September 30, 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 September 30, 1998, the
Company owned approximately 54.4% 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 September 30, 1998,
before reduction for
9
<PAGE> 10
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. SYNTEK ASSET MANAGEMENT, L.P. (Continued)
the principal balance ($4.2 million at September 30, 1998) and accrued interest
($8.1 million at September 30, 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 Election of
Successor General Partner (the "Resolution Agreement")which provided 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. On July 15, 1998, NRLP, SAMLP and the NRLP oversight
committee executed an Agreement for Cash Distribution and Election of Successor
General Partner (the "Cash Distribution Agreement") which provides for the
nomination of an entity affiliated with SAMLP to be the successor general
partner of NRLP, for the distribution of $11.4 million to the plaintiff class
members and for the resolution of all related matters under the Settlement
Agreement. The Cash Distribution Agreement was submitted to the Supervising
Judge on July 23, 1998, as an alternative to the Resolution Agreement. On July
27, 1998, Invenex withdrew the proposal for approval of the Resolution
Agreement. On August 4, 1998, the Supervising Judge entered an order granting
preliminary approval of the Cash Distribution Agreement. On September 9, 1998,
a notice was mailed to the plaintiff class members describing the Cash
Distribution Agreement. On October 16, 1998, a hearing was held to consider any
objections to the Cash Distribution Agreement. On October 23, 1998, the
Supervising Judge entered an order granting final approval of the Cash
Distribution Agreement. The Supervising Judge also entered orders requiring
NRLP to pay $404,000 in attorney's fees to Joseph B. Moorman's legal counsel,
$30,000 to Joseph B. Moorman and $404,000 in attorney's fees to Robert A.
McNeil's legal counsel.
Pursuant to the order $11.4 million will be deposited by NRLP into an escrow
account. The actual distribution of the cash to the plaintiff class members
will occur immediately following the election and taking office of the
successor general partner. The distribution of the cash shall be made to the
plaintiff class members pro rata based upon the formation of NRLP in 1987. The
distribution of cash will be under the control of an independent settlement
administrator.
The proposal to elect the successor general partner will be submitted to the
unitholders of NRLP for a vote. All units of NRLP owned by
10
<PAGE> 11
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. SYNTEK ASSET MANAGEMENT, L.P. (Continued)
affiliates of SAMLP (approximately 61.5% of the outstanding units of NRLP as of
October 30, 1998) will be voted pro rata with the vote of the other limited
partners.
Upon approval by the NRLP 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 first quarter of 1999. Upon the election and
taking office of the successor general partner and the distribution of the cash
to the plaintiff class members, the Settlement Agreement and the NRLP oversight
committee shall be terminated.
Under the Cash Distribution Agreement, SAMLP has agreed to waive its right
under the Settlement Agreement to receive any payment from NRLP for its
Redeemable General Partner Interest upon its resignation and the election of a
successor general partner. In addition, pursuant to the Cash Distribution
Agreement, the NRLP partnership agreement will be amended to provide that, upon
voluntary resignation of the general partner, the resigning general partner
shall not be entitled to the repurchase of its general partner interest under
Paragraph 17.9 of the NRLP partnership agreement.
Under the Cash Distribution Agreement, the successor general partner will
assume liability for the note from SAMLP for its capital contribution to NRLP.
In addition, the successor general partner will assume liability for a note
which will require the repayment to NRLP of the $11.4 million paid by NRLP
under the Cash Distribution Agreement plus the $808,000 in court ordered
attorney's fees and the $30,000 paid to Joseph B. Moorman. This note will
require repayment over a ten-year period, bear interest and be guaranteed by
the Company, which (as of September 30, 1998) is the owner of a 96% limited
partner interest in SAMLP and approximately 54.4% of the outstanding units of
NRLP.
NRLP Management Corp., a wholly-owned subsidiary of the Company, is to be
nominated as successor general partner. If elected, in addition to assuming the
above liabilities it will incur a charge against its earnings for the monies
paid by NRLP under the Supervising Judge's orders. As the units of NRLP owned
by affiliates of SAMLP will be voted pro rata with the vote of the unaffiliated
limited partners there is no assurance that NRLP Management Corp. will be
elected the successor general partner. In the event that the Cash Distribution
Agreement does not become effective, then the parties shall be restored to
their positions of December 14, 1997, and the Settlement Agreement shall remain
in full force and effect.
NOTE 3. NOTES AND INTEREST RECEIVABLE
In December 1997, the Company sold the Pin Oak land, a 567.6 acre parcel of
undeveloped land in Houston, Texas, for $11.4 million. The Company
11
<PAGE> 12
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued)
received net cash of $3.5 million, and provided an additional $6.9 million in
short term seller financing that was paid in full in January 1998. On the
payoff of the seller financing the Company received net cash of $1.5 million
after paying off $5.2 million in underlying mortgage debt and the payment of
various closing costs.
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 stopped making mortgage payments in April 1997, and did not make 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 only the first such payment. 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 did not incur a loss on
foreclosure as the fair value of the property exceeded the carrying value of
the Company's mortgage note receivable. Not having a Nevada gaming license, the
Company has hired a licensed operator to run the hotel and casino. The property
has yet to breakeven.
NOTE 4. REAL ESTATE
In January 1998, the Company purchased the 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 seller 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.
Also in January 1998, the Company purchased the 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 seller financing
12
<PAGE> 13
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
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.
Further in January 1998, the Company purchased the 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.
In February 1998, the Company purchased the 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, required a 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.
Also in February 1998, the Company purchased the 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 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.
Further in February 1998, the Company financed its unencumbered Kamperman land
in the amount of $1.6 million. The Company received net cash of $1.5 million
after the payment of various closing costs. 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.
In February 1998, the Company refinanced the Vineyards land in the amount of
$3.4 million. The Company received net cash of $2.9 million, after paying off
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.
Also in February 1998, the Company financed its unencumbered Valley Ranch land
in the amount of $4.3 million. The Company received net cash of $4.1 million
after the payment of various closing costs. 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.
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
13
<PAGE> 14
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
acquiring 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 on the sale 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, one of which was security for the notes
receivable, for $7.7 million. The Company paid $4.0 million in cash and assumed
the mortgages totaling $3.7 million. Simultaneously the Company refinanced the
three properties for a total of $7.8 million, the Company receiving net cash of
$3.9 million after paying off the $3.7 million of mortgage debt and the payment
of various closing costs. 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 conjunction with reacquiring the properties, the
Company received from Carmel Realty a refund of the $230,000 in real estate
commissions the Company had paid on the sale of the three properties. In June
1998, the Company reacquired the remaining two properties for $8.6 million. The
Company paid $2.1 million in cash and assumed the existing mortgages totaling
$6.6 million. The mortgages bear interest at 8.73% per annum, require monthly
principal and interest payments of a total of $57,000 and mature in January
2019. The Company also received from Carmel Realty a refund of the $323,000
real estate commission the Company had paid on the sale of these properties.
In March 1998, the Company financed its 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.
Also in March 1998, the Company purchased the 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 a variable rate, currently 14% per annum,
requires monthly payments of interest only and matures in March 1999. The
seller financing bore interest at 10% per annum, required monthly payments of
interest only and matured in July 1998. The seller financing was paid in full
at maturity. The Company paid a real estate brokerage commission of $720,000 to
Carmel Realty.
Further in March 1998, the Company refinanced the mortgage debt secured by its
McKinney Corners and Dowdy land in the amount of $20.7 million. The Company
received net cash of $5.9 million after paying off $2.5 million in existing
mortgage debt, the paydown of $10.2 million on the
14
<PAGE> 15
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
Las Colinas I term loan and the payment of various closing costs. The Company
also pledged 800,000 shares of its Series F Cumulative Convertible Preferred
Stock as additional security for the loan. The new mortgage bears interest at
12% per annum, requires monthly payments of interest only and matures in March
1999. BCM has guaranteed repayment of the loan. The Company paid a mortgage
brokerage and equity refinancing fee of $207,000 to BCM.
On September 3, 1998, the lender notified the Company of certain events, of a
non-monetary nature, that in the lender's opinion, constitute events of default
under debt agreement. The lender required that the Company correct such
non-monetary defaults to its satisfaction with in 10 days. On November 4, 1998,
the Company was served with the complaint filed by the lender, against the
Company and BCM as guarantor in Superior Court of New Jersey, Law Division -
Morris County. Among other things the complaint demands repayment of the loan.
The Company has held negotiations with the lender in an effort to resolve this
dispute and reinstate the loan. To date, such negotiations have not been
successful. If the negotiations continue to be unsuccessful, the Company
expects to be able to either refinance the loan or sell the collateral property
and pay off the loan. Currently, a sufficient amount of the collateral property
is under contract to pay off the loan prior to December 31, 1998. There is,
however, no assurance that such sales contracts will close.
In April 1998, the Company purchased the 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 seller financing bears interest at 8.5% per
annum, requires monthly payments of interest only and matures in November 1998.
At maturity, the Company made a $450,000 principal paydown and the lender
extended the loan's maturity to February 2, 1999. All other terms of the loan
remained unchanged. The Company paid a real estate brokerage commission of
$223,000 to Carmel Realty.
Also in April 1998, the Company sold a 77.7 acre tract of its Lewisville land
parcel, for $6.8 million in cash. The Company received net cash of $358,000
after paying off first and second lien mortgages totaling $5.9 million and the
payment of various closing costs. The Company paid a real estate brokerage
commission of $203,000 to Carmel Realty. The Company recognized a gain of $2.0
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 its 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 second lien mortgage which was paid at maturity,
bore interest at 12% per annum, with principal and interest due at maturity in
October 1998. See NOTE 10. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
15
<PAGE> 16
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
In April 1998, the Company refinanced the mortgage debt secured by its
Parkfield land in the amount of $7.3 million. The Company received net cash of
$1.2 million after paying off $5.0 million in existing mortgage debt and the
payment of various closing costs. 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.
In May 1998, but effective April 1, 1998, the Company completed the purchase,
in a single transaction, of 29 apartment complexes (collectively, the "IGI
Properties") totaling 2,441 units in Florida and Georgia for $55.8 million. The
Company acquired the properties through three newly-formed Texas limited
partnerships. The partnerships paid a total of $6.1 million in cash, assumed
$43.4 million in existing mortgage debt and issued a total of $6.6 million in
Class A limited partner units in the acquiring entities, having the Company as
the Class B Limited Partner and a newly-formed wholly-owned subsidiary of the
Company, as the Managing General Partner. The Class A limited partners are
entitled to an annual preferred return of $.08 per unit in 1998, $.09 per unit
in 1999 and $.10 per unit in 2000 and thereafter. The units are exchangeable at
anytime after April 1, 1999, into shares of the Company's Series F Cumulative
Convertible Preferred Stock on the basis of ten units for one share of
Preferred Stock. The mortgages bear interest at rates ranging between 7.86% and
11.22% per annum, require monthly principal and interest payments totaling
$384,000 and mature between July 1, 2000 and September 1, 2017. The Company
paid a real estate brokerage commission of $1.7 million to Carmel Realty.
Also in May 1998, the Company sold a 15.4 acre tract of its Valley Ranch land
parcel, for $1.2 million in cash. The Company received net cash of $41,000
after paying down by $1.1 million the mortgage secured by such land parcel and
the payment of various closing costs. The Company paid a real estate brokerage
commission of $37,000 to Carmel Realty. The Company recognized a gain of
$663,000 on the sale.
Further in May 1998, the Company purchased the FRWM Cummings land, a 6.4 acre
parcel of undeveloped land in Farmers Branch, Texas, for $1.2 million in cash.
The Company paid a real estate brokerage commission of $36,000 to Carmel
Realty.
In May 1998, the Company sold a 21.3 acre tract of its Parkfield land parcel,
for $1.3 million in cash. The Company received net cash of $40,000 after paying
down by $1.1 million the mortgage secured by such land parcel and the payment
of various closing costs. The Company paid a real estate brokerage commission
of $38,000 to Carmel Realty. The Company recognized a gain of $670,000 on the
sale.
Also in May 1998, the Company refinanced the mortgage debt secured by its Scout
and Scoggins land in the amount of $10.4 million under the Las Colinas I term
loan. The Company received net cash of $6.6 million
16
<PAGE> 17
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
after paying off $1.4 million in mortgage debt on the Scout land and $1.5
million in mortgage debt on the Scoggins land, a pay down of $250,000 on the
Keller land mortgage, and the payment of various closing costs. The Company
also pledged 250,000 shares of its Common Stock and BCM, the Company's advisor,
pledged 177,000 shares of the Company's Common Stock as additional collateral
on the mortgage.
In June 1998, the Company sold a 21.6 acre tract of its Chase Oaks land parcel,
for $3.3 million in cash. The Company received net cash of $517,000 after
paying down by $2.0 million the mortgage secured by such land parcel and the
payment of various closing costs. The Company paid a real estate brokerage
commission of $99,000 to Carmel Realty. The Company recognized a gain of
$848,000 on the sale.
Also in June 1998, the Company sold a 150.0 acre tract of its Rasor land
parcel, for $6.8 million in cash. The Company received net cash of $1.6 million
after paying down by $5.0 million the mortgage secured by such land parcel and
the payment of various closing costs. The Company paid a real estate brokerage
commission of $203,000 to Carmel Realty. The Company recognized a gain of
$789,000 on the sale.
Further in June 1998, the Company sold its entire 315.2 acre Palm Desert land
parcel, for $17.2 million in cash. The Company received net cash of $9.2
million after paying off $7.2 million in mortgage debt and the payment of
various closing costs. The Company paid a real estate brokerage commission of
$517,000 to Carmel Realty. The Company recognized a gain of $3.9 million on the
sale.
In July 1998, the Company purchased the Thompson II land, a 3.5 acre parcel of
undeveloped land in Dallas County, Texas, for $471,000 in cash. The Company
paid a real estate brokerage commission of $14,000 to Carmel Realty.
Also in July 1998, the Company purchased the Katrina land, a 454.8 acre parcel
of undeveloped land in Palm Desert, California, for $38.2 million. The purchase
was made by a newly formed partnership of which a wholly-owned subsidiary of
the Company is the general partner and Class B limited partner. The partnership
issued $23.2 million Class A limited partnership units and obtained new
mortgage financing of $15.0 million. The mortgage bears interest at 15.5% per
annum, requires monthly payments of interest only and matures in July 1999. The
Class A limited partners are entitled to an annual preferred return of $.07 per
unit in 1998, $.08 per unit in 1999, $.09 per unit in 2000 and $.10 per unit in
2001 and thereafter. The Class A units may be converted into a total of 231,750
shares of the Company's Series H Preferred Stock anytime after July 13, 1999,
on the basis of 100 Class A units for each share of Series H Cumulative
Convertible Preferred Stock. A portion of the Preferred Stock may be converted
into the Company's Common Stock using a 90% factor starting in December 2000.
The Company paid a real estate brokerage commission of $1.1 million to Carmel
Realty.
17
<PAGE> 18
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
Further in July 1998, the Company purchased the Walker land, a 132.6 acre
parcel of undeveloped land in Dallas County, Texas, for $12.5 million in cash.
Also in July, the Company obtained mortgage financing of $13.3 million secured
by the Walker land. The Company received net financing proceeds of $12.8
million after the payment of various closing costs associated with the
financing. The mortgage bears interest at 15.5% per annum, requires monthly
payments of interest only and matures July 1999. The mortgage is also secured
by the FRWM Cummings land. The Company paid a real estate brokerage commission
of $375,000 to Carmel Realty.
In July 1998, the Company sold a 2.5 acre tract of the Las Colinas I land, for
$1.6 million in cash. The Company received net cash of $721,000 after paying
down by $750,000 the Las Colinas I term loan secured by such land parcel and
the payment of various closing costs. The Company paid a real estate brokerage
commission of $48,000 to Carmel Realty. The Company recognized a gain of
$869,000 on the sale.
In August 1998, the Company financed its unencumbered Keller land in the amount
of $5.0 million under the Las Colinas I term loan. The Company received net
financing proceeds of $4.9 million after the payment of various closing costs.
In September 1998, a newly formed limited partnership, in which the Company has
a combined 95% general and limited partnership interest, purchased the Messick
land, a 72.0 acre parcel of undeveloped land in Palm Springs, California, for
$3.5 million. The Company paid $1.0 million in cash and obtained seller
financing of the remaining $2.5 million of the purchase price. The seller
financing bears interest at 8.5% per annum, requires quarterly payments of
interest only, principal payments of $300,000 in July 1999 and July 2000, and
matures in July 2001. The Company paid a real estate brokerage commission of
$105,000 to Carmel Realty.
Also in September 1998, the Company sold a 60.0 acre tract of its Parkfield
land parcel, for $1.5 million in cash. The Company received net cash of $21,000
after the payoff the $1.4 million mortgage secured by such land parcel and the
payment of various closing costs. The Company paid a real estate brokerage
commission of $45,000 to Carmel Realty. The Company recognized a gain of
$43,000 on the sale.
Further in September 1998, the Company purchased the HSM land, a 6.2 acre
parcel of undeveloped land in Farmers Branch, Texas, for $2.2 million in cash.
The Company paid a real estate brokerage commission of $95,000 to Carmel
Realty.
In September 1998, the Company sold the remaining 10.5 acres of its BP Las
Colinas land for $4.7 million in cash. The Company received net cash of $1.8
million after paying off $2.7 million in mortgage debt and
18
<PAGE> 19
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
the payment of various closing costs. The Company paid a real estate brokerage
commission of $140,000 to Carmel Realty. The Company recognized a gain of $3.4
million on the sale.
Also in September 1998, the Company purchased the Vista Ridge land, a 160 acre
parcel of undeveloped land in Lewisville, Texas, for $15.6 million. The Company
paid $3.1 million in cash and obtained new mortgage financing of $12.5 million.
The mortgage bears interest at 15.5% per annum, requires monthly interest only
payments at a rate of 12.5% per annum and matures in July 1999. The Company
paid a real estate brokerage commission of $235,000 to Carmel Realty.
Further in September 1998, the Company sold its entire 30.0 acre Kamperman land
parcel for $2.4 million in cash. The Company received net cash of $584,000
after paying down by $1.6 million the Las Colinas I term loan secured by such
parcel and the payment of various closing costs. The Company paid a real estate
brokerage commission of $72,000 to Carmel Realty. The Company recognized a gain
of $969,000 on the sale.
In September 1998, the Company sold a 1.1 acre tract of its Santa Clarita land
parcel for $543,000 in cash. The Company received net cash of $146,000 after
paying down by $350,000 the Las Colinas I term loan secured by such tract and
the payment of various closing costs. The Company paid a real estate brokerage
commission of $16,000 to Carmel Realty. The Company recognized a gain of
$409,000 on the sale.
Also in September 1998, the Company purchased the Marine Creek land, a 54.2
acre parcel of undeveloped land in Fort Worth, Texas, for $2.2 million in cash.
The Company paid a real estate brokerage commission of $134,000 to Carmel
Realty.
Further in September 1998, the Company obtained second lien financing of $5.0
million secured by its Katy land from the limited partner in a partnership that
owns approximately 15.6% of the outstanding shares of the Company's Common
Stock. The second lien mortgage bears interest at 12.5% per annum, compounded
monthly, with principal and interest due at maturity in January 1999. See NOTE
10. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
During the third quarter of 1998, the Company recorded a provision for loss of
$3.0 million to write down its Valley Ranch land to its estimated realizable
value less estimated costs of sale. Such write down was necessitated by an
increase in the acreage designated as flood plain.
NOTE 5. INVESTMENT IN EQUITY INVESTEES
Real estate entities. The Company's investment in real estate entities at
September 30, 1998, includes (1) equity securities of three publicly traded
Real Estate Investment Trusts (collectively the "REITs"),
19
<PAGE> 20
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN EQUITY INVESTEES (Continued)
Continental Mortgage and Equity Trust ("CMET"), Income Opportunity Realty
Investors, Inc. ("IORI") and Transcontinental Realty Investors, Inc. ("TCI"),
(2) units of limited partner interest of NRLP, (3) a general partnership
interest in NRLP and NOLP, the operating partnership of NRLP, through the
Company's 96% limited partner interest in SAMLP, (4) a general partnership
interest in Garden Capital, L.P. ("GCLP") and its operating partnerships, and
(5) 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, NOLP and GCLP.
Effective August 1998, a wholly-owned subsidiary of the Company, acquired the
.7% managing general partner interest of Garden Capital, Inc. in GCLP and the
1% managing general partner interest of Garden Capital Incorporated in 50
single asset limited partnerships in which GCLP is the 99% limited partner.
NOLP owns a 99.3% limited partner interest in GCLP. GCLP was formed in November
1992, to facilitate the refinancing of 52 of NOLP's apartment complexes. The
Company issued 250,000 shares of its Series F Cumulative Convertible Preferred
Stock in exchange for the partnership interests.
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 and NOLP. 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 September 30, 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 September 30, 1998 September 30, 1998 September 30, 1998 September 30, 1998
- -------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
NRLP 54.4% $ 23,239 $ * $ 70,114
CMET 41.0 15,875 35,713 26,285
IORI 30.2 3,261 7,239 3,744
TCI 31.2 10,590 28,849 15,765
------------- --------------
52,965 $ 115,908
==============
General partner interest in
NRLP, NOLP and GCLP 7,676
Other equity investees 5,456
-------------
$ 66,097
=============
- -------------------
</TABLE>
20
<PAGE> 21
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN EQUITY INVESTEES (Continued)
* At September 30, 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. Set forth below
is summarized results of operations for the Company's equity investees for the
nine months ended September 30, 1998:
<TABLE>
<CAPTION>
Equity investees owned over 50%:
<S> <C>
Revenues.............................................. $ 85,661
Property operating expenses........................... 61,207
Depreciation.......................................... 7,136
Interest expense...................................... 24,939
--------
(Loss) from operations................................ (7,621)
Gain on sale of real estate........................... 42,410
--------
Net income............................................ $ 34,789
========
</TABLE>
The Company's share of over 50% owned equity investees' operations was a loss
of $4.1 million for the nine months ended September 30, 1998. The Company's
share of equity investees' gains on sale of real estate was $25.1 million for
the nine months ended September 30, 1998.
<TABLE>
<CAPTION>
Equity investees owned less than 50%:
<S> <C>
Revenues.............................................. $ 100,605
Equity in income of partnerships...................... 647
Property operating expenses........................... 68,391
Depreciation.......................................... 15,529
Interest expense...................................... 37,529
Provision for loss.................................... 154
---------
(Loss) from operations................................ (20,351)
Gain on sale of real estate........................... 18,085
---------
Net (loss)............................................ $ (2,266)
=========
</TABLE>
The Company's share of less than 50% owned equity investees' loss from
operations was $1.0 million for the nine months ended September 30,
21
<PAGE> 22
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN EQUITY INVESTEES (Continued)
1998. The Company's share of equity investees' gains on sale of real estate was
$7.4 million for the nine months ended September 30, 1998.
The Company's cash flow from the REITs and NRLP is dependent on the ability of
each of the entities to make distributions. CMET and IORI have paid regular
quarterly distributions since the first quarter of 1993, NRLP since the fourth
quarter of 1993 and TCI since the fourth quarter of 1995. In the first nine
months of 1998, the Company received distributions totaling $9.2 million from
the REITs and NRLP, including $6.7 million in distributions that were accrued
at December 31, 1997.
In the first nine months of 1998, the Company purchased a total of $357,000 of
equity securities of the REITs and NRLP.
In January 1992, the Company entered into a partnership agreement with an
entity affiliated with the limited partner in a partnership that owns
approximately 15.6% 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, 1997, 214 residential lots had been sold. In
the first nine months of 1998, an additional 48 lots were sold. At September
30, 1998, 25 lots remained to be sold. In 1998, the partnership recorded a gain
of $433,000 on such lot sales.
In June 1996, a newly formed limited partnership, of which the Company is a 1%
general partner, purchased 580 acres 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
seller 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 seller financing bore interest at 12% per annum, required monthly payments
of interest only and matured in July 1998. The seller financing was paid off at
maturity, with the net proceeds being distributed; $1.1 million to the limited
partner and $1.1 million to the Company as general partner. The partnership
recognized a gain of $1.2 million on the sale. In September 1998, the
partnership sold the remaining 96.5 acres for $1.3 million in cash. Of the net
proceeds, $587,000 was distributed to the limited partner and $587,000 was
distributed to the Company as general partner. The partnership recognized a
gain of $128,000 on the sale.
In April 1996, the Company purchased a 28% general partner interest in Campbell
Center Associates, Ltd. ("Campbell Associates"), which in turn has a 56.25%
interest in Campbell Centre Joint Venture, which owned at
22
<PAGE> 23
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN EQUITY INVESTEES (Continued)
the time 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 payments of interest only
and matures in April 2000. In January 1997, the Company exercised its option to
purchase an additional 28% general partner interest in Campbell Associates. The
purchase price was $300,000 in cash and a $750,000 note, which bears interest at
8% per annum, requires monthly payments of interest only and matures in April
2000. In July 1997, the Company purchased an additional 9% general partner
interest in Campbell Associates for $868,000 in cash. In March 1998,
Consolidated Equity Properties, Inc. acquired a 30% limited partner interest in
Campbell Associates for $500,000 in cash. In June 1998, the Company purchased
the remaining 5% general partner interest in Campbell Associates for $1.1
million.
In June 1998, Campbell Centre Joint Venture sold the office building for $32.1
million in cash. Campbell Associates, as a partner, received net cash of $13.2
million from the sales proceeds and escrowed an additional $190,000 for pending
parking lot issues. Campbell Associates recognized a gain of $8.2 million on
the sale.
In June 1995, the Company purchased a 1% general partner interest in a limited
partnership which owned an apartment complex in each of the states of Florida,
Illinois and Minnesota, with a total of 900 units. In August 1998, in
conjunction with the sale of the apartment complexes, the Company sold its
general partner interest for $903,000 in cash. The Company recognized a gain of
$270,000 on the sale.
NOTE 6. INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
Other
Real Pizza
1998 Hotels Estate Parlor Total
- ------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues ................ $ 24,541 20,272 $ 21,344 66,157
(Loss) from operations... (331) (39,702) 13 (40,020)
Identifiable assets ..... 75,489 496,268 24,655 596,412
Depreciation and
amortization ........ 1,597 2,346 740 4,683
Capital expenditures .... 959 6,308 787 8,054
</TABLE>
NOTE 7. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO
In the first quarter of 1994, the Company began 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 nine months of 1998, the Company
purchased $7.6 million and sold $4.1 million of such securities. These equity
securities are considered a trading portfolio and are carried at market value.
At September 30, 1998, the Company recognized an unrealized increase in the
market value of its trading portfolio securities of $1.9 million. Also in the
first nine months of 1998, the Company realized a net gain of $206,000 from the
sale of trading portfolio securities and received $14,000 in
23
<PAGE> 24
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO (Continued)
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 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% to 11%. Margin borrowing totaled $42.2
million at September 30, 1998.
In January 1998, the Company obtained a $2.0 million loan secured by a pledge
of Common Stock of the Company owned by BCM, the Company's advisor, with a
market value of $5.7 million at September 30, 1998. The Company received $2.0
million in net cash. In September 1998, the lender advanced the Company an
additional $1.0 million.
In August 1996, the Company consolidated its existing NRLP margin debt held by
various brokerage firms into a single margin loan. The Company has pledged
3,349,169 of its NRLP units as security for such margin loan which had a
principal balance of $10.6 million at September 30, 1998. The margin loan is
due and payable. Subsequent to September 30, 1998, the Company has paid down
such loan by $5.0 million. The lender has not made a demand for payment of the
remaining $5.6 million, nor has it declared an event of default.
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
nine months ended September 30, 1998, due to operating loss carryforwards.
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. In July 1998, an
additional $3.0 million loan was paid in full. In September 1998, the Company
obtained an additional $5.0 million mortgage loan from such entities. In
October 1998, the $2.0 million was paid in full. See NOTE 4. "REAL ESTATE."
24
<PAGE> 25
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 October 1998, the Company purchased the Vista Business Park land, a 41.8
acre parcel of undeveloped land in Travis County, Texas, for $3.0 million. The
Company paid $730,000 in cash and obtained mortgage financing of $2.3 million.
The mortgage bears interest at 8.9% per annum, requires monthly payments of
interest only and matures in September 2000. The Company paid a real estate
brokerage commission of $57,000 to Carmel Realty.
Also in October 1998, the Company purchased the Stone Meadows land, a 13.5 acre
parcel of undeveloped land in Houston, Texas, for $1.6 million. The Company
paid $491,000 in cash and obtained seller financing for the remaining $1.1
million of the purchase price. The seller financing bears interest at 10% per
annum, requires quarterly principal and interest payments of $100,000 and
matures in October 1999. The Company paid a real estate brokerage commission of
$98,000 to Carmel Realty.
Further in October 1998, the Company financed its unencumbered Rasor land in
the amount of $15.0 million, the Company receiving net cash of $13.5 million
after the payment of various closing costs. Portions of the Company's Las
Colinas and Valwood land parcels are included as additional collateral. The
Company used the proceeds from this loan along with an additional $1.8 million
to payoff the $15.8 million in mortgage debt secured by its Las Colinas and
Valwood land parcels. 200.3 acres of the Company's Valwood land parcel are
currently unencumbered. The Company paid BCM a mortgage brokerage and equity
refinancing fee of $150,000.
--------------------------------
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 provided opportunities for
capital appreciation, as well as current income.
25
<PAGE> 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
General. Cash and cash equivalents at September 30, 1998, aggregated $2.0
million, 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
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,
the sale or refinancing of properties and, to the extent available or
necessary, borrowings from its advisor, which totaled $38.2 million at
September 30, 1998, to meet its debt service obligations, pay taxes, interest
and other non-property related expenses. In the fourth quarter of 1998, the
Company's advisor has advanced an additional $15.0 million.
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,
but in April 1998, the Company paid off $5.0 million of this amount, refinanced
the remaining $13.3 million with the same lender, increased the loan's
principal balance by $1.7 million and established a new maturity date of April
2000. On an additional $19.5 million the lender has extended the loan's
maturity date to February 2000. In March 1998, the Company made a $10.2 million
paydown on this loan. Through September 30, 1998 the Company has paid down or
paid off a total of $29.5 million of the remainder of such maturing debt. As
discussed in NOTE 4. " REAL ESTATE," the lender on a loan with a principal
balance of $20.7 million at September 30, 1998, has declared events of
non-monetary default to have accrued and demanded repayment of the amounts
owned to it. Also, as discussed in NOTE 8. "MARGIN BORROWINGS," a margin loan
with a current principal balance of $5.6 million is due, although the lender
has not demanded payment. The Company intends to extend the maturity dates or
obtain alternate financing for these and the remaining $11.5 million of debt
that matures during the fourth quarter 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, Piccadilly Hotels, Williamsburg Hospitality House and
the 34 apartment complexes acquired by the Company in May 1998.
In December 1997, the Company sold its 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
seller financing, that was paid in full in January 1998. On the payoff of the
seller financing the Company received net cash of $1.5 million after paying off
$5.2 million in underlying mortgage debt and the payment of various closing
costs.
26
<PAGE> 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
In January 1998, the Company purchased the 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 the 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 the 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 the 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 the 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.
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 acquiring 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. In February 1998, the Company reacquired three of the properties,
one of which was secured by the mortgage notes, for $7.7 million. The Company
paid $4.0 million in cash and assumed the existing mortgages 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
paying off the $3.7 million in existing mortgage debt and the payment of
various costs. In June 1998, the Company reacquired the remaining two
properties for $8.6 million. The Company paid $2.1 million in cash and assumed
the existing mortgages of $6.6 million.
Also in March 1998, the Company purchased the 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 seller financing was paid off at maturity in July 1998.
In April 1998, the Company purchased the 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.
27
<PAGE> 28
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 its Lewisville land
parcel for $6.8 million in cash. The Company received net cash of $358,000
after paying off first and second lien mortgages totaling $5.9 million. See
NOTE 10. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
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. 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 only the
first such payment. In April 1998, the bankruptcy court allowed the Company to
foreclose on the hotel and casino. The Company did not incur a loss on
foreclosure as the fair value of the property exceeded the carrying value of
the Company's note receivable. Not having a Nevada gaming license, the Company
has hired a licensed operator to run the hotel and casino. The property has yet
to breakeven.
In May 1998, the Company purchased, in a single transaction, 29 apartment
complexes with a total of 2,441 units in Florida and Georgia, for $55.8
million. The Company acquired the properties through three newly-formed Texas
limited partnerships. The partnerships paid a total of $6.1 million in cash,
assumed $43.4 million in existing mortgage debt and issued a total of $6.6
million in Class A limited partner units in the acquiring entities, having the
Company as the Class B Limited Partner and a newly-formed wholly-owned
subsidiary of the Company, as the Managing General Partner. The Class A limited
partners are entitled to a preferred return of $.08 per unit in 1998, $.09 per
unit in 1999 and $.10 per unit in 2000 and thereafter.
In May 1998, the Company sold a 15.4 acre tract of its Valley Ranch land, for
$1.2 million in cash. The Company received net cash of $41,000 after paying
down $1.1 million on the mortgage secured by such land parcel and the payment
of various closing costs.
Also in May 1998, the Company purchased the FRWM Cummings land, a 6.4 acre
parcel of undeveloped land in Farmers Branch, Texas, for $1.2 million in cash.
Further in May 1998, the Company sold a 21.3 acre tract of its Parkfield land,
for $1.3 million in cash. The Company received net cash of
28
<PAGE> 29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
$40,000 after paying down $1.1 million on the mortgage secured by such land
parcel and the payment of various costs.
In June 1998, the Company sold a 21.6 acre tract of its Chase Oaks land, for
$3.3 million in cash. The Company received net cash of $517,000 after paying
down $2.0 million on the mortgage secured by such land parcel and the payment
of various closing costs.
Also in June 1998, the Company sold a 150.0 acre tract of its Rasor land, for
$6.8 million in cash. The Company received net cash of $1.6 million after
paying down $5.0 million on the mortgage secured by such land parcel and the
payment of various closing costs.
Further in June 1998, the Company sold its entire 315.2 acre Palm Desert land
parcel, for $17.2 million in cash. The Company received net cash of $9.2
million after paying off $7.2 million in mortgage debt and the payment of
various closing costs.
In July 1998, the Company purchased the Thompson II land, a 3.5 acre parcel of
undeveloped land in Dallas County, Texas, for $471,000 in cash.
Also in July 1998, the Company through a newly formed partnership, of which a
wholly-owned subsidiary of the Company is the general partner and Class B
limited partner, purchased the Katrina land, a 454.8 acre parcel of undeveloped
land in Palm Desert, California, for $38.2 million. The partnership issued
$23.2 million Class A limited partnership units and obtained new mortgage
financing of $15.0 million. The Class A limited partners are entitled to an
annual preferred return of $.07 per unit in 1998, $.08 per unit in 1999, $.09
per unit in 2000 and $.10 per unit in 2001 and thereafter.
In July 1998, the Company purchased the Walker land, a 132.6 acre parcel of
undeveloped land in Dallas County, Texas, for $12.5 million in cash. Also in
July, the Company obtained mortgage financing of $13.3 million. The Company
received net cash of $12.8 million after the payment of various closing costs
associated with the financing. The mortgage is also secured by the FRWM
Cummings land.
In July 1998, the Company sold a 2.5 acre tract of its Las Colinas I land, for
$1.6 million in cash. The Company received net cash of $721,000 after paying
down by $750,000 the Las Colinas I term loan secured by such land parcel and
the payment of various closing costs.
In September 1998, a newly formed limited partnership in which the Company has
a combined 95% general and limited partnership interest, purchased the Messick
land, a 72.0 acre parcel of undeveloped land in Palm Springs, California, for
$3.5 million. The Company paid $1.0 million in cash and obtained seller
financing of the remaining $2.5 million of the purchase price.
29
<PAGE> 30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Also in September 1998, the Company sold a 60.0 acre tract of its Parkfield
land parcel, for $1.5 million in cash. The Company received net cash of $21,000
after paying off the $1.4 million mortgage secured by such land parcel and the
payment of various closing costs.
Further in September 1998, the Company purchased the HSM land, a 6.2 acre
parcel of undeveloped land in Farmers Branch, Texas, for $2.2 million in cash.
In September 1998, the Company sold the remaining 10.5 acres of its BP Las
Colinas land for $4.7 million in cash. The Company received net cash of $1.8
million after paying off $2.7 million in mortgage debt and the payment of
various closing costs.
Also in September 1998, the Company purchased the Vista Ridge land, a 160 acre
parcel of undeveloped land in Lewisville, Texas, for $15.6 million. The Company
paid $3.1 million in cash and obtained mortgage financing of $12.5 million.
Further in September 1998, the Company sold its entire 30.0 acre Kamperman land
parcel for $2.4 million in cash. The Company received net cash of $584,000
after paying down by $1.6 million the Las Colinas I term loan secured by such
land parcel and the payment of various closing costs.
In September 1998, the Company sold a 1.1 acre tract of its Santa Clarita land
for $543,000 in cash. The Company received net cash of $146,000 after paying
down by $350,000 the Las Colinas I term loan secured by such parcel and the
payment of various closing costs.
Also in September 1998, the Company purchased the Marine Creek land, a 54.2
acre parcel of undeveloped land in Fort Worth, Texas, for $2.2 million in cash.
Further in September 1998, the Company obtained second lien financing of $5.0
million secured by its Katy land from the limited partner in a partnership that
owns approximately 15.6% of the outstanding shares of the Company's Common
Stock. The second lien financing bears interest at 12.5% per annum, compounded
monthly, with principal and interest due at maturity in January 1999. See NOTE
10. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Loans Payable. In February 1998, the Company financed its unencumbered
Kamperman land in the amount of $1.6 million. The Company received net cash of
$1.5 million after the payment of various closing costs.
Also in February 1998, the Company refinanced its Vineyards land in the amount
of $3.4 million. The Company received net cash of $2.9 million, after the
payoff of $540,000 in mortgage debt.
30
<PAGE> 31
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 its unencumbered Valley Ranch
land in the amount of $4.3 million. The Company received net cash of $4.1
million after the payment of various closing costs.
In March 1998, the Company financed its unencumbered Stagliano and Dalho land
in the amount of $800,000. The Company received net cash of $790,000 after the
payment of various closing costs.
Also in March 1998, the Company refinanced the mortgage debt secured by its
McKinney Corners and Dowdy land in the amount of $20.7 million. The Company
received net cash of $5.9 million after paying off $2.5 million in mortgage
debt, paying down $10.2 million on the Las Colinas I term loan and the payment
of various closing costs associated with the financing. The Company also
pledged 800,000 shares of its Series F Cumulative Convertible Preferred Stock
as additional collateral for the loan. BCM has also guaranteed repayment of the
loan.
In April 1998, the Company obtained second lien financing of $2.0 million
secured by its 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 loan was paid at maturity in October 1998. See NOTE 10. "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
Also 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 paying off $5.0 million in mortgage debt and the payment of
various closing costs.
Also in May 1998, the Company refinanced the mortgage debt secured by its Scout
and Scoggins land in the amount of $10.4 million under the Las Colinas I term
loan. The Company received net cash of $6.6 million after paying off $1.4
million in mortgage debt on the Scout land and $1.5 million in mortgage debt on
the Scoggins land, a pay down of $250,000 on the Keller land mortgage, and the
payment of various closing costs. The Company also pledged 250,000 shares of
its Common Stock, and the Company's advisor pledged 177,000 shares of the
Company's Common Stock as additional security for the loan.
In August 1998, the Company financed its unencumbered Keller land for $5.0
million with the Las Colinas I lender. The Company received net cash proceeds
of $4.9 million after the payment of various closing costs.
In August 1996, the Company consolidated its existing NRLP margin debt held by
various brokerage firms into a single margin loan. The Company has pledged
3,349,169 of its NRLP units as security for such margin loan which had a
principal balance of $10.6 million at September 30, 1998. The margin loan is
due and payable. Subsequent to September 30, 1998, the Company has paid down
such loan by $5.0 million. The lender has not made a demand for payment of the
remaining $5.6 million, nor has it declared an event of default.
31
<PAGE> 32
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 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 one year 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. CMET and IORI have paid regular
quarterly distributions since the first quarter of 1993, NRLP since the fourth
quarter of 1993 and TCI since the fourth quarter of 1995. The Company received
distributions totaling $9.2 million in the first nine months of 1998 from the
REITs and NRLP, including $6.7 million in distributions that were 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 $42.2
million at September 30, 1998.
Management reviews the carrying values of the Company's properties and mortgage
notes 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 mortgage note receivable
review includes an evaluation of the collateral property securing such note.
The property review generally includes selective property inspections and
discussions with the manager of the property and visits to selected properties
in the surrounding area and a review of the following:
32
<PAGE> 33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
(1) the property's current rents compared to market rents; (2) the property's
expenses; (3) the property's maintenance requirements; and, (4) the property's
cash flow.
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 September 30, 1998, the Company owned
approximately 54.4% 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 September 30, 1998,
before reduction for the principal balance ($4.2 million at September 30, 1998)
and accrued interest ($8.1 million at September 30, 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 Election of
Successor General Partner (the "Resolution Agreement") which provided 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.
33
<PAGE> 34
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. On July 15, 1998, NRLP, SAMLP and the NRLP oversight
committee executed an Agreement for Cash Distribution and Election of Successor
General Partner (the "Cash Distribution Agreement") which provides for the
nomination of an entity affiliated with SAMLP to be the successor general
partner of NRLP, for the distribution of $11.4 million to the plaintiff class
members and for the resolution of all related matters under the Settlement
Agreement. The Cash Distribution Agreement was submitted to the Supervising
Judge on July 23, 1998, as an alternative to the Resolution Agreement. On July
27, 1998, Invenex withdrew the proposal for approval of the Resolution
Agreement. On August 4, 1998, the Supervising Judge entered an order granting
preliminary approval of the Cash Distribution Agreement. On September 9, 1998,
a notice was mailed to the plaintiff class members describing the Cash
Distribution Agreement. On October 16, 1998, a hearing was held to consider any
objections to the Cash Distribution Agreement. On October 23, 1998, the
Supervising Judge entered an order granting final approval of the Cash
Distribution Agreement. The Supervising Judge also entered orders requiring
NRLP to pay $404,000 in attorney's fees to Joseph B. Moorman's legal counsel,
$30,000 to Joseph B. Moorman, and $404,000 in attorney's fees to Robert A.
McNeil's legal counsel.
Pursuant to the order, $11.4 million will be deposited by NRLP into an escrow
account. The actual distribution of the cash to the plaintiff class members
will occur immediately following the election and taking office of the
successor general partner. The distribution of the cash shall be made to the
NRLP plaintiff class members pro rata based upon the formation of NRLP in 1987.
The distribution of cash will be under the control of an independent settlement
administrator.
The proposal to elect the successor general partner will be submitted to the
unitholders of NRLP for a vote. All units of NRLP owned by affiliates of SAMLP
(approximately 61.5% of the outstanding units of NRLP as of October 30, 1998)
will be voted pro rata with the vote of the other limited partners.
Upon approval by the NRLP 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 first quarter of 1999. Upon the election and
taking office of the successor general partner and the distribution of the cash
to the plaintiff class members, the Settlement Agreement and the NRLP oversight
committee shall be terminated.
Under the Cash Distribution Agreement, SAMLP has agreed to waive its right
under the Settlement Agreement to receive any payment from NRLP for its
Redeemable General Partner Interest upon its resignation and the
34
<PAGE> 35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Commitments and Contingencies (Continued)
election of a successor general partner. In addition, pursuant to the Cash
Distribution Agreement, the NRLP partnership agreement will be amended to
provide that, upon voluntary resignation of the general partner, the resigning
general partner shall not be entitled to the repurchase of its general partner
interest under Paragraph 17.9 of the NRLP partnership agreement.
Under the Cash Distribution Agreement, the successor general partner will
assume liability for the note receivable from SAMLP for its capital
contribution to NRLP. In addition, the successor general partner will assume
liability for a note receivable which will require the repayment to NRLP of the
$11.4 million paid by NRLP under the Cash Distribution Agreement plus the
$808,000 in court ordered attorney's fees and the $30,000 paid to Joseph B.
Moorman. This note will require repayment over a ten-year period, bear interest
and be guaranteed by the Company, which (as of September 30, 1998) is the owner
of a 96% limited partner interest in SAMLP and approximately 54.4% of the
outstanding units of NRLP.
NRLP Management Corp., a wholly-owned subsidiary of the Company, is to be
nominated as successor general partner. If elected, in addition to assuming the
above liabilities it will incur a charge against its earnings for the monies
paid by NRLP under the Supervising Judge's orders. As the units of NRLP owned
by affiliates of SAMLP will be voted pro rata with the vote of the unaffiliated
limited partners there is no assurance that NRLP Management Corp. will be
elected the successor general partner. In the event that the Cash Distribution
Agreement does not become effective, then the parties shall be restored to
their positions of December 14, 1997, and the Settlement Agreement shall remain
in full force and effect.
Results of Operations
For the three months ended September 30, 1998, the Company reported a net loss
of $3.6 million, compared to a net loss of $6.2 million for the three months
ended September 30, 1997. For the nine months ended September 30, 1998, the
Company reported net income of $2.1 million compared with a net loss of $3.4
million for the nine months ended September 30, 1997. The primary factors
contributing to the Company's operating results are discussed in the following
paragraphs.
Sales and cost of sales were $7.3 million and $6.3 million for the three months
ended September 30, 1998, compared to $8.6 million and $7.0 million for the
three months ended September 30, 1997. Sales and cost of sales for the nine
months ended September 30, 1998 were $21.3 million and $18.3 million compared
to $10.8 million and $8.7 million for the same period in 1997. These items of
revenue and cost relate to Pizza World Supreme, Inc. ("PWSI"), which became a
wholly-owned consolidated subsidiary in May 1997. PWSI adopted a standard 13
week quarter in the fourth quarter of 1997, as a result, the three months ended
September 30, 1997, included two additional weeks. Excluding the effects of the
35
<PAGE> 36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
two additional weeks, sales would have been $6.5 million and cost of sales $6.3
million. On a comparable basis, sales increased $800,000 due to an increase in
sales generated by PWSI's Greater San Joaquin Valley stores which achieved a
same store sales growth of 8.45%.
Rents increased from $7.8 million and $18.7 million for the three and nine
months ended September 30, 1997 to $15.5 million and $45.1 million for the
three and nine months ended September 30, 1998. These increases are principally
due to the acquisition in 1997, of the four Piccadilly Hotels, the Collection
Retail Center and Preston Square Shopping Center and obtaining the Williamsburg
Hospitality House through foreclosure in 1997 and the acquisition of 34
apartment complexes in 1998. Rents are expected to continue to increase as the
Company benefits from a full year of operations of the properties it acquired
in late 1997 and 1998.
Interest income of $15,000 and $169,000 for the three and nine months ended
September 30, 1998, decreased from the $471,000 and $2.7 million for the three
and six months ended September 30, 1997. These decreases are attributable to
the foreclosure of the $22.7 million note receivable secured by the Continental
Hotel and Casino in April 1998. The note had been performing in 1997. Interest
income is not expected to be significant in the future.
Other income improved from a loss of $1.9 million and $117,000 for the three
and nine months ended September 30, 1997, to income of $486,000 and loss of
$454,000 for the three and nine months ended September 30, 1998. The
improvement is primarily due to realized income of $1.1 million and a decrease
of $2.6 million in unrealized losses for the three and nine months ended
September 30, 1998, on the Company's trading portfolio securities. See NOTE 7.
"MARKETABLE EQUITY SECURITIES TRADING PORTFOLIO."
Property operating expense increased from $5.0 million and $13.5 million for
the three and nine months ended September 30, 1997, to $12.0 million and $34.2
million for the three and nine months ended September 30, 1998. The increases
are principally due to the acquisition in 1997 of the four Piccadilly Hotels,
the Collection Retail Center and the Preston Square Shopping Center and
obtaining the Williamsburg Hospitality House through foreclosure in 1997 and
the acquisition of 34 apartment complexes in 1998.
Interest expense increased from $8.4 million and $20.4 million for the three
and nine months ended September 30, 1997, to $12.4 million and $35.7 million
for the three and nine months ended September 30, 1998. The increases are
primarily attributable to the debt incurred related to 34 parcels of land, five
hotels, 34 apartment complexes and two commercial property purchased or
obtained through foreclosure subsequent to September 30, 1997. Interest expense
for the remainder of 1998, is expected to increase as the Company continued to
acquire properties on a leveraged basis in the fourth quarter.
36
<PAGE> 37
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Advisory and mortgage servicing fees increased from $630,000 and $1.6 million
for the three and nine months ended September 30, 1997, to $1.1 million and
$2.8 million in the three and nine months ended September 30, 1998. The
increase is primarily attributable to the Company's increase in gross assets,
the basis for such fees. Such fees are expected to continue to increase as the
Company's gross assets increase.
Depreciation and amortization increased from $755,000 and $1.9 million for the
three and nine months ended September 30, 1997, to the $1.5 million and $4.7
million for the three and nine months ended September 30, 1998. Such increases
were attributable to the 41 income producing properties acquired by the Company
subsequent to September 30, 1997.
General and administrative expenses decreased from $2.3 million for the three
months ended September 30, 1997, to $1.7 million in the three months ended
September 30, 1998, due to a decrease in legal costs relating to the
foreclosure of Continental Hotel in 1997. General and administrative expenses
increased from $4.7 million for the nine months ended September 30, 1997 to
$5.9 million for the nine months ended September 30, 1998. The nine month
increase is primarily attributable to $217,000 in legal fees incurred in 1998
relating to pending acquisitions and refinancings, a $87,000 increase in
advisor cost reimbursements and $790,000 from consolidation of the operations
of PWSI.
During the third quarter of 1998, the Company recorded a provision for loss of
$3.0 million to write down its Valley Ranch land to its estimated realizable
value less estimated costs of sale. Such write down was necessitated by an
increase in the acreage designated as flood plain.
Minority interest expense increased from $243,000 and $959,000 for the three
and nine months ended September 30, 1997, to $658,000 and $1.6 million for the
three and nine months ended September 30, 1998. The increase for the three and
nine months is primarily due to the payment of preferred returns to the IGI
properties limited partners. See NOTE 4. "REAL ESTATE."
Incentive compensation for the nine months ended September 30, 1997, was
$299,000 and relates to the sale of Porticos Apartments. No incentive
compensation was earned in 1998.
Equity in income of investees improved from a loss of $145,000 and income of
$5.1 million for the three and nine months ended September 30, 1997, to income
of $6.1 million and $27.4 million for the three and nine months ended September
30, 1998. The increases in equity income are attributable to the Company's
equity share of equity investees' gain on the sale of real estate of $6.3
million and $32.4 million for three and nine months ended September 30, 1998,
compared to $1.1 million and $7.0 million for the three and nine months ended
September 30, 1997. These increases were offset in part, by an increase in the
combined operating losses of the Company's equity investees. The Company's
equity share of
37
<PAGE> 38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
such losses were $200,000 and $5.0 million for the three and nine months ended
September 30, 1998, compared to losses of $1.2 million and $1.9 million for the
same periods of 1997.
Gains on sale of real estate were $5.7 million and 14.7 million for the three
and nine months ended September 30, 1998, compared to $3.2 million and $11.4
million for the three and nine months ended September 30, 1997. In April 1998,
the Company recognized a $663,000 gain on the Valley Ranch land and a $1.9
million gain on the sale of Lewisville land. In May 1998, the Company
recognized a previously deferred gain of $179,000 on the December 1997 sale of
Valley Ranch land and a gain of $671,000 on the sale of Parkfield land. In June
1998, the Company recognized a gain of $848,000 on the sale of Chase Oaks land,
a $789,000 gain on the sale of Rasor land and a $3.9 million gain on the sale
of Palm Desert land. In July 1998, the Company recognized a gain of $869,000 on
the sale of Las Colinas land. In September 1998, the Company recognized a $3.4
million gain on the sale of BP Las Colinas land, a $408,000 gain on the sale of
Santa Clarita land and a $969,000 gain on the sale of Kamperman land.
In June 1997, the Company recognized a previously deferred gain of $3.0 million
on the sale of Porticos Apartments and a $216,000 gain on the sale of the
Kamperman land. In April 1997, a gain of $668,000 was recognized on the sale of
a 3.1 acre tract of Las Colinas I land. In February 1997, a gain of $3.4
million was recognized on the sale of a 40.2 acre tract of BP Las Colinas land,
a gain of $171,000 on the sale of Osceola mortgage note receivable and a gain
of $676,000 on the sale of a 3.0 acre tract of Las Colinas I land. In September
1997, a gain of $578,000 was recognized on the sale of a 2.6 acre tract of Las
Colinas I land, a $481,000 gain on the sale of the Mopac Building and a
$771,000 gain on the sale of a 3.9 acre tract of Las Colinas I land.
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.
38
<PAGE> 39
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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.
Year 2000
Basic Capital Management, Inc. ("BCM"), the Company's advisor, has informed the
Company that its computer hardware operating system and computer software have
been certified as year 2000 compliant.
Further, Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of BCM
that performs property management services for the Company's properties, has
informed the Company that it is currently testing year 2000 compliant property
management computer software for the Company's commercial properties. Carmel,
Ltd. expects to begin utilizing such software January 1, 1999. With regards to
the Company's apartment properties, Carmel, Ltd. has informed the Company that
its subcontractors either have in place or will have in place in the first
quarter of 1999, year 2000 compliant property management computer software.
The Company has not incurred, nor does it expect to incur, any costs related to
its accounting and property management computer software being modified,
upgraded or replaced in order to make it year 2000 compliant. Such costs have
been or will be borne by either BCM, Carmel, Ltd. or the property management
subcontractors of Carmel, Ltd.
Management has yet to complete its evaluation of the Company's computer
controlled building systems, such as security, elevators, heating and cooling,
etc., to determine which systems are not year 2000 compliant. Management does
not believe that any necessary modifications to such systems will require
significant expenditures or cause interruptions in operations, as such enhanced
operating systems are readily available.
The Company has or will have in place the year 2000 compliant systems that will
allow it to operate. The risks the Company faces are that certain of its
vendors will not be able to supply goods or services and that financial
institutions and taxing authorities will not be able to accurately apply
payments made to them. Management believes that other vendors are readily
available and that financial institutions and taxing authorities will, if
necessary, apply monies received manually. The likelihood of the above having a
significant impact on the Company's operations is negligible.
39
<PAGE> 40
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are filed herewith or incorporated by
reference as indicated below.
Exhibit
Number Description
- ------- -----------------------------------------------------------------
3.1 Articles of Amendment of the Articles of Incorporation of
American Realty Trust, Inc. setting forth the Certificate of
Designations, Preferences and Relative Participating or Optional
or Other Special Rights, and Qualifications, Limitations or
Restrictions thereof of Special Stock of Series F 10% Cumulative
Preferred Stock, increasing the number of authorized shares,
dated October 27, 1998, filed herewith.
27.0 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K as follows:
None.
40
<PAGE> 41
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: November 16, 1998 By: /s/ Karl L. Blaha
------------------------- ---------------------------
Karl L. Blaha
President
Date: November 16, 1998 By: /s/ Thomas A. Holland
------------------------- ---------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
41
<PAGE> 42
AMERICAN REALTY TRUST, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- ----------------------------------------------------------------------
<S> <C> <C>
3.1 Articles of Amendment to Articles of Incorporation of American Realty 43
Trust, Inc. increasing the number of authorized shares of Series F
Cumulative Convertible Preferred Stock to 15,000,000, dated October
27, 1998.
27.0 Financial Data Schedule 56
</TABLE>
42
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED ARTICLES OF AMENDMENT
OF THE ARTICLES OF INCORPORATION OF
AMERICAN REALTY TRUST, INC.
setting forth the
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RELATIVE PARTICIPATING
OR OPTIONAL OR OTHER SPECIAL RIGHTS, AND QUALIFICATIONS, LIMITATIONS
OR RESTRICTIONS THEREOF
of
SERIES F CUMULATIVE CONVERTIBLE PREFERRED STOCK
of
AMERICAN REALTY TRUST, INC.
(Pursuant to Section 14-2-1006 of the
Georgia Business Corporation Code)
--------------------------
American Realty Trust, Inc., a corporation organized and existing
under the Georgia Business Corporation Code (hereinafter called the
"Corporation"), hereby certifies:
THAT, pursuant to the authority conferred upon the board of Directors
(the "Board of Directors") by the articles of incorporation, as amended
("Articles of Incorporation") of the Corporation, and pursuant to Section
14-2-1003 of the Georgia Business Corporation Code, the Board of Directors have
recommended by unanimous written consent dated August 3, 1998, and the holders
of a majority of the issued and outstanding shares of Series F Cumulative
Convertible Preferred Stock have duly adopted certain amended and restated
recitals and resolutions providing for the certificate of designations,
preferences and relative participating, optional or other special rights and
qualifications, limitations or other restrictions thereof, of a series of
special stock of the Corporation, specifically the Series F Cumulative
Convertible Preferred Stock, which amended and restated recitals and
resolutions are as follows:
WHEREAS, Article Five of the Articles of Incorporation authorizes the
Corporation to issue not more than 100,000,000 shares of common voting stock,
$0.01 par value per share (the "Common Stock"), and 20,000,000 shares of a
special class of stock, $2.00 par value per share (the "Special Stock"), which
Special Stock may be issued from time to time in one or more series and shall
be designated as the Board of Directors may determine to have such voting
powers, preferences, limitations and relative rights with respect to the shares
of each series of the class of Special Stock
43
<PAGE> 2
of the Corporation as expressly provided in a resolution or resolutions
providing for the issuance of such series adopted by the Board of Directors
which is vested with the authority in respect thereof;
WHEREAS, 16,681 shares of such Special Stock have been previously
designated as the Series C 10% Cumulative Preferred Stock prior to the date
hereof, all of which have been issued and are outstanding;
WHEREAS, 91,000 shares of such Special Stock have been previously
designated as the Series D Cumulative Preferred Stock prior to the date hereof,
none of which has been issued or is outstanding;
WHEREAS, 80,000 shares of such Special Stock have been previously
designated as the Series E Cumulative Convertible Preferred Stock prior to the
date hereof, none of which has been issued or is outstanding;
WHEREAS, 7,500,000 shares of such Special Stock have been previously
designated as the Series F Cumulative Convertible Preferred Stock prior to the
date hereof, 3,350,000 shares of which have been issued and are currently
outstanding;
WHEREAS, 12,000 shares of such Special Stock have been previously
designated as the Series G Cumulative Convertible Preferred Stock prior to the
date hereof, 1,000 shares of which have been issued and are outstanding;
WHEREAS, 231,750 shares of such Special Stock have been previously
designated as the Series H Cumulative Convertible Preferred Stock prior to the
date hereof, none of which has been issued or is outstanding; and
WHEREAS, the Board of Directors now desires to amend and restate the
Articles of Amendment of the Articles of Incorporation of the Corporation
setting forth the certificate of designations, preferences and relative
participating or optional or other special rights, and qualifications,
limitations or restrictions of the Corporation's Series F Cumulative
Convertible Preferred Stock to (i) increase the number of authorized shares of
such series to 15,000,000, and (ii) modify the voting rights with respect to
such series in order to satisfy the listing criteria of the New York Stock
Exchange, all as set forth herein.
NOW, THEREFORE, BE IT RESOLVED, that pursuant to the authority granted
to the Board of Directors by Article Five of the Articles of Incorporation, and
with the unanimous consent and approval of the holders of a majority of the
issued and outstanding shares of Series F Cumulative Convertible Preferred
Stock, the Board of Directors hereby amends and restates the Articles of
Amendment to the Articles of Incorporation setting forth the certificate of
designations, preferences and relative participating or optional or other
special rights, and qualifications, limitations or restrictions of the
Corporation's Series F Cumulative Convertible Preferred Stock as follows:
44
<PAGE> 3
1. Designation and Amount. The shares of such series shall be designated
as "Series F Cumulative Convertible Preferred Stock" (the "Series F
Preferred Stock") and each share of the Series F Preferred Stock shall
have a par value of $2.00 per share and a preference on liquidation as
specified in Section 6 below. The number of shares constituting the
Series F Preferred Stock shall be 15,000,000. Such number of shares
may be increased or decreased by the Board of Directors by filing
articles of amendment as provided in the Georgia Business Corporation
Code; provided, that no decrease shall reduce the number of shares of
Series F Preferred Stock to a number less than the number of shares
then outstanding plus the number of shares reserved for issuance upon
the exercise of outstanding options, rights or warrants; provided
further, that no increase in the authorized amount of shares
constituting Series F Preferred Stock shall be made without the prior
written consent of the holders of a majority of shares of Series F
Preferred Stock then outstanding voting separately as a class.
2. Dividends and Distributions.
(A) The holders of shares of Series F Preferred Stock shall be
entitled to receive, when, as, and if declared by the Board
of Directors and to the extent permitted under the Georgia
Business Corporation Code, out of funds legally available for
the purpose and in preference to and with priority over
dividends upon all Junior Securities, quarterly cumulative
dividends payable in arrears in cash on the fifteenth day
following the end of each calendar quarter (each such date
being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on October 15, 1998, in an amount per
share (rounded to the next highest cent) equal to 10% per
annum of the Adjusted Liquidation Value, as determined
immediately prior to the beginning of such calendar quarter
assuming each year consists of 360 days and each quarter
consists of 90 days. The term "Adjusted Liquidation Value"
shall mean Liquidation Value (as defined in Section 6) plus
all accrued and unpaid dividends through the applicable date.
The foregoing is intended to provide a 10% cumulative return,
compounded on a quarterly basis, on the Liquidation Value
from August 16, 1998.
(B) Dividends shall commence accruing cumulatively on outstanding
shares of the Series F Preferred Stock from August 16, 1998
to and including the date on which the Redemption Price (as
defined in Section 9(A), below) of such shares is paid,
whether or not such dividends have been declared and whether
or not there are profits, surplus or other funds of the
Corporation legally available for the payment of such
dividends. Dividends for the first Quarterly Dividend Payment
Date shall accrue and shall be payable for a period of 45
days. Dividends payable on each Quarterly Dividend Payment
Date shall be dividends accrued and unpaid through the last
Business Day (as defined in Section 3(A) below) of the
immediately preceding calendar month. The Board of Directors
may fix a record date for the determination of holders of
shares of Series F Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon other
than a quarterly dividend paid on the Quarterly Dividend
Payment Date immediately after such dividend accrued; which
record date shall be not more than 50 days prior to the date
fixed for the payment thereof.
45
<PAGE> 4
(C) So long as any shares of the Series F Preferred Stock are
outstanding, the Corporation will not make, directly or
indirectly, any distribution (as such term is defined in the
Georgia Business Corporation Code) in respect of Junior
Securities unless on the date specified for measuring
distributions in Section 14-2-640(e) of the Georgia Business
Corporation Code (a) all accrued dividends on the Series F
Preferred Stock for all past quarterly dividend periods have
been paid in full and the full amount of accrued dividends
for the then current quarterly dividend period has been paid
or declared and a sum sufficient for the payment thereof set
apart and (b) after giving effect to such distribution (i)
the Corporation would not be rendered unable to pay its debts
as they become due in the usual course of business and (ii)
the Corporation's total assets would not be less than the sum
of its total liabilities plus the amount that would be
needed, if the Corporation were to be dissolved at the time
of the distribution, to satisfy the preferential rights upon
dissolution of the holders of the Series F Preferred Stock as
provided in these Articles of Amendment. Dividends shall not
be paid (in full or in part) or declared and set apart for
payment (in full or in part) on any series of Special Stock
(including the Series F Preferred Stock) for any dividend
period unless all dividends, in the case dividends are being
paid in full on the Series F Preferred Stock, or a ratable
portion of all dividends (i.e., so that the amount paid on
each share of each series of Special Stock as a percentage of
total accrued and unpaid dividends for all periods with
respect to each such share is equal), in the case dividends
are not being paid in full on the Series F Preferred Stock,
have been or are, contemporaneously, paid and declared and set
apart for payment on all outstanding series of Special Stock
(including the Series F Preferred Stock) entitled thereto for
each dividend period terminating on the same or earlier date.
If at any time the Corporation pays less than the total amount
of dividends then accrued with respect to the Series F
Preferred Stock, such payment will be distributed ratably
among the then holders of Series F Preferred Stock so that an
equal amount is paid with respect to each outstanding share.
3. Conversion Rights.
(A) The Series F Preferred Stock may be converted at any time and
from time to time in whole or in part after the earliest to
occur of (i) August 15, 2003, (ii) the first Business Day, if
any, occurring after a Quarterly Dividend Payment Date on
which dividends equal to or in excess of 5% of the
Liquidation Value (i.e., $0.50 per share) are accrued and
unpaid, or (iii) the Corporation becomes obligated to mail a
statement pursuant to subsection (G)(iv) below, at the option
of the holders thereof, in accordance with subsection (D)
below at the Conversion Price (as defined below in subsection
(D)) into fully paid and nonassessable Common Stock of the
Corporation by dividing (i) the Adjusted Liquidation Value
for such share of Series
46
<PAGE> 5
F Preferred Stock as of the date of conversion by (ii) the
Conversion Price; provided, however, that as to any shares of
Series F Preferred Stock which shall have been called for
redemption, the right of conversion shall terminate at the
close of business on the second full Business Day (unless
otherwise provided, "Business Day" herein shall mean any day
other than a Saturday, a Sunday or a day on which banking
institutions in Dallas, Texas are authorized or obligated by
law or executive order to remain closed) prior to the date
fixed for redemption. Notwithstanding anything to the
contrary herein provided, the Corporation may elect to redeem
the shares of Series F Preferred Stock sought to be converted
hereunder instead of issuing shares of Common Stock in
replacement thereof in accordance with the provisions of
Section 3(D), below.
(B) For purposes of this Section 3, the term "Conversion Price"
shall be and mean the amount obtained (rounded upward to the
next highest cent) by multiplying (i) 0.9 by (ii) the simple
average of the daily closing price of the Common Stock for
the twenty Business Days ending on the last Business Day of
the calender week immediately preceding the date of
conversion on the New York Stock Exchange or, if the shares
of Common Stock are not then being traded on the New York
Stock Exchange, then on the principal stock exchange
(including without limitation NASDAQ NMS or NASDAQ Small Cap)
on which such Common Stock is then listed or admitted to
trading as determined by the Corporation (the "Principal
Stock Exchange") or, if the Common Stock is not then listed
or admitted to trading on a Principal Stock Exchange, the
average of the last reported closing bid and asked prices on
such days in the over-the-counter market or, if no such
prices are available, the fair market value per share of the
Common Stock, as determined by the Board of Directors of the
Corporation in its sole discretion. The Conversion Price
shall not be subject to any adjustment as a result of the
issuance of any additional shares of Common Stock by the
Corporation for any purpose, except for stock splits (whether
accomplished by stock dividend or otherwise). For purposes of
calculating the Conversion Price, the term "Business Day"
shall mean a day on which the exchange looked to for purposes
of determining the Conversion Price is open for business or,
if no such exchange, the term "Business Day" shall have the
meaning given such term in Section 3(A), above.
(C) Upon any conversion, fractional shares of Common Stock shall
not be issued but any fractions shall be adjusted by the
delivery of one additional share of Common Stock in lieu of
any cash. Any accrued but unpaid dividends shall be
convertible into shares of Common Stock as provided for in
this Section. The Corporation shall pay all issue taxes, if
any, incurred in respect to the issuance of Common Stock on
conversion, provided, however, that the Corporation shall not
be required to pay any transfer or other taxes incurred by
reason of the issuance of such Common Stock in names other
than those in which the Series F Preferred Stock surrendered
for conversion may stand.
47
<PAGE> 6
(D) Any conversion of Series F Preferred Stock into Common Stock
shall be made by the surrender to the Corporation, at the
office of the Corporation set forth in Section 12 hereof or
at the office of the transfer agent for such shares, of the
certificate or certificates representing the Series F
Preferred Stock to be converted, duly endorsed or assigned
(unless such endorsement or assignment be waived by the
Corporation), together with a written request for conversion.
The Corporation shall either (i) issue as of the date of
receipt by the Corporation of such surrender shares of Common
Stock calculated as provided above and evidenced by a stock
certificate delivered to the holder as soon as practicable
after the date of such surrender or (ii) within two Business
Days after the date of such surrender advise the holder of
the Series F Preferred Stock that the Corporation is
exercising its option to redeem the Series F Preferred Stock
pursuant to Section 3(A), above, in which case the
Corporation shall have thirty (30) days from the date of such
surrender to pay to the holder cash in an amount equal to the
Conversion Price for each share of Series F Preferred Stock
so redeemed. The date of surrender of any Series F Preferred
Stock shall be the date of receipt by the Corporation or its
agent of such surrendered shares of Series F Preferred Stock.
(E) A number of authorized shares of Common Stock sufficient to
provide for the conversion of the Series F Preferred Stock
outstanding upon the basis hereinbefore provided shall at all
times be reserved for such conversion. If the Corporation
shall propose to issue any securities or to make any change
in its capital structure which would change the number of
shares of Common Stock into which each share of Series F
Preferred Stock shall be convertible as herein provided, the
Corporation shall at the same time also make proper provision
so that thereafter there shall be a sufficient number of
shares of Common Stock authorized and reserved for conversion
of the outstanding Series F Preferred Stock on the new basis.
(F) The term "Common Stock" shall mean stock of the class
designated as Common Stock of the Corporation on the date the
Series F Preferred Stock is created or stock of any class or
classes resulting from any reclassification or
reclassifications thereof, the right of which to share in
distributions of both earnings and assets is without
limitation in the Articles of Incorporation of the
Corporation as to any fixed amount or percentage and which
are not subject to redemption; provided, that if at any time
there shall be more than one such resulting class, the shares
of each such class then issuable on conversion of the Series
F Preferred Stock shall be substantially in the proportion
which the total number of shares of stock of each such class
resulting from all such reclassifications bears to the total
number of shares of stock of all such classes resulting from
all such reclassifications.
(G) In case the Corporation shall propose at any time before all
shares of the Series F Preferred Stock have been redeemed by
or converted into Common Stock of the Corporation:
48
<PAGE> 7
(i) to pay any dividend on the Common Stock
outstanding payable in Common Stock or to make any other
distribution, other than cash dividends to the holders of the
Common Stock outstanding; or
(ii) to offer for subscription to the holders of the
Common Stock outstanding any additional shares of any class
or any other rights or option; or
(iii) to effect any re-classification or
recapitalization of the Common Stock outstanding involving a
change in the Common Stock, other than a subdivision or
combination of the Common Stock outstanding; or
(iv) to merge or consolidate with or into any other
corporation (unless the Corporation is the surviving entity
and holders of Common Stock continue to hold such Common
Stock without modification and without receipt of any
additional consideration), or to sell, lease, or convey all
or substantially all its property or business, or to
liquidate, dissolve or wind up;
then, in each such case, the Corporation shall mail to the holders of
record of each of the shares of Series F Preferred Stock at their last
known addresses as shown by the Corporation's records a statement,
signed by an officer of the Corporation, with respect to the proposed
action, such statement to be so mailed at least thirty (30) days prior
to the date of the taking of such action or the record date for
holders of the Common Stock for the purposes thereof, whichever is
earlier. If such statement relates to any proposed action referred to
in clauses (iii) or (iv) of this subsection (G), it shall set forth
such facts with respect thereto as shall reasonably be necessary to
inform the holders of the Series F Preferred Stock as to the effect of
such action upon the conversion rights of such holders.
4. Voting Rights and Powers. The holders of shares of Series F Preferred
Stock shall have only the following voting rights:
(A) Except as may otherwise be specifically required by law under
Section 14-2-1004 of the Georgia Business Corporation Code or
otherwise provided herein, the holders of the shares of
Series F Preferred Stock shall not have the right to vote
such stock, directly or indirectly, at any meeting of the
shareholders of the Corporation, and such shares of stock
shall not be counted in determining the total number of
outstanding shares to constitute a quorum at any meeting of
shareholders;
(B) In the event that, under the circumstances, the holders of
the Series F Preferred Stock are required by law to vote upon
any matter, the approval of such series shall be deemed to
have been obtained only upon the affirmative vote of the
holders of a majority of the shares of the Series F Preferred
Stock then outstanding;
49
<PAGE> 8
(C) Except as set forth herein, or as otherwise provided by the
Articles of Incorporation or by law, holders of the Series F
Preferred Stock shall have no voting rights and their consent
shall not be required for the taking of any corporate action;
(D) Notwithstanding anything herein to the contrary, if and
whenever at any time or times all or any portion of the
dividends on Series F Preferred Stock for any six quarterly
dividends, whether or not consecutive, shall be in arrears
and unpaid, then and in any such event, the number of
Directors constituting the Board of Directors shall be
increased by two, and the holders of Series F Preferred
Stock, voting separately as a class, shall be entitled at the
next annual meeting of shareholders, or at a special meeting
of holders of Series F Preferred Stock called as hereinafter
provided, to elect two Directors to fill such newly created
Directorships. Each holder shall be entitled to one vote in
such election for each share of Series F Preferred Stock
held. At such time as all arrearages in dividends on the
Series F Preferred Stock shall have been paid in full and
dividends thereon for the current quarterly period shall have
been paid or declared and a sum sufficient for the payment
thereof set aside, then (i) the voting rights of holders of
Series F Preferred Stock described in this subsection (D)
shall cease (subject always to revesting of such voting
rights in the event of each and every similar future
arrearages in quarterly dividends), (ii) the term of the
Directors then in office as a result of the voting rights
described in this subsection (D) shall terminate and (iii)
the number of Directors shall be reduced by the number of
Directors then in office elected pursuant to this subsection
(D). A vacancy in the class of Directors elected pursuant to
this subsection (D) shall be filled by a Director chosen by
the remaining Directors of the class, unless such vacancy is
filled pursuant to the final sentence of subsection (G);
(E) At any time when the voting right described in subsection (D)
shall have vested and shall remain in the holders of Series F
Preferred Stock, such voting right may be exercised initially
either at a special meeting of holders of Series F Preferred
Stock or at any annual or special shareholders' meeting
called for the purpose of electing Directors, but thereafter
it shall be exercised only at annual shareholders' meetings.
If such voting right shall not already have been initially
exercised, the Secretary of the Corporation may, and upon the
written request of the holders of record of at least 10% of
the shares of Series F Preferred Stock then outstanding
shall, call a special meeting of the holders of Series F
Preferred Stock for the purpose of electing two Directors
pursuant to subsection (D), and notice thereof shall be given
to the holders of Series F Preferred Stock in the same manner
as that required to be given to holders of the Corporation's
Common Stock for the annual meeting of shareholders. Such
meeting shall be held at the earliest practicable date upon
the notice required for special meetings of shareholders of
the Corporation, or, if none, at a time and place designated
by the Secretary of the Corporation.
50
<PAGE> 9
(F) At any meeting held for the purpose of electing Directors at
which the holders of Series F Preferred Stock shall have the
right to elect Directors as provided in subsection (D) above,
the presence in person or by proxy of the holders of at least
thirty-five percent (35%) of the then outstanding shares of
Series F Preferred Stock shall be required and be sufficient
to constitute a quorum of Series F Preferred Stock for the
election of Directors by Series F Preferred Stock, and the
vote of the holders of a majority of such shares so present
in person or by proxy at any such meeting at which there
shall be such a quorum shall be required and be sufficient to
elect the members of the Board of Directors which the holders
of Series F Preferred Stock are entitled to elect as
hereinabove provided. At any such meeting or adjournment
thereof, (i) the absence of a quorum of the holders of Series
F Preferred Stock shall not prevent the election of Directors
other than the Directors to be elected by the holders of
Series F Preferred Stock and (ii) in the case of holders of
Series F Preferred Stock entitled to vote for the election of
Directors, a majority of the holders present in person or by
proxy of such class, if constituting less than a quorum as
hereinabove provided, shall have the power to adjourn the
meeting for the election of the Directors that the holders of
such class are entitled to elect, from time to time until a
quorum shall be present, and notice of such adjourned meeting
need not be given unless otherwise required by law, provided
that nothing herein shall affect the conduct of the meeting
with respect to shareholders of any other class.
(G) Any Director who shall have been elected or appointed
pursuant to Section 4(D) shall hold office for a term
expiring (subject to the earlier termination of the default
in quarterly dividends) at the next annual meeting of
shareholders, and during such term may be removed at any
time, either with or without cause, only by the affirmative
vote of the holders of record of a majority of the shares of
Series F Preferred Stock then outstanding at a special
meeting of such shareholders called for such purpose. Any
vacancy created by such removal may also be filled at such
meeting.
(H) So long as any shares of Series F Preferred Stock remain
outstanding, the Corporation shall not, without the vote or
written consent by the holders of record of two-thirds of the
outstanding shares of Series F Preferred Stock, amend its
articles of incorporation or bylaws if such amendment would
materially alter or change the existing terms of the Series F
Preferred Stock.
5. Reacquired Shares. Any shares of Series F Preferred Stock purchased or
otherwise acquired by the Corporation in any manner whatsoever or
surrendered for conversion hereunder shall no longer be deemed to be
outstanding and all rights with respect to such shares of stock,
including the right, if any, to receive notices and to vote, shall
forthwith cease except, in the case of stock surrendered for
conversion hereunder, rights of the holders thereof to receive Common
Stock in exchange therefor. All shares of Series F Preferred Stock
obtained by the Corporation shall be retired and canceled promptly
after the acquisition thereof. All such shares shall upon their
cancellation become authorized but unissued shares of Special Stock
51
<PAGE> 10
and may be reissued as part of a new series of Special Stock subject
to the conditions and restrictions on issuance set forth herein, in
the Articles of Incorporation, or in any other Certificates of
Designations creating a series of Special Stock or any similar stock
or as otherwise required by law.
6. Liquidation, Dissolution or Winding Up. The Liquidation Value of the
Series F Preferred Stock shall be $10.00 per share. Upon any
liquidation, dissolution or winding up of the Corporation, and after
paying and providing for the payment of all creditors of the
Corporation, the holders of shares of the Series F Preferred Stock
then outstanding shall be entitled, before any distribution or payment
is made upon any Junior Securities (defined to be and mean the Common
Stock and any other equity security of any kind which the Corporation
at any time has issued, issues or is authorized to issue if the Series
F Preferred Stock has priority over such securities as to dividends or
upon liquidation, dissolution or winding up), to receive a liquidation
preference in an amount in cash equal to the Adjusted Liquidation
Value as of the date of such payment, whether such liquidation is
voluntary or involuntary, and the holders of the Series F Preferred
Stock shall not be entitled to any other or further distributions of
the assets. If, upon any liquidation, dissolution or winding up of the
affairs of the Corporation, the net assets available for distribution
shall be insufficient to permit payment to the holders of all
outstanding shares of all series of Special Stock of the amount to
which they respectively shall be entitled, then the assets of the
Corporation to be distributed to such holders will be distributed
ratably among them based upon the amounts payable on the shares of
each such series of Special Stock in the event of voluntary or
involuntary liquidation, dissolution or winding up, as the case may
be, in proportion to the full preferential amounts, together with any
and all arrearages to which they are respectively entitled. Upon any
such liquidation, dissolution or winding up of the Corporation, after
the holders of Special Stock have been paid in full the amounts to
which they are entitled, the remaining assets of the Corporation may
be distributed to holders of Junior Securities, including Common
Stock, of the Corporation. The Corporation will mail written notice of
such liquidation, dissolution or winding up, not less than twenty (20)
nor more than fifty (50) days prior to the payment date stated therein
to each record holder of Series F Preferred Stock. Neither the
consolidation nor merger of the Corporation into or with any other
corporation or corporations, nor the sale or transfer by the
Corporation of less than all or substantially all of its assets, nor a
reduction in the capital stock of the Corporation, nor the purchase or
redemption by the Corporation of any shares of its Special Stock or
Common Stock or any other class of its stock will be deemed to be a
liquidation, dissolution or winding up of the Corporation within the
meaning of this Section 6.
7. Ranking. Except as provided in the following sentence, the Series F
Preferred Stock shall rank on a parity as to dividends and upon
liquidation, dissolution or winding up with all other shares of
Special Stock issued by the Corporation. The Corporation shall not
issue any shares of Special Stock of any series which are superior to
the Series F Preferred Stock as to dividends or rights upon
liquidation, dissolution or winding up of the Corporation as long as
any shares of the Series F Preferred Stock are issued and outstanding,
without the prior
52
<PAGE> 11
written consent of the holders of at least 66 2/3% of such shares of
Series F Preferred Stock then outstanding voting separately as a
class.
8. Redemption at the Option of the Holder. The shares of Series F
Preferred Stock shall not be redeemable at the option of a holder of
Series F Preferred Stock.
9. Redemption at the Option of the Corporation.
(A) In addition to the redemption right of the Corporation set
forth in Section 3(A), above, the Corporation shall have the
right to redeem all or a portion of the Series F Preferred
Stock issued and outstanding at any time and from time to
time, at its option, for cash. The redemption price of the
Series F Preferred Stock pursuant to this Section 9 shall be
an amount per share (the "Redemption Price") equal to (i)
105% of the Adjusted Liquidation Value as of the Redemption
Date (as defined in subsection (B) below) during the period
from August 15, 1997 through August 15, 1998; (ii) 104% of
Adjusted Liquidation Value as of the Redemption Date during
the period from August 16, 1998 through August 15, 1999; and
(iii) 103% of the Adjusted Liquidation Value as of the
Redemption Date at any time on or after August 16, 1999.
(B) The Corporation may redeem all or a portion of any holder's
shares of Series F Preferred Stock by giving such holder not
less than twenty (20) days nor more than thirty (30) days
notice thereof prior to the date on which the Corporation
desires such shares to be redeemed, which date shall be a
Business Day (the "Redemption Date"). Such notice shall be
written and shall be hand delivered or mailed, postage
prepaid, to the holder (the "Redemption Notice"). The
Redemption Notice, once given, shall be irrevocable. If
mailed, such notice shall be deemed to be delivered when
deposited in the United States Mail, postage prepaid,
addressed to the holder of shares of Series F Preferred Stock
at his address as it appears on the stock transfer records of
the Corporation. The Redemption Notice shall state (i) the
total number of shares of Series F Preferred Stock held by
such holder; (ii) the total number of shares of the holder's
Series F Preferred Stock that the Corporation intends to
redeem; (iii) the Redemption Date and the Redemption Price;
and (iv) the place at which the holder(s) may obtain payment
of the applicable Redemption Price upon surrender of the
share certificate(s).
(C) If fewer than all shares of the Series F Preferred Stock at
any time outstanding shall be called for redemption, such
shares shall be redeemed pro rata, by lot drawn or other
manner deemed fair in the sole discretion of the Board of
Directors to redeem one or more such shares without redeeming
all such shares of Series F Preferred Stock. If a Redemption
Notice shall have been so mailed, at least two Business Days
prior to the Redemption Date the Corporation shall provide
for payment of a sum sufficient to redeem the applicable
number of shares of Series F Preferred Stock
53
<PAGE> 12
subject to redemption either by (i) setting aside the sum
required to be paid as the Redemption Price by the
Corporation, separate and apart from its other funds, in
trust for the account of the holder(s) of the shares of
Series F Preferred Stock to be redeemed or (ii) depositing
such sum in a bank or trust company (either located in the
state where the principal executive office of the Corporation
is maintained, such bank or trust company having a combined
surplus of at least $20,000,000 according to its latest
statement of condition, or such other bank or trust company
as may be permitted by the Articles of Incorporation, or by
law) as a trust fund, with irrevocable instructions and
authority to the bank or trust company to give or complete
the notice of redemption and to pay, on or after the
Redemption Date, the applicable Redemption Price on surrender
of certificates evidencing the share(s) of Series F Preferred
Stock so called for redemption and, in either event, from and
after the Redemption Date (a) the share(s) of Series F
Preferred Stock shall be deemed to be redeemed, (b) such
setting aside or deposit shall be deemed to constitute full
payment for such shares(s), (c) such share(s) so redeemed
shall no longer be deemed to be outstanding, (d) the
holder(s) thereof shall cease to be a shareholder of the
Corporation with respect to such share(s), and (e) such
holder(s) shall have no rights with respect thereto except
the right to receive the Redemption Price for the applicable
shares. Any interest on the funds so deposited shall be paid
to the Corporation. Any and all such redemption deposits
shall be irrevocable except to the following extent: any
funds so deposited which shall not be required for the
redemption of any shares of Series F Preferred Stock because
of any prior sale or purchase by the Corporation other than
through the redemption process, subsequent to the date of
deposit but prior to the Redemption Date, shall be repaid to
the Corporation forthwith and any balance of the funds so
deposited and unclaimed by the holder(s) of any shares of
Series F Preferred Stock entitled thereto at the expiration
of one calendar year from the Redemption Date shall be repaid
to the Corporation upon its request or demand therefor, and
after any such repayment of the holder(s) of the share(s) so
called for redemption shall look only to the Corporation for
payment of the Redemption Price thereof. All shares of Series
F Preferred Stock redeemed shall be canceled and retired and
no shares shall be issued in place thereof, but such shares
shall be restored to the status of authorized but unissued
shares of Special Stock.
(D) Holders whose shares of Series F Preferred Stock have been
redeemed hereunder shall surrender the certificate or
certificates representing such shares, duly endorsed or
assigned (unless such endorsement or assignment be waived by
the Corporation), to the Corporation by mail, courier or
personal delivery at the Corporation's principal executive
office or other location so designated in the Redemption
Notice, and upon the Redemption Date the Redemption Price
shall be payable to the order of the person whose name
appears on such certificate or certificates as the owner
thereof, and each surrendered certificate shall be canceled
and retired. In the event fewer than
54
<PAGE> 13
all of the shares represented by such certificates are
redeemed, a new certificate shall be issued representing the
unredeemed shares.
10. Sinking Fund. The Corporation shall not be required to maintain any
so-called "sinking fund" for the retirement on any basis of the Series
F Preferred Stock.
11. Fractional Shares. The Series F Preferred Stock may be issued in
fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights, receive
dividends, participate in distributions and to have the benefit of all
other rights of holders of shares of Series F Preferred Stock.
12. Notice. Any notice or request made to the Corporation in connection
with the Series F Preferred Stock shall be given, and shall
conclusively be deemed to have been given and received three Business
Days following deposit thereof in writing, in the U.S. mails,
certified mail, return receipt requested, duly stamped and addressed
to the Corporation, to the attention of its General Counsel, at its
principal executive offices (which shall be deemed to be the address
most recently provided to the Securities and Exchange Commission
("SEC") as its principal executive offices for so long as the
Corporation is required to file reports with the SEC).
IN WITNESS WHEREOF, these Amended and Restated Articles of Amendment
are executed on behalf of the Corporation by its President and attested by its
Secretary as of the 23rd day of October, 1998.
/s/ Karl L. Blaha
------------------------------------
Karl L. Blaha
President
Attest:
/s/ Robert A. Waldman
- ------------------------------------
Robert A. Waldman
Secretary
55
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