<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 JUNE 30, 1998
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Commission File Number 1-9948
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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 10,755,584
- ---------------------------- ------------------------------
(Class) (Outstanding at July 31, 1998)
<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>
June 30, December 31,
1998 1997
------------ ------------
(dollars in thousands)
Assets
------
<S> <C> <C>
Notes and interest receivable
Performing .............................................. $ 341 $ 9,300
Nonperforming ........................................... 499 18,624
------------ ------------
840 27,924
Less - allowance for estimated losses ...................... (667) (2,398)
------------ ------------
173 25,526
Real estate held for sale, net of accumulated
depreciation ($5,098 in 1997) ........................... 185,454 178,938
Real estate held for investment, net of accumulated
depreciation ($7,624 in 1998 and $5,380 in 1997) ........ 213,168 123,515
Pizza parlor equipment, net of accumulated
depreciation ($1,272 in 1998 and $905 in 1997) .......... 7,347 6,693
Marketable equity securities, at market value .............. 6,196 6,205
Cash and cash equivalents .................................. 4,649 5,347
Investments in equity investees ............................ 61,671 45,851
Intangibles, net of accumulated amortization
($952 in 1998 and $704 in 1997) ......................... 15,086 15,230
Other assets ............................................... 26,262 26,494
------------ ------------
$ 520,006 $ 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>
June 30, December 31,
1998 1997
------------ ------------
(dollars in thousands)
Liabilities and Stockholders' Equity
------------------------------------
<S> <C> <C>
Liabilities
Notes and interest payable ($11,700 in 1998 and
$11,400 in 1997 to affiliates) .......................... $ 342,679 $ 261,986
Margin borrowings .......................................... 56,185 53,376
Accounts payable and other liabilities (including
$10,726 in 1998 and $22,825 in 1997 to affiliate) ....... 23,924 34,442
------------ ------------
422,788 349,804
Minority interest .......................................... 28,921 20,542
Commitments and contingencies
Stockholders' equity
Preferred Stock, $2.00 par value, authorized
20,000,000 shares, issued and outstanding
Series B, 4,000 shares in 1997 .......................... -- 8
Series C, 16,681 shares in 1998 and 1997
(liquidation preference $1,668) ....................... 33 33
Series F, 3,100,000 shares in 1998 and 1997
(liquidation preference $31,000) ...................... 5,600 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 ............................................ 83,691 84,943
Accumulated (deficit) ...................................... (21,137) (25,638)
Treasury stock at cost, 2,737,216 shares in 1998
and 2,767,427 shares in 1997 ............................ (27) (28)
------------ ------------
68,297 63,453
------------ ------------
$ 520,006 $ 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 Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Income
Sales ................................ $ 7,332 $ 2,181 $ 14,085 $ 2,181
Rents ................................ 15,741 5,014 27,308 10,922
Interest ............................. 16 1,176 154 2,297
Other ................................ (399) 1,296 (608) 1,766
----------- ----------- ----------- -----------
22,690 9,667 40,939 17,166
----------- ----------- ----------- -----------
Expenses
Cost of sales ........................ 6,225 1,688 12,005 1,688
Property operations .................. 11,541 4,018 21,204 8,471
Interest ............................. 13,001 6,870 22,537 12,074
Advisory and servicing fees
to affiliate ....................... 949 585 1,709 1,009
Incentive compensation to
affiliate .......................... -- 299 -- 299
General and administrative ........... 1,942 1,556 4,227 2,351
Depreciation and
amortization ....................... 1,727 600 2,959 1,147
Minority interest .................... 445 344 933 716
----------- ----------- ----------- -----------
35,830 15,960 65,574 27,755
----------- ----------- ----------- -----------
(Loss) from operations ................. (13,140) (6,293) (24,635) (10,589)
Equity in income of investees .......... 18,943 4,970 21,330 5,250
Gains on sale of real estate ........... 8,974 3,863 8,974 8,150
----------- ----------- ----------- -----------
Net income ............................. 14,777 2,540 5,669 2,811
Preferred dividend requirement ......... (84) (49) (135) (99)
Net income (loss) applicable
to Common shares ..................... $ 14,693 $ 2,491 $ 5,534 $ 2,712
=========== =========== =========== ===========
Earnings per share
Net income (loss) .................... $ 1.38 $ .21 $ .53 $ .23
=========== =========== =========== ===========
Weighted average Common shares
used in computing earnings
per share ............................ 10,732,266 12,075,307 10,724,507 12,114,939
=========== =========== =========== ===========
</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 Six Months Ended June 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 ($.10 per
share) ..................... -- -- -- -- --
Series B Preferred
Stock ($2.50 per
share) ..................... -- -- -- -- --
Series C Preferred
Stock ($5.00 per
share) ..................... -- -- -- -- --
Issuance of Series G
Preferred Stock ............... -- -- -- 2 --
Issuance of Series F
Preferred Stock ............... -- -- 1,600 -- --
Sale of Common Stock
under dividend
reinvestment plan ............. -- -- -- -- --
Conversion of Series B
Preferred Stock to
Common Stock .................. (8) -- -- -- --
Net income ........................ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance, June 30,
1998 .......................... $ -- $ 33 $ 5,600 $ 2 $ 135
========== ========== ========== ========== ==========
<CAPTION>
Treasury Paid-in Accumulated Stockholders'
Stock Capital (Deficit) Equity
---------- ---------- ----------- -------------
<C> <C> <C> <C>
Balance, January 1, 1998 .......... $ (28) $ 84,943 $ (25,638) $ 63,453
Dividends
Common Stock ($.10 per
share) ..................... -- -- (1,033) (1,033)
Series B Preferred
Stock ($2.50 per
share) ..................... -- -- (54) (54)
Series C Preferred
Stock ($5.00 per
share) ..................... -- -- (81) (81)
Issuance of Series G
Preferred Stock ............... -- 98 -- 100
Issuance of Series F
Preferred Stock ............... -- (1,600) -- --
Sale of Common Stock
under dividend
reinvestment plan ............. -- 197 -- 197
Conversion of Series B
Preferred Stock to
Common Stock .................. 1 53 -- 46
Net income ........................ -- -- 5,669 5,669
---------- ---------- ---------- ----------
Balance, June 30,
1998 .......................... $ (27) $ 83,691 $ (21,137) $ 68,297
========== ========== ========== ==========
</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 Six Months
Ended June 30,
----------------------------
1998 1997
------------ ------------
Cash Flows from Operating Activities (dollars in thousands)
<S> <C> <C>
Pizza parlor sales collected .......................... $ 14,029 $ 2,181
Rents collected ....................................... 23,512 10,443
Interest collected .................................... 381 2,071
Distributions from equity investees'
operating cash flow ................................. 8,498 1,315
Payments for pizza parlor operations .................. (13,781) (1,688)
Payments for property operations ...................... (18,428) (5,938)
Interest paid ......................................... (16,497) (7,517)
Advisory and servicing fees paid to affiliate ......... (1,709) (1,009)
General and administrative expenses paid .............. (4,232) (2,404)
Other ................................................. (861) (396)
------------ ------------
Net cash (used in) operating activities ............. (9,088) (2,942)
Cash Flows From Investing Activities
Collections on notes receivable ....................... 7,653 5,499
Funding of notes receivable ........................... (268) (2,888)
Pizza parlor equipment purchased ...................... (787) --
Proceeds from sale of real estate ..................... 34,126 12,385
Proceeds from sale of marketable equity
securities .......................................... 3,787 4,613
Purchases of marketable equity securities ............. (5,001) (6,345)
Investment in real estate entities .................... (2,650) (463)
Distributions from equity investees' investing
activities ........................................ 13,165 --
Acquisition of real estate ............................ (37,283) (37,063)
Deposits .............................................. (903) (3,883)
Real estate improvements .............................. (4,807) (3,162)
------------ ------------
Net cash provided by (used in) investing
activities ........................................ 7,032 (31,307)
Cash Flows From Financing Activities
Proceeds from notes payable ........................... 82,395 39,472
Payments on notes payable ............................. (60,922) (22,535)
Deferred borrowing costs .............................. (6,322) (2,454)
Net advances (payments) to/from affiliates ............ (12,153) 22,735
Margin borrowings, net ................................ 220 2,353
Common dividends paid ................................. (1,033) (1,013)
Preferred dividends paid .............................. (91) (20)
Distributions to minority interest .................... (933) (716)
Sale of Common Stock under dividend
reinvestment plan ................................. 197 --
------------ ------------
Net cash provided by financing activities ........... 1,358 37,822
Net increase (decrease) in cash and cash
equivalents ................................... $ (698) $ 3,573
Cash and cash equivalents, beginning of period ............. 5,347 1,254
------------ ------------
Cash and cash equivalents, end of period ................... $ 4,649 $ 4,827
============ ============
</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 Six Months
Ended June 30,
----------------------------
1998 1997
------------ ------------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net income to net cash
provided by (used in) operating activities
Net income ............................................ $ 5,669 $ 2,811
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation and amortization ..................... 2,959 1,147
Amortization of deferred borrowing cost ........... 3,462 1,712
Gain on sale of real estate ....................... (8,974) (8,150)
Distributions from equity investees' operating
cash flow ..................................... 8,498 14,448
Equity in (income) losses of investees ............ (21,330) (5,250)
(Increase) decrease in marketable equity
securities .................................... 9 (1,600)
(Increase) decrease in accrued interest
receivable .................................... 346 (93)
(Increase) decrease in other assets ............... (1,523) (5,856)
(Decrease) increase in accrued interest payable ... 349 (1,680)
(Decrease) increase in accounts payable and
other liabilities ............................. 1,640 (613)
Other ............................................. (193) 182
------------ ------------
Net cash (used in) operating activities ......... $ (9,088) $ (2,942)
============ ============
Schedule of noncash investing and financing activities
Stock dividends on Series C Preferred Stock ........... $ -- $ 82
Notes payable from acquisition of real estate ......... 14,619 32,154
Notes payable from acquisition of minority
interest .......................................... -- 5,000
Notes receivable canceled on reacquisition of
property .......................................... 1,300 --
Note receivable from sale of real estate .............. -- 800
Issuance of Series F Preferred Stock .................. 1,600 --
Issuance of Series G Preferred Stock .................. 100 --
Investment in properties reacquired ................... 5,270 --
Foreclosure of note receivable ........................ 22,715 --
Dividend obligation discharged on conversion of
Series B Preferred Stock .......................... 44 --
</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 Six Months
Ended June 30,
----------------------------
1998 1997
------------ ------------
(dollars in thousands)
<S> <C> <C>
Acquisition of Pizza World Supreme, Inc. ...................
Carrying value of intangibles ......................... $ -- $ 15,482
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 six month period ended June 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 June 30, 1998, the Company owned
approximately 54% of the outstanding limited partner units of NRLP.
NRLP, SAMLP and Mr. Phillips were among the defendants in a class action lawsuit
arising from the formation of NRLP. An agreement settling such lawsuit (the
"Settlement Agreement") for the above mentioned defendants became effective on
July 5, 1990. The Settlement Agreement provided for, among other things, the
appointment of an NRLP oversight committee and the establishment of specified
annually increasing targets for five years relating to the price of NRLP's units
of limited partner interest.
The Settlement Agreement provides for the resignation and replacement of SAMLP
as general partner if the unit price targets are not met for two consecutive
anniversary dates. NRLP did not meet the unit price targets for the first and
second anniversary dates. On July 8, 1992, SAMLP notified the NRLP oversight
committee of the failure of NRLP to meet the unit price targets for two
successive years and that it expects to resign as general partner of NRLP and
NOLP.
The withdrawal of SAMLP as general partner would require NRLP to purchase
SAMLP's general partner interest (the "Redeemable General Partner Interest") at
its then fair value, and to pay certain fees and other compensation as provided
in the partnership agreement. Syntek Asset Management, Inc. ("SAMI"), the
managing general partner of SAMLP, has calculated the fair value of such
Redeemable General Partner Interest to be $49.6 million at June 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 June 30, 1998) and accrued interest ($7.8
million at June 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 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 and directed that a
notice be prepared to be mailed to the plaintiff class members describing the
Cash Distribution Agreement. In addition, the Supervising Judge scheduled
October 16, 1998 as the date for the final hearing on any objections to the Cash
Distribution Agreement.
Pursuant to the order entered on August 4, 1998, $11.4 million will be deposited
by NRLP into an escrow account following the final approval by the Supervising
Judge of the Cash Distribution Agreement. 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.
Upon final approval by the Supervising Judge, 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 60.5% of the
outstanding units of NRLP as of July 31, 1998) will be voted pro rata with the
vote of the other limited partners.
10
<PAGE> 11
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. SYNTEK ASSET MANAGEMENT, L.P. (Continued)
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 fourth quarter of 1998. 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 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 total amount of
cash distributed by NRLP under the Cash Distribution Agreement. This note will
require repayment over a ten-year period, bear interest and be guaranteed by the
Trust, which (as of July 31, 1998) is the owner of a 96% limited partner
interest in SAMLP and approximately 54% of the outstanding units of NRLP.
In the event that the Cash Distribution Agreement is disapproved by the
Supervising Judge or does not become effective pursuant to the provisions
thereof, then the parties shall be restated to their respective positions as of
December 14, 1997, all of the provisions of the Cash Distribution Agreement
shall be void, 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 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 associated with the sale.
In August 1990, the Company obtained the Continental Hotel and Casino in Las
Vegas, Nevada, through foreclosure subject to first and second lien mortgages
totaling $10.0 million. In June 1992, the Company sold the
11
<PAGE> 12
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued)
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 the first such payment on March 2, 1998. The Company's
wraparound mortgage note receivable had a principal balance of $22.7 million at
March 31, 1998. In April 1998, the bankruptcy court allowed the Company to
foreclose on its mortgage note receivable. The Company 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.
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, based on the
$952,000 purchase price of the property.
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 bears interest at 10% per
annum, requires quarterly payments of interest only and matures in December
2000. The Company paid a real estate brokerage commission of $123,000 to Carmel
Realty based on the $2.0 million purchase price of the property.
Further in January 1998, the Company purchased 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
based on the $1.3 million purchase price of the property.
12
<PAGE> 13
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
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 based on the $3.0 million purchase price
of the property.
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 the maturity in February
1999. The Company's JHL Connell land is pledged as additional collateral for
this loan. The Company paid a real estate brokerage commission of $30,000 to
Carmel Realty based on the $1.0 million purchase price of the property.
Further in February 1998, the Company financed 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 associated with the financing. The
mortgage bears interest at 9.0% per annum, requires monthly payments of interest
only and matures in February 2000. The Company paid a mortgage brokerage and
equity refinancing fee of $16,000 to BCM based on the $1.6 million mortgage.
In February 1998, the Company refinanced the Vineyards land in the amount of
$3.4 million. The Company received net 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 based on the new $3.4 million mortgage.
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 associated with the financing. The
mortgage bears interest at 9.0% per annum, requires monthly payments of interest
only and matures in February 2000. The Company paid a mortgage brokerage and
equity refinancing fee of $43,000 to BCM based on the $4.3 million mortgage.
In November 1994, the Company and an affiliate of BCM, sold five apartment
complexes to a newly formed limited partnership in exchange for $3.2 million in
cash, a 27% limited partner interest in the partnership and two mortgage notes
receivable, secured by one of the properties sold. The Company had the option to
reacquire the properties at any time after September 1997 for their original
sales prices, after the buyer received a 12% return on its investment.
Accordingly, the
13
<PAGE> 14
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
Company recorded a deferred gain of $5.6 million which was offset against the
Company's investment in the partnership. In February 1998, the Company
reacquired three of the properties, one of which was security for the notes
receivable, for $7.7 million. The Company paid $4.0 million in cash and assumed
the existing 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 mortgage
debt and the payment of various closing costs associated with the financing. The
new mortgages bear interest at 9.5% per annum, require monthly principal and
interest payments of a total of $66,000 and mature in February 2008. In
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
in 1994 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 in 1994 on the sale of these two 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 based on the $800,000 mortgage.
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 4.5% above the prime rate, currently 13%
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 off at
maturity. The Company paid a real estate brokerage commission of $720,000 to
Carmel Realty based on the $12.0 million purchase price of the property.
Further in March 1998, the Company refinanced the mortgage debt secured by 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 Las Colinas I term loan and
the payment of various closing costs associated with the financing. The Company
also pledged 800,000 shares of Series F Preferred Stock as additional security
for the loan. The
14
<PAGE> 15
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
new mortgage bears interest at 12% per annum, requires monthly payments of
interest only and matures in March 1999. The Company paid a mortgage brokerage
and equity refinancing fee of $207,000 to BCM based on the new $20.7 million
mortgage.
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. The
Company paid a real estate brokerage commission of $223,000 to Carmel Realty
based on the $7.4 million purchase price of the property.
Also in April 1998, the Company sold a 77.7 acre tract of the Lewisville land
parcel, for $6.8 million in cash. The Company received net cash of $358,000
after paying off first and second lien mortgages totaling $5.9 million and the
payment of various closing costs associated with the sale. The Company paid a
real estate brokerage commission of $203,000 to Carmel Realty based on the $6.8
million sales price of the property. The Company 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 bears interest at 12% per
annum, with principal and interest due at maturity in October 1998. See NOTE 10.
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
In April 1998, the Company refinanced the mortgage debt secured by 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 associated with the financing. The new mortgage bears
interest at 9.5% per annum, requires monthly payments of interest only and
matures in April 2000. The Company paid a mortgage brokerage and equity
refinancing fee of $73,000 to BCM based on the new $7.3 million mortgage.
In May 1998, but effective April 1, 1998, the Company completed the purchase, in
a single transaction, twenty-nine 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,
15
<PAGE> 16
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
$.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 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 based on the $55.8 million
purchase price of the property.
Also in May 1998, the Company sold a 15.4 acre tract of the 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 associated with the sale. The Company paid a
real estate brokerage commission of $37,000 to Carmel Realty based on the $1.2
million sales price of the property. 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
based on the $1.2 million purchase price of the property.
In May 1998, the Company sold a 21.3 acre tract of the 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 associated with the sale. The Company paid a real estate
brokerage commission of $38,000 to Carmel Realty based on the $1.3 million sales
price of the property. 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 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 associated with the financing. 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 security on
the mortgage.
In June 1998, the Company sold a 21.6 acre tract of the Chase Oaks land, 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 associated with the sale. The Company paid a real estate
brokerage commission of $99,000 to Carmel Realty based on the $3.3 million sales
price of the property. The Company recognized a gain of $848,000 on the sale.
16
<PAGE> 17
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
Also in June 1998, the Company sold a 150.0 acre tract of the Rasor land, 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 associated with the sale. The Company paid a real estate
brokerage commission of $203,000 to Carmel Realty based on the $6.8 million
sales price of the property. The Company 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 the $7.2 million mortgage secured by such land parcel and the
payment of various closing costs associated with the sale. The Company paid a
real estate brokerage commission of $517,000 to Carmel Realty based on the $17.2
million sales price of the property. The Company recognized a gain of $3.9
million on the sale.
NOTE 5. INVESTMENT IN EQUITY INVESTEES
Real estate entities. The Company's investment in real estate entities at June
30, 1998, includes (i) equity securities of three publicly traded Real Estate
Investment Trusts (collectively the "REITs"), Continental Mortgage and Equity
Trust ("CMET"), Income Opportunity Realty Investors, Inc. ("IORI") and
Transcontinental Realty Investors, Inc. ("TCI"), (ii) units of limited partner
interest of NRLP, (iii) a general partnership interest in NRLP and NOLP, the
operating partnership of NRLP, through the Company's 96% limited partner
interest in SAMLP and (iv) interests in real estate joint venture partnerships.
BCM, the Company's advisor, serves as advisor to the REITs, and performs certain
administrative and management functions for NRLP and NOLP on behalf of SAMLP.
The Company accounts for its investment in the REITs, NRLP and the joint venture
partnerships under the equity method. The Company continues to account for its
investment in NRLP under the equity method due to the pending resignation of
SAMLP as general partner of NRLP 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."
[THIS SPACE INTENTIONALLY LEFT BLANK.]
17
<PAGE> 18
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN EQUITY INVESTEES (Continued)
The Company's investment in real estate entities, accounted for using the equity
method, at June 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 June 30, 1998 June 30, 1998 June 30, 1998 June 30, 1998
- -------- ----------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
NRLP 54.4% $ 21,263 $ * $ 68,608
CMET 40.9 16,668 36,643 27,910
IORI 29.7 3,448 7,352 5,210
TCI 31.0 8,330 26,602 19,201
----------- -----------
49,709 $ 120,929
===========
General partner interest in
NRLP and NOLP 6,041
Other equity investees 5,921
-----------
$ 61,671
===========
</TABLE>
* At June 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 six
months ended June 30, 1998:
Equity investees owned over 50%:
<TABLE>
<S> <C>
Revenues ................................. $ 57,764
Property operating expenses .............. 42,024
Depreciation ............................. 4,814
Interest expense ......................... 17,089
---------------
(Loss) from operations ................... (6,163)
Gain on sale of real estate .............. 36,827
---------------
Net income ............................... $ 30,664
===============
</TABLE>
18
<PAGE> 19
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN EQUITY INVESTEES (Continued)
The Company's share of over 50% owned equity investees' operations was a loss of
$3.5 million for the six months ended June 30, 1998. The Company's share of
equity investees' gains on sale of real estate was $22.4 million for the six
months ended June 30, 1998.
Equity investees owned less than 50%:
<TABLE>
<S> <C>
Revenues.................................. $ 68,717
Equity in income of partnerships.......... 740
Property operating expenses............... 43,315
Depreciation.............................. 10,220
Interest expense.......................... 24,402
---------------
(Loss) from operations.................... (8,480)
Gain on sale of real estate............... 7,594
---------------
Net (loss)................................ $ (886)
===============
</TABLE>
The Company's share of less than 50% owned equity investees' loss from
operations was $1.4 million for the six months ended June 30, 1998. The
Company's share of equity investees' gains on sale of real estate was $3.8
million for the six months ended June 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 six
months of 1998, the Company received distributions totaling $8.5 million from
the REITs and NRLP including $6.7 million in distributions that were accrued at
December 31, 1997.
In the first six months of 1998, the Company purchased a total of $291,000 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 six months of 1998 an
additional 12 lots were sold. At June 30, 1998, 61 lots remained to be sold. In
1998, the partnership recorded a gain of $101,000 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
19
<PAGE> 20
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN EQUITY INVESTEES (Continued)
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 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 the time 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 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 June 1998, the Company purchased
the remaining 35% general partner interest in Campbell Associates for $2.1
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.
NOTE 6. INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
Real Pizza
1998 Estate Parlor Total
- ------ ---------- ---------- ----------
<S> <C> <C> <C>
Revenues ........................... $ 26,854 $ 14,085 $ 40,939
(Loss) from operations ............. (24,572) (63) (24,635)
Identifiable assets ................ 495,139 24,867 520,006
Depreciation and amortization ...... 2,480 479 2,959
Capital expenditures ............... 4,807 787 5,594
</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
20
<PAGE> 21
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO (Continued)
first six months of 1998, the Company purchased $5.0 million and sold $3.8
million of such securities. These equity securities are considered a trading
portfolio and are carried at market value. At June 30, 1998, the Company
recognized an unrealized decrease in the market value of its trading portfolio
securities of $1.4 million. Also in the first six months of 1998, the Company
realized a net gain of $206,000 from the sale of trading portfolio securities
and received $14,000 in dividends. Unrealized and realized gains and losses on
trading portfolio securities are included in other income in the accompanying
Consolidated Statements of Operations.
NOTE 8. MARGIN BORROWINGS
The Company has margin arrangements with various brokerage firms which provide
for borrowing of up to 50% of the market value of the Company's 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 $56.2
million at June 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 $4.8 million at June 30, 1998. The Company received $2.0 million in net
cash.
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 $24.0 million at July 31, 1998. The margin loan is due and
payable. The Company has received a commitment from a financial institution for
a new loan in a principal amount in excess of the current outstanding loan
balance. The Company has notified the existing margin lender that it intends to
pay such loan in full prior to August 31, 1998.
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 six
months ended June 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. See NOTE 4. "REAL ESTATE."
21
<PAGE> 22
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 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 based on the
$471,000 purchase price of the property.
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 of 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 shares of the Company's
Series H Preferred Stock anytime after twelve months from closing on the basis
of 100 Class A units for each share of Series H Preferred Stock. The Series H
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 based on the $38.2 million purchase
price of the property.
Further in July 1998, the Company purchased the HSM Cummings land, a 10.9 acre
parcel of undeveloped land in Dallas County, Texas, for $1.6 million in cash.
The Company paid a real estate brokerage commission of $48,000 to Carmel Realty
based on the $1.6 million purchase price of the property.
In July 1998, the Company purchased the Walker land, a 71.1 acre parcel of
undeveloped land in Dallas County, Texas, for $10.9 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 HSM Cummings land.
The Company paid a real estate brokerage commission of $327,000 to Carmel Realty
based on the $10.9 million purchase price of the property.
22
<PAGE> 23
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.
Liquidity and Capital Resources
General. Cash and cash equivalents at June 30, 1998 aggregated $4.6 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 expected
to be sufficient to discharge all of the Company's debt obligations as they
mature. The Company will therefore continue to rely on externally generated
funds, including borrowings against its investments in various real estate
entities, the sale or refinancing of properties and, to the extent available or
necessary, borrowings from its advisor, which totaled $10.7 million at June 30,
1998, to meet its debt service obligations, pay taxes, interest and other
non-property related expenses.
At December 31, 1997, notes payable totaling $89.0 million had either scheduled
maturities or required principal reduction payments during 1998. The Company had
the option of extending the maturity dates of $18.3 million of that amount, 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. The
lender on an additional $19.5 million has extended the loan's maturity date to
February 2000. In March 1998, the Company made a $10.2 million paydown on this
loan. In addition, through June 30, 1998 the Company has paid down or paid off a
total of $20.4 million of the remainder of such maturing debt. The Company
intends to either pay off, extend the maturity dates or obtain alternate
financing for the remaining $30.8 million of debt that matures during the
remainder of 1998. There can be no assurance, however, that these efforts to
obtain alternative financing or complete land sales will be successful.
The Company expects an increase in cash flow from property operations during the
remainder of 1998. Such increase is expected to be derived from operations of
the Inn at the Mart, Best Western Oceanside Hotel, Piccadilly Hotels,
Williamsburg Hospitality House and the twenty-nine apartment complexes acquired
by the Company in May 1998.
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.
23
<PAGE> 24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
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 partnership and two mortgage notes
receivable, secured by one of the properties sold. The Company had the option to
reacquire the properties at any time after September 1997 for their original
sales prices. In February 1998, the Company reacquired three of the properties,
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 associated with the financing. In June 1998, the Company reacquired the
remaining two properties for $8.7 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.
Also in April 1998, the Company sold a 77.7 acre tract of the Lewisville land
parcel for $6.8 million in cash. The Company received net cash of
24
<PAGE> 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
$358,000 after paying off first and second lien mortgages totaling $5.9
million. The Company recognized a gain of $2.0 million on the sale.
See NOTE 10. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
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 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 associated with the sale.
In August 1990, the Company obtained the Continental Hotel and Casino in Las
Vegas, Nevada, through foreclosure subject to first and second lien mortgages
totaling $10.0 million. In June 1992, the Company sold the hotel and casino for,
among other consideration, a $22.0 million wraparound mortgage note receivable.
In March 1997, the wraparound note was modified and extended in exchange for,
among other things, the borrower's commitment to invest $2.0 million in
improvements to the hotel and casino within four months of the March 1997
modification and an additional $2.0 million prior to December 1997. Since April
1997, the borrower had not made the required note payments, nor the required
improvements. In December 1997, the borrower filed for bankruptcy protection. In
February 1998, a hearing was held to allow the Company to foreclose on the hotel
and casino. At the hearing, the court ruled that the borrower had 90 days to
submit a reorganization plan and beginning March 2, 1998, required the borrower
to make monthly payments of $175,000 to the Company. The Company received the
first such payment on March 2, 1998. In April 1998, the bankruptcy court allowed
the Company to foreclose on 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.
In May 1998, the Company purchased, in a single transaction, twenty-nine
apartment complexes totaling 2,441 units in Florida and Georgia for $55.8
million. The Company acquired the properties through three newly-formed Texas
limited partnership. 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 the Valley Ranch land parcel,
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 associated with the sale. The Company recognized a gain of
$663,000 on the sale.
25
<PAGE> 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
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 the Parkfield land
parcel, for $1.3 million in cash. The Company received net cash of $40,000 after
paying down $1.1 million on the mortgage secured by such land parcel and the
payment of various costs associated with the sale. The Company recognized a gain
of $670,000 on the sale.
In June 1998, the Company sold a 21.6 acre tract of the Chase Oaks land parcel,
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 associated with the sale. The Company recognized a gain of
$848,000 on the sale.
Also in June 1998, the Company sold a 150.0 acre tract of the Rasor land parcel,
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 associated with the sale. The Company
recognized a gain of $789,000 on the sale.
Further in June 1998, the Company sold the 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 associated with the sale. 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.
Also in July 1998, the Company purchased, through a newly formed partnership,
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 of 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.
Further in July 1998, the Company purchased the HSM Cummings land, a 10.9 acre
parcel of undeveloped land in Dallas County, Texas, for $1.6 million in cash.
In July 1998, the Company purchased the Walker land, a 71.1 acre parcel of
undeveloped land in Dallas County, Texas, for $10.9 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 HSM
Cummings land.
26
<PAGE> 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
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 associated with the
financing.
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.
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 associated with the
financing.
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. The Company received
net cash of $790,000 after the payment of various closing costs associated with
the financing.
Also in March 1998, the Company refinanced the mortgage debt secured by the
McKinney Corners and Dowdy land in the amount of $20.7 million. The Company
received net cash of $5.9 million after 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 Series F Preferred Stock as additional security for the loan.
In April 1998, the Company obtained a second lien mortgage of $2.0 million
secured by the BP Las Colinas land from the limited partner in a partnership
that owns approximately 15.6% of the outstanding shares of the Company's Common
Stock. See NOTE 10. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
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 associated with the financing.
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 associated with the financing. 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.
27
<PAGE> 28
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.
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 $24.0 million at July 31, 1998. The margin loan is due and
payable. The Company has received a commitment from a financial institution for
a new loan in a principal amount in excess of the current outstanding loan
balance. The Company has notified the existing margin lender that it intends to
pay such loan in full prior to August 31, 1998.
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 $8.5 million in the first six 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 $56.2
million at June 30, 1998.
The Company's 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 Company's mortgage note receivable
review includes an evaluation of the collateral property securing such note. The
property review generally includes selective property inspections, a review of
the property's current rents compared to market
28
<PAGE> 29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
rents, a review of the property's expenses, a review of maintenance
requirements, a review of the property's cash flow, discussions with the manager
of the property and a review of properties in the surrounding area.
Commitments and Contingencies
The Company owns a 96% limited partner interest in Syntek Asset Management, L.P.
("SAMLP"). SAMLP is the general partner of NRLP and National Operating, L.P.
("NOLP"), the operating partnership of NRLP. Gene E. Phillips, a Director and
Chairman of the Board of the Company until November 16, 1992, is also a general
partner of SAMLP. At June 30, 1998, the Company owned approximately 54% of the
outstanding limited partner units of NRLP.
NRLP, SAMLP and Mr. Phillips were among the defendants in a class action lawsuit
arising from the formation of NRLP. An agreement settling such lawsuit (the
"Settlement Agreement") for the above mentioned defendants became effective on
July 5, 1990. The Settlement Agreement provided for, among other things, the
appointment of an NRLP oversight committee and the establishment of specified
annually increasing targets for five years relating to the price of NRLP's units
of limited partner interest.
The Settlement Agreement provides for the resignation and replacement of SAMLP
as general partner if the unit price targets are not met for two consecutive
anniversary dates. NRLP did not meet the unit price targets for the first and
second anniversary dates. On July 8, 1992, SAMLP notified the NRLP oversight
committee of the failure of NRLP to meet the unit price targets for two
successive years and that it expects to resign as general partner of NRLP and
NOLP.
The withdrawal of SAMLP as general partner would require NRLP to purchase
SAMLP's general partner interest (the "Redeemable General Partner Interest") at
its then fair value, and to pay certain fees and other compensation as provided
in the partnership agreement. Syntek Asset Management, L.P. ("SAMI"), the
managing general partner of SAMLP, has calculated the fair value of such
Redeemable General Partner Interest to be $49.6 million at June 30, 1998, before
reduction for the principal balance ($4.2 million at June 30, 1998) and accrued
interest ($7.8 million at June 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 of 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.
29
<PAGE> 30
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 and directed that a
notice be prepared to be mailed to the plaintiff class members describing the
Cash Distribution Agreement. In addition, the Supervising Judge scheduled
October 16, 1998 as the date for the final hearing on any objections to the Cash
Distribution Agreement.
Pursuant to the order entered on August 4, 1998, $11.4 million will be deposited
by NRLP into an escrow account following the final approval by the Supervising
Judge of the Cash Distribution Agreement. 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.
Upon final approval by the Supervising Judge, 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 60.5% of the
outstanding units of NRLP as of July 31, 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 fourth quarter of 1998. 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
30
<PAGE> 31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Commitments and Contingencies (Continued)
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 total amount of
cash distributed by NRLP under the Cash Distribution Agreement. This note will
require repayment over a ten-year period, bear interest and be guaranteed by the
Trust, which (as of July 31, 1998) is the owner of a 96% limited partner
interest in SAMLP and approximately 54% of the outstanding units of NRLP.
In the event that the Cash Distribution Agreement is disapproved by the
Supervising Judge or does not become effective pursuant to the provisions
thereof, then the parties shall be restated to their respective positions as of
December 14, 1997, all of the provisions of the Cash Distribution Agreement
shall be void, and the Settlement Agreement shall remain in full force and
effect.
Results of Operations
For the three months ended June 30, 1998, the Company reported net income of
$14.8 million, compared to net income of $2.5 million for the three months ended
June 30, 1997. For the six months ended June 30, 1998, the Company reported net
income of $5.7 million compared with net income of $2.8 million for the six
months ended June 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 $6.2 million, respectively, for
the three months ended June 30, 1998 compared to $2.2 million and $1.7 million
for the three months ended June 30, 1997. Sales and cost of sales for the six
months ended June 30, 1998 were $14.1 million and $12.0 million, respectively,
compared to $2.2 million and $1.7 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.
Rents increased from $5.0 million and $10.9 million for the three and six months
ended June 30, 1997 to $15.8 million and $27.3 million for the three and six
months ended June 30, 1998. These increases are principally due to the
acquisition in 1997 of the four Piccadilly Hotels, Collection Retail Center, the
Williamsburg Hospitality House and the acquisition of twenty-nine apartment
complexes effective April 1, 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.
31
<PAGE> 32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Interest income from mortgage notes receivable of $16,000 and $154,000 for the
three and six months ended June 30, 1998 decreased from the $1.2 million and
$2.3 million for the three and six months ended June 30, 1997. The decrease is
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 for the remainder of
1998.
Other income decreased from $1.3 million and $1.8 million for the three and six
months ended June 30, 1997 to a negative $399,000 and $608,000 for the three and
six months ended June 30, 1998. The decrease is primarily due to increases of
$1.9 million and $2.7 million in unrealized losses for the three and six months
ended June 30, 1998 on the Company's trading portfolio securities. See NOTE 7.
"MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO."
Property operating expense increased from $4.0 million and $8.5 million for the
three and six months ended June 30, 1997 to $11.5 million and $21.2 million for
the three and six months ended June 30, 1998. The increases are principally due
to the acquisition in 1997 of the four Piccadilly Hotels, Collection Retail
Center, the Williamsburg Hospitality House and the acquisition of twenty-nine
apartment complexes effective April 1998.
Interest expense increased from $6.9 million and $12.0 million for the three and
six months ended June 30, 1997 to $13.0 million and $22.5 million for the three
and six months ended June 30, 1998. The increases are primarily attributable to
the debt incurred related to 30 parcels of land, five hotels, thirty-four
apartment complexes and one commercial property purchased or obtained through
foreclosure subsequent to June 30, 1997. Interest expense for the remaining
quarters of 1998, is expected to increase as the Company continued to acquire
properties in the third quarter on a leveraged basis.
Advisory and mortgage servicing fees increased from $585,000 and $1.0 million
for the three and six months ended June 30, 1997 to $949,000 and $1.7 million in
the three and six months ended June 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 $600,000 and $1.1 million for the
three and six months ended June 30, 1997 to the $1.7 million and $3.0 million
for the three and six months ended June 30, 1998. Such increases are
attributable to the income producing properties acquired by the Company
subsequent to June 30, 1997, as described above.
General and administrative expenses increased from $1.5 million and $2.4
million for the three and six months ended June 30, 1997 to $1.9 million
and $4.2 million in the three and six months ended June 30, 1998. The
32
<PAGE> 33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
increase is primarily attributable to $217,000 in legal fees incurred in 1998
relating to pending acquisitions and refinancings, a $268,000 increase in
advisor cost reimbursements and $1.1 million from consolidation of the
operations of PWSI.
Incentive compensation for the six months ended June 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 increased from $5.0 million and $5.2 million for
the three and six months ended June 30, 1997 to $18.9 million and $21.3 million
for the three and six months ended June 30, 1998. The increases in equity income
are attributable to the Company's equity share of equity investees' gain on sale
of real estate of $23.0 million and $26.2 million for three and six months ended
June 30, 1998 compared to $4.9 million and $5.9 million for the three and six
months ended June 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 such losses being $4.2 million and $4.9 million for
the three and six months ended June 30, 1998 compared to $1.1 million and $1.8
million for the same periods of 1997.
Gains on sale of real estate were $9.0 million for the three and six months
ended June 30, 1998 compared to $3.9 million and $8.1 million for the three and
six months ended June 30, 1997. For the three and six months ended June 30,
1998, the Company recognized a $670,000 gain on the sale of 21.3 acres of
Parkfield land, a $1.9 million gain on the sale of Lewisville land, a $848,000
gain on the sale of 21.2 acres of Chase Oaks land, a $789,000 gain on the sale
of 150.0 acres of Rasor land, a $3.9 million gain on the sale of Palm Desert
land and a $842,000 gain on the sale of 39.4 acres of Valley Ranch land.
For the three months ended June 30, 1997, the Company recognized a previously
deferred gain of $3.0 million on the sale of Porticos Apartments, a $216,000
gain on the sale of Kamperman land, a $668,000 gain on the sale of 3.1 acres of
Las Colinas land. In the first quarter of 1997, a $3.4 million gain on the sale
of 40.2 acres of BP Las Colinas land, a $171,000 gain on the sale of Osceola
land and a $676,000 gain on the sale of 3.0 acres 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
33
<PAGE> 34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Environmental Matters (Continued)
asbestos-containing materials into the air, and third parties may seek recovery
from the Company for personal injury associated with such materials.
The Company's management is not aware of any environmental liability relating to
the above matters that would have a material adverse effect on the Company's
business, assets or results of operations.
Inflation
The effects of inflation on the Company's operations are not quantifiable.
Revenues from property operations fluctuate proportionately with inflationary
increases and decreases in housing costs. Fluctuations in the rate of inflation
also affect the sales values of properties and, correspondingly, the ultimate
gains to be realized by the Company from property sales.
Year 2000
The Company's advisor has advised the Company that its current computer software
has been certified by the Information Technology Association of America ("ITAA")
as year 2000 compliant. The Company's advisor has also advised the Company that
it has recently received and plans to install in the third quarter of 1998 the
ITAA certified year 2000 compliant operating system for its computer hardware.
---------------------
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are filed herewith or incorporated by
reference as indicated below.
Exhibit
Number Description
- ------ ----------------------------------------
27.0 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K as follows:
A Current Report on Form 8-K, dated May 1, 1998 was filed June 25, 1998,
with respect to Item 2. "Acquisition or Disposition of Assets," and Item
7. "Financial Statements and Exhibits," which reports the acquisition of
twenty-nine apartment complexes as amended on Form 8-K/A, field July 16,
1998.
34
<PAGE> 35
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: August 14, 1998 By: /s/ Karl L. Blaha
------------------------ --------------------------------
Karl L. Blaha
President
Date: August 14, 1998 By: /s/ Thomas A. Holland
------------------------ --------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
35
<PAGE> 36
AMERICAN REALTY TRUST, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------ ---------------------------------------- ------
<S> <C> <C>
27.0 Financial Data Schedule, filed herewith. 37
</TABLE>
36
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,649
<SECURITIES> 6,196
<RECEIVABLES> 840
<ALLOWANCES> 667
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 406,702
<DEPRECIATION> 7,624
<TOTAL-ASSETS> 520,006
<CURRENT-LIABILITIES> 0
<BONDS> 342,679
0
5,635
<COMMON> 135
<OTHER-SE> 62,662
<TOTAL-LIABILITY-AND-EQUITY> 520,006
<SALES> 14,085
<TOTAL-REVENUES> 27,308
<CGS> 12,005
<TOTAL-COSTS> 21,204
<OTHER-EXPENSES> 2,959
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,537
<INCOME-PRETAX> 5,669
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,669
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,669
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
</TABLE>
