<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1998
Registration Statement No. 333-21583
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
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AMERICAN REALTY TRUST, INC.
(Exact name of registrant as specified in its governing instrument)
<TABLE>
<S> <C> <C>
GEORGIA 6513 54-0697989
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer Identification No.)
Classification Code Number)
</TABLE>
10670 NORTH CENTRAL EXPRESSWAY
SUITE 300
DALLAS, TEXAS 75231
(214) 692-4700
(Address and telephone number of principal executive offices)
ROBERT A. WALDMAN, ESQ.
10670 NORTH CENTRAL EXPRESSWAY
SUITE 300
DALLAS, TEXAS 75231
(214) 692-4700
(Name, address and telephone number of agent for service)
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Copy to:
THOMAS R. POPPLEWELL, ESQ.
Andrews & Kurth L.L.P.
1717 Main Street, Suite 3700
Dallas, Texas 75201
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Approximate date of commencement of proposed sale of the securities to the
public. From time to time.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is a compliance
with General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS PROPOSED AGGREGATE
OF SECURITIES TO BE AMOUNT TO BE MAXIMUM OFFERING OFFERING AMOUNT OF
REGISTERED REGISTERED PRICE PER PRICE(1) REGISTRATION
UNIT(1) FEE
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<S> <C> <C> <C> <C>
Preferred Stock, $2.00 par value . . . . . . . . . 12,500,000 Shares $10.00 $125,000,000.00 $37,878.79 (3)
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Common Stock, $0.01 par value . . . . . . . . . . . (2)
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</TABLE>
(1) Estimated solely for the purpose of computing the registration fee.
(2) The number of shares of Common Stock of the Registrant to be registered is
such currently indeterminate number of shares of Common Stock as may be
required for issuance upon conversion of the Preferred Stock being
registered hereunder. Such shares of Common Stock will, if issued, be
issued for no additional consideration and therefore no registration fee is
required.
(3) Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
Prospectus contained in this Registration Statement also relates to
5,000,000 shares of Preferred Stock and an indeterminate number of shares
of Common Stock included in this table covered by the registrant's
Registration Statement on Form S-2 (Registration Statement No. 333-21583),
as to which a registration fee of $15,151.52 was previously paid in the
registrant's original filing of such Registration Statement on February 11,
1997. The remaining $22,272.27 of the registration fee was previously
paid in connection with the registrant's filing of the registrant's
Registration Statement on Form S-4 (Registration Statement No. 333-21591)
on February 11, 1997.
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<PAGE> 2
PROSPECTUS
AMERICAN REALTY TRUST, INC.
PREFERRED STOCK
COMMON STOCK
American Realty Trust, Inc. (the "Company"), a Georgia corporation, may
offer from time to time shares of preferred stock, par value $2.00 per share
(the "Preferred Stock"), and in the event such Preferred Stock is convertible,
common voting stock, par value $.01 per share (the "Common Stock"), into which
such Preferred Stock is convertible having a public offering price of up to an
aggregate of $125,000,000 (or its equivalent based on the exchange rate at the
time of sale) in amounts, at prices and on terms to be determined at the time
of the offering. The Preferred Stock may be offered in separate series, in
amounts, at prices and on terms to be set forth in one or more supplements to
this Prospectus (each a "Prospectus Supplement").
The specific terms of the Preferred Stock in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable, the specific number of shares,
title, stated value and liquidation preference of each share, issuance price,
dividend rate (or method of calculation), dividend payment dates, any
redemption or sinking fund provisions and any conversion or exchange fund
provisions. The Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Preferred Stock
covered by the Prospectus Supplement.
It is expected that the terms of acquisitions involving the issuance of the
shares of Preferred Stock covered by this Prospectus will be determined by
direct negotiations with the owners or controlling persons of the assets,
businesses or securities to be acquired, and that the shares of Preferred Stock
issued will be valued at prices reasonably related to the market price of the
Preferred Stock either at the time an agreement is entered into concerning the
terms of the acquisition or at or about the time the shares are delivered. No
underwriting discounts or commissions will be paid, although finder's fees may
be paid in connection with certain acquisitions. Any person receiving such
fees may be deemed to be an "underwriter" within the meaning of the Securities
Act of 1933, as amended (the "Securities Act"), and any profit on the resale of
shares of Preferred Stock purchased by them, or of Common Stock into which such
Preferred Stock is converted, may be deemed to be underwriting commissions or
discounts under the Securities Act.
SEE "RISK FACTORS" IN THE RELATED PROSPECTUS SUPPLEMENT FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
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The date of this Prospectus is May 14, 1998
<PAGE> 3
CERTAIN STATEMENTS UNDER CAPTIONS "THE BUSINESS OF THE COMPANY" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS"CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "REFORM ACT"). SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS
OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE
OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD- LOOKING STATEMENTS. SUCH
FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: GENERAL ECONOMIC AND BUSINESS
CONDITIONS, WHICH WILL, AMONG OTHER THINGS, AFFECT THE SUPPLY AND DEMAND FOR
COMMERCIAL REAL ESTATE, AVAILABILITY AND CREDIT WORTHINESS OF PROSPECTIVE
TENANTS, LEASE RATES AND THE AVAILABILITY OF FINANCING; ADVERSE CHANGES IN THE
REAL ESTATE MARKETS INCLUDING, AMONG OTHER THINGS, COMPETITION WITH OTHER
COMPANIES, RISKS ASSOCIATED WITH REAL ESTATE ACQUISITIONS; GOVERNMENTAL ACTIONS
AND INITIATIVES; ENVIRONMENTAL/SAFETY REQUIREMENTS; AND OTHER CHANGES AND
FACTORS REFERENCED IN THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON
REQUEST FROM THE COMPANY. ANY SUCH REQUEST SHOULD BE DIRECTED TO AMERICAN
REALTY TRUST, INC., 10670 NORTH CENTRAL EXPRESSWAY, SUITE 300, DALLAS, TEXAS
75231, ATTENTION: INVESTOR RELATIONS. THE COMPANY'S TELEPHONE NUMBER IS (214)
692-4700.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports and other information with the Commission.
Reports and proxy and information statements filed by the Company with the
Securities and Exchange Commission (the "Commission") pursuant to the
informational requirements of the Exchange Act may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: New York Regional Office, 7 World Trade Center, 13th Floor, New
York, New York 10048; and Chicago Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information statements
and other information regarding registrants, including the Company, that file
electronically with the Commission. The address of such Web site is
"http://www.sec.gov". In addition, reports, proxy statements and other
information concerning the Company (symbol: "ARB") can be inspected and copied
at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York,
New York 10005-2601, on which the shares of Common Stock of the Company are
listed.
The Company has filed with the Commission a Registration Statement on
Form S-4 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act") with respect to the shares of Preferred Stock
and Common Stock of the Company. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Preferred Stock and
Common Stock, reference is made to the Registration Statement and to the
exhibits thereto. Statements contained herein concerning the provisions of
certain documents are not necessarily complete and, in each instance, reference
is made to the copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference. The Registration Statement and the
exhibits thereto may be inspected without charge at the office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies thereof
may be obtained from the Commission upon payment of the prescribed fees.
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<PAGE> 4
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, heretofore filed by the Company with the
Commission pursuant to the Exchange Act, are hereby incorporated by reference,
except as superseded or modified herein:
1. The Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, as filed with the Commission on March 30, 1998.
2. The Annual Report on Form 10-K for Continental Mortgage and
Equity Trust ("CMET") for the year ended December 31, 1997, as filed with the
Commission on March 20, 1998.
3. The Annual Report on Form 10-K for Income Opportunity Realty
Investors, Inc. ("IORI") for the year ended December 31, 1997, as filed with
the Commission on March 20, 1998.
4. The Annual Report on Form 10-K for Transcontinental Realty
Investors, Inc. ("TCI") for the year ended December 31, 1997, as filed with the
Commission on March 20, 1998.
5. The Annual Report on Form 10-K for National Realty, L.P.
("NRLP") for the year ended December 31, 1997, as filed with the Commission on
March 26, 1998.
6. The description of the Common Stock contained in the Company's
Registration Statement under Section 12 of the Exchange Act and all amendments
and reports filed for the purpose of updating that description.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any document described
above (other than exhibits). Requests for such copies should be directed to
American Realty Trust, Inc., 10670 North Central Expressway, Suite 300, Dallas,
Texas 75231, Attention: Investor Relations. The Company's telephone number is
(214) 692- 4700.
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RATIO OF EARNINGS TO FIXED CHARGES
The following table summarizes the ratio of the Company's earnings to
combined fixed charges and preferred stock dividends for each of the five
fiscal years of the Company ended December 31, 1997:
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Year Ended December 31,
1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK
DIVIDENDS * * * * *
</TABLE>
* Earnings were inadequate to cover fixed charges and preferred stock dividends
by $8,474,000, $4,819,000, $189,000, $1,390,000, and $4,923,000 in 1997, 1996,
1995, 1994 and 1993, respectively.
USE OF PROCEEDS
Unless otherwise indicated in a Prospectus Supplement with respect to
the proceeds from the sale of the particular shares of Preferred Stock to which
such Prospectus Supplement relates, the Company plans to use the net proceeds
from each sale of Preferred Stock for working capital and general corporate
purposes, including, among other things, the development and acquisition of
additional properties and other acquisition transactions and the payment of
certain outstanding debt.
THE COMPANY
The Company, a Georgia corporation, is the successor to a District of
Columbia business trust organized pursuant to a declaration of trust dated July
14, 1961. The business trust merged into the Company on June 24, 1988. The
Company invests in equity interests in real estate (including equity
securities of real estate-related entities), leases, joint venture development
projects and partnerships and finances real estate and real estate activities
through investments in mortgage loans. The Company has invested in private and
open market purchases in the equity securities of CMET, IORI, TCI and NRLP.
The Company's Board of Directors has broad authority under the
Company's governing documents to make all types of real estate investments,
including mortgage loans and equity real estate investments, as well as
investments in the securities of other entities, whether or not such entities
are engaged in real estate related activities.
Although the Company's Board of Directors is directly responsible for
managing the affairs of the Company and for setting the policies which guide
it, the day-to-day operations of the Company are performed by Basic Capital
Management, Inc. ("BCM"), an affiliate of the Company. BCM is a contractual
advisor under the supervision of the Company's Board of Directors. The duties
of BCM include, among other things, locating, investigating, evaluating and
recommending real estate and mortgage note investment and sales opportunities,
as well as financing and refinancing sources for the Company. BCM also serves
as a consultant in connection with the Company's business plan and investment
policy decisions made by the Company's Board of Directors.
BCM, an affiliate of the Company, is a company owned by a trust for
the benefit of the children of Gene E. Phillips, the Chairman of the Board and
a Director of the Company until November 16, 1992. Gene E. Phillips served as
a director of BCM until December 22, 1989 and as Chief Executive Officer of BCM
until September 1, 1992. Gene E. Phillips currently serves as a representative
of the trust that owns BCM for the benefit of his children, and in such
capacity, Gene E. Phillips has substantial contact with the management of BCM
and input with respect to BCM's performance of advisory services to the
Company. Ryan T. Phillips, the son of Gene E. Phillips and a Director of the
Company until June 4, 1996, is also a director of BCM and a trustee of the
trust which owns BCM for the benefit of the children of Gene E. Phillips. As of
May 1, 1998, BCM owned 5,280,324 shares of the Common Stock, representing
approximately 49.4% of the Common Stock then outstanding. BCM has been
providing advisory services to the Company since February 6, 1989. BCM also
serves as advisor to CMET, IORI and TCI. Karl L. Blaha, Randall M. Paulson,
Bruce A. Endendyk and Thomas A. Holland, executive officers of the Company,
are also executive officers of CMET, IORI and TCI. Karl L. Blaha also serves
as a Director of the Company. Oscar W. Cashwell, a Director of the Company,
served as Executive Vice President of BCM until January 10, 1997. Randall M.
Paulson, Executive Vice President of the Company, serves as President and sole
director of Syntek Asset Management, Inc. ("SAMI"), the managing general
partner of Syntek Asset Management, L.P. ("SAMLP"), the general partner of
NRLP and National Operating, L.P. ("NOLP"), the operating partnership of NRLP.
Gene E. Phillips is also a general partner of SAMLP and served as a director
and Chief Executive Officer of SAMI until May 15, 1996. SAMI is a company owned
by BCM. BCM performs certain administrative functions for NRLP and NOLP on a
cost reimbursement basis.
Gene E. Phillips is the former chairman of Southmark Corporation
("Southmark"), a real estate syndicator and parent of San Jacinto Savings
Association ("San Jacinto"). As a result of a deadlock on Southmark's Board of
Directors, Mr. Phillips, among others,
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<PAGE> 6
reached an agreement whereby he resigned his positions with Southmark and
certain of Southmark's subsidiaries and affiliates in January 1989. Southmark
filed a voluntary petition in bankruptcy under Chapter 11 of the United States
Bankruptcy Code in July 1989. In November 1990, San Jacinto was placed under
conservatorship of the RTC by federal banking authorities. In December 1990,
San Jacinto was converted into a Federal Association and placed in
receivership. Mr. Phillips has been named as a defendant in a number of
lawsuits brought by the RTC and private plaintiffs in which the allegations
made against Mr. Phillips included breach of fiduciary duty and other
misconduct, which allegations were denied by Mr. Phillips. These actions have
been dismissed or settled.
Since February 1, 1990, affiliates of BCM have provided property
management services to the Company. Currently, Carmel Realty Services, Ltd.
("Carmel, Ltd.") provides such property management services. Carmel, Ltd.
subcontracts with other entities for the provision of the property-level
management services to the Company at various rates. The general partner of
Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (i) First Equity
Properties, Inc. ("First Equity") which is 50% owned by BCM, (ii) Gene E.
Phillips, and (iii) a trust for the benefit of the children of Gene E.
Phillips. Carmel, Ltd. subcontracts the property-level management of the
Company's hotels, shopping centers, office buildings and the Denver
Merchandise Mart to Carmel Realty, Inc. ("Carmel Realty") which is a company
owned by First Equity. Carmel Realty is entitled to receive property and
construction management fees and leasing commissions in accordance with the
terms of its property-level management agreement with Carmel, Ltd.
Affiliates of BCM are also entitled to receive real estate brokerage
commissions in accordance with the terms of an advisory agreement between the
Company and BCM.
The Company has no employees itself, but Pizza World Supreme, Inc.
("PWSI"), a wholly-owned food service subsidiary of the Company has
approximately 840 employees as of April 1, 1998. Employees of BCM render
services to the Company.
The Company's principal offices are located at 10670 North Central
Expressway, Suite 300, Dallas, Texas 75231. The Company's telephone number is
(214) 692-4700.
THE BUSINESS OF THE COMPANY
GENERAL
The Company, a Georgia corporation, is the successor to a District of
Columbia business trust. The Company elected to be treated as a Real Estate
Investment Trust ("REIT") under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the "Code"), during the period July 1, 1987
through December 31, 1990. The Company allowed its REIT tax status to lapse in
1991.
The Company's primary business is investing in equity interests in
real estate (including equity securities of real estate-related entities),
leases, joint venture development projects and partnerships and financing real
estate and real estate activities through investments in mortgage loans,
including first, wraparound and junior mortgage loans. The Company's Board of
Directors has broad authority under the Company's governing documents to make
all types of real estate investments, including mortgage loans and equity real
estate investments, as well as investments in the securities of other entities,
whether or not such entities are engaged in real estate related activities.
The Company does not have a policy limiting the amount or percentage of assets
that may be invested in any particular property or type of property or in any
geographic area. The Company's governing documents do not contain any
limitation on the amount or percentage of indebtedness the Company may incur.
The Company, through PWSI, also operates and franchises pizza parlors
featuring pizza delivery, carry-out and dine-in under the trademark "Me-N-Ed's"
in California and Texas. The first Me-N-Ed's pizza parlor opened in 1962. At
December 31, 1997, there were 54 Me-N-Ed's pizza parlors in operation,
consisting of 48 owned and 6 franchised pizza parlors, 6 of the owned pizza
parlors were in Texas and the remainder in California.
The Company's businesses are not seasonal. With regard to real estate
investments, the Company is seeking both current income and capital
appreciation. The Company's plan of operation is to continue, to the extent
its liquidity permits, to make equity investments in income producing real
estate such as apartment complexes and commercial properties or equity
securities of real estate-related entities and to continue to service and hold
for investment its mortgage notes. The Company also intends to pursue higher
risk, higher reward investments, such as developed, partially developed and
undeveloped land where it can obtain financing of substantially all of a
property's purchase price. The Company intends to seek selected dispositions
of certain of its assets, in particular certain of its land holdings, where the
prices obtainable for such assets justify their disposition. The Company
intends to continue to service and hold for investment its mortgage notes. The
Company also intends to pursue its rights vigorously with respect to mortgage
notes receivable that are in default.
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The Company may purchase or lease properties for long-term investment,
develop or redevelop its properties or sell such properties, in whole or in
part, when circumstances warrant. The Company currently participates and may
continue to participate with other entities in property ownership, through
joint ventures or other types of co- ownership. Equity investments may be
subject to existing mortgage financing and other indebtedness that have
priority over the Company's equity interest.
The Company may repurchase or otherwise reacquire shares of Common
Stock, Special Stock (as defined under "Description of the Capital Stock --
General") or other securities and may also invest in securities of other
entities engaged in real estate activities or securities of other issuers. The
Company may invest in the securities of other issuers in connection with
acquisitions of indirect interests in real estate (normally general or limited
partnership interests in special purpose partnerships owning one or more
properties). The Company may in the future acquire all or substantially all of
the securities or assets of real estate investment trusts, management companies
or similar entities where such investments would be consistent with its
investment policies. The Company may also invest in securities of other
issuers from time to time for the purpose of exercising control. It is not
intended that the Company's investments in securities will require it to
register as an "investment company" under the Investment Company Act of 1940,
as amended, and it is intended that the Company would divest securities before
any such registration would be required.
The Company's Board of Directors may devote available assets to
particular investments or types of investments, without restriction on the
amount or percentage of the Company's assets that may be so devoted to a
single investment or to any particular type of investment, and without limit on
the percentage of securities of any one issuer that the Company may acquire.
The Company's investment objectives and policies may be changed at any time by
the Company's Board of Directors without the approval of the Company's
shareholders.
To the extent that the Company's Board of Directors determines to seek
additional capital, the Company may raise such capital through additional
equity offerings, debt financing or retention of cash flow, or a combination of
these methods. If the Company's Board of Directors determines to raise
additional equity capital, it may, without stockholder approval, issue
additional shares of Common Stock or Special Stock up to the amount of its
authorized capital in any manner (and on such terms and for such consideration)
as it deems appropriate, including in exchange for property. Such securities
may be senior to the outstanding shares of Common Stock and may include
additional series of Special Stock (which may be convertible into Common
Stock). Existing stockholders of the Company will have no preemptive right to
purchase shares in any subsequent offering of securities by the Company, and
any such offering could cause a dilution of a stockholder's investment in the
Company.
To the extent that the Company's Board of Directors determines to
obtain additional debt financing, the Company intends to do so generally
through mortgages on properties. Such mortgages may be recourse, non-recourse
or cross- collateralized. The Company does not have a policy limiting the
number or amount of mortgages that may be placed on any particular property,
but mortgage financing instruments usually limit additional indebtedness on
such properties. The Company may also borrow funds through bank borrowings,
publicly- and privately-placed debt instruments, or purchase money obligations
to the sellers of properties, any of which indebtedness may be unsecured or may
be secured by any or all of the assets of the Company or any existing or new
property-owning entity in which the Company holds an interest and may have full
or limited recourse to all or any portion of the assets of the Company, or any
such existing or new property-owning entity.
The Company may seek to obtain unsecured or secured lines of credit or
may determine to issue debt securities (which may be convertible into capital
stock or be accompanied by warrants to purchase capital stock), or to sell or
securitize its receivables. The proceeds from any borrowings may be used to
finance acquisitions, to develop or redevelop properties, to refinance existing
indebtedness or for working capital or capital improvements. The Company also
may determine to finance acquisitions through the exchange of properties or
issuance of additional Preferred Stock, Common Stock, Special Stock or other
securities.
The Company has made and may in the future make loans to joint
ventures or other entities in which it participates. The Company does not
intend to engage in (i) trading, underwriting or agency distribution or sale of
securities of other issuers and (ii) the active trade of loans and investments,
other than in connection with acquisitions of additional interests in CMET,
IORI, TCI and NRLP.
Except as required under the Exchange Act and the rules and
regulations of the New York Stock Exchange, the Company is not required to make
annual or other reports to its securityholders.
The specific composition of the Company's real estate and mortgage
notes receivable portfolios from time to time depends largely on the judgment
of the Company's management as to changing investment opportunities and the
level of risk associated with specific investments or types of investments.
The Company's management intends to continue to maintain real estate and
mortgage notes receivable portfolios diversified by location and type of
property. In addition to its equity investments in real estate and mortgage
notes, the Company has also invested in private and open market purchases of
the equity securities of CMET, IORI, TCI and NRLP.
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GEOGRAPHIC REGIONS
For purposes of its investments, the Company has divided the
continental United States into the following six geographic regions;
Northeast region comprised of the states of Connecticut, Delaware,
Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, Rhode Island and Vermont, and the District of Columbia.
As of December 31, 1997, the Company had no properties in this region.
Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia.
As of December 31, 1997, the Company had two hotels in this region.
Southwest region comprised of the states of Arizona, Arkansas,
Louisiana, New Mexico, Oklahoma and Texas. As of December 31, 1997,
the Company had two commercial properties in this region.
Midwest region comprised of the states of Illinois, Indiana, Iowa,
Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North
Dakota, Ohio, South Dakota, West Virginia and Wisconsin. As of
December 31, 1997, the Company had one commercial property and one
hotel in this region.
Mountain region comprised of the states of Colorado, Idaho, Montana,
Nevada, Utah and Wyoming. As of December 31, 1997, the Company had two
commercial properties and one hotel in this region.
Pacific region comprised of the states of California, Oregon and
Washington. As of December 31, 1997, the Company had four hotels in
this region.
Excluded from the above are a single family residence in Dallas, Texas and 42
parcels of developed, partially developed and undeveloped land as described
below.
REAL ESTATE
At December 31, 1997, approximately 80% of the Company's assets were
invested in real estate and the equity securities of real estate entities. The
Company has invested in real estate located throughout the continental United
States, either on a leveraged or nonleveraged basis. The Company's real estate
portfolio consists of properties held for investment, investments in
partnerships, properties held for sale and investments in equity securities of
CMET, IORI, TCI and NRLP.
Types of Real Estate Investments. The Company's real estate consists
of commercial properties (office buildings, shopping centers and a merchandise
mart), hotels and developed, partially developed and undeveloped land. In
selecting new real estate investments, the location, age and type of property,
gross rents, lease terms, financial and business standing of tenants, operating
expenses, fixed charges, land values and physical condition are among the
factors considered. The Company may acquire properties subject to or assume
existing debt and may mortgage, pledge or otherwise obtain financing for its
properties. The Company's Board of Directors may alter the types of and
criteria for selecting new real estate investments and for obtaining financing
without a vote of the Company's stockholders.
Although the Company has typically invested in developed real estate,
the Company may also invest in new construction or development either directly
or in partnership with nonaffiliated parties or affiliates (subject to approval
by the Company's Board of Directors). To the extent that the Company invests in
construction and development projects, the Company would be subject to business
risks, such as cost overruns and construction delays, associated with such
higher risk projects.
At December 31, 1997, the Company had under construction One Hickory
Center, a 102,615 square foot office building in Farmers Branch, Texas. The
Company expects to expend approximately $4.5 million in 1998 to complete
construction and an additional $750,000 for tenant improvements.
In the opinion of the Company's management, the properties owned by
the Company are adequately covered by insurance.
The following table sets forth the percentages, by property type and
geographic region, of the Company's owned real estate (excluding the 42 parcels
of developed, partially developed and undeveloped land, and a single family
residence, described below) at December 31, 1997.
-8-
<PAGE> 9
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Region Commercial Properties Hotels
------ --------------------- ------
<S> <C> <C>
Midwest 9% 14%
Mountain 82 11
Pacific -- 46
Southwest 9 --
Southeast -- 29
------- ----
100% 100%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The foregoing table is based solely on the commercial square footage and
hotel rooms owned by the Company, and does not reflect the value of the
Company's investment in each region. Excluded from the above table are a single
family residence in Dallas, Texas and 42 parcels of developed, partially
developed and undeveloped land consisting of: one developed residential lot in
a residential subdivision in Fort Worth, Texas, two parcels of partially
developed land in Las Colinas, Texas, totaling 59.2 acres; 3.5 acres of
undeveloped land in downtown Atlanta, Georgia; 410.7 acres of partially
developed land in Denver, Colorado; 2 parcels of partially developed land in
Dallas County, Texas, totaling 290.4 acres; 78.4 acres of partially developed
land in Lewisville, Texas; 2 parcels of partially developed land in Irving,
Texas, totaling 335.2 acres; 420.0 acres of undeveloped land in Duchense, Utah;
82.4 acres of undeveloped land in Oceanside, California; 3 parcels of
undeveloped land in Tarrant County, Texas, totaling 1,373.6 acres; 130.6 acres
of undeveloped land in Harris County, Texas; 9 parcels of undeveloped land in
Collin County, Texas, totaling 638.2 acres; 6 parcels of undeveloped land in
Farmers Branch, Texas, totaling 88.6 acres; 2 parcels of undeveloped land in
Plano, Texas, totaling 352.2 acres; 1,448 acres of undeveloped land in Austin,
Texas; 315.2 acres of undeveloped land in Palm Desert, California; 20.6 acres
of undeveloped land in Santa Clarita, California; and 7 additional parcels of
land totaling approximately 114.5 acres.
A summary of the activity in the Company's owned real estate portfolio
during 1997 is as follows:
<TABLE>
<S> <C>
Owned properties in real estate portfolio at January 1, 1997 26*
Properties purchased . . . . . . . . . . . . . . . . . . . 32
Property obtained through foreclosure . . . . . . . . . . 1
Properties sold . . . . . . . . . . . . . . . . . . . . . (3)
----
Owned properties in real estate portfolio at
December 31, 1997 . . . . . . . . . . . . . . . . . . . 56*
</TABLE>
- ---------------------
* Includes one residential subdivision with 22 developed residential lots at
January 1, 1997, and one developed residential lot at December 31, 1997.
Properties Held for Investment. Set forth below are the Company's
properties held for investment and the average annual rental rate per square
foot for commercial properties and the average daily room rate for hotels and
occupancy at December 31, 1997, 1996, 1995, 1994 and 1993 for commercial
properties and average occupancy during such periods for hotels:
-9-
<PAGE> 10
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Average Annual Rental Per Square Foot
or Average Room Rate
------------------------------------------------
Square
Property Location Footage/Rooms 1997 1996 1995 1994 1993
-------- -------- ------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Office Building:
Rosedale Towers Minneapolis, MN 84,798 Sq. Ft. $15.03 $14.88 $13.16 $14.46 $14.00
Shopping Centers:
Collection Denver, CO 267,812 Sq. Ft. 9.46 * * * *
Oak Tree Village Lubbock, TX 45,623 Sq. Ft. 8.17 7.98 7.34 * *
Preston Square Dallas, TX 35,508 Sq. Ft. 15.26 * * * *
Merchandise Mart:
Denver Mart Denver, CO 509,008 Sq. Ft. 14.75 15.33 14.53 14.18 *
Hotels:
Best Western Virginia Beach, VA 110 Rooms 90.44 41.11 * * *
Oceanside
Inn at the Mart Denver, CO 161 Rooms 53.15 46.66 44.69 42.38 *
Kansas City
Holiday Inn Kansas City, MO 196 Rooms 70.73 66.46 61.66 52.47 *
Piccadilly Airport Fresno, CA 185 Rooms 62.98 * * * *
Piccadilly Chateau Fresno, CA 78 Rooms 50.86 * * * *
Piccadilly Shaw Fresno, CA 194 Rooms 64.07 * * * *
Piccadilly University Fresno, CA 190 Rooms 62.22 * * * *
Williamsburg
Hospitality House Williamsburg, VA 296 Rooms 81.87 * * * *
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Property was acquired in 1995, 1996 or 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Occupancy
---------------------------------
Property 1997 1996 1995 1994 1993
-------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Office Building:
Rosedale Towers 93% 91% 90% 94% 92%
Shopping Centers:
Collection 82% * * * *
Oak Tree Village 90% 89% 91% * *
Preston Square 92% * * * *
Merchandise Mart:
Denver Mart 93% 95% 96% 97% *
Hotels:
Best Western 60% 42% * * *
Oceanside
Inn at the Mart 53% 36% 40% 42% *
Kansas City
Holiday Inn 77% 79% 75% 75% *
Piccadilly Airport 50% * * * *
Piccadilly Chateau 49% * * * *
Piccadilly Shaw 62% * * * *
Piccadilly University 49% * * * *
Williamsburg
Hospitality House 60% * * * *
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Property was acquired in 1995, 1996 or 1997.
Occupancy presented above is without reference to whether leases in effect are
at, below or above market rates.
-10-
<PAGE> 11
As of December 31, 1997, none of the Company's properties had a book
value which exceeded 10% of the Company's total assets. For the year ended
December 31, 1997, the revenues of the Denver Merchandise Mart and the Kansas
City Holiday Inn exceeded 10% of the Company's total revenues.
Denver Merchandise Mart. The Denver Merchandise Mart is a wholesale trade
mart located in Denver, Colorado. No tenant occupies ten percent or more of
the rentable square footage of the Denver Merchandise Mart. The principal
business carried on in or from the Denver Merchandise Mart is wholesale sales
of goods.
The following table shows lease expiration information for the tenants of
the Denver Merchandise Mart at December 31, 1997:
<TABLE>
<CAPTION>
% of
Gross 1998 Aggregate 1998
Number of Leased Minimum Minimum
Leases Area Annual Annual
Year Expiring (a) (Sq. Ft.) Rent Rent
---- ------------ --------- ------------ --------
<S> <C> <C> <C> <C>
Month to Month 17 10,840 $ 125,772 2.5%
1998 227 130,821 2,031,948 40.8%
1999 91 61,956 1,049,532 21.1%
2000 132 105,924 1,772,508 35.6%
2001 -- -- -- --%
2002 -- -- -- --%
2003 -- -- -- --%
2004 -- -- -- --%
2005 -- -- -- --%
2006 and thereafter 1 2,278 -- --%
---------- ---------- ---------- ----------
TOTAL 468 311,819 $4,979,760 100.0%
========== ========== ========== ==========
- ---------
</TABLE>
(a) Assumes no renewal options will be exercised in order to show the earliest
termination of the leases.
In October 1997, the Company refinanced the mortgage debt secured by the
Denver Merchandise Mart for $25.0 million. The new loan is secured by a
mortgage against the Denver Merchandise Mart. The Company received net
refinancing proceeds of $10.2 million after the payoff of $14.8 million in
existing mortgage debt that was scheduled to mature in October 1997. The new
loan bears interest at 8.3% per annum, requires monthly principal and interest
payments of $198,000 and matures in October 2012. The current principal
balance of the mortgage debt as of April 1, 1998 was $24.9 million. The
Company substantially completed a renovation and expansion of the Denver
Merchandise Mart in December 1997.
In October 1997, the Company contributed the Denver Merchandise Mart to a
limited partnership in exchange for $6.0 million in cash, a 1% managing general
partner interest in the partnership, all of the Class B limited partner units
in the partnership and the partnership's assumption of the $23.0 million in
mortgage debt secured by such property. The existing general and limited
partners converted their general and limited partner interests into Class A
limited partner units in the partnership. The Class A units have an agreed
value of $1.00 per unit and are entitled to a fixed preferred return of 10% per
annum, paid quarterly. The Class A units may be converted into a total of
529,000 shares of the Company's Series F Cumulative Convertible Preferred Stock
at any time after the first but not later than the sixth anniversary of the
closing, on the basis of one share of Series F Preferred Stock for each ten
Class A units.
Real estate taxes are levied against the Denver Merchandise Mart for county
and township, and school tax purposes. Denver Merchandise Mart paid $305,746
in real estate taxes in 1997. The 1997 millage rate was 8.4042/100. The
Company estimates that Denver Merchandise Mart will owe approximately $312,175
in real estate taxes in 1998. Real estate taxes are substantially reimbursed
by the tenants through real estate tax recovery billings.
-11-
<PAGE> 12
As of December 31, 1997, for Federal income tax purposes, the Company
depreciates the Denver Merchandise Mart under the Modified Accelerated Cost
Recovery System ("MACRS") as follows:
<TABLE>
<S> <C>
Buildings:
Gross Federal Income Tax Basis $17,382,481
Accumulated Depreciation $ 8,762,335
Depreciation Method MACRS - Straight Line ("SL")
Depreciable Life Various
Land Improvements:
Gross Federal Income Tax Basis $ 226,112
Accumulated Depreciation $ 13,743
Depreciation Method MACRS - 150% Declining Balance ("DB")
Depreciable Life 15 years
Personal Property:
Gross Federal Income Tax Basis $ 862,309
Accumulated Depreciation $ 612,465
Depreciation Method MACRS - 200% DB
Depreciable Life Various
</TABLE>
Kansas City Holiday Inn. The Kansas City Holiday Inn is a 196 room hotel
located in Kansas City, Missouri. The first lien mortgage bears interest at
9.45% per annum, requires monthly principal and interest payments of $45,000
and matures in November 2005. The current principal balance of the first lien
mortgage as of April 1, 1998 is $5.8 million. A second lien mortgage bears
interest at 15% per annum, requires monthly interest payments of $41,000 and
matures in February 1999. The current principal balance on the second lien
mortgage as of April 1, 1997 is $3.2 million. The Company currently has no
plans to renovate or improve the Kansas City Holiday Inn.
Real estate taxes are levied against the Kansas City Holiday Inn for county
and township, and school tax purposes. The Kansas City Holiday Inn paid
$95,981 in real estate taxes in 1997. The 1997 millage rate was 6.82/100. The
Company estimates that the Kansas City Holiday Inn will owe approximately
$97,900 in real estate taxes in 1998.
-12-
<PAGE> 13
As of December 31, 1997, for Federal income tax purposes, the Company
depreciates the Kansas City Holiday Inn under the MACRS as follows:
<TABLE>
<S> <C>
Buildings:
Gross Federal Income Tax Basis $5,905,794
Accumulated Depreciation $ 584,428
Depreciation Method MACRS - SL
Depreciable Life 40 years
Land Improvements:
Gross Federal Income Tax Basis $2,330,552
Accumulated Depreciation $ 117,264
Depreciation Method MACRS - SL
Depreciable Life 40 years
Personal Property:
Not applicable
</TABLE>
In September 1997, the Company foreclosed on its $8.9 million junior
mortgage note receivable secured by the Williamsburg Hospitality House, a 297
room hotel in Williamsburg, Virginia. The Company acquired the property at
foreclosure subject to a first lien mortgage of $12.0 million.
In September 1997, the Company purchased The Collection, a 267,812 square
foot retail and commercial center in Denver, Colorado, for $19.5 million. The
Company paid $791,000 in cash and assumed existing mortgages totaling $14.7
million, and issued 400,000 shares of the Company's Series F Cumulative
Convertible Preferred Stock having a stated liquidation value of $10.00 per
share or a total value of $4.0 million. A first lien mortgage in the amount of
$14.2 million bears interest at 8.64% per annum, requires monthly principal and
interest payments of $116,000 and matures in May 2017. A second lien mortgage
in the amount of $580,000 bears interest at 7% per annum until April 2001, 7.5%
per annum from May 2001 to April 2006, and 8% per annum from May 2006 to May
2010, requires monthly principal and interest payments of $3,000 and matures in
May 2010.
In October 1997, the Company purchased, in a single transaction, four
hotels in Fresno, California, for $33.0 million, consisting of (i) Piccadilly
Inn Shaw (194 rooms), (ii) Piccadilly Inn University (190 rooms), (iii)
Piccadilly Inn Airport (185 rooms) and (iv) Chateau Inn (78 rooms). The
Company issued 1.6 million shares of its Series F Cumulative Convertible
Preferred Stock having a liquidation value of $10.00 per share or a total value
of $16.0 million and obtained new mortgage financing of $19.8 million. The
Company received net financing proceeds of $2.2 million after the payment of
various closing costs associated with the financing. The mortgage bears
interest at 8.4% per annum, requires monthly principal and interest payments of
$158,000 and matures in October 2013.
Also in October 1997, the Company refinanced the Oaktree Village Shopping
Center in Lubbock, Texas, for $1.5 million. The Company received no net
financing proceeds after the payoff of $1.4 million in existing mortgage debt
and the payment of various closing costs associated with the financing. The
mortgage bears interest of 8.48% per annum, requires monthly payments of
principal and interest of $18,000 and matures in November 2007.
In December 1997, the Company exchanged a 43.0 acre tract of Valley Ranch
land for Preston Square, a 35,508 square foot shopping center in Dallas, Texas.
In accordance with the provisions of the term loan secured by the Valley Ranch
land, the Company paid $2.8 million to the lender in exchange for the lender's
release of its collateral interest in such land . Simultaneously, the Company
obtained new mortgage financing of $2.5 million secured by the shopping center.
The mortgage bears interest at 8.2% per annum, requires monthly payments of
interest only and matures in December 1999. The Company recognized no gain or
loss on the exchange.
Also in December 1997, the Company refinanced the Inn at the Mart in
Denver, Colorado, for $4.0 million. The Company received net financing
proceeds of $1.4 million, after the payoff of $2.0 million in existing mortgage
debt and the payment of various closing costs associated with the financing.
The mortgage bears interest at 7.85% per annum, requires monthly payments of
principal and interest of $30,000 and matures in January 2013.
-13-
<PAGE> 14
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 having received a 12% return on its investment.
Accordingly, the Company recorded a deferred gain of $5.6 million which was
offset against the Company's investment in the partnership. In February 1998,
the Company reacquired three of the properties for $7.7 million. The Company
paid $4.0 million in cash and assumed the existing 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 the
payoff of $3.7 million in existing mortgage debt and the payment of various
costs associated with the financing. The new mortgages bear interest at 9.5%
per annum, require monthly principal and interest payments of a total of
$66,000 and mature in February 2008.
Properties Held for Sale. Set forth below are the Company's properties held
for sale, primarily undeveloped, partially developed and undeveloped land:
<TABLE>
<CAPTION>
Property Location Acres/Lots
- ----------------- -------------- ---------------
<S> <C> <C>
Atlanta Atlanta, GA 3.5 Acres
Bad Lands Duchense, Utah 420.0 Acres
BP Las Colinas Las Colinas, TX 10.6 Acres
Chase Oaks Plano, TX 60.5 Acres
Dalho Farmers Branch, TX 3.4 Acres
Dowdy Collin County, TX 165.0 Acres
Hollywood Casino Farmers Branch, TX 51.7 Acres
Jeffries Ranch Oceanside, CA 82.4 Acres
Kamperman Collin County, TX 29.9 Acres
Katy Road Harris County, TX 130.6 Acres
Keller Tarrant County, TX 811.8 Acres
Lacy Longhorn Farmers Branch, TX 17.1 Acres
Las Colinas I Las Colinas, TX 48.6 Acres
LBJ Dallas County, TX 10.4 Acres
Lewisville Lewisville, TX 78.5 Acres
McKinney Corners I Collin County, TX 30.4 Acres
McKinney Corners II Collin County, TX 173.9 Acres
McKinney Corners III Collin County, TX 15.5 Acres
McKinney Corners IV Collin County, TX 31.3 Acres
McKinney Corners V Collin County, TX 9.7 Acres
Palm Desert Palm Desert, CA 315.2 Acres
Pantex Collin County, TX 182.5 Acres
Parkfield Denver, CO 410.7 Acres
Pioneer Crossings Austin, TX 1,448.0 Acres
Rasor Plano, TX 291.7 Acres
Santa Clarita Santa Clarita, CA 20.6 Acres
Scout Tarrant County, TX 546.0 Acres
Stagliano Farmers Branch, TX 3.2 Acres
Thompson Farmers Branch, TX 4.0 Acres
Tomlin Farmers Branch, TX 9.2 Acres
Valley Ranch Irving, TX 335.2 Acres
Valley Ranch III Irving, TX 12.5 Acres
Valwood Dallas, TX 280.0 Acres
Vineyards Grapevine, TX 15.8 Acres
Other (8 properties) Various 114.5 Acres
</TABLE>
In January 1997, the Company sold a 3.0 acre tract of the Las Colinas
I land parcel in Las Colinas, Texas, for $1.2 million in cash. The Company
recognized a gain of $676,000 on the sale.
Also in January 1997, the Company purchased the Scout land, a 546 acre
parcel of undeveloped land in Tarrant County, Texas, for $2.2 million. The
Company paid $725,000 in cash and obtained new mortgage financing for the
remaining $1.5 million
-14-
<PAGE> 15
of the purchase price. The mortgage bears interest at 16% per annum, requires
quarterly payments of interest only and matures in January 2000.
In February 1996, the Company entered into a contract to sell a 72.5
acre tract of the 92.6 acre parcel of BP Las Colinas land in Las Colinas,
Texas, for $12.9 million. The contract called for the sale to close in two
phases. In July 1996, the Company completed the first sale. In February 1997,
the Company completed the second sale of 40.2 acres for $8.0 million, of which
$7.2 million was paid in cash. Of the net cash proceeds of $6.9 million, $1.5
million was used to payoff the debt secured by the BP Las Colinas land parcel,
pay a $500,000 maturity fee to the lender, make a $1.5 million principal
paydown on the loan with the same lender, secured by the Parkfield land in
Denver, Colorado, and $1.0 million was applied as a principal paydown on the
term loan secured by the Las Colinas I land. In conjunction with the sale the
Company provided $800,000 in purchase money financing in the form of a six
month unsecured loan. The loan bore interest at 12% per annum, with all
accrued but unpaid interest and principal due at maturity in August 1997. The
Company recognized a gain of $3.4 million on such sale, deferring an additional
$800,000 of gain until the unsecured loan was paid in full. The loan was
collected in full in August 1997 and the additional $800,000 gain was
recognized.
In March 1997, the Company purchased Katy Road land, a 130.6 acre
parcel of undeveloped land in Harris County, Texas, for $5.6 million. The
Company paid $1.6 million in cash and obtained seller financing for the
remaining $4.0 million of the purchase price. The mortgage bears interest at 9%
per annum, requires quarterly payments of interest only and matures in March
2000.
In April 1997, the Company purchased the McKinney Corners I land, a
30.4 acre parcel of undeveloped land in Collin County, Texas, for $3.5 million.
The Company paid $1.0 million in cash and obtained new mortgage financing of
$2.5 million. The mortgage bears interest at 14% per annum, requires monthly
payments of interest only and matures in April 1998.
Also in April 1997, the Company purchased the McKinney Corners II
land, a 173.9 acre parcel of undeveloped land in Collin County, Texas, for $5.9
million. The Company paid $900,000 in cash and obtained new mortgage financing
of $5.0 million as an advance under the term loan from the Las Colinas I
lender. The McKinney Corners II land was added as additional collateral on the
term loan.
Further in April 1997, the Company sold a 3.1 acre parcel of the Las
Colinas I land for $1.3 million in cash. The Company used $1.0 million of the
sales proceeds as a collateral escrow deposit in accordance with the provisions
of the Valley Ranch land loan. The Company recognized a gain of $648,000 on
the sale.
In May 1997, the Company purchased the McKinney Corners III land, a
15.5 acre parcel of undeveloped land in Collin County, Texas, for $896,000 in
cash.
Also in May 1997, the Company purchased the Lacy Longhorn land, a 17.1
acre parcel of undeveloped land in Farmers Branch, Texas, for $1.8 million.
The Company paid $200,000 in cash and obtained seller financing of the
remaining $1.6 million of the purchase price. The loan bore interest at 10%
per annum, required monthly principal and interest payments of $400,000 and
matured in October 1997. The loan was paid off at maturity.
Further in May 1997, the Company purchased the Chase Oaks land, a 60.5
acre parcel of undeveloped land in Plano, Texas, for $4.2 million. The Company
paid $200,000 in cash and obtained seller financing of the remaining $4.0
million of the purchase price. The related mortgage note bears interest at 18%
per annum, requires monthly payments of interest only and matures in May 2000.
In May 1997, the Company purchased the Pioneer Crossing land, a 1,448
acre parcel of undeveloped land in Austin, Texas, for $21.5 million. The
Company paid $5.4 million in cash and obtained seller financing of the
remaining $16.1 million of the purchase price. The related mortgage note bears
interest at 9.5% per annum, requires monthly payments of interest only and
matures in May 2001.
Also in May 1997, the Company financed the unencumbered 10.6 acre
tract of the BP Las Colinas land for $3.1 million. The related mortgage note
bears interest at 9.5% per annum, requires monthly payments of interest only
and matures in December 1999.
Further in May 1997, the Company obtained a second lien mortgage of
$3.0 million secured by the Pin Oak land, from the limited partner in a
partnership that owns approximately 15.6% of the outstanding shares of the
Common Stock of the Company (the "Limited Partner"). The related mortgage note
bears interest at 12.5% per annum compounded monthly and
-15-
<PAGE> 16
matures in February 1999. In January 1998, the Palm Desert land was
substituted for the Pin Oak land as collateral for the mortgage.
In June 1997, the Company purchased the Kamperman land, a 129.6 acre
parcel of undeveloped land in Collin County, Texas, for $5.0 million in cash.
The Company simultaneously sold a 99.7 acre tract for $4.5 million in cash.
The Company recognized a gain of $215,000 on the sale.
Also in June 1997, the Company purchased the Keller land, an 811.8
acre parcel of undeveloped land in Tarrant County, Texas, for $6.3 million.
The Company paid $2.3 million in cash and obtained new mortgage financing of
$4.0 million. The related mortgage note bears interest at 12.95% per annum,
requires monthly payments of interest only and matures in June 1998.
Further in June 1997, the Company purchased the McKinney Corners IV
land, a 31.3 acre parcel of undeveloped land in Collin County, Texas, for $2.4
million. The Company paid $400,000 in cash and obtained new mortgage financing
of $2.0 million, as an advance under the term loan from the Las Colinas I
lender. The McKinney Corners IV land was added as additional collateral on the
term loan.
In June 1997, the Company purchased the Pantex land, a 182.5 acre
parcel of undeveloped land in Collin County, Texas, for $5.4 million. The
Company paid $900,000 in cash and obtained seller financing of the remaining
$4.5 million of the purchase price. The related mortgage note bears interest
at 10.5% per annum, requires semiannual payments of interest only and matures
in December 2000.
Also in June 1997, the Company obtained a second lien mortgage of $3.0
million secured by the Lewisville land, from the Limited Partner. The related
mortgage note bears interest at 12.5% per annum, compounded monthly and matures
in February 1999.
Further in June 1997, the Company refinanced the Valwood land for
$15.8 million. The related mortgagenote bears interest at the prime rate plus
4.5%, currently 13% per annum, requires monthly payments of interest only and
matures in June 1998. The Company received net financing proceeds of $4.9
million, after the payoff of $6.2 million in existing mortgage debt secured by
the property, an additional $3.0 million being applied to payoff the Jefferies
land loan and $1.4 million being applied to paydown the Las Colinas I land term
loan.
In July 1997, the Company sold a 3.9 acre tract of the Las Colinas I
land in Las Colinas, Texas, for $1.6 million in cash. In accordance with the
provisions of the term loan secured by such parcel, the Company applied the net
sales proceeds of $1.4 million, to paydown the term loan in exchange for that
lender's release of its collateral interest in such land. The Company
recognized a gain of $771,000 on the sale.
Also in July 1997, the Company purchased the Dowdy and McKinney
Corners V land, a total of 174.7 acres of undeveloped land in Collin County,
Texas, for $2.9 million. The Company obtained new mortgage financing of $3.3
million as an advance under the term loan from the Las Colinas I lender. The
Dowdy land, McKinney Corners V land and McKinney Corners III land were added as
additional collateral on the term loan.
Further in July 1997, the Company purchased the Perkins land, a 645.4
acre parcel of undeveloped land in Collin County, Texas, for $5.8 million. The
Company paid $3.3 million in cash and assumed the existing mortgage of $2.5
million. The related mortgage note bears interest at 8.5% per annum, requires
quarterly payments of interest only and matures in March 2002.
In July 1997, the Company purchased the LBJ land, a 10.4 acre parcel
of undeveloped land in Dallas County, Texas, for $2.3 million. The Company
paid $300,000 in cash and obtained seller financing of the remaining $2.0
million of the purchase price. The related mortgage note bears interest at 18%
per annum, requires quarterly payments of interest only and matures in March
1998.
Also in July 1997, the Company obtained a third lien mortgage of $2.0
million secured by the Pin Oak land, from the Limited Partner. The mortgage
bore interest at 12.5% per annum, compounded monthly and matured in February
1998. The mortgage was paid in full in January 1998.
In September 1997, the Company sold the Mopac Building in St. Louis,
Missouri, for $1.0 million in cash. In accordance with the provisions of the
Las Colinas I term loan,the Company applied $350,000 of the sales proceeds to
paydown
-16-
<PAGE> 17
the term loan in exchange for the lender's release of its collateral interest
in such property. The Company recognized a gain of $481,000 on the sale.
Also in September 1997, the Company sold a 2.6 acre parcel of the Las
Colinas I land in Las Colinas, Texas, for $1.2 million in cash. In accordance
with the provisions of the term loan secured by such parcel, the Company
applied the net sales proceeds of $1.0 million, to paydown the term loan in
exchange for the lender's release of its collateral interest in such land. The
Company recognized a gain of $578,000 on the sale.
Further in September 1997, the Company sold three tracts of Valley
Ranch land totaling 24.0 acres for $1.6 million in cash. The net cash proceeds
of $1.2 million were deposited in a certificate of deposit for the benefit of
the lender, in accordance with the term loan secured by such land. The
certificate of deposit was released to the lender in December 1997, in
conjunction with the payoff of the loan. The Company recognized a gain of
$567,000 on the sale.
In September 1997, the Company refinanced the Las Colinas I land
Double O tract for $7.3 million. The Company received net refinancing proceeds
of $2.1 million, after the payoff of existing mortgage debt of $5.0 million.
The new mortgage bears interest at the prime rate plus 4.5%, currently 13% per
annum, requires monthly payments of interest only and matures in October 1998.
In October 1997, the Company contributed its Pioneer Crossing land in
Austin, Texas to a limited partnership in exchange for $3.4 million in cash, a
1% managing general partner interest in the partnership and all of the Class B
limited partner units in the partnership and the partnership's assumption of
the $16.1 million mortgage debt secured by such property. The existing general
and limited partners converted their general and limited partner interests into
Class A limited partner units in the partnership. The Class A units have an
agreed value of $1.00 per unit and are entitled to a fixed preferred return of
10% per annum, paid quarterly. The Class A units may be converted into a total
of 360,000 shares of the Company's Series F Cumulative Convertible Preferred
Stock at any time after the first but no later than the sixth anniversary of
the closing, on the basis of one share of Series F Preferred Stock for each ten
Class A units.
Also in October 1997, the Company purchased the Palm Desert land, a
315.2 acre parcel of undeveloped land in Palm Desert, California, for $11.2
million. The Company paid $3.8 million in cash and assumed the existing
mortgage of $7.4 million. The mortgage bears interest at 9% per annum,
requires monthly principal and interest payments of $76,000 and matures in
February 2002.
Further in October 1997, the Company purchased the Thompson land, a
4.0 acre parcel of undeveloped land in Dallas County, Texas, for $869,000 in
cash.
In October 1997, the Company purchased the Santa Clarita land, a 20.6
acre parcel of undeveloped land, in Santa Clarita, California, for $1.3
million. The Company obtained new mortgage financing of $1.3 million as an
advance under the term loan from the Las Colinas I lender. The Santa Clarita
land was added as additional collateral on the term loan.
Also in October 1997, the Company purchased the Tomlin land, a 9.2
acre parcel of undeveloped land in Dallas County, Texas, for $1.7 million in
cash.
Further in October 1997, the Company purchased the Rasor land, a 378.2
acre parcel of undeveloped land in Plano, Texas, for $14.4 million. The
Company paid $5.1 million in cash, obtained new mortgage financing of $3.5
million as an advance under the term loan from the Las Colinas I lender, and
exchanged its Perkins land, a 645.4 acre parcel of undeveloped land in Collin
County, Texas, for the remainder of the purchase price. The Company
simultaneously sold an 86.5 acre tract of Rasor land for $3.8 million in cash,
the Company received net cash of $3.5 million after the payment of various
closing costs associated with the sale. The Rasor land was added as additional
collateral on the term loan. The Company recognized a gain of $212,000 on the
sale of the 86.5 acre tract.
In October 1997, a newly formed partnership, of which the Company is
the 1% general partner and Class B limited partner, purchased Vineyards land, a
15.8 acre parcel of undeveloped land in Tarrant County, Texas, for $4.5
million. The partnership paid $800,000 in cash, assumed $2.5 million of
existing mortgage debt and issued to the seller 1.1 million Class A limited
partner units with an agreed value of $1.00 per unit. The Class A limited
partner is entitled to a fixed annual preferred return of 10% per annum paid
quarterly. The Class A units may be exchanged for either shares of the
Company's Series G Cumulative Convertible Preferred Stock on or after the
second anniversary of the closing date at a rate of one share of Series G
Preferred Stock for each 100 Class A units exchanged or for Common Stock only
on or after the third anniversary of the closing date. The Class A units are
exchangeable for Common Stock at a rate of $1.00 per unit plus any outstanding
preferred return
-17-
<PAGE> 18
divided by 0.9 times the simple average of the daily closing price of the
Common Stock for the 20 business days preceding the date of conversion. The
assumed mortgage bears interest at 12.95% per annum, requires quarterly
payments of interest only and matures in June 1998.
Also in October 1997, the Company purchased the Dalho land, a 3.4 acre
parcel of undeveloped land in Farmers Branch, Texas, for $300,000 in cash.
Further in October 1997, the Company sold an 11.6 acre tract of Valley
Ranch land for $1.2 million in cash. The net cash proceeds of $990,000, after
the payment of various closing costs associated with the sale, were deposited
in a certificate of deposit for the benefit of the lender, in accordance with
the term loan secured by such land. The certificate of deposit was released to
lender in December 1997, in conjunction with the payoff of the loan. The
Company recognized a gain of $629,000 on the sale.
In November 1997, the Company sold two tracts of the Valley Ranch
land, totaling 8 acres, for $577,000 in cash. The net cash proceeds of
$451,000, after the payment of various closing costs associated with the sale,
were deposited in a certificate of deposit for the benefit of the lender, in
accordance with the term loan secured by such land. The certificate of deposit
was released to lender in December 1997, in conjunction with the payoff of the
loan. The Company recognized a gain of $216,000 on the sale.
Also in November 1997, the Company purchased the Hollywood Casino
land, a 51.7 acre parcel of undeveloped land in Farmers Branch, Texas, for
$11.1 million. The Company paid $3.6 million in cash and obtained new mortgage
financing of $7.5 million. The mortgage bears interest at 9.25% per annum,
requires monthly payments of interest only and matures in December 1999.
Further in November 1997, the Company obtained mortgage financing of
$5.4 million secured by 33.9 acres of previously unencumbered Valwood land,
Lacy Longhorn land, Thompson land, and Tomlin land. The Company received net
financing proceeds of $4.8 million after the payment of various closing costs
associated with the financing. The mortgage bears interest at 13.5% per annum,
requires monthly payments of principal and interest and matures in November
2007.
In December 1997, the Company sold a 5.1 acre tract of the Valley
Ranch land, for $430,000 in cash. The net cash proceeds of $353,000, after the
payment of various closing costs associated with the sale, were deposited in a
certificate of deposit for the benefit of the lender, in accordance with the
term loan secured by such land. The certificate of deposit was released to
lender in December 1997, in conjunction with the payoff of the loan. The
Company recognized a gain of $203,000 on the sale.
Also in December 1997, the Company purchased the Valley Ranch III
land, a 12.5 acre parcel of undeveloped land in Irving, Texas, for $2.1
million. The Company paid $527,000 in cash and obtained seller financing of
the remaining $1.6 million of the purchase price. The financing bears interest
at 10.0% per annum, requires the payment of principal and interest at maturity
and matures in December 1998.
Further in December 1997, the Company purchased the Stagliano land, a
3.2 acre parcel of undeveloped land in Farmers Branch, Texas, for $500,000 in
cash.
In December 1997, the Company sold a 32.0 acre tract of the Parkfield
land in Denver, Colorado, for $1.2 million in cash. In accordance with the
provisions of the term loan secured by such parcel, the Company applied the net
cash proceeds of $1.1 million, to paydown the term loan in exchange for the
lender's release of its collateral interest in such land. The Company
recognized a gain of $372,000 on the sale.
Also in December 1997, the Company sold two parcels of the Valley
Ranch land, totaling 25.1 acres, for $3.3 million. The Company received net
cash proceeds of $2.1 million and provided an additional $891,000 in purchase
money financing. The purchase money financing bore interest at 10.0% per annum
and matured in January 1998. The Company received a $624,000 paydown on the
purchase money financing in January 1998 with the remainder being deferred
until a zoning issue is resolved. In accordance with the provisions of the
term loan secured by such parcel, the Company applied the net cash proceeds of
$2.1 million to payoff the term loan secured by such parcel, the lender
releasing its collateral interest in the remaining Valley Ranch land. The
Company recognized a gain of $1.8 million on the sale, and deferred an
additional $267,000 until the zoning issue is resolved.
Further in December 1997, the Company sold Park Plaza, a 105,507
square foot shopping center in Manitowoc, Wisconsin, for $4.9 million in cash.
The Company received net cash of $1.6 million, after the payoff of $3.1 million
in existing
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<PAGE> 19
mortgage debt and the payment of various closing costs associated with the
sale. The Company recognized a gain of $105,000 on the sale.
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 proceeds of $3.5 million, and provided an additional $6.9
million in short term purchase money financing that was paid in full in January
1998. On the payoff of the purchase money financing the Company received net
cash of $1.5 million after the payoff of $5.2 million in underlying mortgage
debt and the payment of various closing costs associated with the sale. The
Company recognized a gain of $3.7 million on the sale.
In 1991, the Company purchased all of the capital stock of a
corporation which owned 198 developed residential lots in Fort Worth, Texas.
Through December 31, 1996, 188 of the residential lots had been sold. During
1997, 9 additional lots were sold for an aggregate gain of $17,000. At
December 31, 1997, one lot remained to be sold.
In November 1991, the Company transferred the Porticos Apartments to
IORI, an equity investee, in satisfaction of the Company's then $3.6 million
obligation to IORI. The Company recorded a deferred gain of $3.0 million on
the transfer. In June 1997, IORI sold the property, and accordingly the
Company recognized such previously deferred gain.
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 and assumed the existing mortgage of $164,000,
and obtained seller financing of the remaining $481,000 of the purchase price.
The mortgage bears interest at 10% per annum, requires semiannual payments of
principal and interest of $18,000 and matures in May 2005. The financing bears
interest at 8% per annum, requires semiannual principal and interest payments
of $67,000 and matures in January 2002.
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 financing bears interest at 10% per
annum, requires quarterly payments of interest only and matures in December
2000.
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. The mortgage bears interest at 14% per annum, requires quarterly
payments of interest only, requires a principal paydown of $300,000 in May
1998, and matures in February 1999.
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.
Further in February 1998, the Company financed the previously
unencumbered Kamperman land for $1.6 million. The Company received net
financing proceeds of $1.5 million after the payment of various closing costs
associated with the financing. The mortgage bears interest at 9.0% per annum,
requires monthly payments of interest only and matures in February 2000.
In February 1998, the Company refinanced the Vineyards land for $3.4
million. The Company received net refinancing proceeds of $2.9 million, after
the payoff of existing mortgage debt of $540,000. The mortgage bears interest
at 9.0% per annum, requires monthly payments of interest only and matures in
February 2000.
Also in February 1998, the Company financed its unencumbered Valley
Ranch land for $4.3 million. The Company received net financing proceeds of
$4.1 million after the payment of various closing costs associated with the
financing. The mortgage bears interest at 9.0% per annum, requires monthly
payments of interest only and matures in February 2000.
In March 1998, the Company financed its unencumbered Stagliano and
Dalho land for $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.
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<PAGE> 20
Competition. Identifying, completing and realizing on real estate
investments has from time to time been highly competitive, and involves a high
degree of uncertainty. The Company competes for investments with many public
and private real estate investment vehicles, including financial institutions
(such as mortgage banks, pension funds and REITs) and other institutional
investors, as well as individuals. Many of those with whom the Company
competes for investments and its services are far larger than the Company, may
have greater financial resources than the Company and may have management
personnel with more experience than the officers of the Company.
MORTGAGE LOANS
In addition to real estate, a substantial portion of the Company's
assets have been and are expected to continue to be invested in mortgage notes
receivable, principally those secured by income-producing real estate. The
Company's mortgage notes receivable consist of first, wraparound, and junior
mortgage loans.
Types of Mortgage Activity. In addition to originating its own
mortgage loans, the Company has acquired existing mortgage notes either
directly from builders, developers or property owners, or through mortgage
banking firms, commercial banks or other qualified brokers. BCM, an affiliate
of the Company, services the Company's mortgage notes receivable in its
capacity as a mortgage servicer.
Types of Properties Subject to Mortgages. The types of properties
securing the Company's mortgage notes receivable portfolio at December 31, 1997
consisted of office buildings, apartment complexes, shopping centers, single-
family residences, hotels and developed land. The Company's Board of Directors
may alter the types of properties subject to mortgages in which the Company
invests without a vote of the Company's stockholders.
At December 31, 1997, the obligors on $1.3 million or 4% of the
Company's mortgage notes receivable portfolio were affiliates of the Company.
Also at that date, $23.2 million or 71% of the Company's mortgage notes
receivable portfolio was in default.
The following table sets forth the percentages (based on the
outstanding mortgage note balance at December 31, 1997), by both property type
and geographic region, of the properties that serve as collateral for the
Company's mortgage notes receivable at December 31, 1997.
<TABLE>
<CAPTION>
Commercial
Region Apartments Properties Total
------ ---------- ------------- -----
<S> <C> <C> <C>
Mountain . . . . -- 71.3% 71.3%
Southeast . . . .2 .3 .5
Southwest . . . 4.3 23.9 28.2
----- ------ ------
4.5% 95.5% 100.0%
</TABLE>
A summary of the activity in the Company's mortgage notes receivable
portfolio during 1997 is as follows:
<TABLE>
<S> <C>
Loans in mortgage notes receivable portfolio
at January 1, 1997 . . . . . . . 13*
Loans funded . . . . . . . . . . . . 4
Loans paid in full . . . . . . . . . (3)
Loans sold . . . . . . . . . . . . . (2)
Loan foreclosed . . . . . . . . . . (1)
---
Loans in mortgage notes receivable portfolio
at December 31, 1997 . . . . . . 11*
</TABLE>
- ---------------
* Includes a mortgage note receivable collateralized by three condominium
mortgage loans.
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<PAGE> 21
During 1997, the Company collected $2.6 million in interest and $4.5
million in principal on its mortgage notes receivable and sold two mortgage
notes receivable for a total of $17.0 million. The Company plans, for the
foreseeable future, to hold, to the extent its liquidity permits, rather than
to sell in the secondary market, the remainder of the mortgage notes in its
portfolio.
First Mortgage Loans. The Company may invest in first mortgage loans,
with either short-, medium- or long-term maturities. First mortgage loans
generally provide for level periodic payments of principal and interest
sufficient to substantially repay the loan prior to maturity, but may involve
interest-only payments or moderate or negative amortization of principal and a
"balloon" principal payment at maturity. With respect to first mortgage loans,
it is the Company's general policy to require that the borrower provide a
mortgagee's title policy or an acceptable legal opinion of title as to the
validity and the priority of the mortgage lien over all other obligations,
except liens arising from unpaid property taxes and other exceptions normally
allowed by first mortgage lenders in the relevant area. The Company may grant
to other lenders participations in first mortgage loans originated by the
Company.
The following discussion briefly describes the events that affected
previously funded first mortgage loans during 1997.
The borrower on a $1.7 million mortgage note receivable secured by
land in Osceola, Florida, failed to pay the note on its November 1, 1993
maturity. The Company instituted foreclosure proceedings and was awarded
summary judgment in January 1994. During 1994 and 1995, the borrower paid the
Company a total of $270,000 in nonrefundable fees to delay foreclosure of the
property until April 24, 1995. On April 21, 1995, the borrower filed for
bankruptcy protection. On August 24, 1996, the bankruptcy court's stay was
lifted allowing the Company to proceed with foreclosure. The note had a
principal balance of $1.6 million at December 31, 1996. On February 21, 1997,
the Company sold its note for $1.8 million in cash. The Company recognized a
gain of approximately $171,000 on the sale.
Wraparound Mortgage Loans. The Company may invest in wraparound
mortgage loans, sometimes called all-inclusive loans, made on real estate
subject to prior mortgage indebtedness. A wraparound mortgage note is a
mortgage note having an original principal amount equal to the outstanding
balance under the prior existing mortgage loan plus the amount actually
advanced under the wraparound mortgage loan.
Wraparound mortgage loans may provide for full, partial or no
amortization of principal. The Company's policy is to make wraparound mortgage
loans in amounts and on properties as to which it would otherwise make a first
mortgage loan.
The following discussion briefly describes events that affected
previously funded wraparound mortgage loans during 1997.
In August 1990, the Company obtained the Continental Hotel and Casino
in Las Vegas, Nevada through foreclosure, subject to first and second lien
mortgages totaling $10.0 million. In June 1992, the Company sold the hotel and
casino for, among other consideration, a $22.0 million wraparound mortgage note
receivable. In March 1997, the wraparound note was modified and extended in
exchange for, among other things, the borrower's commitment to invest $2.0
million in improvements to the hotel and casino within four months of the March
1997 modification and an additional $2.0 million prior to December 1997. The
borrower has not made the required mortgage payments since April 1997, nor the
required improvements . In December 1997, the borrower filed for bankruptcy
protection. In February 1998, a hearing was held to allow the Company to
foreclose on the hotel and casino. At the hearing, the court allowed the
borrower 90 days to submit a reorganization plan and required the borrower to
make monthly payments of $175,000 to the Company beginning March 2, 1998. The
Company received the first such payment on March 2, 1998. The borrower failed
to make the April payment so the Company foreclosed. The Company incurred no
loss on foreclosure as the fair value of the property exceeded the carrying
value of the Company's note receivable.
In September 1997, the Company sold its $16.3 million wraparound
mortgage note receivable secured by the Las Vegas Plaza Shopping Center in Las
Vegas, Nevada, for $15.0 million. The Company received net cash of $5.5
million after the payoff of $9.2 million in underlying debt and the payment of
various closing costs associated with the sale. The Company incurred no loss
on the sale in excess of the reserve previously established.
Junior Mortgage Loans. The Company may invest in junior mortgage
loans. Such notes are secured by mortgages that are subordinate to one or more
prior liens either on the fee or a leasehold interest in real estate. Recourse
on such notes ordinarily includes the real estate which secures the note, other
collateral and personal guarantees of the borrower.
The following discussion briefly describes the junior mortgage loans
funded in 1997 and the events that affected previously funded junior mortgage
notes during 1997.
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<PAGE> 22
At December 31, 1996, the Company held a junior mortgage note
receivable secured by the Williamsburg Hospitality House in Williamsburg,
Virginia, that is subject to a first lien mortgage of $12.0 million. In
September 1997, the Company foreclosed on its $8.9 million junior mortgage note
receivable. The Company obtained the property at foreclosure subject to a
first lien mortgage of $12.0 million. The Company incurred no loss on
foreclosure as the fair value of the property exceeded the carrying value of
its mortgage note receivable and assumed mortgage debt.
In May 1997, the $3.7 million mortgage note receivable secured by an
apartment complex in Merrillville, Indiana, owned by a subsidiary of Davister
Corp., a general partner in a partnership that owns approximately 15.6% of the
Company's outstanding shares of Common Stock, was paid in full.
INVESTMENTS IN REAL ESTATE INVESTMENT TRUSTS AND REAL ESTATE PARTNERSHIPS
The Company's investment in real estate entities includes (i) equity
securities of three publicly traded real estate investment trusts (collectively
the "Affiliated REITs"), CMET, IORI and TCI, (ii) units of limited partner
interest of NRLP, (iii) a general partner interest in NRLP and NOLP, through
the Company's 96% limited partner interest in SAMLP, the general partner of
NRLP and NOLP, and (iv) interests in real estate joint venture partnerships.
Gene E. Phillips, Chairman of the Board and a Director of the Company until
November 16, 1992, served until May 15, 1996 as a director and Chief Executive
Officer of SAMI, a company owned by BCM, an affiliate of the Company, that
serves as SAMLP's managing general partner. Randall M. Paulson, Executive Vice
President of the Company, serves as the sole director and as President of SAMI.
Gene E. Phillips is also a general partner of SAMLP. BCM, the Company's
advisor, serves as advisor to the Affiliated REITs, and performs certain
administrative and management functions for NRLP and NOLP on behalf of SAMLP.
Since acquiring its initial investments in the equity securities of
the Affiliated REITs and NRLP in 1989, the Company has made additional
investments in the equity securities of these entities through private and
open market purchases. The Company's cost with respect to shares of the
Affiliated REITs at December 31, 1997 totaled $21.6 million, and its cost with
respect to units of limited partner interest in NRLP totaled $23.3 million. The
aggregate carrying value (cost plus or minus equity in income or losses and
less distributions received) of such equity securities of the Affiliated REITs
and NRLP was $38.3 million at December 31, 1997 and the aggregate market value
of such equity securities was $134.6 million. The aggregate investee book value
of the equity securities of the Affiliated REITs based upon the December 31,
1997 financial statements of each such entity was $69.8 million and the
Company's share of NRLP's revaluation equity at December 31, 1997 was $198.9
million.
The Company's Board of Directors has authorized the expenditure by the
Company of up to an aggregate of $35.0 million to acquire, in open market
purchases, units of NRLP and shares of the Affiliated REITs, excluding private
purchase transactions which were separately authorized. As of December 31,
1997, the Company had expended $4.0 million to acquire units of NRLP and an
aggregate of $5.6 million to acquire shares of the Affiliated REITs, in open
market purchases, in accordance with these authorizations. The Company expects
to make additional investments in the equity securities of the Affiliated REITs
and NRLP.
At December 31, 1997, SAMLP, the general partner of NRLP and NOLP,
owned 26,475 shares of TCI. The Company owns a 96% limited partnership interest
in SAMLP which the Company consolidates for financial statement purposes.
The purchases of the equity securities of the Affiliated REITs and
NRLP were made for the purpose of investment and were based principally on the
opinion of the Company's management that the equity securities of each were and
are currently undervalued. The determination by the Company to purchase
additional equity securities of the Affiliated REITs and NRLP is made on an
entity-by-entity basis and depends on the market price of each entity's equity
securities relative to the value of its assets, the availability of sufficient
funds and the judgment of the Company's management regarding the relative
attractiveness of alternative investment opportunities. Substantially all of
the equity securities of the Affiliated REITs and NRLP owned by the Company are
pledged as collateral for borrowings. Pertinent information regarding the
Company's investment in the equity securities of the Affiliated REITs and NRLP,
at December 31, 1997, is summarized below (dollars in thousands):
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<PAGE> 23
<TABLE>
<CAPTION>
Percentage Carrying Equivalent
of the Company's Value of Investee Market Value
Ownership at Investment at Book Value at of Investment at
Investee December 31, 1997 December 31, 1997 December 31, 1997 December 31, 1997
- -------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
NRLP . . 54.4% $ 11,479 $ * $ 83,018
CMET . . 40.6 14,939 35,745 25,733
IORI . . 29.7 3,511 7,439 5,176
TCI . . . 30.6 8,378 26,652 20,664
-------- ---------
$ 38,307 $ 134,591
</TABLE>
- ---------------
* At December 31, 1997, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity at December 31, 1997,
however, 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.
Each of the Affiliated REITs and NRLP own a considerable amount of
real estate, much of which, particularly in the case of NRLP, has been held for
many years. Because of depreciation, these entities may earn substantial
amounts in periods in which they sell real estate and will probably incur
losses in periods in which they do not. The Company's reported income or loss
attributable to these entities will differ materially from its cash flow
attributable to them. The Company does not have a controlling equity interest
in any of the Affiliated REITs and therefore it cannot, acting by itself,
determine either the individual investments or the overall investment policies
of such investees. However, due to the Company's equity investments in, and the
existence of common officers with, each of the Affiliated REITs, and that the
Affiliated REITs have the same advisor as the Company and that Mr. Randall M.
Paulson, an Executive Vice President of the Company, is also the President of
the Affiliated REITs and BCM, the Company's advisor, and is the President and
sole director of SAMI, a company owned by BCM, that is the managing general
partner of SAMLP, the Company may be considered to have the ability to exercise
significant influence over the operating and investing policies of these
entities. The Company accounts for its investment in these entities using the
equity method. Under the equity method, the Company recognizes its
proportionate share of the income or loss from the operations of these entities
currently, rather than when realized through dividends or on sale. 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, as more
fully discussed in "NRLP" below. The carrying value of the Company's investment
in these entities, as set forth in the table above, is the original cost of
each such investment adjusted for the Company's proportionate share of each
entity's income or loss and distributions received.
The following is a summary description of each of NRLP and the
Affiliated REITs, based upon information publicly reported by such entities.
NRLP. NRLP is a publicly traded master limited partnership which was
formed under the Delaware Uniform Limited Partnership Act on January 29, 1987.
It commenced operations on September 18, 1987 when, through NOLP, it acquired
all of the assets, and assumed all of the liabilities, of 35 public and private
limited partnerships. NRLP is the sole limited partner of NOLP and owns 99% of
the beneficial interest in NOLP. NRLP and NOLP operate as an economic unit and,
unless the context otherwise requires, all references herein to the Partnership
shall constitute references to NRLP and NOLP as a unit. The general partner and
owner of 1% of the beneficial interest in each of NRLP and NOLP is SAMLP, a
Delaware limited partnership.
SAMI, a company owned by BCM, is the managing general partner of
SAMLP. In November 1992, NOLP transferred 52 apartment complexes and a
wraparound mortgage note receivable to Garden Capital, L.P. ("GCLP"), a
Delaware limited partnership in which NOLP owns a 99.3% limited partner
interest. Concurrent with such transfer, GCLP refinanced all of the mortgage
debt associated with the transferred properties and the wraparound mortgage
note under a new first mortgage in the amount of $223.0 million.
The Company is a limited partner in SAMLP, holding a 96% limited
partner interest therein, which the Company consolidates for financial
statement purposes.
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<PAGE> 24
SAMI, as the managing general partner of SAMLP, has discretion in
determining methods of obtaining funds for the Partnership's operations, and
the acquisition and disposition of its assets. The Partnership's governing
documents place no limitation on the amount of leverage that the Partnership
may incur either in the aggregate or with respect to any particular property or
other investment. At December 31, 1997, the aggregate loan-to-value ratio of
the Partnership's real estate portfolio was 43.4% computed on the basis of the
ratio of total property-related debt to aggregate appraised values. As of
December 31, 1997 NRLP owned 79 properties located in 22 states. These
properties consisted of 66 apartment complexes comprising 16,538 units, five
office buildings with an aggregate 367,271 square feet and eight shopping
centers with an aggregate of 1.1 million square feet.
For the year ended December 31, 1997, the Partnership reported net
income of $8.7 million compared to a net loss of $375,000 for the year ended
December 31, 1996. The Partnership had income from operations, prior to gains
on sale of real estate, of $362,000 for the year ended December 31, 1997
compared to a loss of $436,000 for the year ended December 31, 1996. The
improvement in the Partnership's 1997 income from operations is due to an
average 3.0% increase in average rental rates at the Partnership's apartment
complexes and an average 1.0% increase in rental rates at the Partnership's
commercial properties coupled with an average 1.0% increase in occupancy at the
Partnership's apartment complexes and an average 3.0% increase in occupancy at
the Partnership's commercial properties.
The Partnership has paid quarterly distributions to unitholders since
the fourth quarter of 1993. In 1997, the Company received a total of $1.4
million in distributions from the Partnership and accrued an additional $5.5
million that was received in January 1998.
The Partnership, SAMLP and Gene E. Phillips, were among the defendants
in a class action lawsuit arising out of the formation of the Partnership. An
agreement settling such lawsuit as to the above named defendants, (the "Moorman
Settlement Agreement"), became effective on July 5, 1990. The Moorman
Settlement Agreement provided for, among other things, the appointment of an
oversight committee for the Partnership (the "NRLP Oversight Committee"); the
establishment of specified annually increasing targets for a five-year period
relating to the price of NRLP units of limited partner interest; a limitation
and deferral or waiver of NRLP's reimbursement to SAMLP of certain future
salary costs; and a deferral or waiver of certain future compensation to SAMLP;
the required distribution to unitholders of all of the Partnership's cash from
operations in excess of certain renovation costs unless the NRLP Oversight
Committee approves alternative uses for such cash from operations; the issuance
of unit purchase warrants to members of the plaintiff class; and the
contribution by certain co-defendants of cash and notes payable to the
Partnership aggregating $5.5 million including a $2.5 million contributed by
SAMLP. The Partnership also agreed to pay certain settlement costs, including
plaintiffs' attorneys' fees in the amount of $3.4 million. The settlement plan
remains in effect until the withdrawal of SAMLP as general partner of NRLP and
NOLP.
The Moorman 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 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 the
Partnership 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. SAMI, the managing
general partner of SAMLP, has calculated the fair value of such Redeemable
General Partner Interest to be $49.6 million at December 31, 1997 before
reduction for the principal balance ($4.2 million at December 31, 1997) and
accrued interest ($7.2 million at December 31, 1997) on the note receivable
from SAMLP for its original capital contribution to the Partnership.
In January 1995, NRLP, SAMLP, William H. Elliott and the NRLP
Oversight Committee executed an Implementation Agreement which provided for the
nomination of an entity controlled by Mr. Elliott as successor general partner
and for the resolution of all related matters under the Moorman Settlement
Agreement. In February 1996, the parties to the Implementation Agreement
executed an Amended and Restated Implementation Agreement.
In September 1996, the Judge supervising the implementation of the
Moorman Settlement Agreement (the "Supervising Judge") entered an order
granting tentative approval of the Amended and Restated Implementation
Agreement and the form of notice to be sent to the original class members. In
April 1997, the Supervising Judge entered an order setting a hearing on the
Amended and Restated Implementation Agreement for June 1997. A notice was sent
to all class members and NRLP unitholders in April 1997 and the hearing was
held in June 1997. On September 8, 1997, the Supervising Judge rendered a
Statement of Decision in which he declined to approve the Amended and Restated
Implementation Agreement. As a result of the Statement of Decision, the
Moorman Settlement Agreement remains in full force and effect and all of the
provisions of the Amended and Restated Implementation Agreement have been
voided.
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<PAGE> 25
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 Class Distribution Fund and Election of
Successor General Partner (the "Resolution Agreement") which provides for the
nomination of an entity affiliated with SAMLP to be the successor general
partner of the Partnership, for the establishment of a fund for the benefit of
the plaintiff class members consisting of cash and properties owned by the
Partnership and for the resolution of all related matters under the Moorman
Settlement Agreement.
The Resolution Agreement was submitted to the Supervising Judge and on
February 11, 1998, the Supervising Judge entered an order granting preliminary
approval of the Resolution Agreement and scheduled a hearing to be held on June
8, 1998, for consideration of preliminary approval of a business plan for the
operation of the entity which will receive the cash and properties and to
consider a form of notice to be distributed to the plaintiff class members
describing the Resolution Agreement and the business plan.
Upon final approval by the Supervising Judge, the proposal to elect
the successor general partner will be submitted to the NRLP unitholders for a
vote.
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 third quarter of 1998.
SAMLP has agreed to waive its rights under the Moorman Settlement
Agreement to receive any payment from the Partnership of the fees it is
entitled to receive upon the election of a successor general partner. As of
December 31, 1997, these fees were calculated to be $49.6 million.
Upon final approval by the Supervising Judge, the Partnership will
transfer $1.9 million in cash and five shopping centers to the new entity which
will be owned by the plaintiff class members and managed for their benefit by
a court approved board. This fund is being established in order to provide
additional benefits to the plaintiff class members.
Upon the election and taking office of the successor general partner
and the transfer of the cash and properties to the fund for the benefit of the
plaintiff class members, the Moorman Settlement Agreement and the NRLP
Oversight Committee shall be terminated.
In September 1997, one of the original class action defendants, Robert
A. McNeil filed motions to (i) be installed as receiver for the Partnership,
and (ii) disband the NRLP Oversight Committee. A hearing on the motions has
been set for June 8, 1998.
CMET. CMET is a California business trust which was organized on
August 27, 1980 and commenced operations on December 3, 1980. CMET's primary
business is investing in real estate through direct equity investments and
partnerships and financing real estate and real estate related activities
through investments in mortgage notes. CMET holds equity investments in
apartment complexes and commercial properties (office buildings, industrial
warehouses and shopping centers) throughout the continental United States.
CMET's apartment complexes and commercial properties are concentrated in the
Southeast, Southwest and Midwest regions of the continental United States. At
December 31, 1997, CMET owned 57 income producing properties located in 14
states consisting of 34 apartment complexes comprising of 6,173 units, ten
office buildings with an aggregate of 1.2 million square feet, 11 industrial
warehouses with an aggregate of 1.6 million square feet and two shopping
centers with an aggregate of 247,196 square feet. CMET also holds mortgage
notes receivable secured by real estate located in the Southeast, Southwest and
Midwest regions of the continental United States, with a concentration in the
Southeast and Southwest regions.
For the year ended December 31, 1997, CMET reported net income of $4.2
million as compared with net income of $8.7 million for the year ended December
31, 1996. CMET's 1997 net income includes gains on the sale of real estate of
$8.2 million, whereas its 1996 net income included gains on the sale of real
estate and marketable equity securities of $10.1 million and an extraordinary
gain of $812,000. CMET's cash flow from property operations improved from
$19.3 million in 1996 to $23.7 million in 1997. At December 31, 1997, CMET had
total assets of $299.4 million, which consisted of $250.1 million of real
estate held for investment, $11.6 million of real estate held for sale, $3.6
million of notes and interest receivable, $31.0 million of investments in
partnerships and other assets and $3.1 million in cash and cash equivalents.
CMET has paid quarterly distributions since the first quarter of 1993.
The Company received a total of $885,000 in distributions from CMET in 1997.
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<PAGE> 26
IORI. IORI is a Nevada corporation which was originally organized on
December 14, 1984 as a California business trust and commenced operations on
April 10, 1985. Like CMET, IORI's primary business is investing in real estate
through direct equity investments and partnerships and financing real estate
and real estate related activities through investments in mortgage notes. IORI
holds equity investments in apartment complexes and commercial properties
(office buildings) in the Pacific, Southeast, Southwest, and Midwest regions of
the continental United States. IORI holds one mortgage note receivable which is
secured by a shopping center in the Midwest region. At December 31, 1997, IORI
owned 14 income producing properties located in five states. These properties
consisted of four apartment complexes comprising 654 units and ten office
buildings with an aggregate of 611,009 square feet.
For the year ended December 31, 1997, IORI reported net income of $3.3
million as compared with a net loss of $568,000 for the year ended December 31,
1996. IORI's net income in 1997, is attributable to $4.0 million of gains on
sale of real estate. IORI's cash flow from property operations increased to
$6.5 million in 1997 from $3.5 million in 1996. At December 31, 1997, IORI had
total assets of $90.3 million, which consisted of $81.9 million in real estate
held for investment, $2.0 million in notes and interest receivable, $5.3
million in investments in partnerships and other assets and $1.1 million in
cash and cash equivalents.
IORI has paid quarterly dividends since the first quarter of 1993. The
Company received a total of $184,000 in dividends from IORI in 1997.
TCI. TCI is a Nevada corporation which was originally organized on
September 6, 1983, as a California business trust, and commenced operations on
January 31, 1984. TCI also has investment policies similar to those of CMET and
IORI. TCI holds equity investments in a hotel, apartment complexes and
commercial properties (office buildings, industrial warehouses and shopping
centers) throughout the continental United States with a concentration in the
Northeast, Southeast and Southwest regions. At December 31, 1997, TCI owned 56
income producing properties located in 14 states. These properties consisted
of 28 apartment complexes comprising 5,174 units, 14 office buildings with an
aggregate of 1.3 million square feet, 7 industrial warehouses with an aggregate
of 1.7 million square feet, 6 shopping centers with an aggregate of 857,750
square feet and one hotel with 60 rooms. TCI also holds mortgage notes
receivable secured by real estate located in the Northeast, Midwest, Southeast
and Southwest regions of the continental United States, with a concentration in
the Northeast and Southeast regions.
For the year ended December 31, 1997, TCI reported net income of $12.6
million as compared with a net loss of $7.8 million for the year ended December
31, 1996. TCI's net income for 1997 includes gains on the sale of real estate
of $21.4 million whereas its net loss for 1996 included gains on the sale of
real estate of $1.6 million and extraordinary gains of $256,000. TCI's cash
flow from property operations increased to $16.2 million in 1997 as compared to
$12.7 million in 1996. At December 31, 1997, TCI had total assets of $319.5
million, which consisted of $270.2 million in real estate held for investment,
$5.0 million in real estate held for sale, $15.6 million in investments in real
estate entities, $4.0 million in notes and interest receivable and other assets
and $24.7 million in cash and cash equivalents. At December 31, 1997, TCI
owned 341,500 shares of IORI's common stock, approximately 22.5% of IORI's
shares then outstanding.
TCI has paid quarterly dividends since the fourth quarter of 1995. The
Company received $333,000 in dividends from TCI in 1997.
SAMLP. As discussed in more detail under "Real Estate" above, the
Company owns a 96% limited partner interest in SAMLP. The Company consolidates
SAMLP for financial statement purposes. As a limited partner, the Company has
no role in the management of the business affairs of SAMLP. Rather, SAMI, the
managing general partner of SAMLP, has full and complete authority to manage
SAMLP.
River Trails II. In January 1992, the Company entered into a
partnership agreement with an entity affiliated with a 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, 1996, 197 residential lots
had been sold. In 1997, an additional 17 lots were sold and at December 31,
1997, 73 lots remained to be sold. During 1997, each partner received $21,000
in return of capital distributions from the partnership and $12,000 in profit
distributions.
R. G. Bond, Ltd. In June 1995, the Company purchased the corporate
general partner of a limited partnership which owns apartment complexes in
Illinois, Florida and Minnesota, with a total of 900 units. The corporate
general partner has a 1% interest in the partnership which is subordinated to a
priority return of the limited partner.
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<PAGE> 27
Campbell Center Associates, Ltd. In April 1996, the Company purchased
a 28% general partner interest in Campbell Center Associates, Ltd. which in
turn has a 56.25% interest in Campbell Centre Joint Venture, which owns a
413,175 square foot office building in Dallas, Texas. The purchase price of the
general partner interest was $550,000 in cash and a $500,000 note, which bears
interest at 8% per annum, requires monthly interest only payments and matures
April 2000. In January 1997, the Company exercised its option to purchase an
additional 28% general partner interest in Campbell Center Associates, Ltd. The
purchase price was $300,000 in cash and a $750,000 note, which bears interest
at 8% per annum, requires monthly interest only payments and matures in April
2000. In addition, in July 1997, the Company exercised its option to purchase
an additional 9% general partner interest in Campbell Center Associates, Ltd.
for $868,000 in cash.
Highway 380/Preston Partners, Ltd. In June 1996, a newly formed
limited partnership, of which the Company is 1% general partner, purchased 580
acres of undeveloped land in Collin County, Texas for $5.7 million in cash. The
Company contributed $100,000 in cash to the partnership with the remaining $5.6
million being contributed by the limited partner. The partnership agreement
designates the Company as the managing general partner. In September 1996, the
partnership obtained financing of $2.8 million secured by the 580 acres of land
and personal guarantees of the limited partner. The loan bore interest at a
variable rate, required monthly payments of interest only and matured in
September 1998. The partnership agreement also provides that the limited
partner receive a 12% preferred cumulative return on his investment before any
sharing of partnership profits occurs. In April 1997, the partnership sold a
35.0 acre tract for $1.3 million in cash. The net sales proceeds of $1.2
million were distributed to the limited partner in accordance with the
partnership agreement. The partnership recognized a gain of $884,000 on the
sale. In July 1997, the partnership sold a 24.6 acre tract for $800,000 in
cash. In accordance with the terms of the term loan secured by such property,
$197,000 of the net sales proceeds were used to paydown such term loan. The
remaining $545,000 was distributed to the limited partner in accordance with
the partnership agreement. The partnership recognized a gain of approximately
$497,000 on the sale. In September 1997, the partnership sold a 77.2 acre
tract for $1.5 million in cash. In accordance with the terms of the term loan
secured by such property, the net sales proceeds were used to paydown such
loan. The partnership recognized a gain of $704,000 on the sale. In October
1997, the partnership sold a 96.5 acre tract for $1.7 million in cash. In
accordance with the terms of the term loan secured by such property $548,000 of
the net sales proceeds were used to payoff such loan. The remaining $1.1
million was distributed to the limited partner in accordance with the
partnership agreement. The partnership recognized a gain of $691,000 on the
sale. In December 1997, the partnership sold a 94.4 acre tract for $2.5
million in cash. Of the net sales proceeds, $1.8 million was distributed to
the limited partner and $572,000 was distributed to the Company as general
partner in accordance with the partnership agreement. The partnership
recognized a gain of $1.4 million on the sale. In January 1998, the
partnership sold a 155.4 acre tract for $2.9 million. The partnership received
$721,000 in cash and provided purchase money financing of an additional $2.2
million. Of the net sales proceeds, $300,000 was distributed to the limited
partner and $300,000 was distributed to the Company as general partner in
accordance with the partnership agreement. The purchase money financing bears
interest at 12% per annum, requires monthly payments of interest only and
matures in July 1998. The partnership recognized a gain of $1.2 million on the
sale.
Elm Fork Branch Partners, Ltd. In September 1997, a newly formed
limited partnership of which the Company is a 1% general partner and 21.5%
limited partner, purchased a 422.4 acre parcel of undeveloped land in Denton
County, Texas, for $16.0 million in cash. The Company contributed $3.6 million
in cash to the partnership with the remaining $12.4 million being contributed
by the other limited partners. The partnership agreement designates the
Company as the managing general partner. In September 1997, the partnership
obtained financing of $6.5 million secured by the 422.4 acres of land. The
loan bears interest at 10% per annum, requires monthly payments of interest
only and matures in September 2001. The net financing proceeds were
distributed to the partners, the Company receiving repayment of $2.9 million of
its initial investment. The partnership agreement also provides that the
limited partners receive a 12% preferred cumulative return on their investment
before any sharing of partnership profits occurs. One of the limited partners
in the partnership is also a limited partner in a partnership that owns
approximately 15.6% of the Company's outstanding shares of Common Stock.
[Remainder of Page Intentionally Left Blank]
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<PAGE> 28
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ---------------- ------------------ ----------------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
EARNINGS DATA
Revenue . . . . . . . . . . . $ 49,971 $ 26,979 $ 22,952 $ 23,070 $ 13,427
Expense . . . . . . . . . . . 83,355 38,577 28,314 26,490 18,128
------------ ------------ ------------ ------------- -----------
(Loss) from operations . . . (33,384) (11,598) (5,362 ) (3,420) (4,701)
Equity in income (losses)
of investees . . . . . . 10,660 2,004 (851) 292 (4,014)
Gain on sale of real estate . 20,296 3,659 2,594 379 481
------------ ------------ ------------ ------------- -----------
(Loss) before extraordinary
gain . . . . . . . . . . (2,428) (5,935) (3,619 ) (2,749) (8,234)
Extraordinary gain . . . . . - 381 783 323 3,807
------------ ------------ ------------ ------------- -----------
Net (loss) . . . . . . . . . (2,428) (5,554) (2,836 ) (2,426) (4,427)
Preferred Dividend
Requirement . . . . . . (206) (113) -- -- --
Redeemable Common Stock,
accretion of discount . - -- -- -- (129)
------------ ------------ ------------- ------------- -----------
(Loss) applicable to
Common Shares . . . . . $ (2,634) $ (5,667) $ (2,836 ) $ (2,426) $ (4,556)
============ ============= ============== ============= ===========
PER SHARE DATA
(Loss) before extraordinary
gain . . . . . . . . . . $ (.22) $ (.46) $ (.31) $ (.23) $ (.68)
Extraordinary Gain . . . . . -- .03 .07 .03 .31
------------ ------------ ------------ ------------ -----------
Net (loss) (.22) (.43) (.24) (.20) (.37)
Redeemable Common Stock,
accretion of discount . - -- -- -- (.01)
------------ ------------ ------------ ------------- -----------
(Loss) applicable to
Common shares . . . . . $ (.22) $ (.43) $ (.24) $ (.20) $ (.38)
============= ============= ============== ============= ===========
Dividends per share . . . . . $ .20 $ .15 $ -- $ -- $ --
Weighted average shares
outstanding . . . . . . 11,710,013 12,765,082 11,716,656 12,208,876 12,101,100
</TABLE>
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<PAGE> 29
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Notes and interest
receivable, net . . . . . $ 25,526 $ 48,485 $ 49,741 $ 45,664 $ 51,769
Real estate, net . . . . . . 302,453 119,035 59,424 47,526 52,437
Total assets . . . . . . . . 433,799 235,037 162,033 137,362 139,861
Notes and interest payable . 261,986 127,863 61,163 45,695 53,693
Margin borrowings . . . . . . 53,376 40,044 34,017 26,391 16,147
Stockholders' equity . . . . 63,453 47,786 53,058 55,894 56,120
Book value per share . . . . $ 3.53 $ 3.74 $ 4.53 $ 4.77 $ 5.56
</TABLE>
- -----------------------------------
Shares and per share data have been adjusted for the 2 for 1 forward Common
Stock splits effected January 2, 1996 and February 17, 1997.
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 real
estate and mortgage loan investments selected to provide opportunities for
capital appreciation as well as current income.
LIQUIDITY AND CAPITAL RESOURCES
General. Cash and cash equivalents at December 31, 1997 aggregated
$5.3 million, compared with $1.3 million at December 31, 1996. Although the
Company anticipates that during 1998 it will generate excess cash from
operations, as discussed below, such excess cash is not sufficient to discharge
all of the Company's debt obligations as they mature. The Company will
therefore again rely on externally generated funds, including borrowings
against its investments in various real estate entities, mortgage notes
receivable, the sale or refinancing of properties and, to the extent available
and necessary, borrowings from its advisor to meet its debt service
obligations, pay taxes, interest and other non-property related expenses.
Notes payable totaling $89.0 million are scheduled to mature during
1998. The Company has the option of extending the maturity dates to April and
June 1999 of $18.3 million of that amount. The lender on an additional $19.5
million has agreed to extend the maturity date to February 2000. In January and
February 1998, the Company has also paid off $8.7 million of such maturing
debt.
The Company expects an increase in cash flow from property operations
in 1998. Such increase is expected to be derived from operations of The
Collection Office and Retail Center, the Preston Square Shopping Center, the
Williamsburg Hospitality House and the four Piccadilly hotels, all of which
were acquired during 1997. The Company is also expecting continued lot sales at
its Texas residential subdivision and substantial sales of land to generate
additional cash flow.
In 1997, the Company sold a total of 1,610.3 acres of land in Las
Colinas, Houston, Irving and Collin County, Texas and Denver, Colorado in 20
separate transactions for a total of $52.2 million. The Company applied $23.5
million of the net sales proceeds to paydown the loans secured by such land. In
addition, the Company sold an office building in St. Louis, Missouri, and a
shopping center in Manitowoc, Wisconsin, for a total of $6.7 million in cash.
The Company received net cash of $2.2 million, after the payoff of $3.5 million
in existing mortgage debt secured by such properties.
In 1997, the Company purchased a total of 5,221.4 acres of land in
Palm Desert, and Santa Clarita, California and Austin, Collin County, Dallas
County, Farmers Branch, Harris County, Irving, Plano and Tarrant County, Texas,
for a total of $121.6 million. The Company paid $44.4 million in cash and
obtained new or seller financing of $77.2 million.
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<PAGE> 30
The Company expects that funds from existing cash resources,
collections on or sales of mortgage notes receivable, sales or refinancing of
real estate and/or mortgage notes receivable, and borrowings against its
investments in marketable equity securities, mortgage notes receivable, and to
the extent available additional borrowings from the Company's advisor, will be
sufficient to meet the cash requirements associated with the Company's current
and anticipated level of operations, maturing debt obligations and existing
commitments. To the extent that the Company's liquidity permits or financing
sources are available, the Company will make investments in real estate,
primarily investments in developed, partially developed and undeveloped land,
continue making additional investments in real estate entities and marketable
equity securities, and fund or acquire mortgage notes.
The Company expects that it will be necessary for it to sell $72.6
million, $27.5 million, and $14.3 million of its land holdings during each of
the next three years, respectively, to satisfy the debt on such land as it
matures. If the Company is unable to sell at least the minimum amount of land
to satisfy the debt obligations on such land as it matures, the Company, if it
was not able to extend such debt, would either sell other of its assets to pay
such debt or return the property to the lender.
Notes Receivable. Scheduled principal maturities of $31.2 million are
due in 1998 of which $23.2 million is due on nonperforming notes receivable. In
February 1997, the Company sold a nonperforming note receivable with a
principal balance at December 31, 1996 of $1.6 million for $1.8 million in
cash. In September 1997, the Company sold its $16.3 million wraparound mortgage
note receivable secured by the Las Vegas Plaza Shopping Center in Las Vegas,
Nevada, for $15.0 million. The Company received net cash of $5.5 million after
the payoff of $9.2 million in underlying debt. The Company incurred no loss on
the sale in excess of the reserve previously established. The balance of the
Company's mortgage notes receivable are due over the next one to fifteen years
and provide for "balloon" principal payments. It may be necessary for the
Company to consider extending certain notes if the borrowers do not have the
resources to repay the loans, are unable to sell the property securing such
loans, or are unable to refinance the debt owed.
In August 1990, the Company obtained the Continental Hotel and Casino
in Las Vegas, Nevada, through foreclosure subject to first and second lien
mortgages totaling $10.0 million. In June 1992, the Company sold the hotel and
casino for, among other consideration, a $22.0 million wraparound mortgage note
receivable. In March 1997, the wraparound note was modified and extended in
exchange for, among other things, the borrower's commitment to invest $2.0
million in improvements to the hotel and casino within four months of the March
1997 modification and an additional $2.0 million prior to December 1997. The
borrower has not made the required note payments since April 1997, nor the
required improvements. In December 1997, the borrower filed for bankruptcy
protection. In February 1998, a hearing was held to allow the Company to
foreclose on the hotel and casino. At the hearing, the court ruled that the
borrower had 90 days to submit a reorganization plan and beginning March 2,
1998, required the borrower to make monthly payments of $175,000 to the
Company. The Company received the first such payment on March 2, 1998. The
borrower failed to make the April payment so the Company foreclosed. The
Company incurred no loss as the fair value of the property exceeded the
carrying value of the Company's note receivable.
At December 31, 1996, the Company held a mortgage note receivable
secured by an apartment complex in Merrillville, Indiana, with a principal
balance of $3.5 million. The note matured in December 1996. The Company and
borrower had agreed to a modification and extension of the note. In May 1997,
the note plus accrued but unpaid interest was paid in full.
In September 1997, the Company foreclosed on its junior mortgage note
receivable secured by the Williamsburg Hospitality House in Williamsburg,
Virginia. The Company obtained the property at foreclosure subject to the first
mortgage of $12.0 million. The Company incurred no loss on foreclosure as the
fair value of the property exceeded the carrying value of the Company's
mortgage note receivable and assumed mortgage debt. The property is included in
real estate held for investment in the accompanying Consolidated Balance Sheet.
The Company anticipates a continued improvement in the operations of
the properties securing its mortgage notes receivable. In spite of this
perceived improvement in the real estate market in general, the Company can
give no assurance that it will not continue to experience deterioration in cash
flow from notes receivable due to new problem loans.
Loans Payable. The Company has margin arrangements with various
brokerage firms which provide for borrowings of up to 50% of the market value
of marketable equity securities. The borrowings under such margin arrangements
are secured by such equity securities and bear interest rates ranging from 7.0%
to 11.0%. Margin borrowings totaled $53.4 million (approximately 39.7% of
market value) at December 31, 1997, compared to $40.0 million at December 31,
1996.
In May 1997, the Company financed a previously unencumbered 10.6 acre
tract of BP Las Colinas land for $3.1 million. Also in May 1997, the Company
obtained a second lien mortgage of $3.0 million secured by the Pin Oak land.
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In June 1997, the Company obtained a second lien mortgage of $3.0
million secured by the Lewisville land. Also in June 1997, the Company
refinanced the Valwood land for $15.8 million. The Company received net cash of
$4.9 million, after the payoff of $6.2 million in existing mortgage debt
secured by the property, an additional $3.0 million being applied to payoff the
Jefferies land loan and $1.4 million being applied to pay down the Las Colinas
I land term loan.
In July 1997, the Company obtained a third lien mortgage of $2.0
million secured by the Pin Oak land.
In September 1997, the Company refinanced the Las Colinas I land
Double O tract for $7.3 million. The Company received net cash of $2.1 million,
after the payoff of $5.0 million in existing mortgage debt.
In October 1997, the Company refinanced the Oaktree Village Shopping
Center for $1.5 million. The Company received no net cash after the payoff of
$1.4 million in existing mortgage debt and the payment of various closing costs
associated with the financing. Also in October 1997, the Company refinanced the
Denver Merchandise Mart for $25.0 million. The Company received net cash of
$10.2 million, after the payoff of $14.8 million in existing mortgage debt and
the payment of various closing costs associated with the financing.
In November 1997, the Company obtained mortgage financing of $5.4
million secured by 33.9 acres of previously unencumbered Valwood land, Lacy
Longhorn land, Thompson land, and Tomlin land. The Company received net
financing proceeds of $4.8 million after the payment of various closing costs
associated with the financing.
In December 1997, the Company refinanced the Inn at the Mart in
Denver, Colorado, for $4.0 million. The Company received net cash of $1.4
million, after the payoff of $2.0 million in existing mortgage debt and the
payment of various closing costs associated with the financing.
In August 1996, the Company consolidated its existing National Realty,
L.P. ("NRLP") margin debt held by the various brokerage firms into a single
loan of $20.3 million. The loan is secured by the Company's NRLP units with a
market value of at least 50% of the principal balance of the loan. As of
December 31, 1997, 3,349,535 NRLP units with a market value of $80.0 million
were pledged as security for such loan. In July 1997, the lender advanced an
additional $3.7 million, increasing the loan balance to $24.0 million.
Also in August 1996, the Company obtained a $2.0 million loan from a
financial institution secured by a pledge of equity securities of the
Affiliated REITs owned by the Company and Common Stock of the Company owned by
BCM, with a market value of $4.0 million. The Company received $2.0 million in
net cash after the payment of closing costs associated with the loan. The loan
was paid in full in December 1997, from the proceeds of a $4.0 million loan
from another financial institution also secured by a pledge of equity
securities of the Affiliated REITs owned by the Company and Common Stock of the
Company owned by BCM, with a market value of $10.4 million. The Company
received $2.0 million in net cash after the payoff of the $2.0 million loan. In
January 1998, the lender made a second loan to the Company of $2.0 million.
This second loan is secured by a pledge of Common Stock of the Company owned by
the Company's advisor with a market value of $4.7 million. The Company received
$2.0 million in net cash.
Equity Investments. During the fourth quarter of 1988, the Company
began purchasing shares of the Affiliated REITs, which have the same advisor as
the Company, and units of limited partner interest in NRLP. It is anticipated
that additional equity securities of NRLP and the Affiliated REITs will be
acquired in the future through open-market and negotiated transactions to the
extent the Company's liquidity permits.
Equity securities of the Affiliated 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 one year period after they are
acquired. Such restrictions may reduce the Company's ability to realize the
full fair market value of such investments if the Company attempted to dispose
of such securities in a short period of time.
The Company's cash flow from these investments is dependent on the
ability of each of the entities to make distributions. In 1997, the Company
received total distributions from the Affiliated REITs of $1.4 million and $1.4
million from NRLP and an additional $6.7 million, which was accrued at December
31, 1997, was received in January 1998. The Company anticipates receiving
distributions totaling $2.3 million from the Affiliated REITs and $11.1 million
from NRLP in 1998, including amounts accrued at December 31, 1997.
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In June 1996, the Company resumed dividend payments on the Company's
Common Stock. The Company paid dividends totaling $2.0 million or $.20 per
share in 1997.
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 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.
RESULTS OF OPERATIONS
1997 Compared to 1996. The Company reported a net loss of $2.4 million
in 1997 as compared to a net loss of $5.6 million in 1996. The primary factors
contributing to the Company's net loss are discussed in the following
paragraphs.
Sales and cost of sales were $17.9 million and $14.5 million,
respectively, in 1997. The Company had no sales or cost of sales prior to May
1997. These items of revenue and cost relate to Pizza World Supreme, Inc.
("PWSI"), consolidated in May 1997.
Net rental income (rents less property operating expenses) increased
from $4.8 million in 1996 to $4.9 million in 1997. This increase is primarily
attributable to increased rents at the Denver Merchandise Mart and increased
room rates and occupancy at the Kansas City Holiday Inn. Net rental income is
expected to increase in 1998 from a full years operation of The Collection
Office and Retail Center, Preston Square Shopping Center, Williamsburg
Hospitality House and the four Piccadilly hotels all of which were acquired in
1997.
Interest income decreased from $4.7 million in 1996 to $2.8 million in
1997. This decrease is primarily attributable to the sale of two notes
receivable and the payoff of a third note receivable in 1997. Interest income
in 1998 is expected to approximate that in 1997.
Other income decreased from $1.6 million in 1996 to $134,000 in 1997.
This decrease is due in part to recognizing a unrealized gain on marketable
equity securities of $486,000 in 1996 compared to an unrealized loss of
$850,000 in 1997. This decrease is also attributable in part to a decrease in
dividend income and net gains on sales of marketable equity securities of
$67,000 and $56,000, respectively.
Interest expense increased from $16.5 million in 1996 to $30.2 million
in 1997. Of this increase, $10.8 million is due to the debt secured by the Best
Western Oceanside Hotel acquired in 1996 and the Williamsburg Hospitality
House, Piccadilly Hotels, Pin Oak land, Scout land, Katy land, McKinney land,
Lacy Longhorn land, Santa Clarita land, Chase Oaks land, Pioneer Crossing land,
Pantex land, Keller land, Perkins land, Rasor land, Dowdy land, Palm Desert
land and LBJ land acquired in 1997, $2.0 million is due to additional
borrowings and a full years interest on the loan secured by NRLP units and $1.1
million is due to refinancing the debt secured by the Kansas City Holiday Inn
and Denver Merchandise Mart. Interest expense for 1998 is expected to increase
from the continued acquisition of properties on a leveraged basis.
Advisory and mortgage servicing fees increased from $1.5 million in
1996 to $2.7 million in 1997. The increase is attributable to the increase in
the Company's gross assets, the basis for such fee. Such fee will continue to
increase as the Company's gross assets increase.
General and administrative expenses, increased from $2.7 million in
1996 to $7.0 million in 1997. The increase is attributable to a $1.1 million
increase in legal fees and travel expenses in 1997 relating to potential
acquisitions, financings and refinancings, a $1.1 million increase in advisor
cost reimbursements and $2.1 million attributable to the general and
administrative expenses of PWSI.
Depreciation and amortization increased from $2.0 million in 1996 to
$3.3 million in 1997 due to the acquisition of six properties and PWSI in 1997.
Depreciation and amortization are expected to increase again in 1998 from a
full year's depreciation of the properties acquired in 1997.
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Minority interest in 1997 is the preferred return paid on limited
partner units of Ocean Beach Partners, L.P., Valley Ranch, L.P., Grapevine
American, L.P., Edina Park Plaza Associates, L.P. and Hawthorne Lakes
Associates, L.P.
Equity in income of investees improved from $2.0 million in 1996 to
$10.7 million in 1997. The increase in equity income is primarily attributable
to an increase of $32.1 million in gains on sale of real estate in IORI, NRLP
and TCI offset by a decrease of $1.9 million in CMET. The Company's equity
share of such gains was $13.5 million. The increase is also attributable to an
improvement in income from property operations for the Affiliated REITs and
NRLP, from increased rental rates and operating expense control.
Gains on the sale of real estate increased from $3.7 million in 1996
to $20.3 million in 1997. In 1996, the Company recognized a $2.0 million gain
on the sale of a 32.3 acre tract of BP Las Colinas land in Las Colinas, Texas,
and a $1.1 million gain on the sale of a 4.6 acre tract of Las Colinas I land
also in Las Colinas, Texas. In 1997, the Company recognized gains of $5.9
million on the sale of a 49.7 acre tract of BP Las Colinas land in Las Colinas,
Texas; $3.5 million on the sale of tracts totaling 116.8 acres of Valley Ranch
land in Irving, Texas; $2.7 million on the sale of a 12.5 acre tract of Las
Colinas I land in Las Colinas, Texas; $3.6 million on the sale of Pin Oak land
in Houston, Texas; $216,000 on the sale of a 99.7 acre tract of Kamperman land
in Collin County, Texas; $371,000 on the sale of a 32.0 acre tract of Parkfield
land in Denver, Colorado; $211,000 on the sale of a 86.5 acre tract of Rasor
land in Plano, Texas; $106,000 on the sale of Park Plaza Shopping Center in
Manitowoc, Wisconsin; $480,000 on the sale of the Mopac Building in St. Louis,
Missouri; and $172,000 on the sale of a mortgage note receivable. The Company
also recognized a previously deferred gain of $3.0 million on the sale of
Porticos Apartments.
The Company reported $381,000 in extraordinary gains in 1996 compared
to no extraordinary gains in 1997. The 1996 extraordinary gain is the Company's
share of TCI's extraordinary gain from the early payoff of debt and CMET's
extraordinary gain from an insurance settlement.
1996 Compared to 1995. The Company reported a net loss of $5.6 million
in 1996 as compared to a net loss of $2.8 million in 1995. The primary factors
contributing to the increase in the Company's net loss are discussed in the
following paragraphs.
Net rental income (rents less property operating expenses) increased
from $4.6 million in 1995 to $4.8 million in 1996. This increase is primarily
attributable to increased rents at the Denver Merchandise Mart and increased
room rates and occupancy at the Kansas City Holiday Inn. Net rental income is
expected to increase in 1997 from continued improvement at the Kansas City
Holiday Inn and from a full years operations of the Best Western Oceanside
Hotel which was acquired in December 1996.
Interest income decreased from $4.9 million in 1995 to $4.7 million in
1996. This decrease is primarily attributable to a note receivable being paid
off in 1995.
Other income increased from $154,000 in 1995 to $1.6 million in 1996.
This increase is due to recognizing an unrealized gain of $486,000 on the
Company's trading portfolio of equity securities in 1996 compared to
recognizing an unrealized loss of $1.4 million in 1995. This increase was
offset in part by dividend income and gain on marketable equity securities
decreasing by $689,000 and $292,500 respectively.
Interest expense increased from $8.9 million in 1995 to $16.5 million
in 1996. The increase is primarily attributable to debt refinancings and the
debt incurred related to the purchase of six parcels of land in 1995 and 1996
and the Oaktree Shopping Center obtained in November 1995. Offsetting the
increase was a $161,000 decrease in interest expense due to the sale of an
apartment complex in February 1995.
Advisory and mortgage servicing fees increased from $1.2 million in
1995 to $1.5 million in 1996. The increase is primarily attributable to the
Company's increase in gross assets, the basis for such fee.
Depreciation increased from $1.7 million in 1995 to $2.0 million in
1996 due to $2.9 million in property improvements made in 1996.
Equity in income of investees improved from a loss of $851,000 in 1995
to income of $2.0 million in 1996. The increase in equity income is primarily
attributable to an improvement in income from property operations for both CMET
and NRLP, from increased rental rates and a decrease in operating expenses. The
1995 gains are attributable to the Company's equity share ($1.8 million) of
NRLP's fourth quarter gain on the sale of two apartment complexes, the
Company's equity share ($2.5 million) of
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TCI's gain on the sale of land in the third quarter and an apartment complex in
the fourth quarter of 1995, a $4.6 million gain representing the Company's
equity share of the REIT's gain on sale of real estate.
Gains on the sale of real estate increased from $2.6 million in 1995
to $3.7 million in 1996. In 1996, the Company recognized a $2.0 million gain on
the sale of 32.3 acres of the BP Las Colinas land in Las Colinas, Texas, and a
$1.1 million gain on the sale of 4.6 acres of the Las Colinas I land also in
Las Colinas, Texas. The 1995 gains are attributable to a $1.6 million gain
recognized on the sale of 6.9 acres of Las Colinas I land and a $924,000 gain
recognized on the sale of the Boulevard Villas Apartments in February 1995.
The Company reported $783,000 in extraordinary gains in 1995 compared
to $381,000 in extraordinary gains in 1996. The 1996 extraordinary gain is the
Company's share of TCI's extraordinary gain from the early payoff of debt and
CMET's extraordinary gain from an insurance settlement. The 1995 extraordinary
gain is the Company's equity share of TCI's extraordinary gain from the early
payoff of mortgage debt.
CONTINGENCIES
The Company owns a 96% limited partner interest in Syntek Asset
Management, L.P. ("SAMLP"). SAMLP is the general partner of NRLP and National
Operating, L.P. ("NOLP"), the operating partnership of NRLP. Gene E. Phillips,
a Director and Chairman of the Board of the Company until November 16, 1992, is
also a general partner of SAMLP. At December 31, 1997, the Company owned
approximately 54% of the outstanding limited partner units of NRLP.
NRLP, SAMLP and Mr. Phillips were among the defendants in a class
action lawsuit arising from the formation of NRLP. An agreement settling such
lawsuit (the "Settlement Agreement") for the above mentioned defendants became
effective on July 5, 1990. The Settlement Agreement provided for, among other
things, the appointment of an NRLP oversight committee and the establishment of
specified annually increasing targets for five years relating to the price of
NRLP's units of limited partner interest.
The Settlement Agreement provides for the resignation and replacement
of SAMLP as general partner if the unit price targets are not met for two
consecutive anniversary dates. NRLP did not meet the unit price targets for the
first and second anniversary dates. On July 8, 1992, SAMLP notified the NRLP
oversight committee of the failure of NRLP to meet the unit price targets for
two successive years and that it expects to resign as general partner of NRLP
and NOLP.
The withdrawal of SAMLP as general partner would require NRLP to
purchase SAMLP's general partner interest (the "Redeemable General Partner
Interest") at its then fair value, and to pay certain fees and other
compensation as provided in the partnership agreement. Syntek Asset Management,
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
December 31, 1997, before reduction for the principal balance ($4.2 million at
December 31, 1997) and accrued interest ($7.2 million at December 31, 1997) on
the note receivable from SAMLP for its original capital contribution to the
partnership.
On December 15, 1997, NRLP, SAMLP, the NRLP oversight committee,
Joseph B. Moorman, Invenex and the Counsel for the plaintiff class members
executed an Agreement for Establishment of a Class Distribution of Fund and
Election of Successor General Partner (the "Resolution Agreement") which
provides for the nomination of an entity affiliated with SAMLP to be the
successor general partner of NRLP and NOLP, for the establishment of a fund for
the benefit of the plaintiff class members consisting of cash and properties
owned by NOLP and for the resolution of all related matters under the
Settlement Agreement.
The Resolution Agreement was submitted to the Judge appointed to
supervise the class action settlement (the "Supervising Judge") and on February
11, 1998, the Supervising Judge entered an order granting preliminary approval
of the Resolution Agreement and scheduled a hearing to be held on June 8, 1998,
for consideration of preliminary approval of a business plan for the operation
of the entity which will receive the cash and properties and to consider a form
of notice to be distributed to the plaintiff class members describing the
Resolution Agreement and the business plan.
Upon the election and taking office of the successor general partner
and the transfer of the cash and properties to the fund established for the
benefit of the plaintiff class members, the Settlement Agreement and the NRLP
oversight committee shall be terminated.
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ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances
and regulations, the Company may be potentially liable for removal or
remediation costs, as well as certain other potential costs relating to
hazardous or toxic substances (including governmental fines and injuries to
persons and property) where property-level managers have arranged for the
removal, disposal or treatment of hazardous or toxic substances. In addition,
certain environmental laws impose liability for release of asbestos-containing
materials into the air, and third parties may seek recovery from the Company
for personal injury associated with such materials.
The Company's management is not aware of any environmental liability
relating to the above matters that would have a material adverse effect on the
Company's business, assets or results of operations.
INFLATION
The effects of inflation on the Company's operations are not
quantifiable. Revenues from property operations fluctuate proportionately with
inflationary increases and decreases in housing costs. Fluctuations in the
rate of inflation also affect the sales values of properties and,
correspondingly, the ultimate gains to be realized by the Company from property
sales.
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 the ITAA
certified year 2000 compliant operating system for its computer hardware during
1998.
ACQUISITION TERMS
This Prospectus covers Preferred Stock that may be issued from time to
time in the future by the Company on the completion of acquisitions of assets,
businesses or securities, or on the payment of dividends on or conversion of or
payment of interest on convertible notes issued in connection with such
acquisitions of other businesses or properties.
It is expected that the terms of acquisitions involving the issuance
of the Preferred Stock covered by this Prospectus will be determined by direct
negotiations with the owners or controlling persons of the assets, businesses
or securities to be acquired, and that the Preferred Stock issued will be
valued at prices reasonably related to the market price of the Preferred Stock
either at the time an agreement is entered into concerning the terms of the
acquisition or at or about the time the Shares are delivered. No underwriting
discounts or commissions will be paid, although finder's fees may be paid in
connection with certain acquisitions. Any person receiving such fees may be
deemed to be an "underwriter" within the meaning of the Securities Act, and any
profit on the resale of shares of Common Stock purchased by them may be deemed
to be underwriting commissions or discounts under the Securities Act.
DESCRIPTION OF THE CAPITAL STOCK
GENERAL
The Company is authorized by its Articles of Incorporation, as
amended, to issue up to 100,000,000 shares of Common Stock, $.01 par value per
share, and 20,000,000 shares of a special class of stock, $2.00 par value per
share (the "Special Stock"), which may be designated by the Company's Board of
Directors from time to time. The Preferred Stock to be offered hereunder will
be one or more series of the Special Stock.
COMMON STOCK
All shares of the Common Stock are entitled to share equally in
dividends from funds legally available therefor, when declared by the Company's
Board of Directors, and upon liquidation or dissolution of the Company, whether
voluntary or involuntary (subject to any prior rights of holders of the Special
Stock), and to share equally in the assets of the Company available for
distributions to shareholders. Each holder of Common Stock is entitled to one
vote for each share held on all matters submitted to the shareholders. There
is no cumulative voting, redemption right, sinking fund provision or right of
conversion
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with respect to the Common Stock. The holders of Common Stock do not have any
preemptive rights to acquire additional shares of Common Stock when issued.
All outstanding Common Stock is fully paid and nonassessable. As of May 12,
1998, 10,718,216 shares of Common Stock were outstanding.
SPECIAL STOCK
The following is a description of certain general terms and provisions
of the Preferred Stock. The particular terms of any series of Preferred Stock
will be described in the applicable Prospectus Supplement.
Article 5 of the Articles of Incorporation of the Company, as amended,
authorizes the issuance of up to 20,000,000 shares of Special Stock in one or
more series with such preferences, limitations and rights as the Company's
Board of Directors determines. In particular, the Company's Board of Directors
may fix and determine, among other things, the dividend payable with respect to
such shares of Special Stock (including whether and in what manner such
dividend shall be accumulated); whether such shares shall be redeemable, and if
so, the prices, terms and conditions of such redemption; the amount payable on
such shares in the event of voluntary or involuntary liquidation; the nature of
any purchase, retirement or sinking fund provisions; the nature of any
conversion rights with respect to such shares; and the extent of the voting
rights, if any, of such shares. Certain provisions of the Special Stock may,
under certain circumstances, adversely affect the rights or interests of
holders of Common Stock. For example, the Company's Board of Directors could,
without shareholder approval, issue a series of Special Stock with voting and
conversion rights which could adversely affect the voting power of the common
shareholders. In addition, the Special Stock may be issued under certain
circumstances as a defensive device to thwart an attempted hostile takeover of
the Company.
The Prospectus Supplement relating to the series of Preferred Stock
being offered will describe its terms, including: (i) its title and stated
value; (ii) the number of shares offered, the liquidation preference per share
and the purchase price; (iii) the dividend rate(s), period(s) and/or payment
date(s) or method(s) of calculating dividends; (iv) whether dividends are
cumulative or non-cumulative and, if cumulative, the date from which dividends
accumulate; (v) the procedures for any auction and remarketing, if any; (vi)
the provisions for a sinking fund, if any; (vii) the provisions for redemption,
if applicable; (viii) any listing of such Preferred Stock on a securities
exchange; (ix) the terms and conditions, if applicable, for its conversion into
Common Stock, including the conversion price (or manner of calculation) and
conversion period; (x) voting rights, if any; (xi) its relative ranking and
preferences as to dividend rights and rights upon liquidation, dissolution or
winding up of the affairs of the Company; and (xii) any limitations on issuance
of any series of Preferred Stock ranking senior to or on a parity with such
series of Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company. The Prospectus
Supplement for such Preferred Stock will also include a discussion of any
material and/or special Federal income tax considerations applicable to such
Preferred Stock.
Through the date of this Prospectus, the Company has amended its
Articles of Incorporation to designate seven series of the Special Stock as
explained below. Each series of Special Stock now outstanding ranks on a
parity as to dividends and upon liquidation, dissolution or winding up with all
other shares of Special Stock.
The following description of the provisions of each series of the
Special Stock designated by the Company does not purport to be complete and is
subject to and qualified in its entirety by reference to the definitive
Articles of Amendment of the Articles of Incorporation relating to such series
of Special Stock.
Series A Preferred Stock; Terminated Rights Plan. On April 11, 1990,
the Company's Board of Directors designated 500,000 shares of the Series A
Cumulative Participating Preferred Stock (the "Series A Preferred Stock"),
adopted a preferred share purchase rights plan and approved the distribution to
shareholders of a dividend of one preferred share purchase right on each
outstanding share of the Company's Common Stock (the "Rights"). The rights
plan provided that one Right would be distributed to all shareholders of the
Company for each share of Common Stock owned of record by them as of April 23,
1990. In addition, the rights plan required that the Company issue one Right
with each share of Common Stock that became outstanding thereafter so that all
shares of Common Stock would carry a Right. The Rights were primarily designed
to assure that all holders of Common Stock of the Company receive fair and
equal treatment in the event of any attempt to acquire the Company and to guard
the interest of such shareholders against partial tender offers, inadequate
offers, open market accumulations and other abusive or coercive tactics. The
rights plan was not adopted in response to any effort to acquire the Company,
and the Company has remained unaware of any such effort. On June 12, 1996, the
Company's Board of Directors resolved to redeem the Rights held by the
shareholders of record as of June 21, 1996 at the redemption price of $.01 per
Right. The redemption price was paid on July 8, 1996. The decision by the
Company's Board of Directors was based on a determination that the rights plan
was no longer necessary to protect the Company and its shareholders from
coercive tender offers.
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On February 27, 1997, the Company's Board of Directors deleted the
designation of the Series A Preferred Stock from the Articles of Incorporation
and none will be issued in the future.
Series B Preferred Stock. On April 3, 1996, the Company's Board of
Directors designated 4,000 shares of Series B 10% Cumulative Preferred Stock
(the "Series B Preferred Stock") with a par value of $2.00 per share and a
preference on liquidation of $100 per share plus payment of accrued and unpaid
dividends. The Series B Preferred Stock is non- voting except as required by
law, and the Company is not required to maintain a sinking fund for such stock.
The Series B Preferred Stock is convertible, but only during a 30-day
period beginning May 8, 1998, into that number of shares of Common Stock
obtained by multiplying the number of shares being converted by $100 and then
dividing such sum by (in most instances) 90% of the simple average of the daily
closing price of the Common Stock for the 30 trading days immediately preceding
the conversion period on the market where the Common Stock is then regularly
traded. The right of conversion shall terminate at the close of business on
the second full business day prior to the date fixed for redemption and on the
commencement of any liquidation, dissolution or winding up of the Company.
The Series B Preferred Stock bears a cumulative dividend per share of
$10.00 per annum, payable quarterly in equal installments of $2.50. Dividends
on the Series B Preferred Stock are in preference to and with priority over
dividends upon the Common Stock. The Series B Preferred Stock ranks on a
parity as to dividends and upon liquidation, dissolution or winding up with all
other shares of Special Stock.
The Company may from time to time redeem any or all of the Series B
Preferred Stock upon payment of the liquidation value of $100 per share plus
all accrued and unpaid dividends. There is no restriction on the repurchase or
redemption of the Series B Preferred Stock by the Company while there is any
arrearage in payment of dividends except that at the time of such repurchase or
redemption the Company must pay all accrued and unpaid dividends on the shares
being redeemed. As of May 1, 1998, 4,000 shares of the Series B Preferred
Stock were issued and outstanding.
Series C Preferred Stock. On May 23, 1996, the Company's Board of
Directors designated 16,681 shares of Series C 10% Cumulative Preferred Stock
(the "Series C Preferred Stock") with a par value of $2.00 per share and a
preference on liquidation of $100 per share plus all accrued and unpaid
dividends. The Series C Preferred Stock is non-voting except as required by
law. The Company is not required to maintain a sinking fund for such stock.
Each share of Series C Preferred Stock is convertible, but only during
a 90-day period beginning on November 25, 1998, into the number of shares of
Common Stock obtained by multiplying the number of shares of Series C Preferred
Stock being converted by $100 and dividing the result by (in most instances)
90% of the then-recent average trading price for the Common Stock.
The Series C Preferred Stock bears a cumulative dividend per share of
$10.00 per annum, payable quarterly in equal installments of $2.50. Dividends
on the Series C Preferred Stock are in preference to and with priority over
dividends upon the Common Stock. The Series C Preferred Stock ranks on a
parity as to dividends and upon liquidation, dissolution or winding up with all
other shares of Special Stock. The dividends for the first twelve months were
paid in additional shares of Series C Preferred Stock.
The Company may from time to time redeem any or all of the Series C
Preferred Stock upon payment of the liquidation value of $100 per share plus
all accrued and unpaid dividends. There is no restriction on the repurchase or
redemption of the Series C Preferred Stock by the Company while there is any
arrearage in payment of dividends except that at the time of such repurchase or
redemption the Company must pay all accrued and unpaid dividends on the shares
being redeemed. As of May 1, 1998, 16,681 shares of the Series C Preferred
Stock were issued and outstanding.
Series D Preferred Stock. The Company's Board of Directors designated
91,000 shares of Series D 9.50% Cumulative Preferred Stock (the "Series D
Preferred Stock") on August 2, 1996, with a par value of $2.00 per share and a
preference on liquidation of $20.00 per share plus payment of accrued and
unpaid dividends. The Series D Preferred Stock is non-voting except as
required by law and is not convertible. The Company is not required to
maintain a sinking fund for such stock.
The Series D Preferred Stock has a cumulative dividend per share of
9.50% per annum of the $20.00 liquidation preference, payable quarterly in
equal installments of $0.475. Dividends on the Series D Preferred Stock are in
preference to and with priority over dividends upon the Common Stock. The
Series D Preferred Stock ranks on a parity as to dividends and upon
liquidation, dissolution or winding up with all other shares of Special Stock.
-37-
<PAGE> 38
The Company may from time to time after June 1, 2001 redeem any or all
of the Series D Preferred Stock upon payment of the liquidation value of $20.00
per share plus all accrued and unpaid dividends. There is no restriction on
the repurchase or redemption of the Series D Preferred Stock by the Company
while there is any arrearage in payment of dividends except that at the tine of
such repurchase or redemption the Company must pay all accrued and unpaid
dividends on the shares being redeemed. As of May 1, 1998, no shares of the
Series D Preferred Stock were issued or outstanding.
The Series D Preferred Stock is reserved for issuance upon the
conversion Class A units held by the limited partners of Ocean Beach Partners
L.P.
Series E Preferred Stock. On December 3, 1996, the Company's Board of
Directors designated 80,000 shares of Series E 10% Cumulative Convertible
Preferred Stock (the "Series E Preferred Stock") with a par value of $2.00 per
share and a preference on liquidation of $100 per share plus payment of all
accrued and unpaid dividends. The Series E Preferred Stock is non-voting
except as required by law. The Company is not required to maintain a sinking
fund for such stock.
The Series E Preferred Stock is convertible into that number of shares
of the Common Stock obtained by multiplying the number of shares being
converted by $100, then adding all accrued and unpaid dividends on such shares,
then dividing such sum by (in most instances) 80% of the Common Stock's
then-recent average trading price for the 20 business days ending on the last
business day of the calendar week immediately preceding the date of conversion
on the principal stock exchange on which such Common Stock is then listed or
admitted to trading as determined by the Company. The schedule pursuant to
which shares of Series E Preferred Stock may be so converted is as follows: up
to 30,000 shares of the Series E Preferred Stock may be converted beginning as
of November 4, 1998 and thereafter; up to an additional 10,000 shares of the
Series E Preferred Stock may be converted beginning as of November 4, 1999; and
up to an additional 40,000 shares of the Series E Preferred Stock may be
converted beginning as of November 4, 2001.
The Series E Preferred Stock bears a cumulative dividend per share
equal to $10.00 per annum, payable quarterly in equal installments of $2.50 for
the period from date of issuance to November 4, 1999, and $11.00 per annum
($2.75 per quarter) thereafter. Dividends on the Series E Preferred Stock are
in preference to and with priority over dividends upon the Common Stock. The
Series E Preferred Stock ranks on a parity as to dividends and upon
liquidation, dissolution or winding up with all other shares of Special Stock.
The Company may redeem any or all of the shares of Series E Preferred
Stock from time to time upon payment of $100 per share plus all accrued and
unpaid dividends. There is no restriction on the repurchase or redemption of
the Series E Preferred Stock by the Company while there is any arrearage in
payment of dividends except that at the time of such repurchase or redemption
the Company must pay all accrued and unpaid dividends on the shares being
redeemed. As of May 1, 1998, no shares of the Series E Preferred Stock were
issued or outstanding.
The Series E Preferred Stock is reserved for issuance upon the
conversion of Class A units held by the limited partners in the Valley Ranch
Limited Partnership.
Series F Preferred Stock. On August 13, 1997, the Company's Board of
Directors designated and authorized the issuance of a total of 7,500,000 shares
of its Series F Cumulative Convertible Preferred Stock (the "Series F Preferred
Stock") with a par value of $2.00 per share and a preference on liquidation of
$10.00 per share plus payment of accrued and unpaid dividends (the "Adjusted
Liquidation Value"). The Series F Preferred Stock is non-voting except (i) as
provided by law and (ii) at any time or times when all or any portion of the
dividends on the Series F Preferred Stock for any six quarterly dividends,
whether or not consecutive, shall be in arrears and unpaid. In the latter
event, the number of directors constituting the Company's Board of Directors
shall be increased by two and the holders of Series F Preferred Stock, voting
separately as a class, shall be entitled to elect two directors to fill such
newly created directorships with each holder being entitled to one vote in such
election for each share of Series F Preferred Stock held. The Company is not
obligated to maintain a sinking fund with respect to the Series F Preferred
Stock.
The Series F Preferred Stock is convertible, at the option of the
holder, into Common Stock at any time and from time to time, in whole or in
part, after the earliest to occur of (i) August 15, 2003; (ii) the first
business day, if any, occurring after a Quarterly Dividend Payment Date (as
defined below), on which an amount equal to or in excess of 5% of the $10.00
liquidation value (i.e., $.50 per share of Series F Preferred Stock) is accrued
and unpaid, or (iii) when the Company becomes obligated to mail a statement to
the holders of record of each of the Series F Preferred Stock because of a
proposal by the Company at any time before all of the Series F Preferred Stock
have been redeemed by or converted into Common Stock, to merge or consolidate
with or into any other corporation (unless the Company is the surviving entity
and holders of the Common Stock continue to hold such Common Stock without
modification and without receipt of any additional consideration), or to sell,
lease, or convey all
-38-
<PAGE> 39
or substantially all its property or business, or to liquidate, dissolve or
wind up. The Series F Preferred Stock is convertible into that number of
shares of Common Stock obtained by multiplying the number of shares being
converted by $10.00, then adding all accrued and unpaid dividends, then
dividing such sums by (in most instances) 90% of the simple average of the
daily closing price of the Common Stock for the 20 business days ending on the
last business day of the calendar week immediately preceding the date of
conversion on the principal stock exchange on which such Common Stock is then
listed (the "Conversion Price"). Notwithstanding the foregoing, the Company,
at its option, may elect to redeem shares of the Series F Preferred Stock
sought to be so converted instead of issuing shares of the Common Stock by
paying to the holder thereof cash in an amount equal to the Conversion Price
for those shares of the Series F Preferred Stock so redeemed.
The Series F Preferred Stock bears a cumulative, compounded dividend
per share equal to 10% per annum of the Adjusted Liquidation Value, payable
quarterly on the 15th day of the month following the end of each calendar
quarter (each, a "Quarterly Dividend Payment Date"), and commencing accrual on
August 16, 1998 to and including the date on which the redemption price of such
shares is paid, whether or not such dividends have been declared and whether or
not there are profits, surplus or other funds of the Company legally available
for the payment of such dividends. Dividends on the Series F Preferred Stock
are in preference to and with priority over dividends upon the Common Stock.
Except as provided in the following sentence, the Series F Preferred Stock
ranks on a parity as to dividends and upon liquidation, dissolution or winding
up with all other Special Stock issued by the Company. The Company will not
issue any shares of Special Stock of any series which are superior to the
Series F Preferred Stock as to dividends or rights upon liquidation,
dissolution or winding up of the Corporation as long as any Series F Preferred
Stock is issued and outstanding, without the prior written consent of the
holders of at least 66 2/3% of such shares of the Series F Preferred Stock then
outstanding voting separately as a class.
In addition to the Company's redemption rights described above upon a
conversion of Series F Preferred Stock, the Company may redeem any or all of
the Series F Preferred Stock at any time and from time to time, at its option,
for cash upon no less than twenty (20) days nor more than thirty (30) days
prior notice thereof. The redemption price of the Series F Preferred Stock
shall be an amount per share equal to (i) 105% of the Adjusted Liquidation
Value during the period from August 15, 1997 through August 15, 1998; (ii) 104%
of the Adjusted Liquidation Value during the period from August 16, 1998
through August 15, 1999; and (iii)103% of the Adjusted Liquidation Value at any
time on or after August 16, 1999. As of May 1, 1998, 2,800,000 shares of the
Series F Preferred Stock were issued or outstanding.
Series G Preferred Stock. On September 18, 1997, the Company's Board
of Directors designated 11,000 shares of Series G Cumulative Convertible
Preferred Stock (the "Series G Preferred Stock") with a par value of $2.00 per
share and a preference on liquidation of $100 per share plus all accrued and
unpaid dividends. The Series G Preferred Stock is non-voting except as required
by law, and the Company is not required to maintain a sinking fund for such
stock.
Each share of Series G Preferred Stock is convertible, but only after
October 6, 2000, into that number of shares of Common Stock obtained by
multiplying the number of shares of Series G Preferred Stock being converted by
$100 and then dividing such sum by (in most instances) 90% of the simple
average of the daily closing price of the Common Stock for the 20 trading days
ending on the last trading day of the calendar week immediately preceding the
conversion on the market where the Common Stock is then regularly traded. The
right of conversion shall terminate upon receipt of the notice of redemption
from the Company and on the earlier of (i) the commencement of any liquidation,
dissolution or winding up of the Company or (ii) the adoption of any resolution
authorizing the commencement thereof. The Company may elect to redeem the
shares of Series G Preferred Stock sought to be converted instead of issuing
shares of Common Stock.
The Series G Preferred Stock bears a cumulative dividend per share
equal to $10.00 per annum, payable in arrears in quarterly equal installments
of $2.50 on each Quarterly Dividend Payment Date, and commencing accrual on the
date of issuance to and including the date on which the redemption price of
such shares is paid. Dividends on the Series G Preferred Stock are in
preference to and with priority over dividends upon the Common Stock. The
Series G Preferred Stock ranks on a parity as to dividends and upon
liquidation, dissolution or winding up with all other shares of Special Stock.
The Company may redeem any or all of the shares of the Series G
Preferred Stock at any time and from time to time, at its option, for cash upon
no less than twenty (20) days nor more than thirty (30) days prior notice
thereof. The redemption price of the shares of the Series G Preferred Stock
shall be an amount per share equal to the $100 liquidation value plus all
accrued and unpaid dividends on such shares through the redemption date. The
right of the Company to redeem shares of Series G Preferred Stock remains
effective notwithstanding prior receipt by the Company of notice by any holder
of Series G Preferred Stock of such holder's intent to convert shares of Series
G Preferred Stock. As of May 1, 1998, no shares of Series G Preferred Stock
were issued or outstanding.
-39-
<PAGE> 40
The Series G Preferred Stock is reserved for issuance upon the
conversion of Class A units held by the limited partners in Grapevine American,
Ltd.
PLAN OF DISTRIBUTION
Preferred Stock may be sold directly by the Company or through agents
designated by the Company from time to time. Any agent involved in the offer
or sale of the Preferred Stock in respect of which this Prospectus is delivered
will be named, and any commissions payable by the Company to such agent will be
set forth, in the Prospectus Supplement. Unless otherwise indicated in the
Prospectus Supplement, any such agent will be acting on a best efforts basis
for the period of its appointment.
Underwriters, dealers and agents may be entitled under agreements
entered into with the Company to indemnifications by the Company against
certain civil liabilities, including liabilities under the Securities Act, or
to contribution by the Company to payments they may be required to make in
respect thereof. The terms and conditions of such indemnification will be
described in an applicable Prospectus Supplement. Underwriters, dealers and
agents may be customers of, engage in transactions with, or perform services
for the Company in the ordinary course of business.
LEGAL MATTERS
Certain legal matters with respect to the Preferred Stock and, if
applicable, the Common Stock offered by the Company will be passed upon for the
Company by Holt Ney Zatcoff & Wasserman, LLP, Atlanta, Georgia.
EXPERTS
The financial statements and schedules included and incorporated by
reference in this Prospectus have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the period set forth in
their reports appearing elsewhere herein and in the registration statement, and
such reports are included herein in reliance upon the authority of said firm as
experts in auditing and accounting.
-40-
<PAGE> 41
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets -
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations -
Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows -
Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-11
</TABLE>
All other schedules are omitted because they are not required, are not
applicable or the information required is included in the Consolidated
Financial Statements or the notes thereto.
F-1
<PAGE> 42
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors of
American Realty Trust, Inc.
We have audited the accompanying consolidated balance sheets of American Realty
Trust, Inc. and Subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the financial statements. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Realty Trust, Inc. and Subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
BDO Seidman, LLP
Dallas, Texas
March 25, 1998
F-2
<PAGE> 43
AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------
1997 1996
---------------- --------------
(dollars in thousands, except per share)
<S> <C> <C>
Assets
Notes and interest receivable
Performing (including $1,307 in 1997 and
$13,563 in 1996 from affiliate) . . . . . . . . . . . . . . . $ 9,300 $ 50,784
Nonperforming, nonaccruing . . . . . . . . . . . . . . . . . . 18,624 1,627
---------- ---------
27,924 52,411
Less - allowance for estimated losses . . . . . . . . . . . . . . (2,398) (3,926)
----------- ----------
25,526 48,485
Real estate held for sale, net of accumulated
depreciation ($5,098 in 1996) . . . . . . . . . . . . . . . . . 178,938 77,688
Real estate held for investment net of accumu-
lated depreciation ($5,380 in 1997 and $4,234
in 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,515 41,347
Pizza parlor equipment, net of accumulated
depreciation ($905 in 1997) . . . . . . . . . . . . . . . . . . 6,693 --
Marketable equity securities, at market value . . . . . . . . . . 6,205 2,186
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 5,347 1,254
Investments in equity investees . . . . . . . . . . . . . . . . . 45,851 55,880
Intangibles, net of accumulated amortization
($704 in 1997) . . . . . . . . . . . . . . . . . . . . . . . . 15,230 --
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 26,494 8,197
---------- ---------
$ 433,799 $235,037
========== =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-3
<PAGE> 44
AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
December 31,
-------------
1997 1996
-------------- -------------
(dollars in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable (including $11,400 in
1997 and $8,973 in 1996 to affiliates) . . . . . . . . . . . . $ 261,986 $ 127,863
Margin borrowings . . . . . . . . . . . . . . . . . . . . . . . . 53,376 40,044
Accounts payable and other liabilities (including
$22.9 million in 1997 and $318,000 in 1996 to
affiliate) . . . . . . . . . . . . . . . . . . . . . . . . . . 34,442 8,433
---------- ---------
349,804 176,340
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . 20,542 10,911
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 and 1996
(liquidation preference $400) . . . . . . . . . . . . . . 8 8
Series C, 16,681 shares in 1997 and 15,877
shares in 1996 (liquidation preference
$1,668) . . . . . . . . . . . . . . . . . . . . . . . . . 33 32
Series F, 2,000,000 shares in 1997
(liquidation preference $20,000) . . . . . . . . . . . . 4,000
Common Stock, $.01 par value, authorized
100,000,000 shares; issued 13,479,348 shares
in 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . 135 135
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 84,943 68,595
Accumulated (deficit) . . . . . . . . . . . . . . . . . . . . . . (25,638) (20,978)
Treasury stock at cost, 2,767,427 shares in 1997
and 56,704 shares in 1996 . . . . . . . . . . . . . . . . . . . (28) (6)
63,453 47,786
---------- ---------
$ 433,799 $ 235,037
========== =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
<PAGE> 45
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
(dollars in thousands, except per share)
<S> <C> <C> <C>
Income
Sales ................................................................ $ 17,926 $ -- $ --
Rents ................................................................ 29,075 20,658 17,869
Interest (including $230 in 1997, $539 in 1996 and $506 in
1995 from affiliates) ............................................. 2,835 4,724 4,929
Other ............................................................... 135 1,597 154
------------ ------------ ------------
49,971 26,979 22,952
Expenses
Cost of sales ....................................................... 14,492 -- --
Property operations (including $865 in 1997, $892 in 1996
and $1,200 in 1995 to affiliates) ................................. 24,195 15,874 13,260
Interest (including $433 in 1997, $418 in 1996 and $437
in 1995 to affiliates) ............................................ 30,231 16,450 8,941
Advisory and servicing fees to affiliate ............................ 2,657 1,539 1,195
General and administrative (including $1,809 in 1997, $691 in
1996 and $516 in 1995 to affiliate) ............................... 6,997 2,712 2,554
Depreciation and amortization ....................................... 3,338 2,002 1,691
Minority interest ................................................... 1,145 -- 671
------------ ------------ ------------
83,355 38,577 28,312
------------ ------------ ------------
(Loss) from operations ................................................ (33,384) (11,598) (5,360)
Equity in income (losses) of investees ................................ 10,660 2,004 (851)
Gain on sale of real estate ........................................... 20,296 3,659 2,594
------------ ------------ ------------
(Loss) before income taxes ............................................ (2,428) (5,935) (3,617)
Income tax expense .................................................... -- -- 2
------------ ------------ ------------
(Loss) before extraordinary gain ...................................... (2,428) (5,935) (3,619)
Extraordinary gain .................................................... -- 381 783
------------ ------------ ------------
Net (loss) ............................................................ (2,428) (5,554) (2,836)
Preferred dividend requirement ........................................ (206) (113) --
------------ ------------ ------------
Net (loss) applicable to Common shares ................................ $ (2,634) $ (5,667) $ (2,836)
============ ============ ============
Earnings per share
(Loss) before extraordinary gain ...................................... $ (.22) $ (.46) $ (.31)
Extraordinary gain .................................................... -- .03 .07
------------ ------------ ------------
Net (loss) applicable to Common shares ................................ $ (.22) $ (.43) $ (.24)
============ ============ ============
Weighted average Common shares used in computing
earnings per share ................................................. 11,710,013 12,765,082 11,716,656
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
<PAGE> 46
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series B Series C
Preferred Preferred Common Treasury Paid-in Accumulated Stockholders'
Stock Stock Stock Stock Capital (Deficit) Equity
--------- --------- --------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1995 . . $ -- $ -- $ 11 $ -- $ 66,661 $ (10,884) $ 55,894
Net (loss) . . . . . . -- -- -- -- -- (2,836) (2,836)
--------- --------- --------- --------- --------- --------- ---------
Balance
December 31, 1995 . -- -- 117 -- 66,661 (13,720) 53,058
Common Stock issued . . -- -- 18 -- (18) -- --
Series B Preferred
Stock 8 -- -- -- 392 -- 400
issued . . . . . .
Series C Preferred
Stock -- 30 -- -- 1,469 -- 1,499
issued . . . . . .
Common stock cash
dividend ($.15 per
share) . . . . . . -- -- -- -- -- (1,491) (1,491)
Redemption of share
purchase rights
($.01 -- -- -- -- -- (101) (101)
per right) . . . .
Series B Preferred
Stock
cash dividends -- -- -- -- -- (25) (25)
($6.46
per share) . . . .
Series C Preferred
Stock
stock dividend -- 2 -- -- 85 (87) --
($5.74
per share) . . . .
Treasury stock, at cost -- -- -- (6) 6 -- --
Net (loss) -- -- -- -- -- (5,554) (5,554)
--------- --------- --------- --------- --------- --------- ---------
Balance
December 31, 1996 . $ 8 $ 32 $ 135 $ (6) $ 68,595 $ (20,978) $ 47,786
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
<PAGE> 47
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series B Series C Series F
Preferred Preferred Preferred Common Treasury Paid-in Accumulated Stockholders'
Stock Stock Stock Stock Stock Capital (Deficit) Equity
-------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1997 .. $ 8 $ 32 $ -- $ 135 $ (6) $ 68,595 $(20,978) $ 47,786
Series F Preferred
Stock issued ......... -- -- 4,000 -- -- 16,000 -- 20,000
Common stock cash
dividend ($.20 per
share) .............. -- -- -- -- -- -- (2,026) (2,026)
Series B Preferred
Stock cash dividend
($10.00 per share) ... -- -- -- -- -- -- (40) (40)
Series C Preferred
Stock, stock and
cash dividend ........ -- 1 -- -- -- 81 (166) (84)
($10.00 per share)
Sale of Common
Stock ................ -- -- -- -- -- 245 -- 245
Treasury stock, at .... -- -- -- -- (22) 22 -- --
cost
Net (loss) ............ -- -- -- -- -- -- (2,428) (2,428)
-------- -------- -------- -------- -------- -------- -------- --------
Balance
December 31, 1997 ... $ 8 $ 33 $ 4,000 $ 135 $ (28) $ 84,943 $(25,638) $ 63,453
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-7
<PAGE> 48
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Years Ended December 31,
-------------------------------------
1997 1996 1995
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Pizza parlor sales collected ................................ $ 17,790 $ -- $ --
Rents collected ............................................. 28,199 19,013 18,473
Interest collected ($262 in
1997, $385 in 1996 and $399 in 1995
from affiliates) ...................................... 2,592 4,304 4,845
Distributions from equity investees'
operating activities .................................. 5,689 9,054 1,464
Interest paid (including $19 in 1995 to affiliate) .......... (19,092) (9,601) (8,296)
Payments for property operations
(including $865 in 1997, $892 in 1996
and $1,200 in 1995 to affiliate) ...................... (22,821) (15,034) (13,442)
Payments for pizza parlor operations ........................ (12,580) -- --
Advisory fee paid to affiliate .............................. (2,657) (1,539) (1,195)
Distributions to minority interest holders .................. (1,445) -- --
Purchase of marketable equity securities .................... (15,147) (22,613) (19,394)
Proceeds from sale of marketable equity securities .......... 10,588 23,557 18,374
General and administrative expenses paid
(including $1,809 in 1997, $691 in 1996 and
$516 in 1995 to affiliate) ............................ (6,982) (3,095) (2,448)
Litigation settlement ....................................... -- -- (100)
Other ....................................................... (781) (1,661) 1,016
--------- --------- ---------
Net cash provided by (used in) operating activities.... (16,647) 2,385 (703)
Cash Flows From Investing Activities
Collections on notes receivable (including $3,503 in
1997, $1,166 in 1996 and $394 in 1995 from affiliates) ...... 4,489 1,495 1,604
Proceeds from sale of notes receivable ...................... 16,985 -- --
Notes receivable funded ..................................... (8,716) (250) (3,295)
Proceeds from sale of real estate ........................... 38,169 7,718 11,992
Contributions from minority interest holders ................ 9,799 -- --
Acquisitions of real estate ................................. (123,074) (41,636) (21,394)
Real estate improvements .................................... (10,993) (2,862) (1,802)
Pizza parlor equipment purchased ............................ (2,695) -- --
Deposits .................................................... (6,221) 577 (516)
Investment in equity investees .............................. (1,331) (15,471) (7,169)
--------- --------- ---------
Net cash (used in) investing activities ............... (83,588) (50,429) (20,580)
========= ========= =========
</TABLE>
F-8
<PAGE> 49
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
For The Years Ended December 31,
-------------------------------------
1997 1996 1995
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows From Financing Activities
Proceeds from notes payable ................................. $ 161,103 $ 86,490 $ 36,211
Margin borrowings, net ...................................... 8,914 2,981 7,626
Proceeds from issuance of Preferred Stock ................... -- 400 --
Payments on notes payable (including
$990 in 1995 .......................................... (81,639) (30,003) (22,268)
to affiliate) .........................................
Deferred borrowing costs .................................... (5,174) (5,028) (2,475)
Net advances (payments) to/from affiliates .................. 23,274 (4,979) 3,050
Dividends ................................................... (2,150) (1,617. --
--------- --------- ---------
Net cash provided by financing activities ............. 104,328 48,244 22,144
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ........ 4,093 200 861
Cash and cash equivalents, beginning of year ................ 1,254 1,054 193
--------- --------- ---------
Cash and cash equivalents, end of year ...................... $ 5,347 $ 1,254 $ 1,054
========= ========= =========
Reconciliation of net (loss) to net cash provided
by (used in) operating activities
Net (loss) .................................................. $ (2,428) $ (5,554) $ (2,836)
Adjustments to reconcile net (loss) to net cash provided
by (used in) operating activities
Extraordinary gain .................................... -- (381) (783)
Gain on sale of real estate ........................... (20,296) (3,659) (2,594)
Depreciation and amortization ......................... 3,338 2,002 1,691
Amortization of deferred borrowing costs .............. 4,042 2,692 326
Equity in (income) losses of investees ................ (10,660) (2,004) 851
Distributions from equity investees' operating
activities ....................................... 5,689 9,054 1,464
(Increase) decrease in marketable equity .............. (4,559) 944 (1,020)
securities ............................................
(Increase) decrease in accrued interest ............... 66 (117) 79
(Increase) decrease in other assets .................. 2,403 (2,817) 1,629
Increase (decrease) in accrued interest payable ....... 1,019 1,417 (5)
Increase in accounts payable and other
liabilities ........................................... 4,978 733 495
Other ................................................. (239) 75 --
--------- --------- ---------
Net cash provided by (used in) operating
activities ...................................... $ (16,647) $ 2,385 $ (703)
========= ========= =========
</TABLE>
F-9
<PAGE> 50
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
For The Years Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Schedule of noncash investing and financing activities
Notes payable from acquisition of real estate ................ $ 44,151 $ 9,099 $ 21,394
Stock dividends on Series C Preferred Stock .................. 82 31 --
Series F Preferred Stock issued for real estate .............. 20,000 -- --
Current value of property obtained through
foreclosure of note receivable ............................ 20,226 -- --
Note receivable put to basis ................................. 2,737 -- --
Note payable assumed on property obtained
through foreclosure ....................................... 11,867 -- --
Carrying value of real estate exchanged ...................... 7,882 -- --
Notes payable from acquisition of minority interest
in subsidiary ............................................. 5,000 -- --
Acquisition of Pizza World Supreme, Inc
Carrying value of intangible .............................. 15,641 -- --
Carrying value of pizza parlor equipment .................. 3,998 -- --
Carrying value of note receivable retired ................. 13,387 -- --
Carrying value of accounts payable and
other liabilities ................................... 1,314 -- --
Sale of real estate subject to debt .......................... -- -- (5,878)
Settlement with insurance company
Carrying value of real estate received .................... -- -- 1,619
Carrying value of notes receivable
participation received .............................. -- -- 1,500
Carrying value of notes receivable
returned ............................................ -- -- (32)
Carrying value of real estate returned .................... -- -- (2,183)
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-10
<PAGE> 51
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, the most significant
of which are described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES."
These, along with the remainder of the Notes to Consolidated Financial
Statements, are an integral part of the Consolidated Financial Statements. The
data presented in the Notes to Consolidated Financial Statements are as of
December 31 of each year and for the year then ended, unless otherwise
indicated. Dollar amounts in tables are in thousands, except per share amounts.
Certain balances for 1995 and 1996 have been reclassified to conform
to the 1997 presentation. Shares and per share data have been restated for the
2 for 1 forward Common Stock splits effected February 17, 1997 and January 2,
1996.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and company business. American Realty Trust, Inc.
("ART"), a Georgia corporation, is successor to a District of Columbia business
trust, that primarily invests in real estate and real estate-related entities
and purchases and originates mortgage loans.
Basis of consolidation. The Consolidated Financial Statements include
the accounts of ART, and all majority- owned subsidiaries and partnerships
other than National Realty, L.P. ("NRLP") and during the period April 1996 to
April 1997 for Pizza World Supreme, Inc. ("PWSI"). The Company uses the equity
method to account for its investment in NRLP as control is considered to be
temporary. The Company used the equity method to account for its investment in
PWSI from April 1996 to April 1997 as control was considered to be temporary.
See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P." and NOTE 7. "ACQUISITION OF PIZZA
WORLD SUPREME, INC." All significant intercompany transactions and balances
have been eliminated.
Accounting estimates. In the preparation of the Company's Consolidated
Financial Statements in conformity with generally accepted accounting
principles it was necessary for the Company's management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the Consolidated
Financial Statements and the reported amounts of revenues and expense for the
year then ended. Actual results could differ from these estimates.
Interest recognition on notes receivable. It is the Company's policy
to cease recognizing interest income on notes receivable that have been
delinquent for 60 days or more. In addition, accrued but unpaid interest income
is only recognized to the extent that the net realizable value of the
underlying collateral exceeds the carrying value of the receivable.
Allowance for estimated losses. Valuation allowances are provided for
estimated losses on notes receivable considered to be impaired. Impairment is
considered to exist when it is probable that all amounts due under the terms of
the note will not be collected. Valuation allowances are provided for estimated
losses on notes receivable to the extent that the Company's investment in the
note exceeds the Company's estimate of fair value of the collateral securing
such note.
Real Estate Held for Investment and Depreciation. Real estate held for
investment is carried at cost. Statement of Financial Accounting Standards No.
121 ("SFAS No. 121") requires that a property be considered impaired, if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the property. If impairment
exists, an impairment loss is recognized by a charge against earnings, equal to
the amount by which the carrying amount of the property exceeds the fair value
of the property. If impairment of a property is recognized, the carrying amount
of the property is reduced by the amount of the impairment, and a new cost for
the property is established. Such new cost is depreciated over the property's
remaining useful life. Depreciation is provided by the straight-line method
over estimated useful lives, which range from 10 to 40 years.
Real Estate Held for Sale. Foreclosed real estate is initially
recorded at new cost, defined as the lower of original cost or fair value minus
estimated costs of sale. SFAS No. 121 also requires that properties held for
sale be reported at the lower of carrying amount or fair value less costs of
sale. If a reduction in a held for sale property's carrying amount to fair
value less costs
F-11
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
of sale is required, a provision for loss shall be recognized by a charge
against earnings. Subsequent revisions, either upward or downward, to a held
for sale property's estimated fair value less costs of sale is recorded as an
adjustment to the property's carrying amount, but not in excess of the
property's carrying amount when originally classified as held for sale. A
corresponding charge against or credit to earnings is recognized. Properties
held for sale are not to be depreciated.
Investments in equity investees. Because the Company may be considered
to have the ability to exercise significant influence over the operating and
investment policies of certain of its investees, the Company accounts for such
investments by the equity method. Under the equity method, the Company's
initial investment, recorded at cost, is increased by the Company's
proportionate share of the investee's operating income and any additional
investment and decreased by the Company's proportionate share of the investee's
operating losses and distributions received.
Present value premiums/discounts. The Company provides for present
value premiums and discounts on notes receivable or payable that have interest
rates that differ substantially from prevailing market rates and amortizes such
premiums and discounts by the interest method over the lives of the related
notes. The factors considered in determining a market rate for notes receivable
include the borrower's credit standing, nature of the collateral and payment
terms of the note.
Revenue recognition on the sale of real estate. Sales of real estate
are recognized when and to the extent permitted by Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No.
66"). Until the requirements of SFAS No. 66 for full profit recognition have
been met, transactions are accounted for using either the deposit, the
installment, the cost recovery, the financing or other method, whichever is
appropriate.
Fair value of financial instruments. The Company used the following
assumptions in estimating the fair value of its notes receivable, marketable
equity securities and notes payable. For performing notes receivable, the fair
value was estimated by discounting future cash flows using current interest
rates for similar loans. For nonperforming notes receivable the estimated fair
value of the Company's interest in the collateral property was used. For
marketable equity securities fair value was based on the year end closing
market price of each security. For notes payable the fair value was estimated
using current rates for mortgages with similar terms and maturities.
Cash equivalents. For purposes of the Consolidated Statements of Cash
Flows, the Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
Earnings per share. Loss per share is presented in accordance with the
provision of the Statement of Accounting Standards No. 128, "Earnings Per
Share". Loss per share is computed based upon the weighted average number of
shares of Common Stock outstanding during each year, adjusted for the two for
one forward Common Stock splits effected February 17, 1997 and January 2, 1996.
NOTE 2. SYNTEK ASSET MANAGEMENT, L.P.
The Company owns a 96% limited partner interest in Syntek Asset
Management, L.P. ("SAMLP"). SAMLP is the general partner of National Realty,
L.P. ("NRLP") and National Operating, L.P. ("NOLP"), the operating partnership
of NRLP. Gene E. Phillips, a Director and Chairman of the Board of the Company
until November 16, 1992, is also a general partner of SAMLP. As of September
30, 1997, the Company owned approximately 54% of the outstanding limited
partner units of NRLP. NRLP, SAMLP and Mr. Phillips were among the defendants
in a class action lawsuit arising from the formation of NRLP. An agreement
settling such lawsuit (the "Settlement Agreement") for the above mentioned
defendants became effective on July 5, 1990. The Settlement Agreement provided
for, among other things, the appointment of an NRLP oversight committee and the
establishment of specified annually increasing targets for five years relating
to the price of NRLP's units of limited partner interest.
The Settlement Agreement provides for the resignation and replacement
of SAMLP as general partner if the unit price targets are not met for two
consecutive anniversary dates. NRLP did not meet the unit price targets for the
first and second anniversary dates. On July 8, 1992, SAMLP notified the NRLP
oversight committee of the failure of NRLP to meet the unit price targets for
two successive years and that it expects to resign as general partner of NRLP
and NOLP.
F-12
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
December 31, 1997, before reduction for the principal balance ($4.2 million at
December 31, 1997) and accrued interest ($7.2 million at December 31, 1997) on
the note receivable from SAMLP for its original capital contribution to the
partnership.
On December 15, 1997, NRLP, SAMLP, the NRLP oversight committee,
Joseph B. Moorman, Invenex and the Counsel for the plaintiff class members
executed an Agreement for Establishment of a Class Distribution Fund and
Election of Successor General Partner (the "Resolution Agreement") which
provides for the nomination of an entity affiliated with SAMLP to be the
successor general partner of NRLP and NOLP, for the establishment of a fund for
the benefit of the plaintiff class members consisting of cash and properties
owned by NOLP and for the resolution of all related matters under the
Settlement Agreement. The Resolution Agreement was submitted to the Judge
appointed to supervise the class action settlement (the "Supervising Judge")
and on February 11, 1998, the Supervising Judge entered an order granting
preliminary approval of the Resolution Agreement and scheduled a hearing to be
held on April 24, 1998, for consideration of preliminary approval of a business
plan for the operation of the entity which will receive the cash and properties
and to consider a form of notice to be distributed to the plaintiff class
members describing the Resolution Agreement and the business plan.
Upon the election and taking office of the successor general partner
and the transfer of the cash and properties to the fund established for the
benefit of the plaintiff class members, the Settlement Agreement and the NRLP
oversight committee shall be terminated.
NOTE 3. NOTES AND INTEREST RECEIVABLE
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Notes Receivable
Performing (including $1,307
in 1997 and $13,563 in 1996
from affiliates) . . . . . . . . . $ 9,217 $ 9,340 $ 60,121 $ 55,161
Nonperforming, nonaccruing . . . . . 26,344 23,212 1,784 1,584
-------- -------- -------- ----------
$ 35,561 $ 32,552 $ 61,905 56,745
======== ========
Interest receivable . . . . . . . . 380 445
Unamortized premiums/
(discounts) . . . . . . . . . . . (124) (162)
Deferred gains . . . . . . . . . . . (4,884) (4,617)
-------- ----------
$ 27,924 $ 52,411
======== =========
</TABLE>
The Company recognizes interest income on nonperforming notes receivable on
a cash basis. For the years 1997, 1996 and 1995 unrecognized interest income on
such nonperforming notes receivable totaled $2.2 million, $1.6 million and $1.2
million, respectively.
Notes receivable at December 31, 1997, mature from 1998 to 2014 with
interest rates ranging from 6.0% to 12.9% and a weighted average rate of
12.78%. A small percentage of these notes receivable carry a variable interest
rate. Notes receivable include notes generated from property sales which have
interest rates adjusted at the time of sale to yield rates ranging from 6%
F-13
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
to 14%. Notes receivable are generally nonrecourse and are generally
collateralized by real estate. Scheduled principal maturities of $31.2 million
are due in 1998 of which $23.2 million is due on nonperforming notes
receivable.
Nonrecourse participations totaling $2.2 million and $1.6 million at
December 31, 1997 and 1996, respectively, have been deducted from notes
receivable.
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 accepting, among other consideration, a $22.0 million wraparound
mortgage note receivable. The Company recorded a deferred gain of $4.6 million
in connection with the sale of the hotel and casino resulting from a disputed
third lien mortgage being subordinated to the Company's wraparound mortgage
note receivable. In March 1997, the wraparound note was modified and extended.
In exchange for the extension, the borrower was required 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 also pledged 1,500,000 shares of common stock in Crowne Ventures,
Inc., as additional collateral. The Company's wraparound mortgage note
receivable had a principal balance of $13.3 million at December 31, 1997. The
Company recognizes interest income on this wraparound mortgage note only to the
extent interest is collected. The borrower has not made the required note
payments since April 1997, nor the required improvements. In December 1997, the
borrower filed for bankruptcy protection. In February 1998, a hearing was held
to allow the Company to foreclose on the hotel and casino. At the hearing, the
court allowed the borrower 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. If the Company is allowed to foreclose on the property it does not
expect to incur a loss as the fair value of the property exceeds the carrying
value of the Company's note receivable.
The borrower on a $1.7 million mortgage note receivable secured by land in
Osceola, Florida failed to pay the note on its November 1, 1993 maturity. The
Company instituted foreclosure proceedings and was awarded summary judgment in
January 1994. During 1994 and 1995, the borrower paid the Company a total of
$270,000 in nonrefundable fees to delay foreclosure of the property until April
24, 1995. On April 21, 1995, the borrower filed for bankruptcy protection. On
August 24, 1996, the bankruptcy court's stay was lifted allowing the Company to
proceed with foreclosure. In February 1997, the Company sold its mortgage note
receivable for $1.8 million in cash. The Company recognized a gain of $171,000
on the sale.
In September 1997, the Company sold its $16.3 million wraparound mortgage
note receivable secured by the Las Vegas Plaza Shopping Center in Las Vegas,
Nevada, for $15.0 million. The Company received net cash of $5.5 million after
the payoff of $9.2 million in underlying debt. The Company incurred no loss on
the sale in excess of the reserve previously established.
Related Party. In September 1997, the Company foreclosed on its $8.9
million junior mortgage note receivable secured by the Williamsburg Hospitality
House in Williamsburg, Virginia. The Company obtained the property through
foreclosure subject to the first mortgage of $12.0 million. The Company
incurred no loss on foreclosure as the fair value of the property exceeded the
carrying value of the Company's mortgage note receivable and assumed mortgage
debt. The property is included in real estate held for investment in the
accompanying Consolidated Balance Sheet.
At December 31, 1996, the Company held a mortgage note receivable secured
by an apartment complex in Merrillville, Indiana, with a principal balance of
$3.7 million. The property is owned by a subsidiary of Davister Corp.
("Davister"), a general partner in a partnership that owns approximately 15.6%
of the Company's outstanding shares of Common Stock. In May 1997, the note plus
accrued but unpaid interest was paid in full.
In January 1997, the Company sold a 3.0 acre tract of Las Colinas I land in
Las Colinas, Texas, for $1.2 million in cash. The Company recognized a gain of
$676,000 on the sale.
Also in January 1997, the Company purchased Scout land, a 546 acre parcel
of undeveloped land in Tarrant County, Texas, for $2.2 million. The Company
paid $725,000 in cash and obtained new mortgage financing of $1.5 million. The
mortgage bears interest at 16% per annum, requires quarterly payments of
interest only and matures in January 2000.
F-14
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In February 1996, the Company entered into a contract to sell a 72.5 acre
tract of the 92.6 acre parcel of BP Las Colinas land in Las Colinas, Texas, for
$12.9 million. The contract called for the sale to close in two phases. In July
1996, the Company completed the first sale. In February 1997, the Company
completed the second sale of 40.2 acres for $8.0 million, of which $7.2 million
was paid in cash. Of the net cash proceeds of $6.9 million, $1.5 million was
used to payoff the debt secured by the BP Las Colinas land parcel, pay a
$500,000 maturity fee to the lender, make a $1.5 million principal paydown on
the loan with the same lender, secured by the Parkfield land in Denver,
Colorado and $1.0 million was applied as a principal paydown on the term loan
secured by the Las Colinas I land. In conjunction with the sale the Company
provided $800,000 in purchase money financing in the form of a six month
unsecured loan. The loan bore interest at 12% per annum, with all accrued but
unpaid interest and principal due at maturity in August 1997. The Company
recognized a gain of $3.4 million on such sale, deferring an additional
$800,000 of gain until the unsecured loan was paid in full. The loan was
collected in full in August 1997 and the additional $800,000 gain was
recognized.
In March 1997, the Company purchased Katy Road land, a 130.6 acre parcel of
undeveloped land in Harris County, Texas, for $5.6 million. The Company paid
$1.6 million in cash with the seller providing purchase money financing for the
remaining $4.0 million of the purchase price. The financing bears interest at
9% per annum, requires quarterly payments of interest only and matures in March
2000.
In April 1997, the Company purchased McKinney Corners I land, a 30.4 acre
parcel of undeveloped land in Collin County, Texas, for $3.5 million. The
Company paid $1.0 million in cash and obtained new mortgage financing of $2.5
million. The mortgage bears interest at 14% per annum, requires monthly
payments of interest only and matures in April 1998.
Also in April 1997, the Company purchased McKinney Corners II land, a 173.9
acre parcel of undeveloped land in Collin County, Texas, for $5.9 million. The
Company paid $900,000 in cash and obtained new mortgage financing of $5.0
million as an advance under the term loan from the Las Colinas I lender. The
McKinney Corners II land was added as additional collateral on the term loan.
Further in April 1997, the Company sold a 3.1 acre tract of Las Colinas I
land for $1.3 million in cash. The Company used $1.0 million of the net cash
proceeds to make a collateral escrow deposit in accordance with the provisions
of the Valley Ranch land term loan. The Company recognized a gain of $668,000
on the sale.
In May 1997, the Company purchased McKinney Corners III land, a 15.5 acre
parcel of undeveloped land in Collin County, Texas, for $896,000 in cash.
Also in May 1997, the Company purchased Lacy Longhorn land, a 17.1 acre
parcel of undeveloped land in Farmers Branch, Texas, for $1.8 million. The
Company paid $200,000 in cash with the seller providing purchase money
financing of the remaining $1.6 million of the purchase price. The financing
bore interest at 10% per annum, required monthly principal and interest
payments of $400,000 and matured in October 1997. The loan was paid off at
maturity.
Further in May 1997, the Company purchased Chase Oaks land, a 60.5 acre
parcel of undeveloped land in Plano, Texas, for $4.2 million. The Company paid
$200,000 in cash with the seller providing purchase money financing of the
remaining $4.0 million of the purchase price. The financing bears interest at
18% per annum, requires monthly payments of interest only and matures in May
2000.
In May 1997, the Company purchased Pioneer Crossing land, a 1,448 acre
parcel of undeveloped land in Austin, Texas, for $21.5 million. The Company
paid $5.4 million in cash with the seller providing purchase money financing of
the remaining $16.1 million of the purchase price. The financing bears interest
at 9.5% per annum, requires monthly payments of interest only and matures in
May 2001.
In June 1997, the Company purchased Kamperman land, a 129.6 acre parcel of
undeveloped land in Collin County, Texas, for $5.0 million in cash. The Company
simultaneously sold a 99.7 acre tract for $4.5 million in cash. The Company
recognized a gain of $215,000 on the sale.
F-15
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Also in June 1997, the Company purchased Keller land, a 811.8 acre parcel
of undeveloped land in Tarrant County, Texas, for $6.3 million. The Company
paid $2.3 million in cash and obtained new mortgage financing of $4.0 million.
The mortgage bears interest at 12.95% per annum, requires monthly payments of
interest only and matures in June 1998.
Further in June 1997, the Company purchased McKinney Corners IV land, a
31.3 acre parcel of undeveloped land in Collin County, Texas, for $2.4 million.
The Company paid $400,000 in cash and obtained new mortgage financing of $2.0
million, as an advance under the term loan from the Las Colinas I lender. The
McKinney Corners IV land was added as additional collateral on the term loan.
In June 1997, the Company purchased Pantex land, a 182.5 acre parcel of
undeveloped land in Collin County, Texas, for $5.4 million. The Company paid
$900,000 in cash with the seller providing purchase money financing of the
remaining $4.5 million of the purchase price. The financing bears interest at
10.5% per annum, requires semiannual payments of interest only and matures in
December 2000.
In July 1997, the Company sold a 3.9 acre tract of Las Colinas I land in
Las Colinas, Texas, for $1.6 million in cash. In accordance with the provisions
of the term loan secured by such parcel, the Company applied the net cash
proceeds of $1.4 million to paydown the term loan in exchange for the lender's
release of its collateral interest in such land. The Company recognized a gain
of $771,000 on such sale.
Also in July 1997, the Company purchased Dowdy and McKinney Corners V land,
a total of 174.7 acres of undeveloped land in Collin County, Texas, for $2.9
million. The Company obtained new mortgage financing of $3.3 million as an
advance under the term loan from the Las Colinas I lender. The Dowdy, McKinney
Corners V and McKinney Corners III land were added as additional collateral on
the term loan.
Further in July 1997, the Company purchased Perkins land, a 645.4 acre
parcel of undeveloped land in Collin County, Texas, for $5.8 million. The
Company paid $3.3 million in cash and assumed the existing mortgage of $2.5
million. The mortgage bears interest at 8.5% per annum, requires quarterly
payments of interest only and matures in March 2002.
In July 1997, the Company purchased LBJ land, a 10.4 acre parcel of
undeveloped land in Dallas County, Texas, for $2.3 million. The Company paid
$300,000 in cash and with the seller providing purchase money financing of the
remaining $2.0 million of the purchase price. The financing bears interest at
18% per annum, requires quarterly payments of interest only and matures in
March 1998.
In September 1997, the Company sold the Mopac Building, a 400,000 square
foot office building, in St. Louis, Missouri, for $1.0 million in cash. The
Company received net cash of $1.0 million after the payment of various closing
costs associated with the sale. In accordance with the provisions of the Las
Colinas I term loan, the Company applied $350,000 of the net cash received to
paydown the term loan in exchange for the lender's release of its collateral
interest in the property. The Company recognized a gain of $481,000 on the
sale.
Also in September 1997, the Company sold a 2.6 acre tract of Las Colinas I
land in Las Colinas, Texas, for $1.2 million in cash. In accordance with the
provisions of the term loan secured by such parcel, the Company applied the net
cash proceeds of $1.0 million to paydown the term loan in exchange for the
lender's release of its collateral interest in such land. The Company
recognized a gain of $578,000 on the sale.
Further in September 1997, the Company sold three tracts of Valley Ranch
land totaling 24.0 acres, for $1.6 million in cash. The net cash proceeds of
$1.2 million were deposited into a certificate of deposit for the benefit of
the lender, in accordance with the term loan secured by such land. The
certificate of deposit was released to the lender in December 1997, in
conjunction with the payoff of the loan. The Company recognized a gain of
$567,000 on the sale.
In September 1997, the Company purchased the Collection, a 267,812 square
foot retail and commercial center in Denver, Colorado, for $19.5 million. The
Company paid $791,000 in cash and assumed existing mortgages totaling $14.7
million, and issued 400,000 shares of the Company's Series F Cumulative
Convertible Preferred Stock. See NOTE 13. "PREFERRED
F-16
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
STOCK." A first mortgage in the amount of $14.2 million bears interest at 8.64%
per annum, requires monthly principal and interest payments of $116,000 and
matures in May 2017. A second lien mortgage in the amount of $580,000 bears
interest at 7% per annum until April 2001, 7.5% per annum from May 2001 to
April 2006, and 8% per annum from May 2006 to May 2010, requires monthly
principal and interest payments of $3,000 and matures in May 2010.
In October 1997, the Company contributed its Pioneer Crossing land in
Austin, Texas to a limited partnership in exchange for $3.4 million in cash, a
1% managing general partner interest in the partnership, all of the Class B
limited partner units in the partnership and the partnership's assumption of
the $16.1 million mortgage debt secured by such property. The existing general
and limited partners converted their general and limited partner interests into
Class A limited partner units in the partnership. The Class A limited partner
units have an agreed value of $1.00 per unit and are entitled to a fixed
preferred return of 10% per annum, paid quarterly. The Class A units may be
converted into a total of 360,000 shares of the Company's Series F Cumulative
Convertible Preferred Stock at any time after the first but no later than the
sixth anniversary of the closing, on the basis of one share of Series F
Preferred Stock for each ten Class A units. See NOTE 13. "PREFERRED STOCK."
Also in October 1997, the Company contributed the Denver Merchandise Mart
in Denver, Colorado, to a limited partnership in exchange for $6.0 million in
cash, a 1% managing general partner interest in the partnership, all of the
Class B limited partner units in the partnership and the partnership's
assumption of the $23.0 million in mortgage debt secured by such property. The
existing general and limited partners converted their general and limited
partner interests into Class A limited partner units in the partnership. The
Class A units have an agreed value of $1.00 per unit and are entitled to a
fixed preferred return of 10% per annum, paid quarterly. The Class A units may
be converted into a total of 529,000 shares of the Company's Series F
Cumulative Convertible Preferred Stock at any time after the first but not
later than the sixth anniversary of the closing, on the basis of one share of
Series F Preferred Stock for each ten Class A units. See NOTE 13. "PREFERRED
STOCK."
Further in October 1997, the Company purchased Palm Desert land, a 315.2
acre parcel of undeveloped land in Palm Desert, California, for $11.2 million.
The Company paid $3.8 million in cash and assumed the existing mortgage of $7.4
million. The mortgage bears interest at 9% per annum, requires monthly
principal and interest payments of $76,000 and matures in February 2002.
In October 1997, the Company purchased Thompson land, a 4.0 acre parcel of
undeveloped land in Dallas County, Texas, for $869,000 in cash.
Also in October 1997, the Company purchased Santa Clarita land, a 20.6 acre
parcel of undeveloped land, in Santa Clarita, California, for $1.3 million. The
Company obtained new mortgage financing of $1.3 million as an advance under the
term loan from the Las Colinas I lender. The Santa Clarita land was added as
additional collateral for the term loan.
Further in October 1997, the Company purchased Tomlin land, a 9.2 acre
parcel of undeveloped land in Dallas County, Texas, for $1.7 million in cash.
In October 1997, the Company purchased Rasor land, a 378.2 acre parcel of
undeveloped land in Plano, Texas, for $14.4 million. The Company paid $5.1
million in cash, obtained new mortgage financing of $3.5 million as an advance
under the term loan from the Las Colinas I lender and exchanged the Perkins
land, a 645.4 acre parcel of undeveloped land in Collin County, Texas, for the
remainder of the purchase price. The Company simultaneously sold an 86.5 acre
tract of the Rasor land for $3.8 million in cash, the Company receiving net
cash proceeds of $3.5 million after the payment of various closing costs
associated with the sale. The Company recognized a gain of $217,000 on the sale
of the 86.5 acre tract. The Rasor land was added as additional collateral for
the term loan.
Also in October 1997, the Company purchased the Piccadilly Inns, four
hotels in Fresno, California, with a total of 697 rooms, for $33.0 million. The
Company issued 1.6 million shares of its Series F Cumulative Convertible
Preferred Stock for $16.0 million of the purchase price and obtained new
mortgage financing of $19.8 million. See NOTE 13. "PREFERRED STOCK." The
Company received net financing proceeds of $2.2 million after the payment of
various closing costs associated with the financing. The mortgage bears
interest at 8.40% per annum, requires monthly principal and interest payments
of $158,000 and matures in November 2012.
F-17
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Further in October 1997, a newly formed partnership, of which the Company
is the general partner and Class B limited partner, purchased the Vineyards
land, a 15.8 acre parcel of undeveloped land in Tarrant County, Texas, for $4.5
million. The partnership paid $800,000 in cash, assumed the existing mortgage
of $2.5 million and issued the seller 1.1 million Class A limited partner units
in the partnership as additional consideration. The Class A units have an
agreed value of $1.00 per unit and are entitled to a fixed preferred return of
10% per annum, paid quarterly. The Class A units may be exchanged for either
shares of the Company's Series G Preferred Stock on or after the second
anniversary of the closing at the rate of one share of Series G Preferred Stock
for each 100 Class A units exchanged, or on or after the third anniversary of
the closing, the Class A units are also exchangeable for shares of the
Company's Common Stock. The Class A units are exchangeable for shares of the
Company's Common Stock at the rate of $1.00 per unit plus any outstanding
preferred return divided by .9 times the simple average of the daily closing
price of the Company's Common Stock for the 20 days preceding the date of
conversion. The assumed mortgage bears interest at 12.95% per annum requires
quarterly payments of interest only and matures in June 1998. See NOTE 13.
"PREFERRED STOCK."
In October 1997, the Company purchased Dalho land, a 3.4 acre parcel of
undeveloped land in Farmers Branch, Texas, for $300,000 in cash.
Also in October 1997, the Company sold a 11.6 acre tract of Valley Ranch
land for $1.2 million in cash. The net cash proceeds of $990,000, after the
payment of various closing costs associated with the sale, were deposited in a
certificate of deposit for the benefit of the lender, in accordance with the
term loan secured by such land. The certificate of deposit was released to the
lender in December 1997, in conjunction with the payoff of the loan. The
Company recognized a gain of $629,000 on the sale.
In November 1997, the Company sold two tracts of Valley Ranch land,
totaling 8 acres, for $577,000 in cash. The net cash proceeds of $451,000,
after the payment of various closing costs associated with the sale, were
deposited in a certificate of deposit for the benefit of the lender, in
accordance with the term loan secured by such land. The certificate of deposit
was released to the lender in December 1997 in conjunction with the payoff of
the loan. The Company recognized a gain of $216,000 on the sale.
Also in November 1997, the Company purchased Hollywood Casino land, a 51.7
acre parcel of undeveloped land in Farmers Branch, Texas, for $11.1 million.
The Company paid $3.6 million in cash and obtained new mortgage financing of
$7.5 million. The mortgage bears interest at 9.25% per annum, requires monthly
payments of interest only and matures in December 1999.
In December 1997, the Company sold a 5.1 acre tract of the Valley Ranch
land, for $430,000 in cash. The net cash proceeds of $353,000, after the
payment of various closing costs associated with the sale, were deposited in a
certificate of deposit for the benefit of the lender, in accordance with the
term loan secured by such land. The certificate of deposit was released to the
lender in December 1997, in conjunction with the payoff of the loan. The
Company recognized a gain of $203,000 on the sale.
Also in December 1997, the Company purchased Valley Ranch III land, a 12.5
acre parcel of undeveloped land in Irving, Texas, for $2.1 million. The Company
paid $527,000 in cash with the seller providing purchase money financing of the
remaining $1.6 million of the purchase price. The financing bears interest at
10.0% per annum, requires the payment of principal and interest at maturity,
and matures in December 1998.
Further in December 1997, the Company purchased Stagliano land, a 3.2 acre
parcel of undeveloped land in Farmers Branch, Texas, for $500,000 in cash.
In December 1997, the Company sold a 32.0 acre tract of Parkfield land in
Denver, Colorado, for $1.2 million in cash. In accordance with the provisions
of the term loan secured by such parcel, the Company applied the net cash
proceeds of $1.1 million, to paydown the term loan in exchange for the lender's
release of its collateral interest in such land. The Company recognized a gain
of $372,000 on the sale.
Also in December 1997, the Company exchanged a 43.0 acre tract of Valley
Ranch land for Preston Square, a 35,508 square foot shopping center in Dallas,
Texas. In accordance with the provisions of the term loan securing the Valley
Ranch land, the Company paid $2.8 million to the lender in exchange for the
lender's release of its collateral interest in such land. Simultaneously,
F-18
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
the Company obtained new mortgage financing of $2.5 million secured by the
shopping center. The mortgage bears interest at 8.2% per annum, requires
monthly payments of interest only and matures in December 1999. The Company
recognized no gain or loss on the exchange.
Further in December 1997, the Company sold two parcels of Valley Ranch
land, totaling 25.1 acres, for $3.3 million. The Company received net cash
proceeds of $2.1 million and provided an additional $891,000 in purchase money
financing. The purchase money financing bore interest at 10.0% per annum and
matured in January 1998. The Company received a $624,000 paydown on the
purchase money financing in January with the remainder being deferred until a
zoning issue is resolved. In accordance with the provisions of the term loan
secured by such parcel, the Company applied the net cash proceeds of $2.1
million to payoff the term loan secured by such parcel, the lender releasing
its collateral interest in the remaining Valley Ranch land. The Company
recognized a gain of $1.8 million and deferred an additional $267,000 until the
zoning issue is resolved.
In December 1997, the Company sold Park Plaza, a 105,507 square foot
shopping center in Manitowoc, Wisconsin, for $4.9 million in cash. The Company
received net cash of $1.6 million, after the payoff of $3.1 million in existing
mortgage debt and the payment of various closing costs associated with the
sale. The Company recognized a gain of $105,000 on the sale.
Also in December 1997, the Company sold Pin Oak land, a 567.6 acre parcel
of undeveloped land in Houston, Texas, for $11.4 million. The Company received
net cash proceeds of $3.5 million and provided an additional $6.9 million of
short term purchase money financing that was paid in full in January 1998. On
the payoff of the purchase money financing the Company received net cash of
$1.5 million after the payoff of $5.2 million in underlying mortgage debt, and
the payment of various closing costs associated with the sale. The Company
recognized a gain of $3.7 million on the sale.
In November 1991, the Company transferred the Porticos Apartments to Income
Opportunity Realty Investors, Inc. ("IORI"), an equity investee, in
satisfaction, at the time, of the Company's $3.6 million obligation to IORI.
The Company recorded a deferred gain of $3.0 million on the transfer. In June
1997, IORI sold the property, and accordingly the Company recognized such
previously deferred gain. See NOTE 6. INVESTMENT IN EQUITY INVESTEES."
In 1991, the Company purchased all of the capital stock of a corporation
which owned 198 developed residential lots in Fort Worth, Texas. Through
December 31, 1996, 188 of the residential lots had been sold. During 1997, 9
additional lots were sold for an aggregate gain of $17,000. At December 31,
1997, one lot remained to be sold.
In 1996, the Company sold a total of 39.1 acres of land in Las Colinas,
Texas in four separate transactions for a total of $6.8 million. The Company
applied the $6.5 million net cash proceeds to paydown the term loans secured by
such land. The Company recognized gains totaling $3.7 million from such sales.
In 1996, the Company purchased a single family residence, a hotel and a
total of 1,368.5 acres of land for a total of $57.5 million. In connection with
these acquisitions, the Company obtained new or seller financing totaling $41.3
million. The mortgages bear interest at rates ranging from 9% to 15% per annum,
required monthly payments of principal and interest totaling $491,479 and
matured from June 1998 to December 1999.
Activity in the allowance for estimated losses was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance January 1, ........................ $ 3,926 $ 7,254 $ 8,201
Amounts charged off ....................... (1,528) -- (947)
Writedown of property ..................... -- (3,328) --
------- ------- -------
Balance December 31, ...................... $ 2,398 $ 3,926 $ 7,254
======= ======= =======
</TABLE>
F-19
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 6. INVESTMENTS IN EQUITY INVESTEES
The Company's investment in equity investees at December 31, 1997,
includes (i) equity securities of three publicly traded real estate investment
trusts, Continental Mortgage and Equity Trust ("CMET"), IORI and
Transcontinental Realty Investors, Inc. ("TCI") (collectively the "REITs"),
(ii) units of limited partner interest of NRLP, (iii) a general partner
interest in NRLP and NOLP, the operating partnership of NRLP, through its 96%
limited partner interest in SAMLP and (iv) interests in real estate joint
venture partnerships. Gene E. Phillips, the Chairman of the Board and a
Director of the Company until November 16, 1992, is a general partner of SAMLP,
the general partner of NRLP and NOLP and was a director and Chief Executive
Officer of SAMI until May 15, 1996. Randall M. Paulson, an Executive Vice
President of the Company, serves as the sole director of SAMI and as President
of the REITs, SAMI and Basic Capital Management, Inc. ("BCM"), the Company's
advisor. In addition, BCM 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 using the equity method as more fully described in
NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Investments in equity
investees." The Company continues to account for its investment in NRLP under
the equity method due to the pending resignation of SAMLP as general partner of
NRLP. See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P."
Substantially all of the Company's equity securities of the REITs and
NRLP are pledged as collateral for borrowings. See NOTE 10. "MARGIN
BORROWINGS."
The Company's investment in entity investees accounted for using the
equity method, at December 31, 1997 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 December 31, 1997 December 31, 1997 December 31, 1997 December 31, 1997
- -------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
NRLP 54.4% $ 11,479 $ * $ 83,018
CMET 40.6 14,939 35,745 25,733
IORI 29.7 3,511 7,439 5,176
TCI 30.6 8,378 26,652 20,664
----- ---------
38,307 $134,591
========
General partner
interest in NRLP and NOLP 6,230
Other 1,314
----------
$ 45,851
==========
</TABLE>
- -----------------
* At December 31, 1997, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity, however, was $198.9
million. Revaluation equity is defined as the difference between the
estimated current 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.
F-20
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company's investment in entity investees accounted for using the equity
method, at December 31, 1996 was as follows:
<TABLE>
<CAPTION>
Equivalent
Percentage Carrying Investee
of the Company's Value of Book Value Market Value
Ownership at Investment at at of Investment at
Investee December 31, 1996 December 31, 1996 December 31, 1996 December 31, 1996
- -------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
NRLP 54.4% $ 14,421 $ * $ 44,997
CMET 40.6 14,141 32,148 18,789
IORI 29.6 2,719 6,625 4,838
TCI 30.5 6,318 24,204 13,131
---------- --------
37,599 $ 81,755
========
General partner
interest in NRLP and NOLP 6,607
Other (2,234)
----------
$ 41,972
==========
</TABLE>
- ----------------
* At December 31, 1996, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity, however, was $188.5
million. Revaluation equity is defined as the difference between the
appraised value of the partnership's real estate, adjusted to reflect
the partnership's estimate of disposition costs, and the amount of the
mortgage notes payable and accrued interest encumbering such property
as reported in NRLP's Annual Report on Form 10-K for the year ended
December 31, 1996. The Company's management continues to believe that
the market value of each of the REITs and NRLP undervalues their
assets and the Company has, therefore, continued to increase its
ownership in these entities in 1997, as its liquidity has permitted.
In April 1996, the Company purchased a 28% general partner interest in
Campbell Center Associates, Ltd. ("Campbell, Ltd."), which in turn has a
56.25% interest in Campbell Centre Joint Venture, which owns a 413,175 square
foot office building in Dallas, Texas. The purchase price of the general
partner interest was $550,000 in cash and a $500,000 note, which bears interest
at 8% per annum, requires monthly 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, Ltd. 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, Ltd. for $868,000 in cash.
In June 1996, a newly formed limited partnership, of which the Company
is the general partner, purchased 580 acres of undeveloped land in Collin
County, Texas for $5.7 million in cash. The Company contributed $100,000 in
cash to the partnership with the remaining $5.6 million being contributed by
the limited partner. The partnership agreement designates the Company as the
managing general partner. In September 1996, the partnership obtained financing
of $2.8 million secured by the 580 acres of land and personal guarantee of the
limited partner. The Partnership agreement also provides that the limited
partner receive a 12% preferred cumulative return on his investment before any
sharing of partnership profits occurs. In April 1997, the partnership sold a
35.0 acre tract for $1.3 million in cash. The net sales proceeds of $1.2
million were distributed to the limited partner in accordance with the
partnership agreement. The partnership recognized a gain of $884,000 on the
sale. In July 1997, the Partnership sold a 24.6 acre tract for $800,000 in
cash. In accordance with the terms of the term loan secured by such property,
$197,000 of the net sales proceeds were used to paydown such term loan. The
remaining $545,000 was distributed to the limited partner in accordance with
the partnership agreement. The partnership recognized a gain of $497,000 on the
sale.
F-21
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In September 1997, the partnership sold a 77.2 acre tract for $1.5 million in
cash. In accordance with the terms of the term loan secured by such property,
the net sales proceeds were used to paydown such term loan. The partnership
recognized a gain of $704,000 on the sale. In October 1997, the partnership
sold a 96.5 acre tract for $1.7 million in cash. In accordance with the terms
of the term loan secured by such property, $548,000 of the net sales proceeds
were used to paydown such term loan and the remaining $1.1 million being
distributed to the limited partner in accordance with the partnership
agreement. The partnership recognized a gain of $691,000 on the sale. In
December 1997, the partnership sold a 94.4 acre tract for $2.5 million in cash.
Of the net sales proceeds, $1.8 million was distributed to the limited partner
and $572,000 was distributed to the Company as general partner in accordance
with the partnership agreement. The partnership recognized a gain of $1.4
million on the sale. In January 1998, the partnership sold a 155.4 acre tract
for $2.9 million. The partnership received $721,000 in cash and provided
purchase money financing of an additional $2.2 million. Of the net sales
proceeds, $300,000 was distributed to the limited partner and $300,000 was
distributed to the Company as general partner in accordance with the
partnership agreement. The purchase money financing bears interest at 12% per
annum, requires monthly payments of interest only and matures in July 1998. The
partnership recognized a gain of $1.2 million on the sale.
In September 1997, a newly formed limited partnership, of which the
Company is a 1% general partner and 21.5% limited partner, purchased a 422.4
acre parcel of undeveloped land in Denton County, Texas, for $16.0 million in
cash. The Company contributed $3.6 million in cash to the partnership with the
remaining $12.4 million being contributed by the other limited partners. The
partnership agreement designates the Company as the managing general partner.
In September 1997, the partnership obtained financing of $6.5 million secured
by the 422.4 acres of land. The mortgage bears interest at 10% per annum,
requires quarterly payments of interest only and matures in September 2001. The
net financing proceeds were distributed to the partners, the Company receiving
$2.9 million of its initial investment. The partnership agreement also provides
that the limited partners receive a 12% preferred cumulative return on their
investment before any sharing of partnership profits occurs. One of the limited
partners in the partnership is also a limited partner in a partnership that
owns approximately 15.6% of the Company's outstanding shares of Common Stock.
See NOTE 11. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
In January 1992, the Company entered into a partnership agreement with
an entity affiliated with a limited partner in a partnership that owns
approximately 15.6% of the Company's outstanding shares of Common Stock, that
acquired 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, 1996, 197 of the residential lots had been
sold. During 1997, an additional 17 lots were sold with 73 lots remaining to be
sold at December 31, 1997. During 1997, each partner received $21,000 in return
of capital distributions and $12,000 in profit distributions.
F-22
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Set forth below are summary financial data for equity investees owned over 50%:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Property and notes
receivable, net ................ $ 236,367 $ 240,552
Other assets ...................... 43,213 59,409
Notes payable ..................... (339,102) (352,441)
Other liabilities ................. (17,311) (19,294)
--------- ---------
Equity ............................ $ (76,833) $ (71,774)
========= =========
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues .................................... $ 124,521 $ 124,044 $ 110,892
Depreciation .............................. (10,418) (11,148) (10,268)
Interest .................................. (34,481) (34,640) (34,956)
Operating expenses ........................ (79,463) (78,043) (69,572)
--------- --------- ---------
Income (loss) before gains on sale of
real estate ............................. 159 213 (3,904)
Gains on sale of real estate .............. 8,356 61 7,701
--------- --------- ---------
Net income ................................ $ 8,515 $ 274 $ 3,797
========= ========= =========
</TABLE>
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 equity share of:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- -------------- --------------
<S> <C> <C> <C>
Income (loss) before gains on sale of
real estate . . . . . . . . $ 817 $ 270 $ (1,767)
Gains on sale of real estate . 3,022 -- 1,884
---------- -------------- -----------
Net income . . . . . . . . . . $ 3,839 $ 270 $ 117
========== =========== ===========
</TABLE>
Set forth below are summary financial data for equity investees owned less than
50%:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Property and notes
receivable, net . . . . . . $ 631,825 $ 501,097
Other assets . . . . . . . . . 80,789 57,877
Notes payable . . . . . . . . . (483,064) (358,203)
Other liabilities . . . . . . . (28,326) (19,849)
--------- ---------
Equity . . . . . . . . . . . . $ 201,224 $ 180,922
========= =========
</TABLE>
F-23
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues ............................... $ 129,531 $ 101,246 $ 94,730
Depreciation ........................... (17,429) (14,408) (13,950)
Provision for losses ................... (1,337) 844 (541)
Interest ............................... (38,537) (30,401) (28,102)
Operating expenses ..................... (85,387) (69,698) (65,471)
--------- --------- ---------
(Loss) before gains on sale of
real estate and extraordinary
gains ............................... (13,159) (12,417) (13,334)
Gains on sale of real estate ........... 34,297 11,701 5,822
Extraordinary gains .................... -- 1,068 1,437
--------- --------- ---------
Net income (loss) ...................... $ 21,138 $ 352 $ (6,075)
========= ========= =========
</TABLE>
The Company's equity share of:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(Loss) before gains on sale of
real estate and extraordinary
gains ............................... (3,703) (2,911) (3,356)
Gains on sale of real estate ........... -- 4,645 2,463
Extraordinary gains .................... 10,524 381 783
--------- --------- ---------
Net income (loss) ...................... $ 6,821 $ 2,115 $ (110)
========= ========= =========
</TABLE>
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 been
making quarterly distributions since the first quarter of 1993, NRLP since the
fourth quarter of 1993 and TCI since the fourth quarter of 1995. In 1997, the
Company received distributions totaling $1.4 million from the REITs and $1.4
million from the REITs from NRLP and accrued an additional $6.7 million in NRLP
and TCI distributions that were not received until January 1998. In 1996, the
Company received total distributions from the REITs of $2.1 million and $6.9
million from NRLP. At December 31, 1995, the Company accrued $3.3 million in
NRLP distributions which were received January 2, 1996.
The Company's investments in the REITs and NRLP were initially
acquired in 1989. In 1997, the Company purchased an additional $172,000 of
equity securities of the REITs and NRLP.
NOTE 7. ACQUISITION OF PIZZA WORLD SUPREME, INC.
In April 1996, a newly formed subsidiary of the Company purchased, for
$10.7 million in cash, 80% of the common stock of Pizza World Supreme, Inc.
("PWSI"), which in turn had acquired 26 operating pizza parlors in various
communities in California's San Joaquin Valley. Concurrent with the purchase,
the Company granted to an individual an option to purchase 36.25% of the
Company's subsidiary at any time for the Company's net investment in such
subsidiary. Additionally, the Company held negotiations with underwriters to
take such subsidiary public. The Company believed that such option would be
exercised and further, that the subsidiary would become publicly held
approximately one year from its date of acquisition. Accordingly, the Company
believed its control of such subsidiary was temporary and therefore accounted
for such subsidiary under the equity method through April 1997. In May 1997,
the Company acquired the remaining 20% of PWSI for $5.0 million and
discontinued equity accounting. The sellers provided purchase money financing
in the form of two $2.5 million term loans. The term loans bear interest at 8%
per annum, require quarterly payments of interest only and mature in May 2007.
F-24
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 8. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO
In 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 1997, the Company purchased $15.1 million and sold
$10.6 million of such securities. These equity securities are considered a
trading portfolio and are carried at market value. At December 31, 1997, the
Company recognized an unrealized decline in the market value of the equity
securities in its trading portfolio of $850,000. In 1997, the Company realized
a net gain of $154,000 from the sale of trading portfolio securities and
received $107,000 in dividends. At December 31, 1996, the Company recognized an
unrealized decline in the market value of the equity securities in its trading
portfolio of $486,000. In 1996, the Company realized a net gain of $29,000 from
the sale of trading portfolio securities and received $163,000 in dividends. At
December 31, 1995, the Company recognized an unrealized decline in the market
value of the equity securities in its trading portfolio of $998,000. In 1995,
the Company realized a net gain of $349,000 from the sale of trading portfolio
securities and received $852,000 in dividends and $238,000 in return of capital
distributions on such securities. Unrealized and realized gains and losses in
the trading portfolio are included in other income in the accompanying
Consolidated Statements of Operations.
NOTE 9. NOTES AND INTEREST PAYABLE
Notes and interest payable consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------------------- -----------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
---------- ----- ----------- -----
<S> <C> <C> <C> <C>
Notes payable
Mortgage Loans . . . . . . $ 84,050 $ 96,654 $ 40,680 $ 68,385
Borrowings from financial
institutions . . . . . 170,491 153,369 78,812 48,929
Notes payable to affiliates 7,342 4,570 1,658 4,176
-------- -------- -------- --------
$261,883 254,593 $121,150 121,490
======== ========
Interest payable (including
$4,836 in 1997 and $4,798
in 1996 to affiliate) . . . . . 7,393 6,373
-------- --------
$261,986 $127,863
======== ========
</TABLE>
Scheduled principal payments on notes payable are due as follows:
<TABLE>
<S> <C>
1998 . . . . . . . . . . . . . . . . . . $ 89,049
1999 . . . . . . . . . . . . . . . . . . 28,400
2000 . . . . . . . . . . . . . . . . . . 17,771
2001 . . . . . . . . . . . . . . . . . . 29,564
2002 . . . . . . . . . . . . . . . . . . 8,083
Thereafter . . . . . . . . . . . . . . . 81,726
---------
$ 254,593
=========
</TABLE>
Stated interest rates on notes payable ranged from 6.0% to 15% at
December 31, 1997, and mature in varying installments between 1998 and 2007. At
December 31, 1997, notes payable were collateralized by mortgage notes
receivable with a net carrying value of $22.7 million and by deeds of trust on
real estate with a net carrying value of $302.3 million. Excluded from interest
expense in the accompanying Consolidated Statement of Operations is capitalized
interest of $68,000 in 1997.
F-25
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In May 1997, the Company financed a previously unencumbered 10.6 acre
tract of BP Las Colinas land for $3.1 million. The mortgage bears interest at
9.5% per annum, requires monthly payments of interest only and matures in
December 1999.
In May 1997, the Company obtained a second lien mortgage of $3.0
million secured by the Pin Oak land. The mortgage bears interest at 12.5% per
annum compounded monthly, and matures in February 1999. In January 1998, the
Palm Dessert land was substituted for the Pin Oak land as collateral for the
loan. See NOTE 11. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
In June 1997, the Company obtained a second lien mortgage of $3.0
million secured by the Lewisville land. The mortgage bears interest at 12.5%
per annum, compounded monthly and matures in February 1999. See NOTE 11.
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
In June 1997, the Company refinanced the Valwood land for $15.8
million. The mortgage bears interest at the prime rate plus 4.5%, currently 13%
per annum, requires monthly payments of interest only and matures in June 1998.
The Company received net cash of $4.9 million, after the payoff of $6.2 million
in existing mortgage debt secured by the property, an additional $3.0 million
being applied to payoff the Jefferies land loan and $1.4 million being applied
to paydown the Las Colinas I land term loan.
In July 1997, the Company obtained a third lien mortgage of $2.0
million secured by the Pin Oak land. The mortgage bore interest at 12.5% per
annum, compounded monthly and matured in February 1998. The mortgage was paid
in full in January 1998. See NOTE 11. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
In September 1997, the Company refinanced the Las Colinas I land
Double O tract for $7.3 million. The Company received net refinancing proceeds
of $2.1 million, after the payoff of $5.0 million in existing mortgage debt.
The mortgage bears interest at the prime rate plus 4.5%, currently 13% per
annum, requires monthly payments of interest only and matures in October 1998.
In October 1997, the Company refinanced the Oaktree Village Shopping
Center for $1.5 million. The Company received no net refinancing proceeds after
the payoff of $1.4 million in existing mortgage debt and the payment of various
closing costs associated with the financing. The note bears interest of 8.48%
per annum, requires monthly payments of principal and interest of $13,000 and
matures in November 2007.
Also in October 1997, the Company refinanced the Denver Merchandise
Mart for $25.0 million. The Company received net refinancing proceeds of $10.2
million, after the payoff of $14.8 million in existing mortgage debt and the
payment of various closing costs associated with the financing. The note bears
interest at 8.3% per annum, requires monthly payments of principal and interest
and matures in October 2012.
In November 1997, the Company obtained mortgage financing of $5.4
million secured by 33.9 acres of previously unencumbered Valwood land, Lacy
Longhorn land, Thompson land, and Tomlin land. The Company received net
financing proceeds of $4.8 million after the payment of various closing costs
associated with the financing. The mortgage bears interest at 13.5% per annum,
requires monthly payments of interest only and matures in November 1998.
In December 1997, the Company refinanced the Inn at the Mart in
Denver, Colorado, for $4.0 million. The Company received net refinancing
proceeds of $1.4 million, after the payoff of $2.0 million in existing mortgage
debt. The mortgage bears interest at 7.85% per annum, requires monthly payments
of principal and interest of $35,000 and matures in January 2013.
In 1996, the Company purchased a single family residence, a hotel and
a total of 1,368.5 acres of land for a total of $57.5 million. In connection
with these acquisitions, the Company obtained new or seller financing totaling
$41.3 million. The mortgages bear interest at rates ranging from 9% to 15% per
annum, require monthly payments of principal and interest totaling $491,479 and
mature from June 1998 to December 1999.
F-26
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Also in 1996, the Company refinanced the mortgage debt secured by a
wraparound mortgage note receivable, the Denver Merchandise Mart and an office
building and obtained mortgage financing for two previously unencumbered
hotels, in the total amount of $39.8 million. The Company received net cash of
$23.0 million after the payoff of $10.4 million in existing mortgage debt and
the payment of various costs associated with the financings. The mortgages bore
interest rates from 9.5% to 16.5% per annum, required monthly payments of
principal and interest totaling $404,500 and matured October 1997 to September
2001.
Notes payable to affiliates at December 31, 1997 and 1996 include a
$4.2 million note due to NRLP as payment for SAMLP's general partner interest
in NRLP. The note bears interest at 10% per annum compounded semi-annually and
is due at the earlier of September 2007, the liquidation of NRLP or the
withdrawal of SAMLP as general partner of NRLP. See NOTE 2. "SYNTEK ASSET
MANAGEMENT, L.P."
NOTE 10. MARGIN BORROWINGS
The Company has margin arrangements with various brokerage firms which
provide for borrowings 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 borrowings
were $53.3 million at December 31, 1997, and $40.0 million at December 31,
1996, 39.7% and 34.5%, respectively, of the market values of such equity
securities at such dates.
In August 1996, the Company consolidated its existing NRLP margin debt
held by various brokerage firms into a single loan of $20.3 million. In July
1997, the lender advanced an additional $3.7 million, increasing the loan
balance to $24.0 million. The loan is secured by the Company's NRLP units with
a market value of at least 50% of the principal balance of the loan. As of
December 31, 1997, 3,349,169 NRLP units with a market value of $80.8 million
were pledged as security for such loan.
NOTE 11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 1996, the Company obtained a $2.0 million loan from a
financial institution secured by a pledge of equity securities of the REITS
owned by the Company and Common Stock of the Company owned by BCM, with a
market value at the time of $4.0 million. The Company received $2.0 million in
net cash after the payment of closing costs associated with the loan. The loan
was paid in full by the proceeds of a new $4.0 million loan from another
financial institution secured by a pledge of equity securities of the REITS
owned by the Company and Common Stock of the Company owned by BCM with a market
value at the time of $10.4 million. The Company received $2.0 million in net
cash after the payoff of the $2.0 million loan.
In September 1996, the August 1996 lender made a second $2.0 million
loan. The second loan is also secured by a pledge of equity securities of the
REITs owned by the Company and Common Stock of the Company owned by BCM with a
market value of $9.1 million. The Company received $2.0 million in net cash
after the payment of closing costs associated with the loan. The loan matures
in July 1998.
In January 1998, the December 1997 lender made a second $2.0 million
loan. This loan is secured by a pledge of Common Stock in the Company owned by
BCM with a market value at the time of $4.7 million. The Company received $2.0
million in net cash.
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. See NOTE 9. "NOTES AND INTEREST PAYABLE."
In January 1998, one of the loans in the amount of $2.0 million was paid in
full. In September 1997, the limited partner also became a 22.5% limited
partner in a newly formed limited partnership of which the Company is a 1%
general partner and a 21.5% limited partner. See NOTE 6. "INVESTMENTS IN
EQUITY INVESTEES" and NOTE 3. "NOTES AND INTEREST PAYABLE" and NOTE 4. "REAL
ESTATE."
F-27
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 12. DIVIDENDS
In June 1996, the Company's Board of Directors resumed the payment of
dividends on the Company's Common Stock. The Company paid common dividends
totaling $2.0 million or $.20 per share in 1997 and dividends totaling $1.5
million or $.15 per share in 1996. The Company reported to the Internal Revenue
Service that 100% of the dividends paid in 1997 represented ordinary income and
100% of the dividends paid in 1996 represented a return of capital.
NOTE 13. PREFERRED STOCK
The Company's Series B 10% Cumulative Convertible Preferred Stock
consists of a maximum of 4,000 shares with a par value of $2.00 per share and a
liquidation preference of $100.00 per share. Dividends are payable at the rate
of $10.00 per year or $2.50 per quarter to stockholders of record on the 15th
day of each March, June, September and December when and as declared by the
Company's Board of Directors. The Series B Preferred Stock is convertible
between May 8, 1998 and June 8, 1998, into Common Stock of the Company at 90%
of the average closing price of the Company's Common Stock on the prior 30
trading days. At December 31, 1997, 4,000 shares of Series B Preferred Stock
were issued and outstanding.
The Company's Series C 10% Cumulative Convertible Preferred Stock
consists of a maximum of 16,681 shares with a par value of $2.00 per share and
a liquidation preference of $100.00 per share. Dividends are payable at the
rate of $10.00 per year or $2.50 per quarter to stockholders of record on the
15th day of each March, June, September and December when and as declared by
the Company's Board of Directors. The Series C Preferred Stock is convertible
between November 25, 1998 and February 23, 1999, into Common Stock of the
Company at 90% of the average closing price of the Company's Common Stock on
the prior 30 trading days. At December 31, 1997, 16,681 shares of Series C
Preferred Stock were issued and outstanding.
The Company's Series D 9.50% Cumulative Preferred Stock consists of a
maximum of 91,000 shares with a par value of $2.00 per share and a liquidation
preference of $20.00 per share. Dividends are payable at the rate of $1.90 per
year of $.475 per quarter to stockholders of record on the 15th day of each
March, June, September and December when and as declared by the Company's Board
of Directors. The Class A limited partner units of Ocean Beach Partners, L.P.
may be exchanged for Series D Preferred Stock at the rate of 20 Class A units
for each share of Series D Preferred Stock. No more than one-third of the Class
A units held may be exchanged prior to May 31, 2001. Between June 1, 2001 and
May 31, 2006 all unexchanged Class A units are exchangeable. At December 31,
1997, none of the Series D Preferred Stock was issued.
The Company's Series E 10% Cumulative Convertible Preferred Stock
consists of a maximum of 80,000 shares with a par value of $2.00 per share and
a liquidation preference of $100.00 per share. Dividends are payable at the
rate of 10.00 per year or $2.50 per quarter to stockholders of record on the
15th day of each March, June, September and December when and as declared by
the Company's Board of Directors for periods prior to November 4, 1999 and
$11.00 per year, $2.75 per quarter thereafter. The Series E Preferred Stock is
reserved for the conversion of the Class A limited partner units of Valley
Ranch, L.P. Such Class A units may be exchanged for Series E Preferred Stock at
the rate of 100 Class A units for each share of Series E Preferred Stock.
Beginning November 4, 1998, the Series E Preferred Stock may be converted into
Common Stock of the Company at 80% of the average closing price of the
Company's Common Stock on the prior 20 trading days. Up to 37.50% of the Series
E Preferred Stock may be converted between November 4, 1998 and November 3,
1999. Between November 4, 1999 and November 3, 2001 an additional 12.50% of the
original Series E Preferred Stock may be converted, and the remainder may be
converted on or after November 4, 2001. At December 31, 1997, none of the
Series E Preferred Stock was issued.
The Company's Series F 10% Cumulative Convertible Preferred Stock
consists of a maximum of 7,500,000 shares with a par value of $2.00 per share
and a liquidation preference of $10.00 per share. Dividends are payable at the
rate of $1.00 per year or $.25 per quarter to stockholders of record on the
15th day of each March, June, September and December when and as declared by
the Company's Board of Directors accruing cumulatively from August 16, 1998 and
commencing on October 15, 1998. The Series F Preferred Stock may be converted,
after August 15, 2003, into Common Stock of the Company at 90% of the market
value of the Company's Common Stock for the 20 trading days prior to
conversion. At December 31, 1997, 2,000,000 shares of Series F Preferred Stock
were issued and outstanding.
F-28
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company's Series G 10% Cumulative Convertible Preferred Stock
consists of a maximum of 11,000 shares with a par value of $2.00 per share, and
a liquidation preference of $100.00 per share. Dividends are payable at the
rate of $10.00 per year or $2.50 per quarter to stockholders of record on the
15th day of each March, June, September and December when and as declared by
the Company's Board of Directors. The Series G Preferred Stock is reserved for
the conversion of the Class A limited partner units of Grapevine American, L.P.
The Class A units may be exchanged for Series G Preferred Stock at the rate of
100 Class A units for each share of Series G Preferred Stock, on or after
October 6, 1999. The Series G Preferred Stock may be converted, after October
6, 2000, into Common Stock of the Company at 90% of the market value of the
Company's Common Stock for the twenty trading days prior to conversion. At
December 31, 1997, none of the Series G Preferred Stock was issued.
NOTE 14. ADVISORY AGREEMENT
Although the Company's Board of Directors is directly responsible for
managing the affairs of the Company and for setting the policies which guide
it, the day-to-day operations of the Company are performed by BCM, a
contractual advisor under the supervision of the Company's Board of Directors.
The duties of the advisor include, among other things, locating, investigating,
evaluating and recommending real estate and mortgage loan investment and sales
opportunities as well as financing and refinancing sources for the Company. BCM
as advisor also serves as a consultant in connection with the Company's
business plan and investment policy decisions made by the Company's Board of
Directors.
BCM has been providing advisory services to the Company since February
6, 1989. BCM is a company owned by a trust for the benefit of the children of
Gene E. Phillips. Mr. Phillips served as Chairman of the Board and as a
Director of the Company until November 16, 1992. Mr. Phillips also served as a
director of BCM until December 22, 1989, and as Chief Executive Officer of BCM
until September 1, 1992. Mr. Phillips serves as a representative of the trust
for the benefit of his children that owns BCM and, in such capacity, has
substantial contact with the management of BCM and input with respect to BCM's
performance of advisory services to the Company. Ryan T. Phillips, a Director
of the Company until June 6, 1996, is a director of BCM and a trustee of the
trust that owns BCM. Karl L. Blaha, President and Director of the Company
serves as Executive Vice President - Commercial Asset Management of BCM. Oscar
W. Cashwell, a Director of the Company, served as Executive Vice President of
BCM until January 10, 1997.
The Advisory Agreement provides that BCM shall receive base
compensation at the rate of 0.125% per month (1.5% on an annualized basis) of
the Company's Average Invested Assets. On October 23, 1991, based on the
recommendation of BCM, the Company's advisor, the Company's Board of Directors
approved a reduction in BCM's base advisory fee by 50% effective October 1,
1991. This reduction remains in effect until the Company's earnings for the
four preceding quarters equals or exceeds $.50 per share.
In addition to base compensation, the Advisory Agreement provides that
BCM, or an affiliate of BCM, receive an acquisition fee for locating, leasing
or purchasing real estate for the Company; a disposition fee for the sale of
each equity investment in real estate; a loan arrangement fee; an incentive fee
equal to 10% of net income for the year in excess of a 10% return on
stockholders' equity, and 10% of the excess of net capital gains over net
capital losses, if any; and a mortgage placement fee, on mortgage loans
originated or purchased.
The Advisory Agreement further provides that BCM shall bear the cost
of certain expenses of its employees not directly identifiable to the Company's
assets, liabilities, operations, business or financial affairs; and
miscellaneous administrative expenses relating to the performance by BCM of its
duties under the Advisory Agreement.
If and to the extent that the Company shall request BCM, or any
director, officer, partner or employee of BCM, to render services to the
Company other than those required to be rendered by BCM under the Advisory
Agreement, such additional services, if performed, will be compensated
separately on terms agreed upon between such party and the Company from time to
time. The Company has requested that BCM perform loan administration functions,
and the Company and BCM have entered into a separate agreement, as described
below.
F-29
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Advisory Agreement automatically renews from year to year unless
terminated in accordance with its terms. The Company's management believes
that the terms of the Advisory Agreement are at least as fair as could be
obtained from unaffiliated third parties.
Since October 4, 1989, BCM has acted as loan administration/servicing
agent for the Company, under an agreement terminable by either party upon
thirty days' notice, under which BCM services the Company's mortgage notes and
receives as compensation a monthly fee of .125% of the month-end outstanding
principal balances of the mortgage notes serviced.
NOTE 15. PROPERTY MANAGEMENT
Since February 1, 1990, affiliates of BCM have provided property
management services to the Company. Currently, Carmel Realty Services, Ltd.
("Carmel, Ltd.") provides property management services for a fee of 5% or less
of the monthly gross rents collected on the properties under its management.
Carmel, Ltd. subcontracts with other entities for the property-level management
services to the Company at various rates. The general partner of Carmel, Ltd.
is BCM. The limited partners of Carmel, Ltd. are (i) First Equity Properties,
Inc. ("First Equity"), which is 50% owned by BCM, (ii) Gene E. Phillips and
(iii) a trust for the benefit of the children of Mr. Phillips. Carmel, Ltd.
subcontracts the property-level management of the Company's hotels, shopping
centers, its office building and the Denver Merchandise Mart to Carmel Realty,
Inc. ("Carmel Realty"), which is a company owned by First Equity. Carmel Realty
is entitled to receive property and construction management fees and leasing
commissions in accordance with the terms of its property- level management
agreement with Carmel, Ltd.
F-30
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 16. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
Fees and cost reimbursements to BCM and its affiliates were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Fees
Advisory and mortgage
servicing ................... $ 2,657 $ 1,539 $ 1,195
Loan arrangement ............... 592 806 95
Brokerage commissions ............. 7,586 1,889 905
Property and construction
management and leasing
commissions* ................ 865 892 1,200
------- ------- -------
$11,700 $ 5,126 $ 3,395
======= ======= =======
Cost reimbursements ............... $ 1,809 $ 691 $ 516
======= ======= =======
</TABLE>
- --------------------------
* Net of property management fees paid to subcontractors, other than
Carmel Realty.
NOTE 17. INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
Real Pizza
1997 Estate Parlor Total
- ---- ------ ------ -----
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . $29,075 $17,926 $47,001
Income (loss) before income
taxes . . . . . . . . . . . (4,007) 1,579 (2,428)
Identifiable assets . . . . . . . . . 410,000 23,799 433,799
Depreciation and amortization . . . . 2,652 686 3,338
Capital expenditures . . . . . . . . 10,993 6,693 17,686
</TABLE>
NOTE 18. 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. At December 31, 1997, the Company had a tax net operating loss
carryforwards of $21.0 million expiring through 2011.
At December 31, 1997, the Company has a deferred tax benefit of $8.0
million due to tax deductions available to it in future years. However, due to,
among other factors, the Company's inconsistent earnings history, the Company
was unable to conclude that the future realization of such deferred tax
benefit, which requires the generation of taxable income, was more likely than
not. Accordingly, a valuation allowance for the entire amount of the deferred
tax benefit has been recorded.
F-31
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The components of tax expense are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Income tax provision
Current . . . . . . . . . . . $ -- $ -- $ 2
======== ========= ========
</TABLE>
NOTE 19. EXTRAORDINARY GAIN
In 1996, the Company recognized an extraordinary gain of $381,000
representing its equity share of TCI's extraordinary gain from the early payoff
of debt and CMET's extraordinary gain from an insurance settlement.
In 1995, the Company recognized an extraordinary gain of $783,000
representing its equity share of TCI's extraordinary gain from early payoff of
debt.
NOTE 20. RENTS UNDER OPERATING LEASES
The Company's operations include the leasing of an office building, a
merchandise mart and shopping centers. The leases thereon expire at various
dates through 2006. The following is a schedule of minimum future rents under
non- cancelable operating leases as of December 31, 1997:
<TABLE>
<S> <C>
1998 . . . . . . . . . $ 3,747
1999 . . . . . . . . . 3,427
2000 . . . . . . . . . 2,773
2001 . . . . . . . . . 2,231
2002 . . . . . . . . . 1,875
Thereafter . . . . . . 10,746
-------
$24,799
=======
</TABLE>
PWSI conducts the majority of its operations from leased facilities
which includes an office, warehouse, and sixty-one pizza parlor locations for
which a lease was signed and the pizza parlor was either open at December 31,
1997 or scheduled to open thereafter. The leases expire over the next twelve
years. PWSI also leases vehicles under operating leases. the following is a
schedule of minimum future rent commitments under operating leases as of
December 31, 1997:
<TABLE>
<S> <C>
1998 . . . . . . . . . $ 2,133
1999 . . . . . . . . . 2,176
2000 . . . . . . . . . 2,007
2001 . . . . . . . . . 1,806
2002 . . . . . . . . . 1,773
Thereafter . . . . . . 9,387
----------
$ 19,282
==========
</TABLE>
Total facilities and automobile rent expense relating to these leases was $1.3
million in 1997.
NOTE 21. COMMITMENTS AND CONTINGENCIES
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.
F-32
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 22. QUARTERLY RESULTS OF OPERATIONS
The following is a tabulation of the Company's quarterly results of
operations for the years 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------
1997 March 31, June 30, September 30, December 31,
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue ........................... $ 7,499 $ 9,667 $ 15,039 $ 17,766
Expense ........................... 11,795 15,960 24,296 31,304
-------- -------- -------- --------
(Loss) from operations ............ (4,296) (6,293) (9,257) (13,538)
Equity in income of
investees ...................... 280 4,970 (145) 5,555
Gains on sale of
real estate .................... 4,287 3,863 3,205 8,941
-------- -------- -------- --------
Net income (loss) ................. 271 2,540 (6,197) 958
Preferred dividend
requirement ...................... (50) (49) (49) (58)
-------- -------- -------- --------
Net income (loss) appli-
cable to common shares ........... $ 221 $ 2,491 $ (6,246) $ 900
======== ======== ======== ========
Earnings per share
Net income (loss) ................. $ .02 $ .21 $ (.52) $ .07
======== ======== ======== ========
</TABLE>
F-33
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------
1996 March 31, June 30, September 30, December 31,
---- -------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue ........................... $ 6,790 $ 5,346 $ 7,306 $ 7,537
Expense ........................... 8,255 8,555 9,279 12,488
-------- -------- -------- --------
(Loss) from operations ............ (1,465) (3,209) (1,973) (4,951)
Equity in income of
investees ...................... 678 271 661 394
Gains on sale of
real estate .................... 559 547 1,961 592
Extraordinary gain ................ 13 247 121 --
-------- -------- -------- --------
Net income (loss) ................. (215) (2,144) 770 (3965)
Preferred dividend
requirement ...................... -- (17) (48) (48)
-------- -------- -------- --------
Net income (loss) appli-
cable to common shares ........... $ (215) $ (2,161) $ 722 $ (4,013)
======== ======== ======== ========
Earnings per share
Income (loss) before extra-
ordinary gain .................. $ (.02) $ (.19) $ .05 $ (.28)
Extraordinary gain ................ -- .02 .01 --
-------- -------- -------- --------
Net income (loss) ................. $ (.02) $ (.17) $ .06 $ (.28)
======== ======== ======== ========
</TABLE>
NOTE 23. SUBSEQUENT EVENTS
In January 1998, the Company purchased El Dorado Parkway land, a 8.5 acre
parcel of undeveloped land in McKinney, Texas, for $952,000. The Company paid
$307,000 in cash and assumed the existing mortgage of $164,000 with the seller
providing purchase money financing of the remaining $481,000 of the purchase
price. The assumed mortgage bears interest at 10% per annum, requires
semiannual payments of principal and interest of $18,000 and matures in May
2005. The financing bears interest at 8% per annum, requires semiannual
principal and interest payments of $67,000 and matures in January 2002.
Also in January 1998, the Company purchased Valley Ranch IV land, a 12.3
acre parcel of undeveloped land in Irving, Texas, for $2.0 million. The Company
paid $500,000 in cash with the seller providing purchase money financing of the
remaining $1.5 million of the purchase price. The financing bears interest at
10% per annum, requires quarterly payments of interest only and matures in
December 2000.
Further in January 1998, the Company purchased JHL Connell land, a 7.7 acre
parcel of undeveloped land in Carrollton, Texas, for $1.3 million in cash.
In February 1998, the Company purchased Scoggins land, a 314.5 acre parcel
of undeveloped land in Tarrant County, Texas, for $3.0 million. The Company
paid $1.5 million in cash and obtained new mortgage financing of $1.5 million.
The mortgage bears interest at 14% per annum, requires quarterly payments of
interest only, requires a principal paydown of $300,000 in May 1998, and
matures in February 1999.
F-34
<PAGE> 75
Also in February 1998, the Company purchased Bonneau land, a 8.4 acre
parcel of undeveloped land in Dallas County, Texas, for $1.0 million. The
Company obtained new mortgage financing of $1.0 million. The mortgage bears
interest at 18.5% per annum with the principal and interest being due at
maturity in February 1999.
Further in February 1998, the Company financed the previously unencumbered
Kamperman land in the amount of $1.6 million. The Company received net
financing proceeds of $1.5 million after the payment of various closing costs
associated with the financing. The mortgage bears interest at 9.0%, requires
monthly payments of interest only and matures in February 2000.
In February 1998, the Company refinanced the Vineyards land in the amount
of $3.4 million. The Company received net refinancing proceeds of $2.9 million,
after the payoff of existing mortgage debt of $540,000. The note bears interest
at 9.0% per annum, requires monthly payments of interest only and matures in
February 2000.
Also in February 1998, the Company financed the unencumbered Valley Ranch
land in the amount of $4.3 million. The Company received net financing proceeds
of $4.1 million after the payment of various closing costs associated with the
financing. The mortgage bears interest at 9.0% per annum, requires monthly
payments of interest only and matures in February 2000.
In November 1994, the Company and an affiliate of BCM, sold five apartment
complexes to a newly formed limited partnership in exchange for $3.2 million in
cash, a 27% limited partner interest in the partnership and two mortgage notes
receivable, secured by one of the properties sold. The Company had the option
to reacquire the properties at any time after September 1997 for their original
sales prices, after the buyer received a 12% return on its investment.
Accordingly, the Company recorded a deferred gain of $5.6 million which was
offset against the Company's investment in the partnership. In February 1998,
the Company reacquired three of the properties for $7.7 million. The Company
paid $4.0 million in cash and assumed the existing mortgage of $3.7 million.
Simultaneously, the Company refinanced the three properties for a total of $7.8
million, the Company receiving net cash of $3.9 million after the payoff of
$3.7 million in existing mortgage debt and the payment of various costs
associated with the financing. The new mortgages bear interest at 9.5% per
annum, require monthly principal and interest payments of a total of $66,000
and mature in February 2008. In addition, the Company received a refund of
$230,000 from Carmel Realty, representing the commission the Company had paid
on the sale of the properties in 1994.
In March 1998, the Company financed the previously unencumbered Stagliano
and Dalho land in the amount of $800,000 with the lender on the Bonneau land,
described above. The Company received net financing proceeds of $790,000 after
the payment of various closing costs associated with the financing. 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.
F-35
<PAGE> 76
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION
IS UNLAWFUL.
-----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Incorporation of Certain Information
by Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Ratio of Earnings to Fixed Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Business of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Acquisition Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Description of the Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Index to Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets, December 31, 1997
and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations, Three Years
Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity,
Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows, Three Years
Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-11
</TABLE>
PREFERRED STOCK
COMMON STOCK
AMERICAN REALTY TRUST,
INC.
-----------------------
PROSPECTUS
-----------------------
MAY 14, 1998
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Thirteen of the Company's Articles of Incorporation provides that,
to the fullest extent permitted by Georgia law, as the same exists or may be
hereafter be amended, no director of the Company shall be personally liable to
the Company or the shareholders of the Company for monetary damages for breach
of the duty of care as a director, provided that Article Thirteen does not
limit or eliminate liability for (i) a breach of duty involving an
appropriation of a business opportunity of the Company; (ii) an act or omission
not in good faith or involving intentional misconduct or a knowing violation of
law; or (iii) a transaction from which the director derived an improper
personal benefit. In addition, a director's liability will not be limited as
to any payment of a dividend or approval of a stock repurchase that is illegal
under Section 14-2-640 of the Georgia Business Corporation Code.
Article Thirteen applies only to claims against a director arising out of
his or her role as a director and not, if he or she is also an officer, his or
her role as an officer or in any other capacity. In addition, Article Thirteen
does not reduce the exposure of directors to liability under Federal securities
laws.
The Bylaws of the Company require the Company to indemnify any person who,
by reason of the fact that he is or was a director of the Company, is made or
is threatened to be made a party to an action, including an action brought by
the Company or its shareholders. The Bylaws provide that the Company will
indemnify such person against reasonably incurred expenses (including, but not
limited to, attorneys' fees and disbursements, court costs, and expert witness
fees), and against any judgments, fines and amounts paid in settlement,
provided that the Company shall not indemnify such person under circumstances
in which the Georgia Business Corporation Code, as in effect from time to time,
would not allow indemnification.
The Bylaws of the Company give the board of directors the power to cause
the Company to provide to officers, employees, and agents of the Company all or
any part of the right to indemnification afforded to directors of the Company
as set forth in the Bylaws, subject to the conditions, limitations and
obligations therein, upon a resolution to that effect identifying such officer,
employee or agent and specifying the particular rights provided.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<S> <C>
3.1 -- Articles of Incorporation(1)
3.2 -- Amendment to Articles of Incorporation dated September 15, 1989(1)
3.3 -- Articles of Amendment setting forth Certificate of Designation of Series A
Cumulative Participating Preferred Stock dated as of April 11, 1990(1)
3.4 -- Articles of Amendment dated December 10, 1990 to Articles of Incorporation(1)
3.5 -- Articles of Amendment of the Articles of Incorporation of American Realty
Trust, Inc. setting forth the Certificate of Designations, Preferences and
Relative Participating or Optional or Other Special Rights, and
Qualifications,
Limitations on Restrictions thereof of Special Stock of American Realty
Trust, Inc. (Series B 10% Cumulative Preferred Stock) dated as of
April 4, 1996(1)
3.6 -- Articles of Amendment of the Articles of Incorporation of American Realty
Trust, Inc. setting forth the Certificate of Designations, Preferences and
Relative Participating or Optional or Other Special Rights, and
Qualifications, Limitations on Restrictions thereof of Special Stock of
American Realty Trust, Inc. (Series C 10% Cumulative Preferred Stock) dated
as of June 4, 1996(1)
</TABLE>
II-2
<PAGE> 78
<TABLE>
<S> <C> <C>
3.7 -- Articles of Amendment of the Articles of Incorporation of American
Realty Trust, Inc. setting forth the Certificate of Designations,
Preferences and Relative Participating or Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions thereof of
Series D Cumulative Preferred Stock of American Realty Trust, Inc.
dated as of August 2, 1996(1)
3.8 -- Articles of Amendment of the Articles of Incorporation of American Realty
Trust, Inc. setting forth the Certificate of Designations, Preferences and
Relative Participating or Optional or Other Special Rights, and
Qualifications, Limitations or Restrictions thereof of Series E Cumulative
Convertible Preferred Stock of American Realty Trust, Inc. dated as of
December 3, 1996(1)
3.9 -- Articles of Amendment of the Articles of Incorporation of American Realty
Trust, Inc. setting forth the Certificate of Designations, Preferences and
Relative Participating or Optional or Other Special Rights, and
Qualifications, Limitations or Restrictions thereof of Series F Cumulative
Convertible Preferred Stock of American Realty Trust, Inc. dated as of
August 13, 1996(2)
3.10 -- Articles of Amendment of the Articles of Incorporation deleting Certificate of
Designation of Series A Cumulative Participating Preferred Stock, dated as
of February 28, 1997(2)
3.11 -- Articles of Amendment of the Articles of Incorporation of American Realty
Trust, Inc. setting forth the Certificate of Designations, Preferences and
Relative Participating or Optional or Other Special Rights, and
Qualifications, Limitations or Restrictions thereof of Series G Cumulative
Convertible Preferred Stock of American Realty Trust, Inc. dated as of
September 18, 1997(3)
3.12 -- Articles of Amendment to the Articles of Incorporation of American
Realty Trust, Inc. increasing the number of authorized shares of
Common Stock to 100,000,000 shares, dated March 26, 1998(4)
3.13 -- Amended By-laws of American Realty Trust, Inc., dated December 11, 1991(1)
4.1 -- Instruments defining the rights of security holders (included in Exhibits 3.1
through 3.12)(2)
5.1 --Opinion of Holt Ney Zatcoff & Wasserman, LLP as to the legality of
the Preferred Stock being offered(1)
11.1 -- Statement re: computation of per share earnings(5)
12.1 -- Statement re: computation of ratios(5)
15.1 -- Letter re: unaudited interim financial information(5)
21.1 -- Subsidiaries of the registrant(4)
23.1 -- Consent of BDO Seidman, LLP (American Realty Trust, Inc.)(6)
23.2 -- Consent of BDO Seidman, LLP (Continental Mortgage and Equity Trust)(6)
23.3 -- Consent of BDO Seidman, LLP (Income Opportunity Realty Investors, Inc.)(6)
23.4 -- Consent of BDO Seidman, LLP (Transcontinental Realty Investors, Inc.)(6)
23.5 -- Consent of BDO Seidman, LLP (National Realty, L.P.)(6)
23.6 -- Consent of Holt Ney Zatcoff & Wasserman, LLP (incorporated in Exhibit 5.1)(1)
24.1 -- Power of Attorney(1)
29.1 -- Financial Data Schedule(4)
99.1 -- Form of Prospectus Supplement(2)
- ----------
</TABLE>
(1) Filed as an Exhibit to the Registrant's Registration Statement on
Form S-4 (No. 333-21591), filed with the Commission on February
11, 1997 and incorporated by reference herein.
(2) Filed as an Exhibit to the Registration's Post-Effective Amendment
No. 1 to the Registration Statement on Form S-4 (No. 333-21583),
filed with the Commission on September 8, 1997 and incorporated by
reference herein.
(3) Filed as an Exhibit to the Registrant's Registration Statement on
Form S-4 (No. 333-43777), filed with the Commission on January 6,
1998 and incorporated by reference herein.
(4) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997, as filed with the Commission
on March 30, 1998 and incorporated by reference herein.
(5) Not applicable.
(6) Filed herewith.
II-3
<PAGE> 79
ITEM 22. UNDERTAKINGS.
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of this
Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in
the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the change in volume
and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with
respect to the plan of distribution not previously
disclosed in this Registration Statement or any material
change to such information in this Registration Statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Company hereby undertakes to respond to requests
for information that is incorporated by reference into the Prospectus pursuant
to Items 4, 10(b), 11 or 13 of Form S-4 within one business day of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes any information contained in any documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(c) The undersigned Company hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Company pursuant to Item 15, above, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Post-Effective
Amendment No. 2 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on the 14th day of May, 1998.
AMERICAN REALTY TRUST, INC.
By: /s/ KARL L. BLAHA
-----------------------------------
Karl L. Blaha President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 2 to Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
* President (Principal Executive May 14, 1998
- ------------------------- Officer) and Director
Karl L. Blaha
* Director May 14, 1998
- -------------------------
Roy E. Bode
*
Director May 14, 1998
- -------------------------
Oscar W. Cashwell
*
Director May 14, 1998
- -------------------------
Al Gonzalez
*
Director May 14, 1998
- -------------------------
Cliff Harris
*
Executive Vice President and May 14, 1998
- ------------------------- Chief Financial Officer
Thomas A. Holland (Principal Financial and
Accounting Officer)
*By: /s/ KARL L. BLAHA
-------------------------
Karl L. Blaha
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 81
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
<S> <C> <C>
3.7 -- Articles of Amendment of the Articles of Incorporation of American
Realty Trust, Inc. setting forth the Certificate of Designations,
Preferences and Relative Participating or Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions thereof of
Series D Cumulative Preferred Stock of American Realty Trust, Inc.
dated as of August 2, 1996(1)
3.8 -- Articles of Amendment of the Articles of Incorporation of American Realty
Trust, Inc. setting forth the Certificate of Designations, Preferences and
Relative Participating or Optional or Other Special Rights, and
Qualifications, Limitations or Restrictions thereof of Series E Cumulative
Convertible Preferred Stock of American Realty Trust, Inc. dated as of
December 3, 1996(1)
3.9 -- Articles of Amendment of the Articles of Incorporation of American Realty
Trust, Inc. setting forth the Certificate of Designations, Preferences and
Relative Participating or Optional or Other Special Rights, and
Qualifications, Limitations or Restrictions thereof of Series F Cumulative
Convertible Preferred Stock of American Realty Trust, Inc. dated as of
August 13, 1996(2)
3.10 -- Articles of Amendment of the Articles of Incorporation deleting Certificate of
Designation of Series A Cumulative Participating Preferred Stock, dated as
of February 28, 1997(2)
3.11 -- Articles of Amendment of the Articles of Incorporation of American Realty
Trust, Inc. setting forth the Certificate of Designations, Preferences and
Relative Participating or Optional or Other Special Rights, and
Qualifications, Limitations or Restrictions thereof of Series G Cumulative
Convertible Preferred Stock of American Realty Trust, Inc. dated as of
September 18, 1997(3)
3.12 -- Articles of Amendment to the Articles of Incorporation of American
Realty Trust, Inc. increasing the number of authorized shares of
Common Stock to 100,000,000 shares, dated March 26, 1998(4)
3.13 -- Amended By-laws of American Realty Trust, Inc., dated December 11, 1991(1)
4.1 -- Instruments defining the rights of security holders (included in Exhibits 3.1
through 3.12)(2)
5.1 --Opinion of Holt Ney Zatcoff & Wasserman, LLP as to the legality of
the Preferred Stock being offered(1)
11.1 -- Statement re: computation of per share earnings(5)
12.1 -- Statement re: computation of ratios(5)
15.1 -- Letter re: unaudited interim financial information(5)
21.1 -- Subsidiaries of the registrant(4)
23.1 -- Consent of BDO Seidman, LLP (American Realty Trust, Inc.)(6)
23.2 -- Consent of BDO Seidman, LLP (Continental Mortgage and Equity Trust)(6)
23.3 -- Consent of BDO Seidman, LLP (Income Opportunity Realty Investors, Inc.)(6)
23.4 -- Consent of BDO Seidman, LLP (Transcontinental Realty Investors, Inc.)(6)
23.5 -- Consent of BDO Seidman, LLP (National Realty, L.P.)(6)
23.6 -- Consent of Holt Ney Zatcoff & Wasserman, LLP (incorporated in Exhibit 5.1)(1)
24.1 -- Power of Attorney(1)
29.1 -- Financial Data Schedule(4)
99.1 -- Form of Prospectus Supplement(2)
- ----------
</TABLE>
(1) Filed as an Exhibit to the Registrant's Registration Statement on
Form S-4 (No. 333-21591), filed with the Commission on February
11, 1997 and incorporated by reference herein.
(2) Filed as an Exhibit to the Registration's Post-Effective Amendment
No. 1 to the Registration Statement on Form S-4 (No. 333-21583),
filed with the Commission on September 8, 1997 and incorporated by
reference herein.
(3) Filed as an Exhibit to the Registrant's Registration Statement on
Form S-4 (No. 333-43777), filed with the Commission on January 6,
1998 and incorporated by reference herein.
(4) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997, as filed with the Commission
on March 30, 1998 and incorporated by reference herein.
(5) Not applicable.
(6) Filed herewith.
<PAGE> 1
Exhibit 23.1
Consent of Independent Certified Public Accountants
American Realty Trust, Inc.
Dallas, Texas
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 25, 1998, relating to the
consolidated financial statements of American Realty Trust, Inc. for the year
ended December 31, 1997.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
Dallas, Texas
May 13, 1998
<PAGE> 1
Exhibit 23.2
Consent of Independent Certified Public Accountants
American Realty Trust, Inc.
Dallas, Texas
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement of our report dated March 6,
1998, relating to the consolidated financial statements and schedules of
Continental Mortgage and Equity Trust appearing in the Trust's Annual Report on
Form 10-K for the year ended December 31, 1997.
/s/ BDO Seidman, LLP
Dallas, Texas
May 13, 1998
<PAGE> 1
Exhibit 23.3
Consent of Independent Certified Public Accountants
American Realty Trust, Inc.
Dallas, Texas
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement of our report dated March 18,
1998, relating to the consolidated financial statements and schedules of Income
Opportunity Realty Investors, Inc. appearing in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
/s/ BDO Seidman, LLP
Dallas, Texas
May 13, 1998
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Exhibit 23.4
Consent of Independent Certified Public Accountants
American Realty Trust, Inc.
Dallas, Texas
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement of our report dated March 12,
1998, relating to the consolidated financial statements and schedules of
Transcontinental Realty Investors, Inc. appearing in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
/s/ BDO Seidman, LLP
Dallas, Texas
May 13, 1998
<PAGE> 1
Exhibit 23.5
Consent of Independent Certified Public Accountants
American Realty Trust, Inc.
Dallas, Texas
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement of our report dated March 17,
1998, relating to the consolidated financial statements and schedules of
National Realty, L.P. appearing in the Partnership's Annual Report on Form 10-K
for the year ended December 31, 1997.
/s/ BDO Seidman, LLP
Dallas, Texas
May 13, 1998
