1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1996
-------------
Commission File Number 1-9948
------
AMERICAN REALTY TRUST, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Georgia 54-0697989
------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas 75231
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(214) 692-4700
--------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, $.01 par value 6,740,328
- ---------------------------- -----------------------------
(Class) (Outstanding at July 30, 1996)
1
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements have not been examined by
independent certified public accountants but in the opinion of the management
of American Realty Trust, Inc. (the "Company"), all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of consolidated
results of operations, consolidated financial position and consolidated cash
flows at the dates and for the periods indicated, have been included.
AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1996 1995
--------------- --------------
(dollars in thousands)
Assets
------
Notes and interest receivable
Performing.......................................... $ 51,385 $ 51,840
Nonperforming, nonaccruing.......................... 1,827 1,827
--------------- --------------
53,212 53,667
Less - allowance for estimated losses............... (3,926) (3,926)
--------------- --------------
49,286 49,741
Real estate held for sale, net of accumulated
depreciation ($5,098 in 1996 and 1995)............ 40,930 32,627
Less - allowance for estimated losses............... (3,328) (3,328)
--------------- --------------
37,602 29,299
Real estate held for investment, net of accumulated
depreciation ($3,344 in 1996 and $2,646 in 1995).. 31,087 30,125
Marketable equity securities, at market value....... 4,605 2,093
Cash and cash equivalents........................... 173 1,054
Investments in equity investees..................... 53,832 41,072
Other assets........................................ 7,941 8,649
--------------- --------------
$ 184,526 $ 162,033
=============== ==============
The accompanying notes are an integral part of these
Consolidated Financial Statements.
2
3
AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS - Continued
June 30, December 31,
1996 1995
--------------- --------------
(dollars in thousands)
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable......................... $ 91,475 $ 61,163
Margin borrowings.................................. 31,495 34,017
Accounts payable and other liabilities (including
$624 in 1996 and $4,584 in 1995 to affiliate).... 8,641 12,698
--------------- --------------
131,611 107,878
Minority interest.................................. 1,097 1,097
Commitments and contingencies
Stockholders' equity
Preferred stock, authorized 20,000,000 shares,
issued and outstanding
4,000 shares Series B, 10% cumulative, $2.00
par value.................................... 8 -
15,111 shares Series C, 10% cumulative, $2.00
par value.................................... 30 -
Common stock, $.01 par value; authorized
16,667,000 shares, issued and outstanding
6,740,328 shares in 1996 and 5,858,328 in 1995.... 67 59
Paid-in capital..................................... 68,584 66,719
Accumulated (deficit)............................... (16,871) (13,720)
--------------- --------------
51,818 53,058
--------------- --------------
$ 184,526 $ 162,033
=============== ==============
The accompanying notes are an integral part of these
Consolidated Financial Statements.
3
4
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------------- ----------------------------------
1996 1995 1996 1995
--------------- --------------- ---------------- --------------
(dollars in thousands, except per share)
Income
Rents....................... $ 4,084 $ 3,684 $ 9,394 $ 9,091
Interest.................... 1,135 1,257 2,273 2,580
Other....................... 127 611 469 (39)
--------------- --------------- ---------------- --------------
5,346 5,552 12,136 11,632
--------------- --------------- ---------------- --------------
Expenses
Property operations......... 3,856 3,333 7,566 7,212
Interest.................... 3,270 1,999 6,416 3,756
Advisory and servicing fees
to affiliate............. 381 239 701 543
General and administrative.. 595 667 1,237 1,227
Depreciation and
amortization............. 453 402 890 842
Equity in (losses) of
real estate investees.... 1,530 1,699 2,420 2,959
Minority interest........... - 671 - 671
--------------- --------------- ---------------- --------------
10,085 9,010 19,230 17,210
--------------- --------------- ---------------- --------------
(Loss) before gain on sale of
real estate and extraordinary
gain........................ (4,739) (3,458) (7,094) (5,578)
Gain on sale of real estate.. 2,348 24 4,475 948
Extraordinary gain........... 247 12 260 327
--------------- --------------- ---------------- --------------
Net (loss)................... (2,144) (3,422) (2,359) (4,303)
Preferred dividend requirement (17) - (17) -
--------------- --------------- ---------------- --------------
Net (loss) applicable to
Common shares............... $ (2,161) $ (3,422) $ (2,376) $ (4,303)
=============== =============== ================ ==============
Earnings per share
(Loss) before extraordinary
gain..................... $ (.37) $ (.59) $ (.42) $ (.79)
Extraordinary gain.......... .04 - .04 .06
--------------- --------------- ---------------- --------------
Net (loss) applicable to
Common shares............ $ (.33) $ (.59) $ (.38) $ (.73)
=============== =============== ================ ==============
Weighted average Common share
used in computing earnings
per share................... 6,615,317 5,858,328 6,236,823 5,858,328
=============== =============== ================ ==============
The accompanying notes are an integral part of these
Consolidated Financial Statements.
4
5
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 1996
Series B Series C
Preferred Preferred Common Paid-in
Stock Stock Stock Capital
------------- ------------ ----------- --------------
(dollars in thousands)
Balance, January 1, 1996.... $ - $ - $ 59 $ 66,719
Common stock issued......... - - 8 (8)
Series B Preferred stock
issued..................... 8 - - 392
Series C Preferred stock
issued..................... - 30 - 1,470
Common stock cash dividend
($.10 per share)........... - - - -
Redemption of share
purchase rights ($.015
per right per share)....... - - - -
Series B Preferred Stock
cash dividend distribu-
tion ($1.46 per share)..... - - - -
Series C Preferred Stock
stock dividend............. - - - 11
Net (loss).................. - - - -
------------- ------------ ----------- --------------
Balance, June 30, 1996...... $ 8 $ 30 $ 67 $ 68,584
============= ============ =========== ==============
Accumulated Stockholders'
(Deficit) Equity
---------------- ---------------
Balance, January 1, 1996.... $ (13,720) $ 53,058
Common stock issued......... - -
Series B Preferred stock
issued..................... - 400
Series C Preferred stock
issued..................... - 1,500
Common stock cash dividend
($.10 per share)........... (674) (674)
Redemption of share
purchase rights ($.015
per right per share)....... (101) (101)
Series B Preferred Stock
cash dividend distribu-
tion ($1.46 per share)..... (6) (6)
Series C Preferred Stock
stock dividend............. (11) -
Net (loss).................. (2,359) (2,359)
---------------- ---------------
Balance, June 30, 1996...... $ (16,871) $ 51,818
================ ===============
The accompanying notes are an integral part of these
Consolidated Financial Statements.
5
6
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
-------------------------------------
1996 1995
---------------- ---------------
(dollars in thousands)
Cash Flows From Operating Activities
Rents collected................................. $ 8,677 $ 9,437
Interest and dividends collected................ 2,250 3,054
Distributions received from equity investees'
operating cash flow.......................... 5,982 878
Payments for property operations................ (8,209) (6,702)
Interest paid................................... (3,688) (3,922)
Advisory and servicing fees paid to affiliate... (701) (543)
General and administrative expenses paid........ (1,274) (1,284)
Other........................................... (98) 228
---------------- ---------------
Net cash provided by operating activities.... 2,939 1,146
Cash Flows From Investing Activities
Collections on notes receivable................. 449 1,186
Funding of notes receivable..................... (100) -
Proceeds from sale of real estate............... 1,951 9,731
Proceeds from sale of marketable equity
securities................................... 17,122 3,061
Purchases of marketable equity securities....... (18,421) (9,870)
Investment in equity investees.................. (13,545) (5,546)
Purchases of real estate........................ (798) (14,076)
Earnest money deposits.......................... (1,865) -
Real estate improvements........................ (731) (1,026)
---------------- ---------------
Net cash (used in) investing activities...... (15,938) (16,540)
Cash Flows From Financing Activities
Proceeds from notes payable..................... 43,750 23,700
Payments on notes payable....................... (20,050) (14,401)
Deferred borrowing costs........................ (1,735) (1,200)
Net repayment of advances from affiliates....... (3,960) (1,059)
Margin (repayments) borrowings, net............. (6,281) 8,592
Proceeds from issuance of series B preferred
stock........................................ 400 -
Distributions to stockholders................... (6) -
---------------- ---------------
Net cash provided by financing activities.... 12,118 15,632
Net increase (decrease) in cash and cash
equivalents................................ (881) 238
Cash and cash equivalents, beginning of period.... 1,054 193
---------------- ---------------
Cash and cash equivalents, end of period.......... $ 173 $ 431
================ ===============
The accompanying notes are an integral part of these
Consolidated Financial Statements.
6
7
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Six Months
Ended June 30,
-------------------------------------
1996 1995
---------------- ---------------
(dollars in thousands)
Reconciliation of net (loss) to net cash provided
by operating activities
Net (loss)........................................ $ (2,359) $ (4,303)
Adjustments to reconcile net (loss) to net cash
provided by operating activities
Extraordinary gain............................. (260) (327)
Depreciation and amortization.................. 890 842
Gain on sale of real estate.................... (4,475) (948)
Distributions from equity investees' operating
cash flow.................................... 5,982 878
Equity in losses of investees.................. 2,420 2,959
Unrealized (gain) loss on marketable equity
securities................................... (663) 899
Decrease in accrued interest receivable........ 11 266
Decrease in other assets....................... 1,882 631
Increase (decrease) in accrued interest
payable...................................... 219 (260)
Increase (decrease) in accounts payable and
other liabilities............................ (843) 414
Other.......................................... 135 95
---------------- ---------------
Net cash provided by operating activities.... $ 2,939 $ 1,146
================ ===============
Schedule of noncash investing activities
Issuance of 15,000 shares of Series B Preferred
Stock with an aggregate liquidation value of
$1.5 million................................... $ 1,500 $ -
The accompanying notes are an integral part of these
Consolidated Financial Statements.
7
8
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements of American Realty Trust,
Inc. and consolidated entities (the "Company") have been prepared in conformity
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
Operating results for the six month period ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. For further information, refer to the Consolidated
Financial Statements and Notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K").
Shares and per share data have been restated for the two for one forward share
split effected January 2, 1996.
NOTE 2. SYNTEK ASSET MANAGEMENT, L.P.
The Company owns 76.8% limited partner interest in Syntek Asset Management,
L.P. ("SAMLP"), the general partner of National Realty, L.P. ("NRLP") and
National Operating, L.P. ("NOLP"), the operating partnership of NRLP. Gene E.
Phillips, a Director and Chairman of the Board of the Company until November
16, 1992, is a general partner of SAMLP, and until March 4, 1994, William S.
Friedman, a Director and President of the Company until December 31, 1992, was
also general partner of SAMLP.
NRLP, SAMLP and Messrs. Phillips and Friedman were among the defendants in a
class action lawsuit arising from the formation of NRLP. An agreement settling
such lawsuit for the above mentioned defendants became effective on July 5,
1990. The settlement agreement provided for, among other things, the
appointment of an NRLP oversight committee; the establishment of specified
annually increasing targets for five years relating to the price of NRLP's
units of limited partner interest; a limitation and deferral or waiver of
NRLP's reimbursement to SAMLP of certain future salary costs; a deferral or
waiver of certain future compensation to SAMLP; the required distribution to
unitholders of all of NRLP's cash from operations in excess of certain
renovation costs unless the NRLP oversight committee approves alternative uses
for such cash from operations; the issuance of unit purchase warrants to
members of the plaintiff class; and the contribution by the then individual
general partners of $2.5 million to NRLP over a four-year period. In
accordance with the indemnification provisions of SAMLP's agreement of limited
partnership, SAMLP agreed to indemnify Messrs. Phillips and Friedman, the
individual general partners, at the time, of SAMLP, for the $2.5 million
payment to NRLP. The final annual installment of principal and interest was
paid by SAMLP in May 1994.
The settlement agreement provides for the resignation and replacement of SAMLP
as general partner if the unit price targets are not met for two
8
9
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. SYNTEK ASSET MANAGEMENT, L.P. (Continued)
consecutive anniversary dates. NRLP did not meet the unit price targets for
the first and second anniversary dates. On July 8, 1992, SAMLP notified the
NRLP oversight committee of the failure of NRLP to meet the unit price targets
for two successive years and that it expects to resign as general partner of
NRLP and NOLP.
The withdrawal of SAMLP as general partner would require NRLP to purchase
SAMLP's general partner interest (the "Redeemable General Partner Interest") at
its then fair value, and to pay certain fees and other compensation as provided
in the partnership agreement. Syntek Asset Management, L.P. ("SAMI"), the
managing general partner of SAMLP, has calculated the fair value of such
Redeemable General Partner Interest to be $36.2 million at June 30, 1996,
before reduction for the principal balance ($4.2 million at June 30, 1996) and
accrued interest ($5.7 million at June 30, 1996) on the note receivable from
SAMLP for its original capital contribution to the partnership.
In January 1995, NRLP, SAMLP and the NRLP oversight committee executed an
Implementation Agreement which provides for the nomination of a successor
general partner to succeed SAMLP and for the resolution of all related matters
under the class action settlement. On February 20, 1996, the parties to the
Implementation Agreement executed an Amended and Restated Implementation
Agreement.
Provided that the successor general partner is elected pursuant to the terms of
the amended and restated Implementation Agreement, SAMLP shall receive
$12,471,500 from NRLP. This amount represents a compromise settlement of the
net amounts owed by NRLP to SAMLP upon SAMLP's withdrawal as general partner
and any amounts which SAMLP and its affiliates may owe to NRLP. This amount
shall be paid to SAMLP pursuant to a promissory note in accordance with the
terms set forth in the Amended and Restated Implementation Agreement.
The Amended and Restated Implementation Agreement has been submitted to the
Judge appointed to supervise the class action settlement (the "Supervising
Judge") for tentative approval and approval of the notice to be sent to the
original class members. Upon final approval by the Supervising Judge, the
proposal to elect the successor general partner will be submitted to the NRLP
unitholders for a vote. In addition, the unitholders will vote upon amendments
to NRLP's partnership agreement which relate to the proposed compensation of
the successor general partner and other related matters.
The Amended and Restated Implementation Agreement provides that SAMLP, and its
affiliates owning units in NRLP, shall not vote to remove the successor general
partner, except for removal with cause, for a period of 36 months from the date
the successor general partner takes office.
Upon approval by NRLP's unitholders, SAMLP shall resign as general partner of
NRLP and NOLP and the successor general partner shall take
9
10
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. SYNTEK ASSET MANAGEMENT, L.P. (Continued)
office. If the required approvals are obtained, it is anticipated that the
successor general partner may be elected and take office during the fourth
quarter of 1996.
Upon the election and taking office of the successor general partner, the class
action settlement and the NRLP oversight committee shall be terminated. If the
successor general partner nominee is not elected, the existing settlement shall
remain in full force and effect and all of the provisions of the Amended and
Restated Implementation Agreement shall be voided, including the compromise
settlement referred to above.
NOTE 3. NOTES AND INTEREST RECEIVABLE
In February 1996, the Company refinanced the $7.8 million of debt
collateralized by a mortgage note receivable with a balance of $18.4 million at
June 30, 1996, which is secured by the Las Vegas Shopping Center in Las Vegas,
Nevada, for $12.0 million. The Company received net refinancing proceeds of
$2.3 million after the payoff of the existing debt, payment of closing costs
associated with the refinancing and making a $1.5 million paydown on the term
loan secured by land in Las Colinas, in exchange for that lender's release of
its participation interest in the note receivable. The new loan bears interest
at 15% per annum, requires monthly principal and interest payments of $152,000
and matures February 6, 1998. The Company paid Basic Capital Management, Inc.
("BCM"), the Company's advisor, a mortgage brokerage and equity refinancing fee
of $120,000 based upon the $12.0 million refinancing.
In August 1990, the Company foreclosed on its fourth lien note receivable
secured by the Continental Hotel and Casino in Las Vegas, Nevada. The Company
acquired the hotel and casino property at foreclosure subject to first and
second lien mortgages totaling $10.0 million and a disputed third lien
mortgage. In June 1992, the Company sold the hotel and casino to the third
lien holder accepting as partial payment a $22.0 million wraparound mortgage
note receivable. The Company's wraparound mortgage note receivable had a
principal balance of $22.7 million at June 30, 1996.
In April 1996, the underlying liens relating to this wraparound mortgage note
receivable were refinanced for $16.8 million. The Company received net cash of
$11.2 million after the payoff of the two underlying liens then totaling $2.9
million, the payment of various closing costs associated with the refinancing
and making a $1.4 million paydown on the term loan secured by land in Las
Colinas, Texas, in exchange for that lender's release of its participation
interest in the wraparound note receivable. Such paydown was credited against
the term loan payments that would have otherwise been due in May and November
1996. The new loan bears interest at 16.5% per annum, requires monthly
interest only payments at a rate of 12.5% with the remaining 4% being deferred
and added to principal. The loan matures April 16, 1998. The Company paid BCM
a mortgage brokerage and equity refinancing fee of $168,000 based upon the
$16.8 million refinancing.
10
11
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued)
At June 30, 1996, the Company held a mortgage note receivable secured by a
third lien on a commercial property in South Carolina and personal guaranties
of several individuals. The borrower had failed to make the required payments
of principal and interest since December 1, 1994. The Company accelerated the
note and instituted foreclosure proceedings, as well as actions against the
guarantors of the note. Effective September 1, 1995, the note was extended to
September 1, 1996, requiring a $68,000 principal reduction payment with the
monthly interest, quarterly principal payments and all other terms remaining
the same. The Company received $43,000 of the required principal reduction
payment in 1995 and received the remaining $25,000 in 1996 as well as the
required first and second quarterly principal reduction payments totaling
$50,000. The principal balance of the note was $204,000 at June 30, 1996 and
the note is now performing in accordance with its terms.
In May 1996, the Company funded a $100,000 second lien mortgage secured by a
single family residence in Oklahoma City, Oklahoma. The mortgage note
receivable bears interest at 10% per annum with the principal and accrued but
unpaid interest being payable in a single installment on demand. The mortgage
note receivable matures June 1, 1998.
NOTE 4. REAL ESTATE
In March 1996, the Company sold 2.3 acres of the 74.9 acre Las Colinas land
parcel for $961,000 in cash. In accordance with the provisions of the term
loan secured by such parcel, the Company applied the net proceeds of the sale,
$891,000, to pay down the term loan, $400,000 being applied to pay off the
remaining balance owing on the $3.0 million principal payment due March 31,
1996, with the remaining $491,000 being applied against the principal payment
of $1.5 million otherwise due in May 1996. The Company recognized a gain of
$538,000 on the sale.
In October 1995, the Company purchased an additional 92.6 acre tract of
partially developed land in Las Colinas, Texas. In February 1996, the Company
entered into a contract to sell 72.5 acres for $12.9 million in cash. The
contract calls for the sale to close in two phases. The first phase was
scheduled to close on or before May 1996 but was extended to July 1996, and the
second phase is to close on or before December 1996. See NOTE 11. "SUBSEQUENT
EVENTS."
In May 1996, the Company sold an additional 2.3 acres of the 74.9 acre Las
Colinas land parcel for $941,000 in cash. The Company applied the net proceeds
of the sale of $864,000 to paydown the term loan secured by such parcel in
accordance with provisions of the loan. The net proceeds were applied toward
the $3.0 million principal payment otherwise due in November 1996. The Company
recognized a gain of $538,000 on the sale. At June 30, 1996, 63.4 acres
remained to be sold.
Also in May 1996, the Company purchased a 2,271 square foot single family
residence in Dallas, Texas for $266,000 in cash.
11
12
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
In June 1996, the Company purchased 442 acres of partially developed land in
Denver, Colorado for $8.5 million. In connection with the acquisition, the
Company obtained purchase money financing for $7.5 million and issued 15,000
shares of the Company's Series C 10% cumulative preferred stock with an
aggregate liquidation value of $1.5 million. See NOTE 9. "PREFERRED STOCK."
The excess financing proceeds of $500,000 were applied to the various closing
costs associated with the acquisition in addition to $272,000 of such costs
which the Company paid in cash. The new loan bears interest at 15% per annum,
requires monthly interest only payments at a rate of 12% with the remaining 3%
being deferred and added to the principal of the loan. The principal balance,
accrued and unpaid interest and a $600,000 "maturity fee" is due at maturity on
June 1, 1998. The Company paid a real estate brokerage commission of $255,000
to Carmel Realty, Inc., an affiliate of Basic Capital Management, Inc. ("BCM"),
the Company's advisor, based on the $8.5 million purchase price.
Also in June 1996, the Company sold for $120,000 in cash a tract of land in
Midland, Michigan that was leased under a long-term land lease. The Company
recognized a gain of $44,000 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, 1995, 176 of the residential lots had been sold. During 1996, 8 additional
lots have been sold for an aggregate gain of $10,000. At June 30, 1996, 14
lots remained to be sold.
NOTE 5. INVESTMENT IN REAL ESTATE ENTITIES
The Company's investment in real estate entities at June 30, 1996, includes (i)
equity securities of three publicly traded real estate investment trusts
(collectively the "REITs"), Continental Mortgage and Equity Trust ("CMET"),
Income Opportunity Realty Investors, Inc., formerly Income Opportunity Realty
Trust (collectively "IORI") and Transcontinental Realty Investors, Inc.
("TCI"), (ii) units of limited partner interest of NRLP, (iii) a general
partnership interest in NRLP and NOLP, the operating partnership of NRLP,
through the Company's 76.8% limited partner interest in SAMLP and (iv)
interests in real estate joint venture partnerships. BCM, the Company's
advisor, serves as advisor to the REITs, and performs certain administrative
and management functions for NRLP and NOLP on behalf of SAMLP.
The Company accounts for its investment in the REITs, NRLP and the joint
venture partnerships under the equity method. The Company continues to account
for its investment in NRLP under the equity method due to the pending
resignation of SAMLP as general partner of NRLP. See NOTE 2. "SYNTEK ASSET
MANAGEMENT, L.P." Substantially all of the Company's equity securities of the
REITs and NRLP are pledged as collateral for borrowings. See NOTE 7. "NOTES
AND INTEREST PAYABLE."
12
13
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN REAL ESTATE ENTITIES (Continued)
The Company's investment in real estate entities, accounted for using the
equity method, at June 30, 1996 was as follows:
Equivalent
Percentage Carrying Investee
of the Company's Value of Book Value Market Value
Ownership at Investment at at of Investment at
Investee June 30, 1996 June 30, 1996 June 30, 1996 June 30, 1996
- -------- ------------- ------------- ------------- -------------
NRLP 52.2% $ 10,838 $ * $ 36,004
CMET 38.9 13,971 30,503 16,301
IORI 27.5 2,706 6,272 4,305
TCI 29.1 8,818 25,214 11,823
-------------- -------------
36,333 $ 68,433
=============
General partner interest in
NRLP and NOLP 7,130
Other equity investees 10,369
--------------
$ 53,832
==============
___________________
* At June 30, 1996, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity at December 31, 1995, was
$161.5 million. Revaluation equity is defined as the difference
between the appraised value of the partnership's real estate, adjusted to
reflect the partnership's estimate of disposition costs, and the amount of
the mortgage notes payable and accrued interest encumbering such property
as reported in NRLP's Annual Report on Form 10-K for the year ended
December 31, 1995.
The difference between the carrying value of the Company's investment and the
equivalent investee book value is being amortized over the life of the
properties held by each investee.
The Company's management continues to believe that the market value of each of
the REITs and NRLP undervalues their assets and the Company may, therefore,
continue to increase its ownership in these entities in 1996.
Set forth below is summarized combined results of operations for the real
estate entities the Company accounts for using the equity method for the six
months ended June 30, 1996:
Revenues.................................................... $ 105,153
Equity in (loss) of Partnerships............................ (297)
Property operating expenses................................. (68,710)
Depreciation................................................ (11,959)
Interest expense............................................ (31,497)
Provision for losses........................................ (1,579)
Gain on sale of real estate................................. 7,819
Extraordinary gain.......................................... 711
-------------
Net (loss).................................................. $ (359)
=============
13
14
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN REAL ESTATE ENTITIES (Continued)
The Company's cash flow from the REITs and NRLP is dependent on the ability of
each of the entities to make distributions. In the first quarter of 1993, CMET
and IORI resumed regular quarterly distributions. NRLP resumed distributions in
the fourth quarter of 1993 and TCI resumed distributions in the fourth quarter
of 1995. In the first six months of 1996, the Company received aggregate
distributions of $6.0 million from the REITs and NRLP.
In the first six months of 1996, the Company purchased a total of $660,000 of
equity securities of the REITs and NRLP.
IORI was scheduled to begin liquidation of its assets prior to October 24,
1996. However, on March 15, 1996, IORI's stockholders approved a proposal to
convert IORI from a finite life business trust to a perpetual life corporation.
In April 1996, the Company purchased a 28% general partner interest in Campbell
Center Associates, Ltd. which in turn has a 56.25% interest in Campbell Centre
I, which owns a 413,175 square foot office building in Dallas, Texas. The
purchase price of the general partner interest was $550,000 in cash and a
$500,000 note, which bears interest at 8% per annum, requires monthly interest
only payments commencing in April 1997 and matures April 2000.
In January 1992, the Company entered into a partnership agreement with an
entity affiliated with the owner, at the time, of in excess of 14% of the
Company's outstanding shares of Common Stock, to acquire 287 developed
residential lots adjacent to the Company's other residential lots in Fort
Worth, Texas. The partnership agreement designates the Company as managing
general partner. The partnership agreement also provides each of the partners
with a guaranteed 10% return on their respective investments. Through December
31, 1995, 145 residential lots had been sold. In the first six months of 1996
an additional 38 lots were sold. At June 30, 1996, 117 lots remained to be
sold. Through June 30, 1996, each partner had received $117,000 in return of
capital distributions and $146,000 in profit distributions from the
partnership.
NOTE 6. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO
In the first quarter of 1994, the Company began purchasing equity securities of
entities other than those of the REITs and NRLP to diversify and increase the
liquidity of its margin accounts. In the first six months of 1996, the Company
purchased $18.4 million and sold $17.1 million of such securities. These
equity securities are considered a trading portfolio and are carried at market
value. At June 30, 1996, the Company recognized an unrealized increase in the
market value of its trading portfolio securities of $663,000. Also in the
first six months of 1996, the Company realized a net loss of $660,000 from the
sale of trading portfolio securities and received $45,000 in
14
15
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO (Continued)
dividends. Unrealized and realized gains and losses on trading portfolio
securities are included in other income in the accompanying Consolidated
Statements of Operations.
NOTE 7. NOTES AND INTEREST PAYABLE
In April 1996, the Company refinanced the $5.1 million first and second lien
debt related to the Denver Merchandise Mart in Denver, Colorado for $15.0
million. The new loan is secured by a first lien mortgage against the Denver
Merchandise Mart and a pledge of 632,000 newly issued shares of the Company's
common stock. See NOTE 8. "COMMON STOCK." The Company received net
refinancing proceeds of $4.8 million after the payoff of the first and second
lien debt totaling $5.1 million, a $3.0 million holdback pending the lender's
receipt of the collateral shares, which was funded to the Company in May 1996,
purchasing the ground lease on Denver Merchandise Mart for $678,000 and payment
of various closing costs associated with the refinancing. The new loan bears
interest at the prime rate plus 2.25%, currently 10.5% per annum, requires
monthly principal and interest payments of $142,000 and matures October 31,
1997. The Company paid BCM a mortgage brokerage and equity refinancing fee of
$150,000 based upon the $15.0 million refinancing.
The Company has margin arrangements with various brokerage firms which provide
for borrowing of up to 50% of the market value of the Company's marketable
equity securities. The borrowings under such margin arrangements are secured
by equity securities of the REITs, NRLP and the Company's trading portfolio and
bear interest rates ranging from 7.0% to 9.0%. Margin borrowings totaled $31.5
million at June 30, 1996.
NOTE 8. COMMON STOCK
At June 30, 1996 and December 31, 1995, there were authorized 16,667,000 shares
of common stock, par value $.01 per share, of which 6,740,328 and 5,858,328
shares were outstanding at the respective dates. The increase in common shares
outstanding is described below.
In April 1996, the Company issued 250,000 shares of common stock to ND
Investments, Inc., a wholly-owned subsidiary of the Company, which pledged the
shares as additional collateral for the loan secured by the 92.6 acres of
partially developed land in Las Colinas, Texas. See NOTE 4. "REAL ESTATE."
Also in April 1996, the Company issued 632,000 shares of common stock to Garden
Capital Merchandise Mart, Inc., a wholly-owned subsidiary of the Company, which
pledged the shares as additional collateral for the loan secured by the Denver
Merchandise Mart, in Denver, Colorado. See NOTE 7. "NOTES AND INTEREST
PAYABLE."
On June 12, 1996, the Company's Board of Directors announced the resumption of
the payment of dividends on the Company's Common Stock with the declaration of
a second
15
16
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 8. COMMON STOCK (Continued)
quarter dividend of $.10 per share. The distribution totaling $674,000 was
paid on July 8, 1996 to stockholders of record on June 21, 1996. The
Company last paid dividends on May 15, 1990. Future distributions to
stockholders will be dependent upon the Company's realized income, financial
condition, capital requirements and other factors deemed relevant by the
Company's Board of Directors.
Also on June 12, 1996, the Company announced the redemption of the outstanding
share purchase rights for $.01 per right. As of the date of redemption, each
share of Common Stock represented 1.5 share rights. The redemption proceeds
totaling $101,000 were also distributed on July 8, 1996 to stockholders of
record on June 12, 1996. These rights were initially distributed to
stockholders on April 23, 1990.
NOTE 9. PREFERRED STOCK
In April 1996, the Company filed Articles of Amendment to its Articles of
Incorporation creating and designating a Series B 10% cumulative Preferred
Stock, par value $2.00 per share, out of the 20,000,000 shares authorized of a
special class of stock. The Series B Preferred Stock consists of a maximum of
4,000 shares, all of which were sold April 4, 1996 for $400,000 in cash in a
private transaction. Dividends are payable at a 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 Board of Directors of
the Company.
In June 1996, the Company filed Articles of Amendment to its Articles of
Incorporation creating and designating a Series C 10% cumulative Preferred
Stock, par value $2.00 per share, out of the 20,000,000 shares authorized of a
special class of stock. The Series C Preferred Stock consists of a maximum of
16,500 shares, of which 15,000 were issued on June 4, 1996 in connection with
the purchase of 442 acres of partially developed land in Denver, Colorado. See
NOTE 4. "REAL ESTATE." Dividends are payable at a 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 Board of Directors of
the Company. The dividends for the first four quarters are to be paid with
additional shares of Series C Preferred Stock. On June 30, 1996, the Company
issued 111 shares of Series C Preferred Stock to stockholders of record on June
15, 1996.
NOTE 10. INCOME TAXES
Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated
losses. The Company had no taxable income or provision for income taxes in the
six months ended June 30, 1996.
16
17
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 11. OTHER EQUITY INVESTMENTS
In April 1996, a newly formed subsidiary of the Company purchased for $10.7
million in cash 80% of the common stock of an entity 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 is in
negotiations with underwriters to take such subsidiary public. The Company
believes that such option will be exercised and that the subsidiary will become
publicly held within a year. Accordingly, the Company believes its control of
such subsidiary is temporary and therefore accounts for such subsidiary under
the equity method.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Litigation. The Company is involved in various lawsuits arising in the
ordinary course of business. In the opinion of the Company's management, the
outcome of these lawsuits will not have a material impact on the Company's
financial condition, results of operations or liquidity.
NOTE 13. SUBSEQUENT EVENTS
In July 1996, a newly formed limited partnership, of which the Company is 1%
general partner, acquired 580 acres of land located in Collin County, Texas for
$5.7 million in cash. The Company paid $100,000 in cash with the remaining
$5.6 million being paid by the limited partner. The partnership agreement
designates the Company as the managing general partner. The Partnership
agreement also provides that the limited partner receive a 12% preferred
cumulative return on its investment before any sharing of partnership profits.
Also in July 1996, the Company sold 32.3 acres of the 92.6 acre tract of
partially developed land in Las Colinas, Texas for $4.9 million in cash. In
accordance with the provisions of the term loan secured by such parcel, the
Company applied the net proceeds of the sale, $4.7 million, to paydown the term
loan in exchange for that lenders' partial release of its collateral interest
in such land. See NOTE 4. "REAL ESTATE." The Company will record a gain of
approximately $2.0 million on such sale.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
American Realty Trust, Inc. (the "Company") was organized in 1961 to provide
investors with a professionally managed, diversified portfolio of equity real
estate and mortgage loan investments selected to provides opportunities for
capital appreciation as well as current income.
17
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources
General. Cash and cash equivalents at June 30, 1996 aggregated $173,000,
compared with $1.1 million at December 31, 1995. Although the Company
anticipates that during the remainder of 1996 it will generate excess cash flow
from operations, as discussed below, such excess cash is not expected to be
sufficient to discharge all of the Company's debt obligations as they mature.
The Company will therefore continue to rely on externally generated funds,
including borrowings against its investments in various real estate entities,
mortgage notes receivable, the sale or refinancing of properties and, to the
extent available or necessary, borrowings from its advisor to meet its debt
service obligations, pay taxes, interest and other non-property related
expenses.
At December 31, 1995, notes payable totaling $26.4 million had scheduled
maturities during 1996. Through July 31, 1996 the Company has paid a total of
$10.4 million of such debt and refinanced an additional $9.6 million. The
Company intends to either pay off, extend the maturity dates or obtain
alternate financing for the remaining $6.4 million debt obligations that mature
during the remainder of 1996. There can be no assurance, however, that these
efforts to obtain alternative financing or debt extensions will be successful.
The Company expects an increase in cash flow from property operations during
the remainder of 1996. Such increase is expected to be derived from operations
of the Denver Merchandise Mart, the Inn at the Mart and the Oak Tree Village
Shopping Center. The Company also expects continued lot sales at its Texas
residential subdivisions and substantial sales of its Las Colinas, Texas land
and its Denver, Colorado land to generate additional cash flow. See NOTE 4.
"REAL ESTATE."
In March 1996, the Company sold 2.3 acres of the 74.9 acre parcel in Las
Colinas, Texas for $961,000 in cash. In accordance with the provisions of the
term loan, the Company applied the $891,000 net proceeds of the sale to pay
down the term loan.
In April 1996, a subsidiary of the Company purchased for $10.7 million in cash
80% of the common stock of an entity that had acquired 26 operating pizza
parlors in various communities in California's San Joaquin Valley. See NOTE
12. "OTHER INVESTMENTS."
Also in April 1996, the Company purchased a 28% general partner interest in
Campbell Center Associates, Ltd. for $550,000 in cash and a $500,000 four-year
note.
In May 1996, the Company sold an additional 2.3 acres of the 74.9 acre parcel
in Las Colinas, Texas for $941,000 in cash. In accordance with the provisions
of the term loan, the Company applied the $864,000 net proceeds of the sale to
paydown the term loan.
18
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Also in May 1996, the Company purchased a 2,271 square foot single family
residence in Dallas, Texas for $266,000 in cash.
In June 1996, the Company purchased 442 acres of partially developed land in
Denver, Colorado for $8.5 million. In connection with the acquisition, the
Company obtained purchase money financing for $7.5 million and issued 15,000
shares of the Company's Series C 10% cumulative preferred stock with an
aggregate liquidation value of $1.5 million. The excess financing proceeds of
$500,000 was applied to the various closing costs associated with the
acquisition in addition to $272,000 of such costs paid by the Company.
Also in June 1996, the Company sold a tract of land that was leased under a
long-term land lease for $120,000 in cash.
In July 1996, a newly formed limited partnership of which the Company is the
general partner acquired 580 acres of land in Collin County, Texas for $5.7
million in cash. The Company paid $100,000 in cash with the remaining $5.6
million being paid by the limited partner.
In October 1995, the Company purchased 92.6 acres of partially developed land
in Las Colinas, Texas. In February 1996, the Company entered into a contract
to sale 72.5 of the 92.6 acres for $12.9 million in cash. In July 1996, the
Company closed the first phase of the contract selling 32.3 acres for $4.9
million in cash. In accordance with the provisions of the term loan, the
Company applied the $4.7 million net proceeds to paydown the term loan in
exchange for that lender's partial release of its collateral interest in such
land.
On June 12, 1996, the Company's Board of Directors announced the resumption of
dividend payments at the initial rate of $.10 per share. The distribution,
totaling 674,000, was payable on July 8, 1996 to stockholders of record on June
21, 1996.
Also on June 12, 1996, the Company announced the redemption of the share
purchase rights for $.01 per right. The redemption price, totaling $101,000,
was also paid on July 8, 1996 to stockholders of record on June 21, 1996.
The Company expects that funds from existing cash resources, collections on
mortgage notes receivable, sales or refinancing of real estate and/or mortgage
notes receivable, and borrowings against its investments in marketable equity
securities, mortgage notes receivable and to the extent available, borrowings
from the Company's advisor, 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 may
make investments in real estate, additional investments in real estate entities
and marketable equity securities and fund or acquire mortgage notes.
19
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Notes Receivable. The Company has received $449,000 in principal payments on
its notes receivable in the six months ended June 30, 1996.
Loans Payable. In February 1996, the Company refinanced $7.8 million of debt
collateralized by a mortgage note receivable with a balance of $18.4 million
which is secured by the Las Vegas Shopping Center in Las Vegas, Nevada, for
$12.0 million. The Company received net cash of $2.3 million after the payoff
of the existing debt, payment of closing costs associated with the refinancing
and making a $1.5 million paydown on the term loan secured by land in Las
Colinas, Texas in exchange for that lender's release of its participation
interest in the note receivable. See NOTE 3. "NOTES AND INTEREST RECEIVABLE."
In April 1996, the Company refinanced the first and second lien mortgage debt
on its $22.0 million wraparound mortgage note receivable secured by the
Continental Hotel and Casino in Las Vegas, Nevada for $16.8 million. See NOTE
3. NOTES AND INTEREST RECEIVABLE. The Company received net cash of $11.2
million after the payoff of the two underlying liens totaling $2.9 million,
various closing costs associated with the refinancing and making a $1.4 million
paydown on the term loan secured by land in Las Colinas, Texas in exchange for
that lender's release of its participation interest in the note receivable.
Also in April 1996, the Company refinanced $5.1 million of first and second
lien debt secured by the Denver Merchandise Mart for $15.0 million. The
Company received net refinancing proceeds of $4.8 million after the payoff of
the first and second lien debt, a $3.0 million holdback by the lender pending
its receipt of 632,000 newly issued shares of the Company's common stock which
was funded in May 1996, purchasing the ground lease on Denver Merchandise Mart
for $678,000 and payment of various closing costs associated with the
refinancing.
The Company has margin arrangements with various brokerage firms which provide
for borrowing up to 50% of the market value of the Company's marketable equity
securities. The borrowing under such margin arrangements are secured by equity
securities of the REITs, NRLP and the Company's trading portfolio and bear
interest rates ranging from 7.0% to 9.0%. Margin borrowing totaled $31.5
million at June 30, 1996.
Equity Investments. During the fourth quarter of 1988, the Company began
purchasing shares of various real estate investment trusts having the same
advisor as the Company, and units of limited partner interest in National
Realty, L.P. ("NRLP"). It is anticipated that additional equity securities of
NRLP and the REITs, Continental Mortgage and Equity Trust ("CMET"), Income
Opportunity Realty Investors, Inc., formerly Income Opportunity Realty Trust
(collectively "IORI") and Transcontinental Realty Investors, Inc. ("TCI"), will
be acquired in the future through open-market and negotiated transactions to
the extent the Company's liquidity permits.
20
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Equity securities of the REITs and NRLP held by the Company may be deemed to be
"restricted securities" under Rule 144 of the Securities Act of 1933
("Securities Act"). Accordingly, the Company may be unable to sell such equity
securities other than in a registered public offering or pursuant to an
exemption under the Securities Act for a period of two years after they are
acquired. Such restrictions may reduce the Company's ability to realize the
full fair market value of such investments if the Company attempted to dispose
of such securities in a short period of time.
The Company's cash flow from these investments is dependent on the ability of
each of the entities to make distributions. In the first quarter of 1993, CMET
and IORI resumed quarterly distributions. NRLP resumed distributions in the
fourth quarter of 1993 and TCI resumed distributions in the fourth quarter of
1995. The Company received distributions totaling $6.0 million in the first
six months of 1996 from the REITs and NRLP.
On a quarterly basis, the Company's management reviews the carrying value of
the Company's mortgage notes receivable, properties held for sale and
periodically, but no less than annually, its properties held for investment.
Generally accepted accounting principles require that the carrying value of
such assets cannot exceed the lower of their respective carrying amounts or
estimated net realizable value. In the initial instance when the estimated net
realizable value of a mortgage note receivable or a property held for sale is
less than the carrying amount at the time of evaluation, a reserve is
established and a corresponding provision for loss is recorded by a charge
against earnings. A subsequent revision to estimated net realizable value
either increases or decreases such reserve with a corresponding charge against
or credit to earnings. In the case of properties held for investment the
carrying value of the property is written down and a provision for loss is
recorded. The estimate of net realizable value of the Company's mortgage note
receivable is based on management's review and evaluation of the collateral
property securing the mortgage note. The property review generally includes
selective property inspections, a review of the property's current rents
compared to market rents, a review of the property's expenses, a review of
maintenance requirements, discussions with the manager of the property and a
review of the surrounding area. See "Recent Accounting Pronouncement," below.
Commitments and Contingencies
In January 1995, NRLP, Syntek Asset Management, L.P. ("SAMLP") and the NRLP
oversight committee executed an Implementation Agreement which provides for the
nomination of a successor general partner to succeed SAMLP as general partner
of NRLP and National Operating, L.P. ("NOLP"), the operating partnership of
NRLP and for the resolution of all related matters under the 1990 settlement of
a class action lawsuit. On February 20, 1996, the parties to the
Implementation Agreement executed an Amended and Restated Implementation
Agreement.
21
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Commitments and Contingencies (Continued)
Provided that the successor general partner is elected pursuant to the terms of
the Amended and Restated Implementation Agreement, SAMLP shall receive
$12,471,500 from the Partnership. This amount represents a compromise
settlement of the net amounts owed by the Partnership to SAMLP upon SAMLP's
withdrawal as general partner and any amounts which SAMLP and its affiliates
may owe to the Partnership. This amount shall be paid to SAMLP pursuant to a
promissory note in accordance with the terms set forth in the Amended and
Restated Implementation Agreement.
The Amended and Restated Implementation Agreement has been submitted to the
Judge appointed to supervise the class action settlement (the "Supervising
Judge") for tentative approval and approval of the notice to be sent to the
original class members. Upon final approval by the Supervising Judge, the
proposal to elect the successor general partner will be submitted to the NRLP's
unitholders for a vote. In addition, the unitholders will vote upon amendments
to the NRLP's Partnership Agreement which relate to the proposed compensation
of the successor general partner and other related matters.
Upon approval by NRLP's unitholders, SAMLP shall withdraw as General Partner
and the successor general partner shall take office. If the required approvals
are obtained, it is anticipated that the successor general partner will be
elected and take office during the fourth quarter of 1996.
The Amended and Restated Implementation Agreement provides that SAMLP, and its
affiliates owning units in NRLP shall not vote to remove the successor general
partner, except for removal with cause, for a period of 36 months from the date
the successor general partner takes office.
Upon election and taking office of the successor general partner, the class
action settlement and the NRLP oversight committee shall be terminated. If the
successor general partner is not elected, the existing class action settlement
shall remain in full force and effect and all of the provisions of the Amended
and Restated Implementation Agreement shall be voided, including the compromise
settlement of amounts owed by SAMLP and NRLP to each other. See NOTE 2.
"SYNTEK ASSET MANAGEMENT, L.P."
Results of Operations
For the three months ended June 30, 1996, the Company reported a net loss of
$2.1 million, compared to a net loss of $3.4 million for the three months ended
June 30, 1995. For the six months ended June 30, 1996, the Company had a net
loss of $2.4 million compared with a net loss of $4.3 million for the six
months ended June 30, 1995. The primary factors contributing to the Company's
net loss are discussed in the following paragraphs.
Rents increased from $3.6 million and $9.1 million for the three and six months
ended June 30, 1995 to $4.1 million and $9.4 million for the
22
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
three and six months ended June 30, 1996. The increases are principally due to
the Company obtaining the Oak Tree Village Shopping Center in November 1995
combined with increases in rents from Denver Merchandise Mart and rents from a
ground lease on land in Atlanta, Georgia.
Interest income from mortgage notes receivable decreased from $1.3 million and
$2.3 million for the three and six months ended June 30, 1995 to $1.1 million
and $2.3 million for the three and six months ended June 30, 1996. The
decrease is due to the payoff of a mortgage note receivable in February 1995.
Interest income for the remainder of 1996 is expected, on a quarterly basis, to
approximate that of the second quarter.
Other income decreased from $611,000 for the three months ended June 30, 1995
to $127,000 for the three months ended June 30, 1996 and improved from a loss
of $39,000 for the six months ended June 30, 1995 to income of $469,000 for the
six months ended June 30, 1996. The decrease in other income for the three
months ended June 30, 1996 is primarily due to a $312,000 decrease in dividend
income from the Company's trading portfolio securities in addition to a
$334,000 increase in losses from the sale of the Company's trading portfolio
securities. This is offset by an increase of $274,000 recognized in preferred
returns on a 50% partnership interest. The six month improvement is due to
recognizing $663,000 unrealized gains on the Company's trading portfolio
securities in 1996 compared to an $899,000 unrealized loss in 1995. This is
offset by a $390,000 decrease in dividend income and an increase of $744,000 in
losses from the sale of the Company's trading portfolio securities.
Property operating expenses increased from $3.3 million and $7.2 million for
the three and six months ended June 30, 1995 to $3.9 million and $7.6 million
for the three and six months ended June 30, 1996. Of this increase, $385,000
and $561,000 for the three and six months ended June 30, 1996 is due to
obtaining the Oaktree Shopping Center subsequent to June 30, 1995 and to the
acquisition of Las Colinas land in May 1995. In addition, for the three and
six months ended June 30, 1996 real estate taxes for the Denver Merchandise
Mart and Inn at the Mart increased $86,000 and $149,000, respectively.
Interest expense increased from $2.0 million and $3.8 million for the three and
six months ended June 30, 1995 to $3.3 million and $6.4 million for the three
and six months ended June 30, 1996. The increases are primarily attributable
to debt refinancings and the debt incurred related to the acquisition of one
parcel of land in May 1995 and two parcels of land and one commercial property
subsequent to June 30, 1995. The increase for the six months ended June 30,
1996 is offset by a $161,000 decrease in interest expense due to the Boulevard
Villa sale in February 1995. Interest expense for the remainder of 1996 is
expected, on a quarterly basis, to approximate that of the second quarter.
23
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Advisory and mortgage servicing fees increased from $239,000 and $543,000 for
the three and six months ended June 30, 1995 to $381,000 and $701,000 for the
three and six months ended June 30, 1996. The increases are primarily
attributable to the Company's increase in gross assets, the basis for such fee,
due to the acquisitions of one commercial property and three parcels of land in
1995 and 1996.
General and administrative expenses of $1.2 million for the six months ended
June 30, 1996 approximated those in 1995. For the three months ended June 30,
1996, general and administrative expenses decreased from $667,000 in 1995 to
$595,000 in 1996. The decrease is primarily attributable to consulting fees
incurred in 1995 in connection with the Company's notes receivables and hotels.
Depreciation and amortization expense of $453,000 and $890,000 for the three
and six months ended June 30, 1996 approximate the $402,000 and $842,000 for
the three and six months ended June 30, 1995.
Equity in losses of investees decreased from a loss of $1.7 million and $3.0
million for the three and six months ended June 30, 1995 to a loss of $1.5
million and $2.4 million for the three and six months ended June 30, 1996. The
decrease in equity losses is attributable to a decrease in the combined
operating losses of the REITs and NRLP from a combined operating loss of $5.6
million and $9.6 million for the three and six months ended June 30, 1995 to a
combined operating loss of $5.4 million and $8.9 million for the three and six
months ended June 30, 1996. Such improvement is generally attributable to
improved occupancy and increased rental rates.
For the three and six months ended June 30, 1995, the Company recognized
$671,000 of minority interest expense. The expense is attributable to the
termination of a joint venture partnership in which the Company held a 60%
interest in June 1995.
Gains on sale of real estate were $2.3 million and $4.5 million for the three
and six months ended June 30, 1996 compared to $24,000 and $948,000 for the
three and six months ended June 30, 1995. For the three months ended June 30,
1996 the Company recognized a $538,000 gain on the sale of 2.3 acres of Las
Colinas land, a $44,000 gain on the sale of a parcel of land in Midland,
Michigan, a $10,000 gain on the sale of eight residential lots and a $1.8
million gain representing the Company's equity share of the REITs gain on sale
of real estate. In the three months ended June 30, 1995, the Company
recognized a $24,000 gain on the sale of the final four lots in a joint
venture. The first six months of 1996 includes an additional $538,000 gain on
the sale of another 2.3 acres of land in Las Colinas, Texas and a $3.3 million
gain representing the Company's equity share of the REITs gain on the sale of
real estate. The first six months of 1995 includes an additional $924,000 gain
on the sale of Boulevard Villas in February.
24
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
The Company reported extraordinary gains of $247,000 and $260,000 for the three
and six months ended June 30, 1996 compared to $12,000 and $327,000 for the
three and six months ended June 30, 1995. The extraordinary gain for the three
months ended June 30, 1996 represents the Company's share of an equity
investee's extraordinary gain related to an insurance settlement from a fire
loss. The first six months of 1996 includes an additional extraordinary gain
of $13,000 which represents the Company's share of an equity investee's
extraordinary gain from the early payoff of debt. For the three and six months
ended June 30, 1995, the extraordinary gains also represent the Company's share
of an equity investee's extraordinary gain from the early payoff of debt.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, the Company may be potentially liable for removal or remediation
costs, as well as certain other potential costs relating to hazardous or toxic
substances (including governmental fines and injuries to persons and property)
where property-level managers have arranged for the removal, disposal or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the
air, and third parties may seek recovery from the Company for personal injury
associated with such materials.
The Company's management is not aware of any environmental liability relating
to the above matters that would have a material adverse effect on the Company's
business, assets or results of operations.
Inflation
The effects of inflation on the Company's operations are not quantifiable.
Revenues from property operations fluctuate proportionately with inflationary
increases and decreases in housing costs. Fluctuations in the rate of
inflation also affect the sales values of properties and, correspondingly, the
ultimate gains to be realized by the Company from property sales.
Recent Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of".
The statement requires that long-lived assets be considered impaired "...if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset." If impairment exists,
an impairment loss shall be recognized, by a charge against earnings, equal to
"...the amount by which the carrying amount of the asset exceeds the fair value
of the asset." If
25
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Recent Accounting Pronouncement (Continued)
impairment of a long-lived asset is recognized, the carrying amount of the
asset shall be reduced by the amount of the impairment, shall be accounted for
as the asset's "new cost" and such new cost shall be depreciated over the
asset's remaining useful life.
SFAS No. 121 further requires that long-lived assets held for sale "...be
reported at the lower of carrying amount or fair value less cost to sell." If
a reduction in a held for sale asset's carrying amount to fair value less cost
to sell is required, a provision for loss shall be recognized by a charge
against earnings. Subsequent revisions, either upward or downward, to a held
for sale asset's fair value less cost to sell shall be recorded as an
adjustment to the asset's carrying amount, but not in excess of the asset's
carrying amount when originally classified or held for sale. A corresponding
charge or credit to earnings is to be recognized. Long-lived assets held for
sale are not to be depreciated. The Company adopted SFAS No. 121 effective
January 1, 1996.
The adoption of SFAS had no effect on the Company's reported net loss for the
six months ended June 30, 1996, as the Company's one depreciable asset
classified as held for sale is fully depreciated.
______________________________
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Effective May 8, 1996, the Company filed Articles of Amendment to its Articles
of Incorporation creating and designating a Series B 10% Cumulative Preferred
Stock, par value $2.00 per share, out of the special class of stock, $2.00 par
value per share, of the Company, which series consists of a maximum of 4,000
shares, all of which were issued April 4, 1996. See NOTE 9. "PREFERRED STOCK"
of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS under ITEM 1. FINANCIAL
STATEMENTS. Pursuant to the terms of the Articles of Amendment creating and
designating such series, so long as any shares of the Series B 10% Cumulative
Preferred Stock remain outstanding, no dividend may be declared or paid and no
other distribution may be made on the Common Stock of the Company or any other
shares junior to the Series B 10% Cumulative Preferred Stock, except in shares
junior to the Series B 10% Cumulative Preferred Stock, unless all accumulated
dividends on the Series B 10% Cumulative Preferred Stock have been paid. Such
provision might be considered to be a limitation or qualification on another
class of securities.
Effective June 5, 1996, the Company filed an Articles of Amendment to its
Articles of Incorporation creating and designating a Series C 10% Cumulative
Preferred Stock, par value $2.00 per share, out of the special class of stock,
$2.00 par value per share, of the Company, which
26
27
ITEM 2. CHANGES IN SECURITIES (Continued)
series consists of a maximum of 16,500 shares, of which 15,000 were issued on
June 4, 1996. See NOTE 9. "PREFERRED STOCK" of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS under ITEM 1. FINANCIAL STATEMENTS. Pursuant to the terms of the
Articles of Amendment creating and designating such series, so long as any
shares of the Series C 10% Cumulative Preferred Stock remain outstanding, no
dividend may be declared or paid and no other distribution may be made on the
Common Stock of the Company or any other shares junior to the Series C 10%
Cumulative Preferred Stock, except in shares junior to the Series C 10%
Cumulative Preferred Stock, unless all accumulated dividends on the Series C
10% Cumulative Preferred Stock have been paid. Such provision might be
considered to be a limitation or qualification on another class of securities.
ITEM 5. OTHER INFORMATION
See NOTE 8. "COMMON STOCK" and NOTE 9. "PREFERRED STOCK" of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS in PART I for information regarding the
issuance of securities and related transactions thereto.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are filed herewith or incorporated
by reference as indicated below.
Exhibit
Number Description
- -------- -------------------------------------------------------------------------------------------------
3.0 Articles of Amendment setting forth the Certificate of Designations, Preferences and Relative
Participating or Optional or Other Special Rights and Qualifications, Limitations or Restrictions
Thereof of Special Stock, filed with the Secretary of State of Georgia on May 8, 1996.
3.1 Articles of Amendment setting forth the Certificate of Designations, Preferences and Relative
Participating or Optional or Other Special Rights and Qualifications, Limitations or Restrictions
Thereof of Special Stock, filed with the Secretary of State of Georgia on June 5, 1996.
27.0 Financial Data Schedule
(b) Reports on Form 8-K as follows:
A Current Report on Form 8-K, dated June 12, 1996, was filed with
respect to Item 5. "Other Events", which reports on the resumption of
the payment of cash dividends, the redemption of share purchase rights
and the resignation of a member of the Company's Board of Directors.
27
28
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN REALTY TRUST, INC.
Date: August , 1996 By: /s/ Karl L. Blaha
------------------------- ----------------------------------
Karl L. Blaha
President
Date: August , 1996 By: /s/ Thomas A. Holland
------------------------- ----------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
28
29
AMERICAN REALTY TRUST, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Quarter ended June 30, 1996
Exhibit Page
Number Description Number
- ------- --------------------------------------------------- ------
3.0 Articles of Amendment setting forth the Certificate 30
of Designations, Preferences and Relative
Participating or Optional or Other Special Rights
And Qualifications, Limitations or Restrictions
Thereof of Special Stock, filed with the Secretary
of State of Georgia on May 8, 1996.
3.1 Articles of Amendment setting forth the Certificate 42
of Designations, Preferences and Relative
Participating or Optional or Other Special Rights
And Qualifications, Limitations or Restrictions
Thereof of Special Stock, filed with the Secretary
of State of Georgia on June 5, 1996.
27.0 Financial Data Schedule 54
29