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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1997
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Commission File Number 1-9948
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AMERICAN REALTY TRUST, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Georgia 54-0697989
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas 75231
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(Address of Principal Executive Offices) (Zip Code)
(214) 692-4700
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(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 13,479,348
- ----------------------------- ---------------------------------
(Class) (Outstanding at October 31, 1997)
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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
September 30, December 31,
1997 1996
------------ ------------
(dollars in thousands)
Assets
Notes and interest receivable
Performing ............................................ $ 4,182 $ 50,784
Nonperforming ......................................... 18,954 1,627
------------ ------------
23,136 52,411
Less - allowance for estimated losses .................... (2,398) (3,926)
------------ ------------
20,738 48,485
Real estate held for sale, net of accumulated
depreciation ($5,098 in 1996) ......................... 149,127 77,688
Real estate held for investment, net of accumulated
depreciation ($5,636 in 1997 and $4,234 in 1996) ...... 84,898 41,347
Plant and equipment, net of accumulated depreciation
($669 in 1997) ........................................ 5,809 --
Marketable equity securities, at market value ............ 7,425 2,186
Cash and cash equivalents ................................ 2,031 1,254
Investments in equity investees .......................... 46,266 55,880
Intangibles, net of accumulated amortization ($580
in 1997) .............................................. 15,309 --
Other assets ............................................. 23,015 8,197
------------ ------------
$ 354,618 $ 235,037
============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS - Continued
September 30, December 31,
1997 1996
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(dollars in thousands)
Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable ($9,293 in 1997
and $8,973 in 1996 to affiliates) ............ $ 213,293 $ 127,863
Margin borrowings ............................... 52,071 40,044
Accounts payable and other liabilities (including
$23,227 in 1997 to affiliate) ................ 31,456 8,433
-------------- --------------
296,820 176,340
Minority interest ............................... 10,742 10,911
Commitments and contingencies
Stockholders' equity
Preferred Stock, $2.00 par value, authorized
20,000,000 shares, issued and outstanding
4,000 shares Series B .................... 8 8
16,681 shares Series C ................... 33 32
400,000 shares Series F .................. 800 --
Common stock, $.01 par value; authorized
16,667,667 shares, issued 13,479,348 shares in
1997 and 1996 ................................ 120 129
Paid-in capital ................................. 72,147 68,601
Accumulated (deficit) ........................... (26,037) (20,978)
Treasury stock at cost, 1,503,427 shares in 1997
and 564,704 shares in 1996 ................... (15) (6)
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47,056 47,786
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$ 354,618 $ 235,037
============== ==============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenues (dollars in thousands, except per share)
Sales ............................................. $ 8,647 $ -- $ 10,828 $ --
Rents ............................................. 7,804 5,339 18,725 14,733
Interest .......................................... 471 1,143 2,769 3,416
Other ............................................. (1,883) 824 (117) 1,293
------------ ------------ ------------ ------------
15,039 7,306 32,205 19,442
Expenses
Cost of sales ..................................... 6,984 -- 8,672 --
Property operations ............................... 5,030 3,600 13,501 11,166
Interest .......................................... 8,351 4,240 20,425 10,656
Advisory and servicing fees
to affiliate ................................... 630 392 1,639 1,093
Incentive compensation to
affiliate ...................................... -- -- 299 --
General and administrative ........................ 2,303 618 4,654 1,855
Depreciation and
amortization ................................... 755 429 1,902 1,319
Minority interest ................................. 243 -- 959 --
------------ ------------ ------------ ------------
24,296 9,279 52,051 26,089
------------ ------------ ------------ ------------
(Loss) from operations ............................... (9,257) (1,973) (19,846) (6,647)
Equity in income (losses) of
investees ......................................... (145) 604 5,106 1,544
Gain on sale of real estate .......................... 3,205 2,018 11,354 3,133
------------ ------------ ------------ ------------
Income (loss) before
extraordinary gain ................................ (6,197) 649 (3,386) (1,970)
Extraordinary gain ................................... -- 121 -- 381
------------ ------------ ------------ ------------
Net income (loss) .................................... (6,197) 770 (3,386) (1,589)
Preferred dividend requirement ....................... (49) (48) (151) (65)
------------ ------------ ------------ ------------
Net income (loss) applicable
to Common shares .................................. $ (6,197) $ 722 $ (3,537) $ (1,654)
============ ============ ============ ============
Earnings per share
Income (loss) before
extraordinary gain ............................. $ (.52) $ .05 $ (.29) $ (.16)
Extraordinary gain ................................ -- .01 -- .03
------------ ------------ ------------ ------------
Net income (loss) applicable
to Common shares ............................... $ (.52) $ .06 $ (.29) $ (.13)
============ ============ ============ ============
Weighted average Common shares
used in computing earnings
per share ......................................... 11,975,921 13,192,148 12,041,252 12,714,894
============ ============ ============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1997
Series B Series C Series F
Preferred Preferred Preferred Common Treasury Paid-in Accumulated Stockholders'
Stock Stock Stock Stock Stock Capital (Deficit) Equity
-------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands, except per share)
Balance, January
1, 1997 ......................... $ 8 $ 32 $ -- $ 129 $ (6) $ 68,601 $(20,978) $ 47,786
Dividends
Common Stock ($.15
per share) ................... -- -- -- -- -- -- (1,520) (1,520)
Series B Preferred
Stock ($7.50 per
share) ....................... -- -- -- -- -- -- (30) (30)
Series C Preferred
Stock ($7.50 per
share) ....................... -- 1 -- -- -- 79 (123) (43)
Series F Preferred
Stock issued .................... -- -- 800 -- -- 3,200 -- 4,000
Sale of Common Stock ............... -- -- -- -- -- 249 -- 249
Treasury stock, at
cost ............................ -- -- -- (9) (9) 18 -- --
Net income ......................... -- -- -- -- -- -- (3,386) (3,386)
-------- -------- -------- -------- -------- -------- -------- --------
Balance, September
30, 1997 ........................ $ 8 $ 33 $ 800 $ 120 $ (15) $ 72,147 $(26,037) $ 47,056
======== ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months
Ended September 30,
--------------------------
1997 1996
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(dollars in thousands)
Cash Flows From Operating Activities
Revenues collected ............................ $ 27,800 $ 14,760
Interest collected ............................ 2,624 3,197
Distributions received from equity investees'
operating cash flow ....................... 1,905 8,626
Payments for property operations and cost of
products sold ............................. (17,697) (11,628)
Interest paid ................................. (12,723) (5,881)
Advisory and servicing fees paid to affiliate . (1,938) (1,093)
Distributions to minority interest holders .... (1,128) --
General and administrative expenses paid ...... (4,765) (2,169)
Other ......................................... (717) 417
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Net cash provided by (used in) operating
activities ............................. (6,639) 6,229
Cash Flows From Investing Activities
Collections on notes receivable ............... 3,062 640
Notes receivable funded ....................... (3,688) (100)
Proceeds from sale of real estate ............. 18,567 6,740
Proceeds from sale of marketable equity
securities ................................ 6,019 22,564
Proceeds from sale of notes receivable ........ 18,342 --
Purchases of marketable equity securities ..... (11,779) (21,271)
Investment in real estate entities ............ (3,523) (14,219)
Acquisition of real estate .................... (67,620) (5,658)
Deposits ...................................... (12,277) (526)
Real estate improvements ...................... (5,505) (1,901)
Fixed asset purchased ......................... (5,809) --
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Net cash (used in) investing activities ... (64,211) (13,731)
Cash Flows From Financing Activities
Proceeds from notes payable ................... 91,141 48,153
Payments on notes payable ..................... (47,150) (29,486)
Deferred borrowing costs ...................... (3,294) (3,019)
Net advances (payments) from/to affiliates .... 23,632 (7,530)
Margin borrowings, net ........................ 8,890 464
Proceeds from issuance of Series B preferred
stock ..................................... -- 400
Dividends on Common Stock ..................... (1,520) (1,437)
Dividends on Preferred Stock .................. (72) --
----------- -----------
Net cash provided by financing activities . 71,627 7,545
Net increase in cash and cash equivalents . 777 43
Cash and cash equivalents, beginning of period ... 1,254 1,054
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Cash and cash equivalents, end of period ......... $ 2,031 $ 1,097
=========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Nine Months
Ended September 30,
--------------------------
1997 1996
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(dollars in thousands)
Reconciliation of net (loss) to net cash provided
by (used in) operating activities
Net (loss) ........................................... $ (3,386) $ (1,589)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities
Extraordinary gain ............................... -- (381)
Depreciation and amortization .................... 1,570 1,319
Amortization of deferred borrowing cost .......... 332 --
Gain on sale of real estate ...................... (11,434) (3,133)
Distributions from equity investees' operating
cash flow ..................................... 1,905 8,626
Equity in (income) of investees .................. (5,106) (1,544)
Unrealized (gain) loss on marketable equity
securities .................................... 470 (598)
(Increase) decrease in interest receivable ....... 3 (93)
(Increase) decrease in other assets .............. 8,553 2,151
Increase in interest payable ..................... 520 844
(Decrease) in accounts payable and
other liabilities ............................. (205) (131)
Other ............................................ 139 758
----------- -----------
Net cash provided by (used in) operating
activities .................................. $ (6,639) $ 6,229
=========== ===========
Schedule of noncash investing and financing
activities
Issuance of 16,681 shares of Series C Preferred
Stock with a liquidation value of $1,667 ............. $ -- $ 31
Stock dividends on Series C Preferred Stock ............. 82 --
Issuance of 400,000 shares of Series F Preferred
Stock with a liquidation value of $4,000 ............. 800 --
Current value of property acquired through
foreclosure on $14,485 note receivable ............... 20,226 --
Notes payable from property acquired through
foreclosure .......................................... 11,867 --
Notes payable from acquisition of real estate ........... 33,746 --
Notes payable from acquisition of minority
interest in subsidiary ............................... 5,000 --
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Nine Months
Ended September 30,
-----------------------
1997 1996
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(dollars in thousands)
Acquisition of Pizza World Supreme, Inc. ...........
Carrying value of intangibles ................... $ 15,641 $ --
Carrying value of plant and equipment ........... 3,998 --
Carrying value of note receivable retired ....... 13,387 --
Carrying value of accounts payable and other
liabilities ................................. 1,314 --
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements of American Realty Trust,
Inc. and consolidated entities (the "Company") have been prepared in conformity
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
Operating results for the nine month period ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. 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, 1996 (the "1996 Form 10-K").
Certain balances for 1996 have been reclassified to conform to the 1997
presentation. Shares and per share data have been restated for the two for one
forward share split effected February 17, 1997.
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
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 Mr. Phillips, 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.
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. SYNTEK ASSET MANAGEMENT, L.P. (Continued)
The settlement agreement provides for the resignation and replacement of SAMLP
as general partner if the unit price targets are not met for two consecutive
anniversary dates. NRLP did not meet the unit price targets for the first and
second anniversary dates. On July 8, 1992, SAMLP notified the NRLP oversight
committee of the failure of NRLP to meet the unit price targets for two
successive years and that it expects to resign as general partner of NRLP and
NOLP.
The withdrawal of SAMLP as general partner would require NRLP to purchase
SAMLP's general partner interest (the "Redeemable General Partner Interest") at
its then fair value, and to pay certain fees and other compensation as provided
in the partnership agreement. Syntek Asset Management, L.P. ("SAMI"), the
managing general partner of SAMLP, has calculated the fair value of such
Redeemable General Partner Interest to be $40.2 million at September 30, 1997,
before reduction for the principal balance ($4.2 million at September 30, 1997)
and accrued interest ($6.9 million at September 30, 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 class action
settlement. On February 20, 1996, the parties to the Implementation Agreement
executed an Amended and Restated Implementation Agreement.
In September 1996, the Judge appointed to supervise the class action settlement
(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. On April 7, 1997, the Supervising Judge entered
an order amending the September 23, 1996 order, approving the formal notice and
setting a hearing on the Amended and Restated Implementation Agreement for June
27, 1997. A notice was sent to all class members and unitholders in April 1997
and the hearing was held on June 27, 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 original class action settlement
shall remain in full force and effect and all of the provisions of the Amended
and Restated Implementation Agreement have been voided. SAMLP and the NRLP
oversight committee are considering alternative methods to implement the
election of a successor general partner as required under the original class
action settlement.
On September 26, 1997, one of the original class action defendants, Robert A.
McNeil, filed motions to (i) be installed as receiver for NRLP and (ii) disband
the NRLP oversight committee. As of November 10, 1997, a hearing on the motions
had not been set.
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES AND INTEREST 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 a 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 25, 1995, the borrower filed for bankruptcy protection. On
August 26, 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 secured net cash of $5.5 million after the
payoff of the loan in the amount of $9.2 million secured by such note
receivable. The Company incurred no loss on the sale beyond the reserve
previously established.
In September 1997, the Company foreclosed on its $14.6 million junior mortgage
note receivable secured by the Williamsburg Hospitality House in Williamsburg,
Virginia. The Company acquired the property at foreclosure subject to a first
lien mortgage of $11.9 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. The property is included in real estate held for
investment in the accompanying Consolidated Balance Sheet.
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 through foreclosure subject to first and second
lien mortgages totaling $10.0 million. In June 1992, the Company sold the hotel
and casino for a $22.0 million wraparound mortgage note receivable, a $500,000
unsecured note receivable, which was collected in full, and $100,000 in cash.
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 payments since April 1997, nor the required
improvements and the Company is in negotiations with the borrower, but has also
begun foreclosure proceedings. If the negotiations are not successful and
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES AND INTEREST RECEIVABLE
the Company forecloses 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.
Related Party. In December 1996, the Company and the borrower on a $3.7 million
note receivable secured by an apartment complex in Merrillville, Indiana agreed
to an extension of the notes December 1996 maturity date to December 2000. The
property is owned by a subsidiary of Davister Corp. ("Davister"), a general
partner in a partnership that owns approximately 14.6% of the Company's
outstanding shares of Common Stock. In May 1997, the note plus accrued but
unpaid interest was paid in full. See NOTE 10. "CERTAIN RELATIONSHIPS AND
TRANSACTIONS."
NOTE 4. REAL ESTATE
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 $697,000 on the sale.
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 mortgage financing for the remaining $1.5 million
of the purchase price. The mortgage bears interest at 16% per annum, requires
quarterly interest only payments of $61,000, and matures in January 2000. The
Company paid a real estate brokerage commission of $135,000 to Carmel Realty,
Inc. ("Carmel Realty"), an affiliate of Basic Capital Management, Inc. ("BCM"),
the Company's advisor, based on the $2.2 million purchase price of the
property.
In October 1995, the Company purchased BP Las Colinas land, a 92.6 acre parcel
of partially developed land in Las Colinas, Texas. In February 1996, the
Company entered into a contract to sell 72.5 acres of such parcel for $12.9
million. The contract called for the sale to close in two phases. In July 1996,
the Company completed the first phase sale of 32.3 acres for $4.9 million in
cash. In February 1997, the Company completed the second phase sale of 40.2
acres for $8.0 million, of which $7.2 million was paid in cash. Of the net
sales proceeds of $6.9 million, $1.5 million was used to payoff the underlying
debt secured by the BP Las Colinas parcel, pay a $500,000 maturity fee to the
lender, make a $1.5 million principal paydown on note secured by Parkfield land
in Denver, Colorado with the same lender, and $1.0 million was applied as a
principal paydown on the term loan secured by the Las Colinas I land parcel. 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 bears 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 is paid
in full. The loan was
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
paid in full August 1997 and the $800,000 gain was recognized. The Company paid
a real estate brokerage commission of $239,000 to Carmel Realty based on the
$8.0 million sales price of the property.
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 mortgage bears interest at 9%
per annum, requires quarterly interest only payments of $92,000 and matures in
March 2000. The Company paid a real estate brokerage commission of $209,000 to
Carmel Realty based on the $5.6 million purchase price of the property.
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 mortgage financing for the
remaining $2.5 million of the purchase price. The loan bears interest at 14%
per annum, requires monthly interest only payments of $29,000 and matures in
April 1998. The Company paid a real estate brokerage commission of $208,000 to
Carmel Realty based on the $3.5 million purchase price of the property.
In April 1997, the Company purchased McKinney Corners II land, a 173.9 acre
parcel of undeveloped land in Collin County, Texas, for $5.7 million. The
Company paid $700,000 in cash and obtained mortgage financing for the remaining
$5.0 million of the purchase price as a fourth advance under the term loan from
the Las Colinas I lender. The term loan was amended increasing the term loan
amount from $19.5 million to $24.5 million. The amendment also changed the
required principal reduction payments to $500,000 in June, July, September and
October 1997 and $1.0 million in August and November 1997. The McKinney Corners
II land was added as additional collateral on the term loan. The Company paid a
real estate brokerage commission of $343,000 to Carmel Realty based on the $5.7
million purchase price of the property.
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 provision of the Valley Ranch
land loan. In September 1997, such collateral escrow was released to the
Company. The Company recognized a gain of $648,000 on the sale. The Company
paid a real estate brokerage commission of $38,000 to Carmel Realty based on
the $1.3 million sales price of the property.
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. The
Company paid a real estate brokerage commission of $54,000 to Carmel Realty
based on the $896,000 purchase price of the property.
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
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 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. The Company paid a real estate
brokerage commission of $105,000 to Carmel Realty based on the $1.8 million
purchase price of the property.
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 and obtained seller financing of the remaining $4.0 million of the
purchase price. The note bears interest at 18% per annum, requires monthly
interest only payments of $60,000 and matures May 2000. The Company paid a real
estate brokerage commission of $250,000 to Carmel Realty based on the $4.2
million purchase price of the property.
Also 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 and obtained seller financing of the remaining $16.1
million of the purchase price. The note bears interest at 9.5% per annum,
requires monthly interest only payments of $127,000 and matures in May 2001.
The Company paid a real estate brokerage commission of $675,000 to Carmel
Realty based on the $21.5 million purchase price of the property.
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 closed on a sale of a 99.7 acre parcel for $4.5 million in cash.
The Company recognized a $215,000 gain on the sale. The Company paid a real
estate brokerage commission of $152,000 to Carmel Realty based on the $5.0
million purchase price of the property and $135,000 to Carmel Realty based on
the $4.5 million sales price of the tract sold.
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 mortgage financing for the remaining $4.0
million of the purchase price. The loan bears interest at 12.95% per annum,
requires monthly interest only payments of $43,000 and matures in June 1998.
The Company paid a real estate brokerage commission of $280,000 to Carmel
Realty based on the $6.3 million purchase price of the property.
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 mortgage
14
15
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
financing for the remaining $2.0 million of the purchase price, as a fifth
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. The Company paid a
real estate brokerage commission of $151,000 to Carmel Realty based on the $2.4
million purchase price of the property.
Also 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 and obtained seller financing of the remaining $4.5 million of
the purchase price. The note bears interest at 10.5% per annum, requires
semiannual interest only payments of $239,000 and matures in December 2000. The
Company paid a real estate brokerage commission of $321,000 to Carmel Realty
based on the $5.4 million purchase price of the property.
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. The Company paid a real estate
brokerage commission of $48,000 to Carmel Realty based on the $1.6 million
sales price of the property.
Also in July 1997, the Company purchased Dowdy and McKinney Corners V land,
which parcels are adjacent to the Company's other McKinney Corners land,
consisting of a total of 175 acres of undeveloped land in Collin County, Texas,
for $2.9 million. The Company obtained mortgage financing of $3.3 million as a
sixth 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. The Company paid a real estate
brokerage commission of $173,000 to Carmel Realty based on the $2.9 million
purchase price of the properties.
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 interest only
payments of $53,000 and matures March 2002. The Company paid a real estate
brokerage commission of $224,000 to Carmel Realty based on the $5.8 million
purchase price of the property.
Also 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 obtained seller financing of the remaining $2.0 million of
the purchasing price. The loan bears interest
15
16
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
at 18% per annum, with interest payable quarterly and matures in January 1998.
The Company paid a real estate brokerage commission of $141,000 to Carmel
Realty based on the $2.3 million purchase price.
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 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. The Company paid a real estate
brokerage commission of $35,000 to Carmel Realty based on the $1.2 million
sales price of the property.
In September 1997, the Company sold three tracts of Valley Ranch land totaling
24.0 acres for $1.6 million in cash. The net sales proceeds of $1.2 million
were put into a certificate of deposit for the benefit of the lender, in
accordance with the term loan secured by such land. The Company recognized a
gain of $567,000 on the sale. The Company paid a real estate brokerage
commission of $46,000 to Carmel Realty based on the $1.6 million sales price of
the property.
Also in September 1997, the Company purchased the Collection, a retail and
commercial center totaling 206,048 square feet 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 11. "PREFERRED STOCK". The
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. The second lien mortgage in the amount of $580,000 bears interest
at 7% per annum from April 1996 to 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. The Company
paid a real estate brokerage commission of $646,000 to Carmel Realty based on
the $19.5 million purchase price of the property.
16
17
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
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 September 30, 1997, one lot
remained to be sold.
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 5. "INVESTMENT IN EQUITY INVESTEES."
NOTE 5. INVESTMENT IN EQUITY INVESTEES
Real estate entities. The Company's investment in real estate entities at
September 30, 1997, includes (i) equity securities of three publicly traded
Real Estate Investment Trusts (collectively the "REITs"), Continental Mortgage
and Equity Trust ("CMET"), IORI and Transcontinental Realty Investors, Inc.
("TCI"), (ii) units of limited partner interest of NRLP, (iii) a general
partnership interest in NRLP and NOLP, the operating partnership of NRLP,
through the Company's 96% limited partner interest in SAMLP and (iv) interests
in real estate joint venture partnerships. BCM, the Company's advisor, serves
as advisor to the REITs, and performs certain administrative and management
functions for NRLP and NOLP on behalf of SAMLP.
The Company accounts for its investment in the REITs, NRLP and the joint
venture partnerships under the equity method. The Company continues to account
for its investment in NRLP under the equity method due to the pending
resignation of SAMLP as general partner of NRLP and NOLP. See NOTE 2. "SYNTEK
ASSET MANAGEMENT, L.P." Substantially all of the Company's equity securities of
the REITs and NRLP are pledged as collateral for borrowings. See NOTE 7. "NOTES
AND INTEREST PAYABLE."
[THIS SPACE INTENTIONALLY LEFT BLANK.]
17
18
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN EQUITY INVESTEES (Continued)
The Company's investment in real estate entities, accounted for using the
equity method, at September 30, 1997 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 September 30, 1997 September 30, 1997 September 30, 1997 September 30, 1997
- -------- ------------------ ------------------ ------------------ ------------------
NRLP 54.4% $ 16,516 $ * $ 76,996
CMET 40.6 14,888 35,387 32,674
IORI 29.6 3,457 7,342 5,626
TCI 30.6 5,162 22,941 22,682
------------ -------------
40,023 $ 137,978
=============
General partner interest in
NRLP and NOLP 6,324
Other equity investees (81)
------------
$ 46,266
============
- -------------------
* At September 30, 1997, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity at December 31, 1996, 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 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 1997.
Other equity investees. 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 believes that such option will 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
18
19
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN EQUITY INVESTEES (Continued)
April 1997. In May 1997, the Company acquired the remaining 20% of PWSI
and discontinued equity accounting. See NOTE 8. "ACQUISITION OF PIZZA
WORLD SUPREME, INC."
Set forth below is summarized results of operations for the Company's equity
investees for the nine months ended September 30, 1997:
Equity investees owned over 50%:
Revenues......................................................... $ 94,320
Property operating expenses...................................... 61,189
Depreciation..................................................... 7,806
Interest expense................................................. 25,727
----------
(Loss) from operations........................................... (402)
Gain on sale of real estate...................................... 5,654
----------
Net income....................................................... $ 5,252
==========
The Company's share of over 50% owned equity investees' operations was income
of $900,000 for the nine months ended September 30, 1997. The Company's share
of equity investees gains on sale of real estate was $3.0 million for the nine
months ended September 30, 1997.
Equity investees owned less than 50%:
Revenues......................................................... $ 90,546
Equity in income (loss) of partnerships.......................... 751
Property operating expenses...................................... 60,132
Depreciation..................................................... 12,740
Interest expense................................................. 27,100
Provision for loss............................................... 225
--------
(Loss) from operations........................................... (8,900)
Gain on sale of real estate...................................... 11,835
--------
Net income....................................................... $ 2,935
========
The Company's share of less than 50% owned equity investees' loss from
operations was $2.8 million for the nine months ended September 30, 1997. The
Company's share of equity investees gains on sale of real estate was $4.0
million for the nine months ended September 30, 1997.
The Company's cash flow from the REITs and NRLP is dependent on the ability of
each of the entities to make distributions. CMET and IORI have paid regular
quarterly distributions since the first quarter of 1993, NRLP since the fourth
quarter of 1993 and TCI since the fourth quarter of 1995. In the first nine
months of 1997, the Company received aggregate distributions of $1.9 million
from the REITs and NRLP.
In the first nine months of 1997, the Company purchased a total of $173,000 of
equity securities of the REITs and NRLP.
19
20
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN EQUITY INVESTEES (Continued)
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, 1996, 184 residential lots had been sold. In the first nine months of 1997
an additional 13 lots were sold. At September 30, 1997, 90 lots remained to be
sold. In 1997, each partner has received $21,000 in return of capital
distributions.
In June 1996, a newly formed limited partnership, of which the Company is a 1%
general partner, purchased a 580 acre parcel of undeveloped land in Collin
County, Texas. In April 1997, the partnership sold a 35.0 acre tract for $1.3
million in cash. The net proceeds of $1.2 million were distributed to the
limited partners 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
partners in accordance with the partnership agreement. The partnership
recognized a gain of $497,000 on the sale. In September 1997, the partnership
sold a 77.19 acre tract for $1.5 million in cash. In accordance with the terms
of the term loan secured by such property, the net 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 96.53 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 partners in accordance with the
partnership agreement. The partnership will recognize a gain of approximately
$691,000 on the sale. The Company has received no distributions from the
partnership.
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
interest only payments of $54,000 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
20
21
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN EQUITY INVESTEES (Continued)
12% preferred cumulative return on their investment before any sharing
of partnership profits occurs. See NOTE 10. "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
NOTE 6. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO
In the first quarter of 1994, the Company began purchasing equity securities of
entities other than the REITs and NRLP to diversify and increase the liquidity
of its margin accounts. In the first nine months of 1997, the Company purchased
$11.8 million and sold $5.7 million of such securities. These equity securities
are considered a trading portfolio and are carried at market value. At
September 30, 1997, the Company recognized an unrealized decrease in the market
value of its trading portfolio securities of $782,000. Also in the first nine
months of 1997, the Company realized a net gain of $128,000 from the sale of
trading portfolio securities and received $87,000 in dividends. Unrealized and
realized gains and losses on trading portfolio securities are included in other
revenues in the accompanying Consolidated Statements of Operations.
NOTE 7. NOTES AND INTEREST PAYABLE
In May 1997, the Company financed a 10.6 acre parcel of the BP Las Colinas land
for $3.1 million. The note bears interest at 9.5% per annum, requires monthly
interest only payments of $24,000 and matures in November 1997.
In May 1997, the Company obtained a second mortgage of $3.0 million
secured by the Pin Oak land. The note bears interest at 12.5% per annum
compounded monthly, and matures in December 1997. See NOTE 10. "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
In June 1997, the Company obtained a second mortgage of $3.0 million
secured by the Lewisville land. The note bears interest at 12.5% per
annum, compounded monthly and matures in February 1998. See NOTE 10.
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
In June 1997, the Company refinanced the Valwood land for $15.8 million. The
note bears interest at the prime rate plus 4.5% per annum, currently 13%,
requires monthly interest only payments of $176,000 and matures in June 1998.
The Company received net refinancing proceeds of $4.9 million, after the payoff
of $6.2 million in existing mortgage debt secured by the property, $3.0 million
being applied to payoff the Jefferies land loan and $1.4 million being applied
to paydown the Las Colinas I land loan.
In July 1997, the Company obtained a third mortgage of $2.0 million
secured by the Pin Oak land. The note bears interest at 12.5% per
annum, compounded monthly and matures in February 1998. See NOTE 10.
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
21
22
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. NOTES AND INTEREST PAYABLE (Continued)
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 note
bears interest at the prime rate plus 4.5% per annum, currently 13%, requires
monthly interest only payments of $77,000 and matures October 1998. The Company
paid a mortgage brokerage and equity refinancing fee of $73,000 to BCM based
upon the new mortgage of $7.3 million.
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 $28.1
million at September 30, 1997.
In August 1996, the Company consolidated its existing NRLP margin debt held by
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 September 30, 1997, 3,349,169 NRLP units
with a market value of $74.9 million were pledged as security for such loan. In
July, the lender advanced an additional $3.7 million, increasing the loan
balance to $24.0 million.
NOTE 8. 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 PWSI, an entity which had acquired
26 operating pizza parlors in various communities in California's San Joaquin
Valley. The Company accounted for such subsidiary under the equity method. See
NOTE 5. "INVESTMENT IN EQUITY INVESTEES."
In May 1997, the Company purchased the remaining 20% of the common stock of
PWSI for $5.0 million in unsecured promissory notes. The notes bear interest at
8% per annum, for three years and 10% per annum thereafter, require quarterly
interest only payments of $100,000 and mature in May 2007. The Company now
consolidates PWSI's operations.
NOTE 9. INCOME TAXES
Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated
losses. The Company had no taxable income or provision for income taxes in the
nine months ended September 30, 1997, due to operating loss carryforwards.
22
23
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 10. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May, June and July 1997, the Company obtained a total of $8.0 million in
mortgage loans from entities and trusts affiliated with the limited partner in
a partnership that owns approximately 14% of the Company's outstanding shares
of Common Stock. See NOTE 7. "NOTES AND INTEREST PAYABLE."
In September 1997, the limited partner in a partnership that owns approximately
14.6% of the Company's outstanding shares of Common Stock became a 22.50%
limited partner in a newly formed limited partnership of which the Company is a
1% general partner and a 21.50% limited partner.
See NOTE 5. "INVESTMENT IN EQUITY INVESTEES."
NOTE 11. PREFERRED STOCK
In August 1997, the Company filed Articles of Amendment to its Articles of
Incorporation creating and designating a Series F 10% Cumulative Convertible
Preferred Stock, par value $2.00 per share, and a liquidation value of $10.00
per share out of the 7,500,000 shares authorized. 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 accruing cumulatively from August 16, 1998 and
commencing on October 15, 1998. The Series F Preferred Stock may be converted
into Common Stock of the Company at 90% of the market value of the Company's
Common Stock after August 15, 2003.
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 October 1997, the Company contributed its Pioneer Crossing land, a 1,448
acre tract of undeveloped land in Austin, Texas to a limited partnership in
exchange for $3.4 million in cash, a 1% managing general partner interest, 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 the property. The
existing partners converted their general and limited partner interests into
Class A limited partner units. The Class A limited partner units have an agreed
value of $1.00 per unit. The Class A units 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 anniversary of the closing but no
later than the sixth anniversary, on a basis of one Series F Cumulative
Convertible Preferred share per ten Class A units.
In October 1997, the Company refinanced the mortgage debt secured by the Denver
Merchandise Mart in Denver, Colorado for $23.0 million. The Company received
net refinancing proceeds of $5.4 million after the payoff of $14.8 million in
existing mortgage debt and the payment of various closing costs associated with
the refinancing. The new mortgage bears interest at 8.3% per annum requires
monthly principal and interest payments of $198,000 and matures in October
2012.
Also in October 1997, the Company contributed its Denver Merchandise Mart, a
509,000 square foot merchandise mart in Denver, Colorado, to a limited
partnership in exchange for $6.0 million in cash, a 1% managing general partner
interest, all of the Class B limited partner units in the partnership and the
partnership's assumption of the $23.0 million in
23
24
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 13. SUBSEQUENT EVENTS (Continued)
mortgage debt secured by the property. The existing general and limited
partners converted their general and limited partner interests into Class A
limited partner units. The Class A units have an agreed value of $1.00 per
unit. The Class A units 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 anniversary of the closing but not later than the
sixth anniversary, on the basis of one Series F Cumulative Convertible
Preferred share per ten Class A units. See NOTE 11. "PREFERRED STOCK"
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. The Company paid a
real estate brokerage commission of $396,000 to Carmel Realty based on the
$11.2 million purchase price of the property.
Also 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. The Company
paid a real estate brokerage commission of $52,000 to Carmel Realty based on
the $869,000 purchase price of the property.
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 in cash.
The Company paid a real estate brokerage commission of $78,000 to Carmel Realty
based on the $1.3 million purchase price of the property.
Also 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. The Company
paid a real estate brokerage commission of $100,000 to Carmel Realty based on
the $1.7 million purchase price of the property.
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 $1.6
million in cash, obtained mortgage financing from the Las Colinas I lender of
$3.5 million, applied the net proceeds of $3.5 million from the simultaneous
$3.8 million sale of an 86.5 acre tract, 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 paid a real estate brokerage
commission of $268,000 to Carmel Realty based on the $14.4 million purchase
price of the property. The Company will recognize a gain of approximately
$200,000 on the sale of the 86.5 acre tract. The Company paid a real estate
brokerage commission of $115,000 to Carmel Realty based on the $3.8 million
sales price of the tract.
24
25
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 13. SUBSEQUENT EVENTS (Continued)
In October 1997, the Company purchased the Piccadilly Inns, four hotels in
Fresno, California, for $33.0 million. The Company issued 1.6 million shares of
Series F Cumulative Convertible Preferred Stock having a liquidation value of
$10.00 per share or a total of $16.0 million and obtained mortgage financing of
$19.8 million See NOTE 11. "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 October
2013. The Company paid a real estate brokerage commission of $1.1 million to
Carmel Realty based on the $33.0 million purchase price of the property.
In October 1997, a newly formed partnership, of which the Company is the 1%
general partner and 99% Class B limited partner, purchased 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 mortgage debt and issued 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 $.10 per unit annual preferred
return 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
Cumulative Preferred Stock for each 100 Class A units exchanged or shares of
the Company's Common Stock only on or after the third anniversary of the
closing date. The Class A units are exchangeable for shares of Common Stock at
a 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 Common Stock for the
20 days preceding the date of conversion. The assumed mortgage bears interest
at 12.95% per annum requires quarterly interest only payments of $81,000 and
matures in June 1998.
---------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
American Realty Trust, Inc. (the "Company") was organized in 1961 to provide
investors with a professionally managed, diversified portfolio of equity real
estate and mortgage loan investments selected to provide opportunities for
capital appreciation as well as current income.
25
26
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 September 30, 1997 aggregated $2.0
million, compared with $1.3 million at December 31, 1996. Although the Company
anticipates that during the remainder of 1997 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, which totaled $23.2
million at September 30, 1997, to meet its debt service obligations, pay taxes,
interest and other non-property related expenses.
At December 31, 1996, notes payable totaling $36.0 million had either scheduled
maturities or principal payments required during 1997. Through September 30,
1997, the Company has paid a total of $11.5 million of such debt and refinanced
an additional $18.9 million. The Company intends to either pay off, extend the
maturity dates or obtain alternate financing for the remaining $5.6 million of
debt obligations that mature during the remainder of 1997. 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 1997. Such increase is expected to be derived from operations
of the Inn at the Mart and Kansas City Holiday Inn as well as the recently
purchased Piccadilly Inns and Collection retail and commercial center. The
Company also expects continued sales of its Las Colinas I land, Pin Oak land
and Valley Ranch land to generate additional cash flow. See NOTE 4. "REAL
ESTATE."
In January 1997, the Company sold a 3.0 acre tract of the Las Colinas I
land in Las Colinas, Texas, for $1.2 million in cash. The Company
recognized a gain of $697,000 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 mortgage financing for the remaining $1.5 million
of the purchase price.
In October 1995, the Company purchased BP Las Colinas, a 92.6 acre parcel of
partially developed land in Las Colinas, Texas. In February 1996, the Company
entered into a contract to sell 72.5 acres of such parcel for $12.9 million.
The contract called for the sale to close in two phases. In July 1996, the
Company completed the first phase sale of 32.3 acres for $4.9 million in cash.
In February 1997, the Company completed the second phase sale of 40.2 acres for
$8.0 million, of which $7.2 million was paid in cash. Of the net sales proceeds
of $6.9 million, $1.5 million was used to payoff the underlying debt secured by
the BP Las Colinas parcel, pay a $500,000 maturity fee to the lender,
26
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
make a $1.5 million principal paydown on the note secured by Parkfield land in
Denver, Colorado with the same lender, and $1.0 million was applied as a
principal paydown on the term loan secured by the Las Colinas I land parcel. In
conjunction with the sale, the Company provided $800,000 in purchase money
financing in the form of a six month unsecured loan. 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. In August 1997, the loan was paid in
full and the deferred gain 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 of the
remaining $4.0 million of the purchase price.
In April 1997, the Company purchased McKinney Corners I, 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 mortgage financing for the remaining $2.5
million of the purchase price.
Also in April 1997, the Company purchased McKinney Corners II, a 173.9 acre
parcel of undeveloped land in Collin County, Texas, for $5.7 million. The
Company paid $700,000 in cash and obtained mortgage financing for the remaining
$5.0 million of the purchase price as a fourth advance under the term loan from
the Las Colinas I lender. The term loan was amended changing the required
principal reduction payments to $500,000 in June, July, September and October
1997 and $1.0 million in August and November 1997.
In April 1997, the Company sold a 3.1 acre tract of the Las Colinas I land for
$1.3 million in cash. The Company used $1.0 million of the net sales proceeds
as a collateral escrow deposit in accordance with the provisions of the Valley
Ranch land loan. In September 1997, such collateral escrow was released to the
Company. The Company recognized a gain of $648,000 on the sale.
In May 1997, the Company purchased McKinney Corners III land, a 15.5 acre
parcel 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 and the seller provided short-term purchase money
financing of the remaining $1.6 million of the purchase price. The loan was
paid off at its October 15, 1997 maturity.
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 and the seller provided purchase money financing of the remaining $4.0
million of the purchase price.
27
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Also in May 1997, the Company purchased the remaining 20% of Pizza World
Supreme, Inc. ("PWSI") that it did not already own, for $5.0 million in
unsecured promissory notes. See NOTE 8. "ACQUISITION OF PIZZA WORLD
SUPREME, INC."
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 and the seller provided purchase money financing of the
remaining $16.1 million of the purchase price.
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
simultaneously selling a 99.7 acre tract for $4.5 million in cash. The Company
recognized a $215,000 gain on the sale.
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 mortgage financing for the remaining $4.0
million of the purchase price.
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 mortgage financing for the remaining
$2.0 million of the purchase price, as a fifth advance under the term loan from
the Las Colinas I lender.
Also 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 and the seller provided purchase money financing of the
remaining $4.5 million of the purchase price.
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 proceeds
of the sale, $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 such sale.
Also in July 1997, the Company purchased Dowdy and McKinney Corners V land,
which parcels are adjacent to the Company's other McKinney Corners land,
consisting of a total of 175 acres of undeveloped land in Collin County, Texas,
for $2.9 million. The Company obtained mortgage financing of $3.3 million as a
sixth 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.
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.
28
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Also 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 the seller provided purchase money financing of the
remaining $2.0 million of the purchase price.
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 net sales proceeds to paydown
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.
In September 1997, the Company sold a 2.6 acre tract 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.
In September 1997, the Company sold three tracts of Valley Ranch land totaling
24.0 acres for $1.6 million in cash. The net sales proceeds of $1.2 million
were put into a certificate of deposit for the benefit of the lender, in
accordance with the term loan secured by such land. The Company recognized a
gain of $567,000 on the sale.
In September 1997, the Company purchased the Collection, a retail and
commercial center in Denver, Colorado for $19.5 million. The Company paid
$791,000 in cash, assumed existing mortgages totaling $14.7 million and issued
400,000 shares of Series F Cumulative Convertible Preferred Stock with a
liquidation value of $4.0 million.
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 September 30, 1997, one lot
remained to be sold.
In October 1997, the Company contributed its Pioneer Crossing land, a 1,448
acre parcel of undeveloped land in Austin, Texas to a limited partnership in
exchange for $3.4 million in cash, a 1% managing general partner interest, 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 the property. The
existing partners converted their general and limited partner interests into
Class A limited partner units. The Class A units are entitled to a fixed
preferred return of 10% per annum, paid quarterly. The Class A Partnership
units have an agreed value of $1.00 per unit. The Class A limited partner units
may be converted into the Company's Series F Cumulative Convertible Preferred
Stock at any time after the first anniversary of the closing but no later than
the sixth anniversary of the closing date.
29
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
In October 1997, the Company refinanced the mortgage debt secured by the Denver
Merchandise Mart in Denver, Colorado for $23.0 million. The Company received
net refinancing proceeds of $5.4 million after the payoff of $14.8 million in
existing mortgage debt and the payment of various closing costs associated with
the refinancing.
Also in October 1997, the Company contributed its Denver Merchandise Mart, a
509,000 square foot merchandise mart in Denver, Colorado, to a limited
partnership in exchange for $6.0 million in cash, a 1% managing general partner
interest, 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 the
property. The existing general and limited partners converted their interests
into Class A limited partner units. The Class A units have an agreed value of
$1.00 per unit. The Class A units are entitled to a fixed preferred return of
10% per annum, paid quarterly. The Class A units may be converted into the
Company's Series F Cumulative Convertible Preferred Stock at any time after the
first anniversary of the closing but not later than the sixth anniversary of
the closing date
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.
Also 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.
In October 1997, the Company purchased Santa Clarita land, a 20.6 acre parcel
of undeveloped residential lots in Santa Clarita, California, for $1.3 million
in cash.
Also 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 $1.6
million in cash, obtained additional mortgage financing from the Las Colinas I
lender of $3.5 million applied the net proceeds of $3.5 million from the
simultaneous $3.8 million sale of an 86.5 acre tract, 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 will recognize a gain of
approximately $200,000 on the sale of the 86.5 acre tract.
In October 1997, the Company purchased the Piccadilly Inns, four hotels in
Fresno, California, for $33.0 million. The Company issued 1.6 million shares of
Series F Cumulative Convertible Preferred Stock having liquidation value of
$10.00 per share or total of $16.0 million and
30
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
obtained 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.
In October 1997, a newly formed partnership, of which the Company is the 1%
general partner and 99% Class B limited partner, purchased 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 mortgage debt and issued 1.1
million Class A limited partner units, with an agreed value of $1.00 per unit,
in the newly formed partnership. 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 for
each 100 Class A units exchanged or shares of the Company's Common Stock only
on or after the third anniversary of the closing date.
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 necessary, 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
financing sources are available, the Company will continue to make investments
in real estate, primarily investments in partially developed and/or undeveloped
land, continue making additional investments in real estate entities and
marketable equity securities and fund or acquire mortgage notes.
Notes Receivable. The Company has received $22.9 million in principal payments
or sales proceeds on its notes receivable in the nine months ended September
30, 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 a 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 25, 1995, the borrower filed for bankruptcy protection. On
August 26, 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 December 1996, the Company and the borrower on a $3.7 million note
receivable secured by an apartment complex in Merrillville, Indiana agreed to
an extension of the note's maturity to December 2000. In May 1997, the Company
received $3.7 million plus accrued but unpaid interest in full payment of the
loan. See NOTE 3. "NOTES AND INTEREST RECEIVABLE."
31
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
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 in cash. The Company received net cash of $6.0 million after
the payoff of the loan in the amount of $9.2 million secured by such note
receivable.
In September 1997, the Company foreclosed on its $14.6 million junior mortgage
note receivable secured by the Williamsburg Hospitality House in Williamsburg,
Virginia. The Company acquired the property at foreclosure subject to a first
lien mortgage of $11.9 million. The Company incurred no loss on the
foreclosure.
Loans Payable. In May 1997, the Company financed 10.6 acres of the BP
Las Colinas land for $3.1 million. The note matures in November 1997.
In May 1997, the Company obtained second lien financing of $3.0 million secured
by the Pin Oak land. The note matures in December 1997.
In June 1997, the Company obtained second lien financing of $3.0 million
secured by the Lewisville land. The loan matures in February 1998.
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 with 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 loan. The new loan matures in June 1998.
In July 1997, the Company obtained a third lien financing of $2.0 million
secured by the Pin Oak land. The note matures in February 1998.
In September 1997, the Company refinanced the Las Colinas I land Double O tract
for $7.3 million. The Company received net cash of $2.0 million after the
payoff of $5.0 million in existing mortgage debt. The note matures in October
1998.
Margin debt. 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 $28.1 million at September 30, 1997.
In August 1996, the Company consolidated its existing 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 September 30, 1997, 3,349,169 NRLP units
with a market value of $74.9 million were pledged as security for such loans.
In July 1997, the lender advanced an additional $3.7 million, increasing the
loan balance to $24.0 million.
32
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Equity Investments. During the fourth quarter of 1988, the Company began
purchasing shares of various real estate investment trusts having the same
advisor as the Company, and units of limited partner interest in National
Realty, L.P. ("NRLP"). It is anticipated that additional equity securities of
NRLP and the REITs, Continental Mortgage and Equity Trust ("CMET"), Income
Opportunity Realty Investors, Inc. ("IORI") and Transcontinental Realty
Investors, Inc. ("TCI"), will be acquired in the future through open-market and
negotiated transactions to the extent the Company's liquidity permits.
Equity securities of the REITs and NRLP held by the Company may be deemed to be
"restricted securities" under Rule 144 of the Securities Act of 1933
("Securities Act"). Accordingly, the Company may be unable to sell such equity
securities other than in a registered public offering or pursuant to an
exemption under the Securities Act for a period of one year after they are
acquired. Such restrictions may reduce the Company's ability to realize the
full fair market value of such investments if the Company attempted to dispose
of such securities in a short period of time.
The Company's cash flow from these investments is dependent on the ability of
each of the entities to make distributions. CMET and IORI have paid regular
quarterly distributions since the first quarter of 1993, NRLP since the fourth
quarter of 1993 and TCI since the fourth quarter of 1995. The Company received
distributions totaling $1.9 million in the first nine months of 1997 from the
REITs and NRLP.
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.
Commitments and Contingencies
In January 1995, NRLP, Syntek Asset Management, L.P. ("SAMLP") and the
NRLP oversight committee and William H. Elliott executed an
Implementation Agreement which provided for the nomination of a
successor general partner to succeed SAMLP as general partner of NRLP
33
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Commitments and Contingencies (Continued)
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.
In September 1996, the Judge appointed to supervise the class action settlement
(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. A notice was sent to all class members and
unitholders in April 1997 and a hearing was held on June 27, 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 original class action settlement
shall remain in full force and effect and all of the provisions of the Amended
and Restated Implementation Agreement have been voided. SAMLP and the NRLP
oversight committee are considering alternative methods to implement the
election of a successor general partner as required under the original class
action settlement.
On September 26, 1997, one of the original class action defendants, Robert A.
McNeil, filed motions to (i) be installed as receiver for NRLP and (ii) disband
the NRLP oversight committee. As of November 10, 1997, a hearing on the motions
had not been set.
Results of Operations
For the three months ended September 30, 1997, the Company reported a net loss
of $6.2 million, compared to net income of $770,000 for the three months ended
September 30, 1996. For the nine months ended September 30, 1997, the Company
reported a net loss of $3.4 million compared with a net loss of $1.6 million
for the nine months ended September 30, 1996. The primary factors contributing
to the Company's operating results are discussed in the following paragraphs.
Sales and cost of sales for the three and nine months ended September
30, 1997 relate to the operations of PWSI. See NOTE 8. "ACQUISITION OF
PIZZA WORLD SUPREME, INC."
Rents increased from $5.3 million and $14.7 million for the three and nine
months ended September 30, 1996 to $7.8 million and $18.7 million for the three
and nine months ended September 30, 1997. The increases are principally due to
increased rents at the Company's commercial properties and increased rents and
occupancy at the Company's hotels. One of the Company's hotels, the Best
Western Oceanside, was purchased in December 1996.
Interest income from mortgage notes receivable decreased from $1.1 million and
$3.4 million for the three and nine months ended September
34
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
30, 1996 to $471,000 and $2.7 million for the three and nine months ended
September 30, 1997. The decreases are due to the collection of $6.0 million in
principal payments on mortgage notes receivable, in the nine months ended
September 30, 1997, the sale of the $1.7 million note receivable secured by
land in Osceola, Florida, the $16.3 million mortgage note receivable secured by
the Las Vegas Plaza Shopping Center in Las Vegas, Nevada and the foreclosure of
the $14.6 million mortgage note receivable secured by the Williamsburg
Hospitality House in Williamsburg, Virginia. See NOTE 3. "NOTES AND INTEREST
RECEIVABLE." Interest income for the remainder of 1997 is expected to
approximate that of the third quarter of 1997.
Other income decreased from income of $824,000 for the three months ended
September 30, 1996 to a loss of $1.8 million for the three months ended
September 30, 1997 and decreased from income of $1.3 million for the nine
months ended September 30, 1996 to a loss of $117,000 for the nine months ended
September 30, 1997. The decreases are primarily due to a $2.1 million and a
$1.6 million increase in unrealized losses offset by on trading portfolio
securities and decreases of $688,000 and $133,000 in realized losses incurred
on the sale of trading portfolio securities.
Property operating expenses increased from $3.6 million and $11.2 million for
the three and nine months ended September 30, 1996 to $5.0 million and $13.5
million for the three and nine months ended September 30, 1997. The increases
are primarily due to the acquisition of the Best Western Oceanside Hotel in
1996 and taxes and property maintenance costs associated with the Company's
land parcels. These costs are expected to continue to increase as the Company
acquires additional properties.
Interest expense increased from $4.2 million and $10.7 million for the three
and nine months ended September 30, 1996 to $5.0 million and $13.5 million for
the three and nine months ended September 30, 1997. The increases are primarily
due to the debt incurred related to the acquisition of 14 parcels of land and
the Best Western Oceanside Hotel subsequent to September 1996. These increases
were offset in part by a decrease of $969,000 due to the sale of 40.2 acres of
the BP Las Colinas land parcels in February 1997. Interest expense is expected
to increase as the Company continues to acquire properties on a leveraged
basis.
Advisory and mortgage servicing fees increased from $392,000 and $1.1 million
for the three and nine months ended September 30, 1996 to $630,000 and $1.6
million for the three and nine months ended September 30, 1997. These increases
are primarily attributable to the increase in the Company's gross assets, the
basis for such fee. Such fee is expected to increase as the Company continues
to acquire additional properties.
General and administrative expenses increased from $618,000 and $1.9 million
for the three and nine months ended September 30, 1996 to $2.3 million and $4.7
million for the three and nine months ended September
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36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
30, 1997. The increase is primarily attributable to legal fees and
travel expenses incurred in 1997 relating to pending acquisitions and
refinancings, increases in advisor cost reimbursements, and the
inclusion of the general and administrative expenses of PWSI. See NOTE
8. "ACQUISITION OF PIZZA WORLD SUPREME, INC."
Depreciation and amortization expense increased from $429,000 and $1.1 million
for the three and nine months ended September 30, 1996 to the $755,000 and $1.9
million for the three and nine months ended September 30, 1997. These increases
are primarily due to the purchase of Best Western Oceanside Hotel in December
1996. Depreciation and amortization for the remainder of 1997 is expected to be
higher than in the third quarter of 1997 due to the recent purchase of the
Piccadilly Inns and the Collection retail and commercial center.
Incentive compensation for the nine months ended September 30, 1997 was
$299,000. Incentive compensation relates to the deferred gain
recognition on the sale of Porticos Apartments. See NOTE 4. "REAL
ESTATE."
Equity in income of investees was income of $604,000 and $1.5 million for the
three and nine months ended September 30, 1996 compared to a loss of $145,000
and income of $5.0 million for the three and nine months ended September 30,
1997. The nine month improvement in equity income is attributable in part to an
increase in the combined operating income of REITs and NRLP. Such improvement
is generally attributable to improved occupancy and increased rental rates. The
remainder of the improvement is due to gains on sale of real estate. See NOTE
5. "INVESTMENT IN EQUITY INVESTEES."
Gains on sale of real estate were $3.3 million and $11.4 million for the three
and nine months ended September 30, 1997 compared to $2.0 million and $3.1
million for the three and nine months ended September 30, 1996. In June 1997,
the Company recognized a previously deferred gain of $3.0 million on the sale
of Porticos Apartments and a $216,000 gain on the sale of the Kamperman land.
In April 1997, a gain of $668,000 was recognized on the sale of a 3.1 acre
tract of Las Colinas I land. In February 1997, a gain of $3.4 million was
recognized on the sale of a 40.2 acre tract of BP Las Colinas land, a gain of
$171,000 on the sale of Osceola mortgage note receivable and a gain of $676,000
on the sale of a 3.0 acre tract of Las Colinas I land. See NOTE 3. "NOTES AND
INTEREST RECEIVABLE" and NOTE 4. "REAL ESTATE." In September 1997, a gain of
$578,000 was recognized on the sale of a 2.6 acre tract of Las Colinas I land,
a $481,000 gain on the sale of the Mopac Building and a $771,000 gain on the
sale of a 3.9 acre tract of Las Colinas I land. For the three months ended
September 30, 1996, the Company recognized a $2.0 million gain on the sale of a
32.3 acre parcel of the Las Colinas I land, and a $13,000 gain on the sale of
four residential lots. The first nine months of 1996 includes an additional
$1.1 million gain on the sale of a 4.6 acre parcel in Las Colinas I land, a
$44,000 gain on the sale of a parcel of land in Midland, Michigan and an
$11,000 gain on the sale of eight residential lots.
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37
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 $121,000 and $381,000 for the three
and nine months ended September 30, 1996. The extraordinary gain for the three
months ended September 30, 1996 represents the Company's share of its equity
investees' extraordinary gain from the early payoff of debt. The first nine
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 and $247,000 represents the Company's share of an
equity investee's extraordinary gain relating to an insurance settlement from a
fire loss.
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.
-----------------------------
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
See NOTE 11. "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 of the Articles of Incorporation of
American Realty Trust, Inc. setting forth the Certificate of
Designations, Preferences and Relative Participating or Optional
or Other Special Rights, and Qualifications, Limitations or
Restrictions thereof of Special Stock or Series F 10% Cumulative
Convertible Preferred Stock, dated August 13, 1997.
27.0 Financial Data Schedule, filed herewith.
37
38
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
(b) Reports on Form 8-K as follows:
A Current Report on Form 8-K, dated October 16, 1997, was filed with
respect to Item 2. "Acquisitions and Dispositions of Assets," and Item
7. "Financial Statements and Exhibits," which reports the acquisition
of the Collection and Piccadilly Inns.
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39
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN REALTY TRUST, INC.
Date: November 14, 1997 By: /s/ Karl L. Blaha
------------------------- --------------------------------
Karl L. Blaha
President
Date: November 14, 1997 By: /s/ Thomas A. Holland
------------------------- --------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
39
40
AMERICAN REALTY TRUST, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Nine Months Ended September 30, 1997
Exhibit Page
Number Description Number
- ------ ------------------------------------------------------------- ------
3.0 Articles of Amendment of the Articles of Incorporation of 41
American Realty Trust, Inc. setting forth the Certificate of
Designations, Preferences and Relative Participating or
Optional or Other Special Rights, and Qualifications,
Limitations or Restrictions thereof of Special Stock of
Series F 10% Cumulative Convertible Preferred Stock dated
August 13, 1997.
27.0 Financial Data Schedule 54