10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2000 ------------- Commission File Number 1-9948 ------ AMERICAN REALTY TRUST, INC. ------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Georgia 54-0697989 ------------------------------- --------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 10670 North Central Expressway, Suite 300, Dallas, Texas 75231 --------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (214) 692-4700 ------------------------------ (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, $.01 par value 10,435,600 ---------------------------- -------------------------------- (Class) (Outstanding at July 31, 2000) 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ------------------------------ The accompanying Consolidated Financial Statements have not been audited by independent certified public accountants but in the opinion of the management of American Realty Trust, Inc. ("ART"), all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of consolidated results of operations, consolidated financial position and consolidated cash flows at the dates and for the periods indicated, have been included. AMERICAN REALTY TRUST, INC. CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2000 1999 -------- -------- (dollars in thousands) Assets ------ Notes and interest receivable Performing ($21,872 in 2000 and $13,345 in 1999 from affiliates)....................................... $ 31,610 $ 38,272 Nonperforming............................................ 2,920 2,909 -------- -------- 34,530 41,181 Less - allowance for estimated losses...................... (2,577) (2,577) -------- -------- 31,953 38,604 Real estate held for sale.................................. 312,495 319,636 Real estate held for investment, net of accumulated depreciation ($148,851 in 2000 and $164,583 in 1999).................................................... 438,698 451,994 Pizza parlor equipment, net of accumulated depreciation ($2,791 in 2000 and $2,369 in 1999)......... 7,033 6,872 Marketable equity securities, at market value.............. 847 394 Cash and cash equivalents.................................. 2,732 2,479 Investments in equity investees............................ 41,976 47,686 Intangibles, net of accumulated amortization, ($2,001 in 2000 and $1,770 in 1999)...................... 14,074 14,305 Other assets (including $8,764 in 2000 from affiliates).... 50,873 37,576 -------- -------- $900,681 $919,546 ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 2 AMERICAN REALTY TRUST, INC. CONSOLIDATED BALANCE SHEETS - Continued
June 30, December 31, 2000 1999 -------- ------------ (dollars in thousands, except per share) Liabilities and Stockholders' Equity ------------------------------------ Liabilities Notes and interest payable ($23,149 in 2000 and $13,900 in 1999 to affiliates).....................$692,972 $706,196 Margin borrowings.................................... 33,678 33,264 Accounts payable and other liabilities ($4,700 in 2000 and $18,917 in 1999 to affiliate).......... 25,719 45,983 -------- ------------ 752,369 785,443 Minority interest.................................... 109,950 87,837 Commitments and contingencies Stockholders' equity Preferred Stock, $2.00 par value, authorized 20,000,000 shares, issued and outstanding Series F, 2,600,000 shares in 2000 and 1999 (liquidation preference $26,000).............. 4,600 4,600 Series I, 50,000 shares in 2000 (liquidation preference $500)................................... 100 -- Common Stock, $.01 par value; authorized 100,000,000 shares, issued 11,459,132 shares in 2000 and 13,496,348 in 1999........................ 115 135 Paid-in capital...................................... 85,508 85,854 Accumulated (deficit)................................ (51,953) (44,295) Treasury stock at cost, 827,800 shares in 2000 and 2,737,216 shares 1999.......................... (8) (28) -------- ------- 38,362 46,266 -------- ------- $900,681 $919,546 ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 3 AMERICAN REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------------ ------------------------ 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (dollars in thousands, except per share) Property operations Rents........................................... $ 35,424 $ 41,623 $ 70,503 $ 81,865 Property operations expense. 22,710 25,523 46,675 53,401 ----------- ----------- ----------- ----------- Operating income.............................. 12,714 16,100 23,828 28,464 Land operations Sales.......................................... 5,760 33,260 18,953 41,724 Cost of sales.................................. 4,698 26,904 15,442 30,345 ----------- ----------- ----------- ----------- Gain on land sales............................ 1,062 6,356 3,511 11,379 Pizza parlor operations Sales.......................................... 8,392 7,829 16,264 14,953 Cost of sales.................................. 6,852 6,624 13,340 12,798 ----------- ----------- ----------- ----------- Gross margin.................................. 1,540 1,205 2,924 2,155 Income from operations........................... 15,316 23,661 30,263 41,998 Other income Interest income................................. 772 1,846 3,012 3,698 Equity in income (loss) of investees..................................... 94 4,121 296 3,396 Gain on sale of real estate. 32,078 14,845 48,232 27,338 Other........................................... (288) 670 (187) (1,040) ----------- ----------- ----------- ----------- 32,656 21,482 51,353 33,392 Other expenses Interest........................................ 20,391 24,426 40,573 45,540 Depreciation and amortization.................................. 4,544 4,537 8,908 9,017 General and administrative...................... 4,723 4,797 8,832 8,850 Advisory fee to affiliate....................... 1,283 1,385 2,624 2,486 Litigation settlement.......................... -- 91 -- 275 Provision for loss............................. -- 2,027 -- 2,027 Minority interest.............................. 17,895 6,931 27,266 15,373 ----------- ----------- ----------- ----------- 48,836 44,194 88,203 83,568 ----------- ----------- ----------- ----------- Net income (loss)................................ (864) 949 (6,587) (8,178) Preferred dividend requirement (563) (568) (1,071) (1,134) ----------- ----------- ----------- ----------- Net income (loss) applicable to Common shares............................... $ (1,427) $ 381 $ (7,658) $ (9,312) =========== =========== =========== =========== Earnings per share Net income (loss).............................. $(.13) $.04 $ (.71) $ (.87) =========== =========== =========== =========== Weighted average Common shares used in computing earnings per share...................................... 10,716,533 10,759,166 10,738,003 10,750,790 =========== =========== =========== ===========
The accompanying notes are an integral part of these Consolidated Financial Statements. 4 AMERICAN REALTY TRUST, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Six Months Ended June 30, 2000
Series F Series I Preferred Preferred Common Treasury Paid-in Accumulated Stockholders' Stock Stock Stock Stock Capital (Deficit) Equity --------- --------- ------ --------- ------- ----------- ------------ (dollars in thousands, except per share) Balance, January 1, 2000............... $4,600 $ - $135 $(28) $85,854 $(44,295) $ 46,266 Preferred dividends Series F Preferred Stock ($.50 per share).......................... - - - - - (1,064) (1,064) Series I Preferred Stock ($.14 per share).................... - - - - - (7) (7) Retirement of Treasury Stock........... - - (20) 20 - - - Repurchase of Common Stock............. - - - - (746) - (746) Sale of Series I Preferred Stock....... - 100 - - 400 - 500 Net (loss)............................. - - - - - (6,587) (6,587) ------ ---- ---- --- ------- -------- -------- Balance, June 30, 2000................. $4,600 $100 $115 $(8) $85,508 $(51,953) $ 38,362 ====== ==== ==== === ======= ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 5 AMERICAN REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000 1999 -------- -------- Cash Flows From Operating Activities (dollars in thousands) Rents collected............................................. $ 69,984 $ 97,048 Pizza parlor sales collected................................ 16,299 15,635 Interest collected.......................................... 3,948 1,027 Distributions received from equity investees' operating cash flow........................................ 1,806 849 Payments for property operations............................ (60,701) (63,096) Payments for pizza parlor operations........................ (13,295) (12,873) Interest paid............................................... (32,965) (39,003) Advisory fee paid to affiliate.............................. (2,624) (2,487) Distributions to minority interest holders.................. (5,153) (2,921) Purchase of marketable equity securities.................... (5,531) (1,196) Proceeds from sale of marketable equity securities................................................. 4,203 1,604 General and administrative expenses paid.................... (8,832) (8,899) Other....................................................... 764 5,345 -------- -------- Net cash (used in) operating activities.................... (32,097) (8,967) Cash Flows From Investing Activities Collections on notes receivable............................. 14,757 13,170 Proceeds from sale of real estate........................... 42,759 60,130 Acquisition of real estate.................................. (1,040) (36,649) Pizza parlor equipment purchased............................ (161) (578) Notes receivable funded..................................... (9,956) (30,717) Earnest money/escrow deposits............................... (5,944) 23,578 Investment in real estate entities.......................... 3,997 (35) Construction and development................................ (8,030) -- Real estate improvements.................................... (5,064) (13,578) -------- -------- Net cash provided by (used in) investing activities................................................ 31,318 15,321 Cash Flows From Financing Activities Proceeds from notes payable................................. 124,201 71,385 Payments on notes payable................................... (90,809) (96,770) Deferred borrowing costs.................................... (3,737) (2,334) Net (payments) to/advances from affiliates.................. (27,681) 18,281 Common dividends paid....................................... -- (541) Issuance of Series I Preferred Stock........................ 500 -- Preferred dividend.......................................... (1,071) (1,134) Margin borrowings, net...................................... 375 (694) Sale of Common Stock under dividend reinvestment plan.......................................... -- 5 Repurchase of Common Stock.................................. (746) -- -------- -------- Net cash provided by financing activities.................. 1,032 (11,802) Net increase (decrease) in cash and cash equivalents............................................... 253 (5,448) Cash and cash equivalents, beginning of period................ 2,479 11,523 -------- -------- Cash and cash equivalents, end of period...................... $ 2,732 $ 6,075 ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 6 AMERICAN REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Six Months Ended June 30, 2000 1999 -------- ------- (dollars in thousands) Reconciliation of net (loss) to net cash (used in) operating activities Net (loss)...................................... $(6,587) $(8,178) Adjustments to reconcile net (loss) to net cash (used in) operating activities Depreciation and amortization................. 8,908 14,924 Gain on sale of real estate..................... (51,743) (38,717) Distributions from equity investees' operating cash flow.................................... 1,806 849 Distributions to minority interest holders...... 5,153 2,921 Equity in (income) loss of investees............ (296) (3,396) Decrease in marketable equity securities........ 543 2,209 (Increase) decrease in accrued interest receivable................................... 940 (2,597) Decrease in other assets........................ 4,548 11,674 Increase (decrease) in accrued interest payable 546 (1,242) Increase in accounts payable and other liabilities.................................. 4,085 12,658 Other........................................... -- (72) -------- -------- Net cash (used in) operating activities...... (32,097) $ (8,967) ======== ======== Schedule on noncash investing and financing activities Notes payable from acquisition of real estate... $ 2,927 $ 64,047 Notes payable assumed by buyer on sale of real estate........................................ 27,914 2,428 Notes receivable from sale of real estate....... -- 20,000 Issuance of partnership units................... -- 1,617 Retirement of Common Stock...................... 20 -- Provision for loss.............................. -- 2,027 Exchange of real estate at carrying value....... 2,989 --
The accompanying notes are an integral part of these Consolidated Financial Statements. 7 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION ------------------------------- The accompanying Consolidated Financial Statements 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. Dollar amounts in tables are in thousands, except per share amounts. Certain balances for 1999 have been reclassified to conform to the 2000 presentation. Operating results for the six month period ended June 30, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information, refer to the Consolidated Financial Statements and Notes thereto included in ART's Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999 Form 10-K"). NOTE 2. NRLP MANAGEMENT CORP. ------------------------------- Effective December 18, 1998, NRLP Management Corp. ("NMC"), a wholly-owned subsidiary, was elected general partner of National Realty, L.P. ("NRLP") and National Operating, L.P. ("NOLP"), the operating partnership of NRLP. NRLP is a publicly traded master limited partnership which was formed on January 29, 1987. It commenced operations on September 18, 1987, when, through NOLP, it acquired all of the assets, and assumed all of the liabilities, of 35 public and private limited partnerships. NRLP is the sole limited partner of NOLP and owns 99% of the beneficial interest in NOLP. NRLP and NOLP operate as an economic unit and, unless the context otherwise requires, all references herein to NRLP shall constitute references to NRLP and NOLP as a unit. NMC, as general partner, has discretion in determining methods of obtaining funds for NRLP's operations, and the acquisition and disposition of its assets. In November 1992, NOLP refinanced 52 of the apartments in its real estate portfolio and the underlying debt of a wraparound mortgage note receivable with a financial institution. To facilitate such refinancing, NOLP transferred these assets to Garden Capital, L.P. ("GCLP"). NOLP is the sole limited partner in GCLP. GCLP is the sole limited partner in the single asset limited partnerships which were formed for the purpose of acquiring, operating and holding title to the apartments and wraparound mortgage note transferred by NOLP. The general partner and owner of a .7% beneficial interest in GCLP and a 1% beneficial interest in the GCLP single asset operating partnerships is Garden National Realty, Inc. ("GNRI"), a wholly- owned subsidiary of ART. As of July 31, 2000, ART owned approximately 56.2% of NRLP's outstanding units of limited partnership interest. NOTE 3. TRANSACTION WITH AMERICAN REALTY INVESTORS, INC. ---------------------------------------------------------- On November 3, 1999, NRLP and ART jointly announced their agreement to combine, in a tax free exchange, under the ownership of a new company to be named American Realty Investors, Inc. ("ARI"). The share exchange and merger was subject to a vote of stockholders/unitholders of both 8 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. TRANSACTION WITH AMERICAN REALTY INVESTORS, INC. (Continued) ---------------------------------------------------------- entities. Approval required the vote of the unitholders holding a majority of NRLP's outstanding units, and the vote of the stockholders holding a majority of ART's outstanding shares of common and preferred stock. At special meetings held on March 21, 2000, the NRLP unitholders and ART stockholders approved the merger proposal. The transaction was closed on August 2, 2000. ART stockholders and NRLP unitholders, except for ART, received one share of ARI common stock for each unit of NRLP held. ART stockholders received .91 shares of ARI common stock for each share of ART common stock held. Each share of ART preferred stock was converted into one share of preferred stock of ARI, having substantially the same rights as ART's preferred stock. The ART shares of common stock ceased trading on the New York Stock Exchange on August 2, 2000. ARI common stock commenced trading on the New York Stock Exchange on August 3, 2000. NOTE 4. NOTES RECEIVABLE -------------------------- In January 2000, NRLP collected in full a $365,000 note receivable, including accrued but unpaid interest. In March 2000, NRLP collected in full, including accrued but unpaid interest a $942,000 note receivable. In August 1999, NRLP funded a $2.6 million loan to JNC Enterprises, Inc. ("JNC"). The loan was subsequently split into two pieces. The loans were secured by second liens on a 3.5 acre and a 1.2561 acre parcel of land in Dallas, Texas, the guarantee of the borrower and the personal guarantees of its shareholders. The loans bore interest at 16.0% per annum and matured in February 2000. All principal and interest were due at maturity. In March 2000, the $2.0 million loan secured by the 3.5 acre land parcel was collected in full, including accrued but unpaid interest. In April 2000, the remaining loan, with a principal balance of $600,000, was collected in full, including accrued but unpaid interest. In September 1999, in conjunction with the sale of two apartments, NRLP provided $2.1 million in purchase money financing secured by limited partnership interests in two limited partnerships owned by the buyer. The financing bore interest at 16.0% per annum, required monthly payments of interest only at 6.0%, beginning in February 2000 and a $200,000 principal paydown in December 1999, which was not received, and matured in August 2000. NRLP had the option to obtain the buyer's general and limited partnership interests in the collateral partnerships in full satisfaction of the financing. In March 2000, NRLP agreed to forbear foreclosing on the collateral securing the note, and released one of the partnership interests, in exchange for payment of $250,000 and executed deeds of trusts on certain properties owned by the borrower. In March 2000, the borrower made a $1.1 million payment, upon receipt of which NRLP returned the deeds of trust and terminated the option agreement. The borrower executed a replacement promissory note for the remaining note balance of $1.0 million, which is unsecured, non-interest bearing and matures in April 2003. In April 2000, NRLP funded a $100,000 loan to the borrower. The loan is secured by five second lien deeds of trust, is non-interest bearing and matures in September 2001. 9 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. NOTES RECEIVABLE (Continued) -------------------------- In December 1999, a note with a principal balance of $1.2 million and secured by a pledge of a partnership interest in a partnership which owns real estate in Addison, Texas, matured. The maturity date was extended to April 2000 in exchange for an increase in the interest rate to 14.0% per annum. All other terms remained the same. Negotiations are in process to further modify and extend the loan. In June 1998, a $4.2 million loan was funded to Cuchara Partners, Ltd. and Ski Rio Partners, Ltd., affiliates of JNC. The loan was secured by (1) a first lien on approximately 450 acres of land in Huerfano County, Colorado, known as Cuchara Valley Mountain Ski Resort; (2) an assignment of a $2.0 million promissory note secured by approximately 2,623 acres of land in Taos County, New Mexico, known as Ski Rio Resort; and (3) a pledge of all related partnership interests. The loan bore interest at 16.0% per annum and had an extended maturity of March 2000. All principal and interest were due at maturity. In the fourth quarter of 1998, $109,000 was received on the sale of 11 parcels of the collateral property in Taos, New Mexico. In August and September 1999, paydowns totaling $3.3 million were received. The loan had a principal balance of $1.6 million at March 31, 2000. In April 2000, the loan was collected in full, including accrued but unpaid interest. In August 1998, NRLP funded a $635,000 loan to La Quinta Partners, LLC. The loan was secured by interest bearing accounts prior to being used as escrow deposits toward the purchase of a total of 956 acres of land in La Quinta, California, and the personal guarantee of the manager of the borrower. The loan had an extended maturity of November 1999. All principal and interest were due at maturity. In November and December 1998, $250,000 in principal paydowns were received. In the second quarter of 1999, the loan was modified, increasing the interest rate to 15.0% per annum and extending the maturity date to November 1999. Accrued but unpaid interest was added to the principal balance, increasing it by $42,000 to $402,000. In the fourth quarter of 1999, an additional $2,000 was funded, increasing the loan's principal balance to $404,000 at March 31, 2000. In March 2000, $25,000 in interest was collected and the loan's maturity was extended to April 2000. The borrower did not make the required payments and the loan was classified as nonperforming. NRLP has begun legal proceedings to collect the balance due. No loss is expected in excess of previously established reserves if NRLP is unable to collect the balance due. In October 1998, NRLP funded a $2.1 million loan to Frisco Panther Partners, Ltd., an affiliate of JNC. The loan was secured by a second lien on 408.23 acres of land in Frisco, Texas, the guaranty of the borrower and the personal guarantees of its partners. The loan bore interest at 16.0% per annum and had an extended maturity of March 2000. All principal and interest were due at maturity. In April 2000, the loan was collected in full, including accrued but unpaid interest. In December 1998, NRLP funded $3.3 million of a $5.0 million loan commitment to JNC. In January 1999, a $1.3 million paydown was received 10 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. NOTES RECEIVABLE (Continued) -------------------------- and subsequently in 1999 an additional $3.0 million was funded, increasing the loan balance to $5.0 million. The loan was secured by a second lien on 1,791 acres of land in Denton County, Texas, and a second lien on 91 acres of land in Collin County, Texas. The loan bore interest at 16.0% per annum, and had an extended maturity of March 2000. All principal and interest were due at maturity. At March 31, 2000, the loan had a principal balance of $5.0 million. In April 2000, the loan was collected in full, including accrued but unpaid interest. In conjunction with the April 2000 JNC loan payoffs, described above, NRLP paid off $5.0 million in mortgage debt secured by the notes. In June 2000, NRLP sold the 124,322 sq.ft. Marina Playa Office Building in Santa Clara, California, for $25.8 million, receiving $7.6 million in cash and providing financing of $18.8 million. Also in June 2000, NRLP sold the note receivable, net of the underlying debt, for $6.2 million, retaining a $3.9 million participation. Related Party. In 1998, a loan commitment of $1.8 million was funded to Warwick of Summit, Inc. ("Warwick"). The loan was secured by a second lien on a shopping center in Rhode Island, by 100% of the stock of the borrower and by the personal guarantee of the principal shareholder of the borrower. The loan bears interest at 14.0% per annum and has an extended maturity of December 2000. All principal and interest are due at maturity. In December 1999, the borrower sold the collateral property. NRLP received $810,000 of the net proceeds of the sale, of which $386,000 was applied to accrued interest and the remaining $424,000 was applied to principal reducing the principal balance to $1.7 million. NRLP is to receive escrowed monies of $377,000 in 2000. Through June 2000, $50,000 has been received. The loan is currently unsecured. Richard D. Morgan, a Warwick shareholder, is a Director of NMC, the general partner of NRLP. Beginning in 1997 and through January 1999, a $1.6 million loan commitment was funded to Bordeaux Investments Two, L.L.C. ("Bordeaux"). The loan is secured by (1) a 100% membership interest in Bordeaux, which owns a shopping center in Oklahoma City, Oklahoma; (2) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and (3) the personal guarantees of the Bordeaux partners. The loan bears interest at 14.0% per annum. In November 1998, the loan was modified to allow interest payments based on monthly cash flow of the collateral property and the maturity date was extended to December 1999. In the second quarter of 1999, the loan was again modified, increasing the loan commitment to $2.1 million and an additional $33,000 was funded. In the third quarter of 1999, an additional $213,000 was funded. The property has had no cash flow, therefore, NRLP ceased accruing interest on the loan in the second quarter of 1999. In October 1999, a $724,000 paydown was received, which was applied first to accrued but unpaid interest due of $261,000, then to principal, reducing the loan balance to $1.4 million. The note 11 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. NOTES RECEIVABLE (Continued) -------------------------- was further modified, changing the loan commitment to $1.5 million, the maturity date to December 2000, and payments to net revenues of the shopping center. Richard D. Morgan, a Bordeaux member, is a Director of NMC, the general partner of NRLP. In 1999, ART funded a $2.0 million loan commitment to Lordstown, L.P. The loan is secured by a second lien on land in Ohio and Florida, by 100% of the general and limited partner interest in Partners Capital, Ltd., the limited partner of Lordstown, L.P., and a profits interest in subsequent land sales. A corporation controlled by Richard D. Morgan, is the general partner of Lordstown, L.P., and Mr. Morgan is a director of NMC, a wholly-owned subsidiary of ART and the general partner of NRLP. In 1999, ART funded a $2.4 million loan commitment to 261, L.P. The loan is secured by 100% of the general and limited partner interest in Partners Capital, Ltd., the 99% limited partner of 261, L.P., and a profits interest in subsequent land sales. A corporation controlled by Richard D. Morgan, is the general partner of 261, L.P., and Mr. Morgan is a director of NMC, a wholly-owned subsidiary of ART and the general partner of NRLP. In February 1999, NRLP funded a $5.0 million unsecured loan to One Realco Corporation, which at June 30, 2000, owned approximately 15.8% of the outstanding shares of ART's common stock. The loan bears interest at 12.0% per annum and originally matured in February 2000. All principal and interest were due at maturity. The loan is guaranteed by Basic Capital Management, Inc. ("BCM"), ART's advisor. In March 2000, the note was modified and extended, increasing the loan commitment to $11.0 million, and an additional $1.2 million was funded. The maturity date was extended to February 2002. In exchange for the modification and extension, the borrower paid all accrued but unpaid interest and pledged collateral consisting of a $10.0 million promissory note secured by the stock of World Trade Company, Ltd., which owns a hotel in Bulgaria. Through June 30, 2000, $10.2 million has been funded. In July 2000, the note was again modified, increasing the loan commitment to $15.0 million. During 1998 and 1999, NRLP funded a total of $31.0 million of a $52.5 million loan commitment to Centura Tower, Ltd. ("Centura"). The loan was secured by 2.244 acres of land and an office building under construction in Farmers Branch, Texas. In August 1999, NRLP exercised its option contained in the loan agreement, and obtained a combined 80% general and limited partnership interest in Centura in exchange for a $24.1 million capital contribution through conversion of a portion of its note receivable to an equity interest. NRLP has contracted to purchase an additional 10.0% limited partnership interest in both Centura and NLP/CH, Ltd., a Centura affiliated partnership that owns 12 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. NOTES RECEIVABLE (Continued) -------------------------- land adjacent to the office building, for a total of $1.3 million. Through April 2000, $542,000 has been paid. Through July 2000, $697,000 has been paid. NOTE 5. REAL ESTATE ---------------------- In 2000, ART sold the following properties:
Net Units/ Sales Cash Debt Gain on Property Location Sq.Ft./Acres Price Received Discharged Sale ------------------ ----------------- -------------- ------- -------- ---------- ------- First Quarter Apartments Summerwind Reseda, CA 172 Units $ 9,000 $3,082 $5,568* $ 6,684 Windtree Reseda, CA 159 Units 8,350 2,911 5,063* 6,170 Whispering Pines Canoga Park, CA 102 Units 5,300 1,597 3,437* 3,106 Shopping Center -- Katella Plaza Orange, CA 62,290 Sq.Ft. 1,814 283 1,188 194 Land Duchense Duchense, UT 420 Acres 43 42 -- 16 Frisco Bridges Collin County, TX 15.00 Acres 2,675 706 2,000 297 Frisco Bridges Collin County, TX 19.74 Acres 2,971 -- --** -- Mason/Goodrich Houston, TX 1.1 Acres 129 -- 116 70 Mason/Goodrich Houston, TX 12.8 Acres 2,536 -- 1,803 1,783 Nashville Nashville, TN 2.6 Acres 405 -- 345 225 Rasor Plano, TX 43.01 Acres 1,850 -- 1,604 58 Second Quarter Apartments Pines Little Rock, AR 257 Units 4,650 1,281 3,063 2,441 Four Seasons Denver, CO 384 Units 16,600 6,543 9,220* 8,191 Sherwood Glen Urbandale, IA 180 Units 6,250 1,244 4,626* 4,161 Office Building Marina Playa Santa Clara, CA 124,205 Sq.Ft. 25,750 7,627 7,766 17,285 Land Rasor Plano, TX 5.4 Acres 915 -- 915 705 Salmon River Salmon River, ID 3.0 Acres 45 44 -- 38 Valley Ranch Irving, TX 22.4 Acres 1,455 -- 1,375 (585) Parkfield Denver, CO 2.6 Acres 615 (1) 584 512 Frisco Bridges Collin County, TX 24.3 Acres 4,194 (435) 4,000 259 Vista Business Park Travis County, TX 5.4 Acres 620 14 577 173 McKinney Corners II Collin County, TX 14.6 Acres 500 (599) 1,050 (40) Third Quarter Apartments Fair Oaks Euless, TX 208 Units 6,850 609 5,711 4,082 Land Mason/Goodrich Houston, TX 6.8 Acres 1,198 114 991 807 McKinney Corners I,II,III,IV,V Collin County, TX 82.0 Acres 9,150 613 8,123 1,638
13 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 5. REAL ESTATE (Continued) --------------------- ------------ * Debt assumed by purchaser. ** Exchanged for 3.25 acres of Clark land. In 2000, ART purchased the following properties:
Net Units/ Purchase Cash Debt Interest Maturity Property Location Sq.Ft./Acres Price Paid Incurred Rate Date ---------------- ------------------ ------------ -------- ---- -------- --------- -------- First Quarter Land Clark Farmers Branch, TX 3.25 Acres $2,989 $ -- $ -- ** -- % -- Kelly lots Collin County, TX .75 Acres 130 20 100 * 10.0 03/10 Mastenbrook Collin County, TX 157.86 Acres 3,200 704 2,400 * 9.0 09/00 Second Quarter Land Sladek Travis County, TX 63.3 Acres 712 316 427 * 10.0 05/04
------------ * Seller financing. ** Exchanged for 19.74 acres of Frisco Bridges land. NOTE 6. INVESTMENTS IN EQUITY INVESTEES ----------------------------------------- Real estate entities. ART's investment in real estate entities at June 30, 2000, included equity securities of two publicly traded Real Estate Investment Trusts (collectively the "REITs") Income Opportunity Realty Investors, Inc. ("IORI") and Transcontinental Realty Investors, Inc. ("TCI"), and interests in real estate joint venture partnerships. BCM, ART's advisor, serves as advisor to the REITs. ART accounts for its investment in the REITs and the joint venture partnerships using the equity method. Substantially all of the equity securities of the REITs are pledged as collateral for borrowings. See NOTE 10. "MARGIN BORROWINGS." ART's investment in real estate entities, accounted for using the equity method, at June 30, 2000 was as follows:
Equivalent Percentage Carrying Investee of ART's Value of Book Value Market Value Ownership at Investment at at of Investment at Investee June 30, 2000 June 30, 2000 June 30, 2000 June 30, 2000 -------- -------------- ------------- ------------- ---------------- IORI 28.7% $ 7,516 $11,054 $ 2,972 TCI 25.1% 24,937 44,881 26,348 ------- ------- 32,453 $29,320 Other 9,523 ------- $41,976 =======
The difference between the carrying value of ART's investment and the equivalent investee book value is being amortized over the life of the properties held by each investee. 14 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 6. INVESTMENTS IN EQUITY INVESTEES (Continued) ----------------------------------------- Management continues to believe that the market value of each of the REITs undervalues their assets and ART may, therefore, continue to increase its ownership in these entities. Set forth below is summarized results of operations of equity investees for the six months ended June 30, 2000: Revenues.................................... $ 77,554 Equity in income of partnerships............ 69 Property operating expenses................. 50,422 Depreciation................................ 11,846 Interest expense............................ 25,877 -------- (Loss) before gains on sale of real estate.. (10,522) Gain on sale of real estate................. 34,829 -------- Net income.................................. $ 24,307 ========
ART's share of equity investees' loss before gains on the sale of real estate was $1.9 million for the six months ended June 30, 2000, and its share of equity investees' gains on sale of real estate was $9.3 million for the six months ended June 30, 2000. ART's cash flow from the REITs is dependent on the ability of each of them to make distributions. In the six months ended June 30, 2000, distributions totaling $1.4 million were received from the REITs. In the first six months ended June 30, 2000, ART purchased a total of $976,000 of equity securities of the REITs. In June 2000, ART sold 1.6 million shares of TCI stock resulting in a $7.7 million loss and 54,000 shares of IORI stock resulting in a $246,000 loss. These losses are included in equity income (loss) of investees on the Statement of Operations. Also in June 2000, ART sold its partnership interest in Vestavia Lake Apartments in Orlando, Florida, resulting in a gain of $787,000 included in equity income (loss) of investees on the Statement of Operations. Elm Fork Ranch, L.P. In September 1997, a newly formed limited partnership, of which ART is a 1% general partner and 21.5% limited partner, purchased a 422.4 acre parcel of unimproved land in Denton County, Texas, for $16.0 million in cash. ART contributed $3.6 million in cash with the remaining $12.4 million being contributed by the other limited partners. The partnership agreement designates ART as the managing general partner. In September 1997, the partnership obtained financing of $6.5 million secured by the 422.4 acres of land. The mortgage bears interest at 10% per annum, requires quarterly payments of interest only and matures in September 2001. The net financing proceeds were distributed to the partners, ART receiving $2.9 million of its initial investment. The partnership agreement also provides that the limited partners receive a 12% preferred cumulative return on their 15 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 6. INVESTMENTS IN EQUITY INVESTEES (Continued) ----------------------------------------- investment before any sharing of partnership profits occurs. One of the limited partners in the partnership is also a limited partner in a partnership that owns approximately 15.8% of the outstanding shares of ART's Common Stock. In June 2000, ART sold its partnership interest for $2.0 million with an option to repurchase the interest at any time prior to December 31, 2000 for $2.0 million plus an amount equal to 20% times the number of days from the date of agreement to the exercise date. ART, intends to exercise the option and therefore, has not recognized a gain (loss) on the sale. NOTE 7. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO ---------------------------------------------------------- Since 1994, ART has been purchasing equity securities of entities other than those of the REITs and NRLP to diversify and increase the liquidity of its margin accounts. In the first six months of 2000, ART purchased $4.8 million and sold $4.2 million of such securities. These equity securities are considered a trading portfolio and are carried at market value. At June 30, 2000, ART recognized an unrealized decrease in the market value of its trading portfolio securities of $127,000. Also in the first six months of 2000, ART realized a net loss of $747,000 from the sale of trading portfolio securities and received no dividends. Unrealized and realized gains and losses on trading portfolio securities are included in other income in the accompanying Consolidated Statements of Operations. NOTE 8. NOTES PAYABLE ----------------------- In 2000, ART financed/refinanced or obtained second mortgage financing on the following:
Net Acres/ Debt Debt Cash Interest Maturity Property Location Units/Sq.Ft. Incurred Discharged Received Rate Date ------------------- ------------------ -------------- -------- ---------- -------- --------- -------- First Quarter Land Centura, Clark and Woolley Farmers Branch, TX 10.08 Acres $ 7,150 $ -- $ 6,960 14.00% 03/03 Frisco Bridges Collin County, TX 127.41 Acres 18,000 11,900 6,190 13.00 03/01 Frisco Bridges Collin County, TX 62.84 Acres 7,800 4,985 2,432 14.00 03/02 Nashville Nashville, TN 144.82 Acres 10,000 2,034 7,039 15.50 07/00 Second Quarter Apartments Rockborough Denver, CO 345 Units 2,222 -- 1,942 8.37 11/10 Confederate Point Jacksonville, FL 206 Units 7,440 5,879 1,039 8.12 05/07 Whispering Pines Topeka, KS 320 Units 7,530 6,829 302 8.12 05/07 Chateau Bayou Ocean Springs, MS 122 Units 1,007 -- 988 8.36 05/10 Waters Edge Gulfport, MS 238 Units 7,532 3,993 3,447 8.08 05/07 Land Katy Harris County, TX 130.6 Acres 4,250 4,042 (9) 13.0 5/1/01 Third Quarter Office Buildings Centura Tower Farmers Branch, TX 410,910 Sq.Ft. 15,000 -- 14,612 16.9 07/02
Related Party. GCLP has funded a $125.0 million loan commitment to ART. The loan is secured by second liens on six ART properties in Minnesota, 16 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 8. NOTES PAYABLE (Continued) ----------------------- Mississippi and Texas; by the stock of ART Holdings, Inc., a wholly-owned subsidiary of ART that owns 3,268,535 NRLP limited partner units; by the stock of NMC, also a wholly-owned subsidiary of ART and the general partner of NRLP; a pledge of 678,475 NRLP limited partner units owned by BCM and a pledge of 284,434 NRLP limited partner units owned by ART. The loan bears interest at 12.0% per annum, requires monthly payments of interest only and matures in November 2003. In March 2000, ART sold 3.254 acres of improved land in Farmers Branch, Texas, adjacent to NRLP's Centura Tower Office Building, to NRLP for its carrying value of $3.0 million, with the sales price being applied as a paydown on the loan. In April 2000, an additional $3.2 million was funded. GCLP is consolidated for financial statement purposes and the loan balance is eliminated. The loan will not be repaid due to merger. See NOTE 3. "TRANSACTION WITH AMERICAN REALTY INVESTORS, INC." NOTE 9. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC. ------------------------------------------------------- Fees and cost reimbursement to affiliates for the six months ended:
June 30, 2000 -------- Property and construction management fees*.. $1,577 Loan placement fees......................... 530 Real estate commissions..................... 2,780 Leasing commissions......................... 496 Reimbursement of administrative expenses.... 2,636 ------ $8,019 ======
----------------- * Net of property management fees paid to subcontractors, other than Regis Realty, Inc., which is owned by an affiliate of BCM. NOTE 10. MARGIN BORROWINGS --------------------------- ART has margin arrangements with various brokerage firms which provide for borrowing of up to 50% of the market value of marketable equity securities. The borrowings under such margin arrangements are secured by equity securities of the REITs, NRLP and ART's trading portfolio and bear interest rates ranging from 7.0% to 11.0%. Margin borrowing totaled $33.7 million at June 30, 2000. In April 2000, ART obtained a security loan in the amount of $5.0 million with a financial institution. ART received net cash of $4.6 million after various closing costs. The loan bears interest at 1% plus prime per annum (currently 10.5%), requires monthly payments of interest only and matures April 2001. The loan is secured by 910,224 shares of ART Common Stock held by BCM, ART's advisor, and 100,000 units of NRLP. In June 2000, certain brokerage firms foreclosed upon and sold 1.6 million shares of TCI and 54,000 shares of IORI pledged on the margin accounts, in the amount of $6.8 million and $164,000, respectively. The proceeds from these sales reduced margin debt secured by such shares. 17 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 10. MARGIN BORROWINGS (Continued) --------------------------- In June 2000, TCI advanced ART $9.0 million. The loan is secured by 409,934 shares of IORI common stock. The loan bears interest at 15% per annum and matures October 2000. All principal and interest are due at maturity. NOTE 11. 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. ART had no taxable income or provision for income taxes in the six months ended June 30, 2000 or 1999. NOTE 12. OPERATING SEGMENTS ---------------------------- Significant differences among the accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation and allocation of administrative expenses. Management evaluates the performance of each of the operating segments and allocates resources to them based on their net operating income and cash flow. Expenses that are not reflected in the segments are $8.8 million of general and administrative expenses for the six months ended June 30, 2000 and $8.9 million for 1999. Excluded from operating segment assets are assets of $132.9 million in 2000 and $83.5 million in 1999, which are not identifiable with an operating segment. There are no intersegment revenues and expenses and ART conducts all of its business within the United States. Presented below are ART's reportable segments operating income for the six months ended June 30, and segment assets at June 30.
Commercial Pizza 2000 Properties Apartments Hotels Land Parlors Receivables Total ------- ---------- ---------- -------- --------- -------- ----------- -------- Rents................. $ 16,478 $ 36,309 $ 16,468 $ 1,248 $16,264 $ -- $ 86,767 Property operating expenses............. 9,939 20,389 11,460 4,887 13,340 -- 60,015 Interest income....... -- -- -- -- -- 3,012 3,012 Interest expense - notes receivable..... -- -- -- -- -- -- -- Segment operating income............... -- -- -- -- -- -- -- -------- -------- -------- -------- ------- ----------- -------- $ 6,539 $ 15,920 $ 5,008 $(3,639) $ 2,924 $3,012 $ 29,764 ======== ======== ======== ======== ======= =========== ======== Depreciation/ amortization......... $ 3,498 $ 3,449 $ 1,238 $ -- $ 720 $ -- $ 8,905 Interest on debt...... 8,264 10,817 2,452 14,177 569 -- 36,279 Capital expenditures.. 1,529 9,488 317 1,760 161 -- 13,255 Assets................ 181,177 177,085 241,561 151,370 21 -- 751,214 Commercial Property Sales: Properties Apartments Land Total ---------- ---------- -------- -------- Sales price $27,564 $50,150 $18,953 $96,667 Cost of sale 10,085 19,397 15,442 44,924 ------- ------- ------- ------- Gain on sale $17,479 $30,753 $ 3,511 $51,743 ======= ======= ======= =======
18 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 12. OPERATING SEGMENTS (Continued) ----------------------------
Commercial Pizza 1999 Properties Apartments Hotels Land Parlors Receivables Total ----------------- ---------- ---------- ------- -------- ------- ----------- -------- Rents............ $ 14,241 $ 50,734 $15,661 $ 1,229 $14,953 $ -- $ 96,818 Property operating expenses........ 7,450 29,771 11,006 5,174 12,798 -- 66,199 Interest income.......... - - - - - 3,698 3,698 Interest expense - notes receivable - - - - - 559 559 -------- -------- ------- -------- ------- ----------- -------- Segment operating income (loss).......... $ 6,791 $ 20,963 $ 4,655 $ (3,945) $ 2,155 $ 3,139 $ 33,758 ======== ======== ======= ======== ======= =========== ======== Depreciation/ amorti- zation.......... $ 1,954 $ 5,122 $ 1,272 $ -- $ 652 $ -- $ 9,000 Interest on debt............ 3,804 14,948 2,433 17,642 488 -- 39,315 Capital expendi- tures........... 8,413 3,246 994 926 127 -- 13,706 Assets........... 139,671 237,331 72,236 319,776 21,514 92,200 882,728 Property Sales: Apartments Hotels Land Total ---------- -------- -------- -------- Sales price...... $ 45,800 $25,000 $ 44,724 $115,524 Cost of sales.... 26,340 17,122 33,345 76,807 -------- ------- -------- -------- Gain on sale..... $ 19,460 $ 7,878 $ 11,379 $ 38,717 ======== ======= ======== ========
NOTE 13. COMMITMENTS AND CONTINGENCIES ---------------------------------------- In 1996, ART was admitted to the Valley Ranch, L.P. partnership as general partner and Class B Limited Partner. The existing general and limited partners converted their general and limited partner interest into 8,000,000 Class A units. The units are exchangeable into shares of ART's Series E Cumulative Convertible Preferred Stock at the rate of 100 Class A units for each share of Series E Preferred Stock. In February 1999, the limited partner notified ART that it intended to convert 100,000 Class A units into 1,000 shares of Series E Preferred Stock. In March 1999, ART purchased the 100,000 of the Class A units for $100,000. ART subsequently reached an agreement with the other Class A unitholders to acquire the remaining 7,900,000 Class A units for $1.00 per unit. In 1999 and the first quarter of 2000, a total of 4,000,000 units were purchased, and an additional 2,000,000 units will be purchased in May 2001 and May 2002. In the second quarter of 2000, NRLP obtained second mortgage financing secured by an apartment of $2.2 million. ART has agreed to guaranty the loan as the corporate parent of the general partner of the borrower. 19 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued) --------------------------------------- In the second quarter of 2000, NRLP obtained second mortgage financing secured by an apartment of $7.4 million. ART has agreed to guaranty the loan as the corporate parent of the general partner of the borrower. In the second quarter of 2000, NRLP obtained second mortgage financing secured by an apartment of $7.5 million. ART has agreed to guaranty the loan as the corporate parent of the general partner of the borrower. Litigation. ART is involved in various lawsuits arising in the ordinary course of business. In the opinion of ART's management, the outcome of these lawsuits will not have a material impact on ART's financial condition, results of operations or liquidity. ------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION --------------------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- Introduction ------------ ART 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. Transaction with American Realty Investors, Inc. On November 3, 1999, NRLP and ART jointly announced their agreement to combine, in a tax free exchange, under the ownership of a new company to be named ARI. The share exchange and merger was subject to a vote of stockholders/unitholders of both entities. Approval required the vote of the unitholders holding a majority of NRLP's outstanding units, and the vote of the stockholders holding a majority of ART's outstanding shares of common and preferred stock. At special meetings held on March 21, 2000, the NRLP unitholders and ART stockholders approved the merger proposal. The transaction was closed on August 2, 2000. Shares of its common stock to ART stockholders and NRLP unitholders, except for ART, received one share of ARI common stock for each unit of NRLP held. ART stockholders received .91 shares of ARI common stock for each share of ART common stock held. Each share of ART preferred stock converted into one share of preferred stock of ARI, having substantially the same rights as ART's preferred stock. The ART shares of common stock ceased trading on the New York Stock Exchange on August 2, 2000. ARI common stock commenced trading on the New York Stock Exchange on August 3, 2000. Liquidity and Capital Resources ------------------------------- General. Cash and cash equivalents at June 30, 2000, totaled $2.7 million, compared with $2.5 million at December 31, 1999. Although ART anticipates that during the remainder of 2000 it will generate excess 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ---------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Liquidity and Capital Resources (Continued) ------------------------------- cash flow from property operations, as discussed below, such excess cash is not sufficient to discharge all of ART's debt obligations as they mature. ART will therefore continue to rely on externally generated funds, including borrowings against its investments in various real estate entities, mortgage notes receivable, refinancing of properties and, to the extent necessary, borrowings to meet its debt service obligations, pay taxes, interest and other non-property related expenses. At December 31, 1999, notes payable totaling $196.9 million had either scheduled maturities or required principal reduction payments during 2000. During the first six months of 2000, ART either extended, refinanced, paid down, paid off or received commitments from lenders to extend or refinance $101.3 million of the debt scheduled to mature in 2000. Net cash used in operating activities increased to a use of $32.0 million million in the six months ended June 30, 2000, from a use of $9.0 million in the six months ended June 30, 1999. Fluctuations in the components of cash flow from operations are discussed in the following paragraphs. Net cash from property operations (rents collected less payments for expenses applicable to rental income) decreased to $9.3 million in the six months ended June 30, 2000 from $33.9 million in 1999. The decrease is primarily attributable to the sale of 14 apartments in 1999. Net cash from pizza operations (sales less cost of sales) in the six months ended June 30, 2000, was $3.0 million approximating the $2.7 million in the six months ended June 30, 1999. ART expects a decrease in cash flow from property operations during the remainder of 2000. Such decrease is expected to result from NRLP's continued selective sale of income producing properties. Interest collected increased to $3.9 million in the six months ended June 30, 2000, from $1.0 million in 1999. The increase was attributable to loans funded in 1999. Interest paid decreases to $33.0 million in the six months ended June 30, 2000, from $39.0 million in 1999. The decrease was attributable to the 22 land parcels and 14 apartments sold in 1999 resulting in the payoff, paydown or assumption by the purchaser of mortgage debt. Advisory fees paid of $2.6 million in the six months ended June 30, 2000, approximated the $2.5 million in 1999. General and administrative expenses of $8.8 million in the six months ended June 30, 2000, approximated the $8.9 million in 1999. 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION --------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Liquidity and Capital Resources (Continued) ------------------------------- ART's cash flow from its REIT investments is dependent on the ability of each of the entities to make distributions. ART received distributions from the REITs totaling $1.8 million in the first six months of 2000 compared to $849,000 in 1999. Other cash from operating activities decreased to $764,000 in the six months ended June 30, 2000, from $5.3 million in 1999. The decrease was due to an increase in property prepaids, other miscellaneous property receivables and property escrows. In the first six months of 2000, ART received a total $11.7 million on the collection of seven mortgage notes receivable and $1.1 million in partial paydown of another mortgage note receivable. In the first six months of 2000, NRLP sold six apartments, one office building and one shopping center for a total of $77.7 million, receiving net cash of $24.6 million after the payment of various closing costs and the payment or assumption of $39.9 million in mortgage debt. NRLP obtained new mortgage financing secured by three parcels of unimproved land of $7.2 million, receiving net cash of $7.0 million after the payment of various closing costs. NRLP obtained second mortgage financing secured by an apartment of $2.2 million, receiving net cash of $1.9 million after the payment of various closing costs. NRLP also refinanced the mortgage debt secured by two apartments in the amount of $15.0 million, receiving net cash of $1.3 million after paying off $12.7 million in existing mortgage debt and the payment of various closing costs. ART obtained new mortgage financing secured by three parcels of unimproved land of $43.0 million, receiving net cash of $22.6 million after the payment of various closing costs. ART obtained new mortgage financing and a second mortgage financing secured by two apartments, for a total of $8.5 million, receiving net cash of $4.4 million after paying off an existing mortgage debt in the amount of $3.8 million and the payment of various closing costs. ART has margin arrangements with various brokerage firms which provide for borrowing up to 50% of the market value of ART's marketable equity securities. The borrowings under such margin arrangements are secured by equity securities of the REITs, NRLP and ART's trading portfolio and bear interest rates ranging from 7.0% to 11.0%. Margin borrowing totaled $33.7 million at June 30, 2000. In June 2000, certain brokerage firms foreclosed upon and sold 1.6 million shares of TCI and 54,000 shares of IORI pledged on the margin accounts, in the amount of $6.8 million and $164,000, respectively. The proceeds from these sales reduced margin debt secured by such shares. Management expects that it will be necessary for ART to sell $65.0 million, $25.2 million and $11.0 million of its land holdings during each of the next three years to satisfy the debt on such land as it matures. If ART is unable to sell at least the minimum amount of land to satisfy the debt obligations on such land as it matures, or, if it was not able to extend such debt, ART would either sell other of its assets to pay such debt or return the property to the lender. 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION --------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Liquidity and Capital Resources (Continued) ------------------------------- Management reviews the carrying values of ART's properties and mortgage note receivables 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. ART'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 1996, ART was admitted to the Valley Ranch, L.P. partnership, as general partner and Class B Limited Partner. The existing general and limited partners converted their general and limited partner interest into 8,000,000 Class A units. The units are exchangeable into shares of ART's Series E Cumulative Convertible Preferred Stock at the rate of 100 Class A units for each share of Series E Preferred Stock. In February 1999, the limited partner notified ART that it intended to convert 100,000 Class A units into 1,000 shares of Series E Preferred Stock. In March 1999, ART purchased the 100,000 Class A units for $100,000. ART subsequently reached agreement with the Class A unitholder to acquire the remaining 7,900,000 Class A units for $1.00 per unit. In 1999 and the first quarter of 2000, a total of 4,000,000 units were purchased, and an additional 2,000,000 units will be purchased in May 2001 and May 2002. In the second quarter of 2000, NRLP obtained second mortgage financing secured by an apartment of $2.2 million. ART has agreed to guaranty the loan as the corporate parent of the general partner of the borrower. In the second quarter of 2000, NRLP obtained second mortgage financing secured by an apartment of $7.4 million. ART has agreed to guaranty the loan as the corporate parent of the general partner of the borrower. In the second quarter of 2000, NRLP obtained second mortgage financing secured by an apartment of $7.5 million. ART has agreed to guaranty the loan as the corporate parent of the general partner of the borrower. Results of Operations --------------------- For the six months ended June 30, 2000, ART reported a net loss of $7.7 million, compared to the net loss of $9.3 million for the six months ended June 30, 1999. The primary factors contributing to ART's net loss are discussed in the following paragraphs. Pizza parlor sales and cost of sales were $8.4 million and $6.9 million, respectively, in the three months ended June 30, 2000 and $16.3 million and $13.3 million for the six months ended June 30, 2000 compared to $7.8 million and $6.6 million, respectively, for the three months ended June 30, 1999 and $15.0 million and $12.8 million for the six months ended June 30, 1999. The increased sales were primarily attributable to 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION --------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Results of Operations (Continued) --------------------- the effects of a more aggressive marketing and advertising strategy, and the return of cheese prices to historical levels. Cheese prices were at a record high in January 1999. Rents decreased to $35.4 million and $70.5 million in the three and six months ended June 30, 2000, from $41.6 million and $81.9 million in 1999. Rents from commercial properties increased to $16.5 million for the six months ended June 30, 2000, from $14.2 million in 1999, rent from hotels increased to $16.5 million in the six months ended June 30, 2000, from $15.7 million in 1999 and rent from apartments decreased to $36.3 million in the six months ended June 30, 2000, from $50.7 million in 1999. The increase in commercial property rents was primarily attributable to the purchase of Encino Executive Plaza in May 1999 and the decrease in apartment rent was due to the sale of 14 apartments in 1999. Rental income is expected to decrease significantly in the remainder of 2000 as a result of the income producing properties sold in 1999 and 2000. Property operations expense decreased to $22.7 million and $46.7 million in the three and six months ended June 30, 2000, from $25.5 million and $53.4 million in 1999. Property operations expense for commercial properties increased to $9.9 million in the six months ended June 30, 2000, from $7.5 million in 1999. For hotels, property operations expense increased to $11.5 million in the six months ended June 30, 2000, from $11.0 million in 1999. For land, property operations expense decreased to $4.9 million in the six months ended June 30, 2000 from $5.2 million in 1999. For apartments, property operations expense decreased to $20.4 million in the six months ended June 30, 2000, from $29.8 million in 1999. The increase in commercial property operations expense was primarily due to the purchase of Encino Executive Plaza in May 1999. The decrease for land was primarily due to the 11 land parcels sold in 1999. The decrease in property operations expense for apartments was due to the sale of 14 apartments in 1999. Property operations expense is expected to decrease significantly in the remainder of 2000 as a result of the properties sold in 1999 and 2000. Interest income from notes receivable decreased to $772,000 and $3.0 million in the three and six months ended June 30, 2000 from $1.8 million and $3.7 million in 1999. The decrease is due to the collection of mortgage receivables and their related interest at maturity in 2000. Other income decreased to a loss of $288,000 and increased to a loss of $187,000 in the three and six months ended June 30, 2000 from income of $670,000 in the three months ended June 30, 1999 and a loss of $1.0 million in the six months ended June 30, 1999. ART recognized an unrealized decrease in market value of its trading portfolio securities of $127,000 in the six months ended June 30, 2000 compared to $1.9 million in 1999. See NOTE 7. "MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO." Interest expense decreased to $20.4 million and $40.6 million in the three and six months ended June 30, 2000 from $24.4 million and $45.5 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION --------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Results of Operations (Continued) --------------------- million in 1999. The decrease was attributable to the sale of 14 apartments and 22 parcels of land in 1999. In the remainder of 2000, interest expense is expected to continue to decrease due to the properties sold in 1999 and 2000. Depreciation expense was $4.5 million and $8.9 million in the three and six months ended June 30, 2000, approximated the $4.5 million and $9.0 million in 1999. Advisory fees of $1.3 million and $2.6 million in the three and six months ended June 30, 2000 approximated the $1.4 million and $2.5 million in 1999. General and administrative expenses of $4.7 million and $8.8 million in the three and six months ended June 30, 2000, approximated the $4.8 million and $8.9 million in 1999. Minority interest increased to $17.9 million and $27.3 million in the three and six months ended June 30, 2000 from $6.9 million and $15.4 million in 1999. The increase is attributable to the increased earnings of NRLP. Equity in income of investees decreased to $94,000 and $296,000 in the three and six months ended June 30, 2000 from $4.1 million and $3.4 million in 1999. The decrease in equity income was attributable to the loss associated with the sale of TCI and IORI stock. In the six months ended June 30, 2000, ART recognized gains on the sale of real estate totaling $51.7 million; a $556,000 gain on the sale of three tracts of its Frisco Bridges land, totaling 59.0 acres, a $1.9 million gain on the sale of two tracts of its Mason Goodrich land, totaling 13.9 acres, a $225,000 gain on the sale of a 2.6 acre tract of its Nashville land, a $763,000 gain on the sale of two tracts totaling 48.4 acres of its Rasor land, $16,000 on the sale of its entire 450 acre Duchense land tract, $512,000 on the sale of a 2.6 acre tract of its Denver International land, $38,000 on the sale of its entire 3.0 acre tract of Salmon River land and $173,000 on the sale of a 5.4 acre tract of its Vista Business Park land. ART recognized a $585,000 loss on the sale of a 22.4 acre tract of its Valley Ranch land and a $40,000 loss on the sale of a 14.6 acre tract of its McKinney Corners II land. NRLP recognized a $6.7 million gain on the sale of the Summerwind Apartments, a $6.2 million gain on the sale of the Windtree Apartments, a $3.1 million gain on the sale of Whispering Pines Apartments, a $194,000 gain on the sale of the Katella Plaza Shopping Center, a $2.4 million gain on the sale of the Pines Apartments, a $8.2 million gain on the sale of the Four Seasons Apartments, a $4.2 million gain on the sale of the Sherwood Glen Apartments and a $17.3 million gain on the sale of the Marina Playa Office Building. In the six months ended June 30, 1999, gains on sale of real estate of $38.7 million were recognized. In January 1999, GCLP recognized a $2.2 million gain on the sale of the Olde Towne Apartments. In February 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION --------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Results of Operations (Continued) --------------------- 1999, ART recognized a gain on the sale of: (1) a 4.6 acre tract of its Plano Parkway land; (2) the Santa Fe Apartments; and, (3) the Mesa Ridge Apartments, totaling $11.4 million. In March 1999, ART recognized gains on the sale of: (1) a 9.9 acre tract of its Mason/Goodrich land; (2) two tracts of its McKinney II and McKinney IV land totaling 33.7 acres; and (3) a 13.0 acre tract of its Rasor land, totaling $4.3 million. In April 1999, NRLP recognized a $1.8 million gain on the sale of the Horizon East Apartments and a $2.3 million gain on the sale of the Lantern Ridge Apartments. In May 1999, ART recognized a $913,000 gain on the sale of a 15.0 acre tract of its Vista Ridge land and a $1.1 million gain on the sale of two tracts totaling 24.5 acres of its Plano Parkway land. In June 1999, ART recognized gains on the sale of: (1) two tracts totaling 77.6 acres of its Frisco Bridges land; (2) 6.6 acres of its Plano Parkway land; (3) the Continental Hotel; and, (4) the Barcelona Apartments, totaling $14.9 million. Environmental Matters --------------------- Under various federal, state and local environmental laws, ordinances and regulations, ART 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 for personal injury associated with such materials. Management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on ART's business, assets or results of operations. Inflation --------- The effects of inflation on ART's operations are not quantifiable. Revenues from apartment 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 the ultimate gains to be realized from property sales. To the extent that inflation affects interest rates, earnings from short-term investments and the cost of new borrowings as well as the cost of variable interest rate debt will be affected. Year 2000 --------- Even though January 1, 2000, has passed and no adverse impact from the transition to the year 2000 was experienced, no assurance can be provided that ART's suppliers and tenants have not been affected in a manner not yet apparent. As a result, management will continue to monitor ART's year 2000 compliance and the year 2000 compliance of its suppliers and tenants. 26 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS --------------------------------------------------------------------- At June 30, 2000, ART's exposure to a change in interest rates on its debt is as follows:
Weighted Effect of 1% Average Increase In Balance Interest Rate Base Rates ---------- --------------- ------------- (Amounts in thousands, except per share) Notes payable: Variable rate.................. $123,116 9.20% $ 1,231 Total decrease in ART's annual net income..................... $ 1,231 ============ Per share....................... $ .11 ============
---------------------------------------- PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ------------------------------------------ (a) Exhibits: Exhibit Number Description ------- ----------------------------------------------------------------- 3.0 Amendment to Articles of Incorporation of American Realty Trust, Inc. Deleting Certificate of Designation of Special Stock of Series J 10% Cumulative Convertible Preferred Stock, dated as of June 19, 2000, filed herewith. 27.0 Financial Data Schedule, filed herewith. (b) Reports on Form 8-K as follows: A Current Report on Form 8-K, dated June 19, 2000, was filed with respect to ITEM 5. "OTHER EVENTS," and ITEM 7. "FINANCIAL STATEMENTS AND EXHIBITS," which reports that ART had received margin calls from numerous margin debt holders. A Current Report on Form 8-K, dated June 22, 2000, was filed with respect to ITEM 5. "OTHER EVENTS," and ITEM 7. "FINANCIAL STATEMENTS AND EXHIBITS," which reports the postponement of ART's reorganization and combination with National Realty, L.P. A Current Report on Form 8-K, dated July 26, 2000, was filed with respect to ITEM 5. "OTHER EVENTS," which reports the changes in ART's Board of Directors. 27 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (Continued) ------------------------------------------ A Current Report on Form 8-K, dated July 26, 2000, was filed with respect to ITEM 5. "OTHER EVENTS," and ITEM 7. "FINANCIAL STATEMENTS AND EXHIBITS," which reports the indictments of Gene E. Phillips and A. Cal Rossi of Basic Capital Management, Inc. and the sale of securities and reduction of margin debt. A Current Report on Form 8-K, dated July 31, 2000, was filed with respect to ITEM 5. "OTHER EVENTS," which reports the rescheduling of ART's reorganization and combination with National Realty, L.P. on or before August 3, 2000. 28 SIGNATURE PAGE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN REALTY TRUST, INC. Date: August 14, 2000 By: /s/ Karl L. Blaha ------------------------- ----------------------------------- Karl L. Blaha President Date: August 14, 2000 By: /s/ Mark W. Branigan -------------------------- ----------------------------------- Mark W. Branigan Executive Vice President and Chief Financial Officer (Principal Financial Officer) 29 AMERICAN REALTY TRUST, INC. EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the Quarter ended June 30, 2000 Exhibit Page Number Description Number ------- --------------------------------------------------- ------ 3.0 Amendment to Articles of Incorporation of 31 American Realty Trust, Inc. Deleting Certificate of Designation of Special Stock of Series J 10% Cumulative Convertible Preferred Stock, dated as of June 19, 2000. 27.0 Financial Data Schedule. 33 30