-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q7hF+5eFcfaBSdP5eSvIfkHGun7EbZoLMtmO2uZ2bUtGuBCMFskIbhnU8v/FHFSe N0SoU30QoDr32SYynk0AXg== 0000930661-99-001956.txt : 19990817 0000930661-99-001956.hdr.sgml : 19990817 ACCESSION NUMBER: 0000930661-99-001956 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN REALTY TRUST INC CENTRAL INDEX KEY: 0000827165 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE OPERATORS (NO DEVELOPERS) & LESSORS [6510] IRS NUMBER: 540697989 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09948 FILM NUMBER: 99691358 BUSINESS ADDRESS: STREET 1: 10670 N CENTRAL EXPRESSWAY STREET 2: STE 300 CITY: DALLAS STATE: TX ZIP: 75231 BUSINESS PHONE: 2146924700 MAIL ADDRESS: STREET 1: 10670 N CENTRAL EXPRESSWAY STREET 2: SUITE 600 CITY: DALLAS STATE: TX ZIP: 75231 10-Q 1 FORM 10-Q - DATED JUNE 30, 1999 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, 1999 ------------- 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 10,563,434 - ---------------------------- -------------------------------- (Class) (Outstanding at July 31, 1999) 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The accompanying Consolidated Financial Statements have not been examined by independent certified public accountants but in the opinion of the management of American Realty Trust, Inc. (the "Company"), all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of consolidated results of operations, consolidated financial position and consolidated cash flows at the dates and for the periods indicated, have been included. AMERICAN REALTY TRUST, INC. CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1999 1998 ------------ ------------ (dollars in thousands) Assets ------ Notes and interest receivable Performing ($5,837 in 1999 and $594 in 1998 from affiliates)....................................... $ 88,891 $ 47,823 Nonperforming...................................... 5,886 6,807 -------- -------- 94,777 54,630 Less - allowance for estimated losses................ (2,577) (2,577) -------- -------- 92,200 52,053 Real estate held for sale............................ 319,767 282,301 Real estate held for investment, net of accumulated depreciation ($204,407 in 1999 and $208,396 in 1998).............................................. 449,496 452,606 Pizza parlor equipment, net of accumulated depreciation ($2,078 in 1999 and $1,464 in 1998)... 6,986 6,859 Marketable equity securities, at market value........ 690 2,899 Cash and cash equivalents............................ 6,075 11,523 Investments in equity investees...................... 37,324 34,433 Intangibles, net of accumulated amortization ($1,546 in 1999 and $1,298 in 1998)................ 14,528 14,776 Other assets......................................... 39,443 61,155 -------- -------- $966,509 $918,605 ======== ========
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, 1999 1998 ------------ ------------ (dollars in thousands, except per share) Liabilities and Stockholders' Equity ------------------------------------ Liabilities Notes and interest payable ($13,200 in 1999 and $12,600 in 1998 to affiliates).................. $ 800,827 $ 768,272 Margin borrowings................................. 35,584 35,773 Accounts payable and other liabilities (including $27,201 in 1999 and $8,900 in 1998 to affiliates) 51,259 38,321 ---------- --------- 887,670 842,366 Minority interest................................. 50,416 37,967 Commitments and contingencies Stockholders' equity Preferred Stock, $2.00 par value, authorized 20,000,000 shares, issued and outstanding Series F, 3,350,000 shares in 1999 and 1998 (liquidation preference $33,500)............... 6,100 6,100 Series G, 1,000 shares in 1999 and 1998 (liquidation preference $100).................. 2 2 Common stock, $.01 par value; authorized 100,000,000 shares, issued 13,496,382 shares in 1999 and 13,479,348 in 1998.................. 135 133 Paid-in capital................................... 83,947 83,945 Accumulated (deficit)............................. (61,733) (51,880) Treasury stock at cost, 2,737,216 shares in 1999 and 1998........................................ (28) (28) ---------- --------- 28,423 38,272 ---------- --------- $ 966,509 $ 918,605 ========== =========
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, ------------------- -------------------- 1999 1998 1999 1998 ------ ------ ------ ------ (dollars in thousands, except per share) Income Sales........................................ $ 7,829 $ 7,332 $ 14,953 $ 14,085 Rents........................................ 41,623 15,741 81,865 27,308 Interest..................................... 1,846 16 3,698 154 Other........................................ 670 (399) (1,040) (608) -------- -------- -------- -------- 51,968 22,690 99,476 40,939 -------- -------- -------- -------- Expenses Cost of sales................................ 6,624 6,225 12,798 12,005 Property operations.......................... 25,523 11,541 53,401 21,204 Interest..................................... 24,426 13,001 45,540 22,537 Advisory and servicing fees to affiliate............................... 1,385 949 2,486 1,709 General and administrative................... 4,797 1,942 8,850 4,227 Depreciation and amortization............................... 4,537 1,727 9,017 2,959 Provision for loss........................... 2,027 - 2,027 - Litigation settlement........................ 91 - 275 - Minority interest............................ 6,931 445 15,373 933 -------- -------- -------- -------- 76,341 35,830 149,767 65,574 -------- -------- -------- -------- (Loss) from operations........................ (24,373) (13,140) (50,291) (24,635) Equity in income of investees. 4,121 18,943 3,396 21,330 Gains on sale of real estate.................. 21,201 8,974 38,717 8,974 -------- -------- -------- -------- Net income (loss)............................. 949 14,777 (8,178) 5,669 Preferred dividend requirement (568) (84) (1,134) (135) -------- -------- -------- -------- Net income (loss) applicable to Common shares............................ $ 381 $ 14,693 $ (9,312) $ 5,534 ======== ======== ======== ======== Earnings per share Net income (loss)........... $ .04 $ 1.38 $ (.87) $ .53 ======== ======== ======== ======== Weighted average Common shares used in computing earnings per share................... 10,759,166 10,732,266 10,750,790 10,724,507 ========== ========== ========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. 4 AMERICAN REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Six Months Ended June 30, 1999 Series F Series G Preferred Preferred Common Treasury Paid-in Accumulated Stockholders' Stock Stock Stock Stock Capital (Deficit) Equity --------- --------- --------- -------- --------- ----------- ------------ (dollars in thousands, except per share) Balance, January 1, 1999..... $ 6,100 $ 2 $ 133 $ (28) $ 83,945 $(51,880) $ 38,272 Dividends Common Stock ($.05 per share)................... - - - - - (541) (541) Series F Preferred Stock ($.50 per share).......... - - - - - (1,129) (1,129) Series G Preferred Stock ($5.00 per share)......... - - - - - (5) (5) Sale of Common Stock under dividend reinvestment plan.. - - 2 - 2 - 4 Net income................... - - - - - (8,178) (8,178) -------- -------- -------- -------- -------- -------- -------- Balance, June 30, 1999....... $ 6,100 $ 2 $ 135 $ (28) $ 83,947 $(61,733) $ 28,423 ======== ======== ======== ======== ======== ======== ========
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, ------------------ 1999 1998 ------- -------- Cash Flows from Operating Activities (dollars in thousands) Pizza parlor sales collected................... $ 15,635 $ 14,029 Rents collected................................ 97,048 23,512 Interest collected............................. 1,027 381 Distributions from equity investees' operating cash flow..................................... 849 8,498 Payments for pizza parlor operations........... (12,873) (13,781) Payments for property operations............... (63,096) (18,428) Interest paid.................................. (39,003) (16,497) Advisory and servicing fees paid to affiliate.. (2,487) (1,709) General and administrative expenses paid....... (8,899) (4,232) Other.......................................... 5,345 (861) -------- -------- Net cash (used in) operating activities...... (6,454) (9,088) Cash Flows From Investing Activities Collections on notes receivable................ 13,170 7,653 Funding of notes receivable.................... (30,717) (268) Pizza parlor equipment purchased............... (578) (787) Proceeds from sale of real estate.............. 60,130 34,126 Proceeds from sale of marketable equity securities.................................... 1,604 3,787 Purchases of marketable equity securities...... (1,196) (5,001) Investment in real estate entities............. (35) (2,650) Distributions from equity investees' investing activities.................................... - 13,165 Acquisition of real estate..................... (36,649) (37,283) Deposits....................................... 23,578 (903) Real estate improvements....................... (13,578) (4,807) -------- -------- Net cash provided by investing activities.... 15,729 7,032 Cash Flows From Financing Activities Proceeds from notes payable.................... 71,385 82,395 Payments on notes payable...................... (96,770) (60,922) Deferred borrowing costs....................... (2,334) (6,322) Net advances (payments) to/from affiliates..... 18,281 (12,153) Margin borrowings, net......................... (693) 220 Common dividends paid.......................... (541) (1,033) Preferred dividends paid....................... (1,134) (91) Distributions to minority interest............. (2,921) (933) Sale of Common Stock under dividend reinvestment plan............................. 4 197 -------- -------- Net cash provided by (used in) financing activities.................................. (14,723) 1,358 Net increase (decrease) in cash and cash equivalents................................. $ (5,448) $ (698) Cash and cash equivalents, beginning of period.. 11,523 5,347 -------- -------- Cash and cash equivalents, end of period........ $ 6,075 $ 4,649 ======== ========
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, ------------------- 1999 1998 -------- -------- (dollars in thousands) Reconciliation of net income (loss) to net cash provided by (used in) operating activities Net income (loss)...................................... $ (8,178) $ 5,669 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation and amortization........................ 9,017 2,959 Amortization of deferred borrowing costs............. 5,907 3,462 Gain on sale of real estate.......................... (38,717) (8,974) Distributions from equity investees' operating cash flow.......................................... 849 8,498 Equity in (income) losses of investees............... (3,396) (21,330) Decrease in marketable equity securities............... 2,209 9 (Increase) decrease in accrued interest receivable........................................... (2,597) 346 (Increase) decrease in other assets.................... 11,674 (1,523) Increase in accrued interest payable................... (1,242) 349 Increase (decrease) in accounts payable and other liabilities..................................... 18,092 1,640 Other.................................................. (72) (193) -------- -------- Net cash (used in) operating activities............ $ (6,454) $ (9,088) ======== ======== Schedule of noncash investing and financing activities Notes payable from acquisition of real estate.......... $ 64,047 $ 14,619 Notes receivable canceled on reacquisition of property.............................................. - 1,300 Note receivable from sale of real estate............... 20,000 - Issuance of Series F Preferred Stock................... - 1,600 Issuance of Series G Preferred Stock................... - 100 Issuance of partnership units.......................... 1,617 - Investment in properties reacquired.................... - 5,270 Real estate obtained through foreclosure of mortgage note receivable.............................. - 22,715 Provision for loss..................................... 2,027 - Notes payable assumed by buyer upon sale of properties............................................ 2,428 - Dividend obligation discharged on conversion of Series B Preferred Stock.............................. - 44 Acquisition of IGI Properties Carrying value of mortgages assumed.................... - 43,421 Issuance of Class A partnership units.................. - 6,568 Carrying value of other assets......................... - (441) Carrying value of accounts payable and other liabilities........................................... - 292 Investment in partnerships............................. - 1,980
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 of American Realty Trust, Inc. ("ART") and consolidated entities (the "Company") have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the six month period ended June 30, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. 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, 1998 (the "1998 Form 10-K"). Certain balances for 1998 have been reclassified to conform to the 1999 presentation. NOTE 2. SYNTEK ASSET MANAGEMENT, L.P. ART owns a 96% limited partner interest in Syntek Asset Management, L.P. ("SAMLP"). Until December 18, 1998, SAMLP was the general partner of National Realty, L.P. ("NRLP") and National Operating, L.P. ("NOLP"), the operating partnership of NRLP (collectively the "Partnership"). Gene E. Phillips, a Director and Chairman of the Board of the Company until November 16, 1992, is also a general partner of SAMLP. As of June 30, 1999, the Company owned approximately 55% of the outstanding limited partner units of the Partnership. The Partnership, SAMLP and Gene E. Phillips were among the defendants in a class action lawsuit arising from the formation of the Partnership (the "Moorman Litigation"). An agreement settling such lawsuit (the "Settlement Agreement") for the above named defendants became effective on July 5, 1990. The Settlement Agreement provided for, among other things, the appointment of the Partnership oversight committee for the Partnership and the establishment of specified annually increasing targets for five years relating to the price of the Partnership's units of limited partner interest. The Settlement Agreement provided for the resignation and replacement of SAMLP as general partner if the unit price targets were not met for two consecutive anniversary dates. The Partnership did not meet the unit price targets for the first and second anniversary dates. On July 15, 1998, the Partnership, SAMLP and the Partnership oversight committee executed an Agreement for Cash Distribution and Election of Successor General Partner (the "Cash Distribution Agreement") which provided for the nomination of an entity affiliated with SAMLP to be the successor general partner of the Partnership, for the distribution of $11.4 million to the plaintiff class members and for the resolution of all related matters under the Settlement Agreement. On October 23, 8 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 2. SYNTEK ASSET MANAGEMENT, L.P. (Continued) 1998, the Court entered an order granting final approval of the Cash Distribution Agreement. The Court also entered orders requiring the Partnership to pay $404,000 in attorney's fees to Joseph B. Moorman's legal counsel, $30,000 to Joseph B. Moorman and $404,000 in attorney's fees to Robert A. McNeil's legal counsel. Pursuant to the order, $11.4 million was deposited by the Partnership into an escrow account and then transferred to the control of an independent administrator. The distribution of cash is under the control of the independent settlement administrator. On March 24, 1999, the initial distribution of cash was made to the plaintiff class members. The proposal to elect NRLP Management Corp. ("NMC"), a wholly-owned subsidiary of ART, as the successor general partner was submitted to the unitholders of the Partnership for a vote at a special meeting of unitholders held on December 18, 1998. NMC was elected by a majority of the Partnership unitholders. The Settlement Agreement remained in effect until December 18, 1998, when SAMLP resigned as general partner and NMC was elected successor general partner and took office. Under the Cash Distribution Agreement, NMC assumed liability for SAMLP's note for its original capital contribution to the Partnership. In addition, NMC assumed liability for the note which requires the repayment of the $11.4 million paid by the Partnership under the Cash Distribution Agreement, plus the $808,000 in court ordered attorney's fees and $30,000 paid to Joseph B. Moorman. This note requires repayment over a 10-year period, bears interest at a variable rate, currently 7.0% per annum, and is guaranteed by ART. The liability assumed under the Cash Distribution Agreement was expensed as a "litigation settlement." An additional $184,000 was expensed as a "litigation settlement" in the first quarter of 1999. As of December 31, 1998, ART discontinued accounting for its investment in the Partnership under the equity method upon the election of NMC as general partner of the Partnership and the settlement of the Moorman Litigation. The Company began consolidation of the Partnership's accounts at that date and its operations subsequent to that date. NOTE 3. NOTES AND INTEREST RECEIVABLE In January 1999, the Partnership collected, in full, a mortgage note receivable with a principal balance of $350,000. In May 1999, the Partnership collected, in full, a mortgage note receivable with a principal balance of $1.5 million. In both cases, the monies received were applied to paydown a note payable partially secured by the mortgage notes receivable. In June 1999, a mortgage note receivable in the amount of $4.2 million matured. The note is secured by (1) a first lien on approximately 1,000 9 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued) acres of land in Huerfano County, Colorado, known as Cuchara Valley Mountain Ski Resort; (2) an assignment of a $2.0 million promissory note which is 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 was classified as nonperforming at June 30, 1999. The Partnership is negotiating with the borrower to extend the loans' maturity date in exchange for a principal paydown. During 1998 and the first six months of 1999, the Partnership funded a total of $2.1 million of a $2.2 million loan commitment to Varner Road Partners, L.L.C. The loan is secured by 129.77 acres of land in Riverside County, California and a pledge of the stock of the borrower. The loan bears interest at 15.0% per annum and matures in November 1999. All principal and interest are due at maturity. During 1998 and the first six months of 1999, the Partnership funded a total of $26.0 million of a $52.5 million loan commitment to Centura Tower, Ltd. The loan is secured by 2.2 acres of land and an office building under construction in Farmers Branch, Texas. The loan bears interest at 12.0% per annum, requires monthly payments based on net revenues after development of the land and building and matures in January 2003. The borrower has not obtained a construction loan, therefore, the Partnership may be required to fund construction costs in excess of its loan commitment, in order to preserve its collateral interest. Estimated cost to construct the office building is in excess of $60.0 million. In July 1999, the Partnership funded an additional $4.9 million. Beginning in 1997 and through January 1999, the Partnership funded a $1.6 million loan commitment to Bordeaux Investments Two, L.L.C. ("Bordeaux"). The loan is secured by (1) a 100% 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. Until November 1998, the loan required monthly payments of interest only at the rate of 12.0% per annum, with the deferred interest payable at maturity in January 1999. In November 1998, the loan was modified to allow 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 modified increasing the loan commitment to $2.1 million and the Partnership funded an additional $33,000. In July 1999, the Partnership funded an additional $93,000. The property has had no cash flow, therefore, the Partnership ceased accruing interest in the second quarter of 1999. In June 1998, the Partnership funded a $365,000 loan to RB Land & Cattle, L.L.C. The loan is secured by a pledge of a note secured by 7,200 acres of undeveloped land near Crowell, Texas, and the personal guarantee of the borrower. The loan bore interest at 10.0% per annum 10 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued) and matured in December 1998. All principal and interest were due at maturity. The borrower did not make the required payments and the loan was classified as nonperforming. The Partnership has begun foreclosure proceedings. The Partnership expects to incur no loss on foreclosure as the fair value of the collateral property, less estimated costs of sale, exceeds the carrying value of the note. In August 1998, the Partnership funded a $6.0 million loan to Centura Holdings, LLC, a subsidiary of Centura Tower, Ltd. The loan is secured by 6.4 acres of land in Farmers Branch, Texas. The loan bears interest at 15.0% per annum and matures in August 2000. All principal and interest are due at maturity. In February 1999, the Partnership funded an additional $37,500. Also in August 1998, the Partnership funded a $3.7 million loan to JNC Enterprises, Inc. ("JNC"). The loan was secured by a contract to purchase 387 acres of land in Collin County, Texas, the guaranty of the borrower and the personal guarantees of its partners. The loan bore interest at 12.0% per annum and matured the earlier of termination of the purchase contract or February 1999. All principal and interest were due at maturity. This loan was cross- collateralized with other JNC loans. In January 1999, ART purchased the contract from JNC and acquired the land. In connection with the purchase, Garden Capital, L.P. ("GCLP") funded an additional $6.0 million of its $95.0 million loan commitment to ART. GCLP is a partnership in which NOLP is the sole limited partner with a 99.3% limited partner interest and a wholly-owned subsidiary of ART is the general partner with .7% general partner interest. A portion of the funds were used to payoff the $3.7 million loan, including accrued but unpaid interest, a $1.3 million paydown of the JNC line of credit and a $820,000 paydown of the JNC Frisco Panther Partners, Ltd. loan, discussed below. See NOTE 7. "NOTES PAYABLE." Further in August 1998, the Partnership funded a $635,000 loan to La Quinta Partners, LLC. The loan is 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. The loan bore interest at 10.0% per annum and matured in November 1998. All principal and interest were due at maturity. In November and December 1998, the Partnership received $250,000 in principal paydowns. 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 balances increasing it to $401,000 at June 30, 1999. In 1997 and 1998, the Partnership funded a $3.8 million loan to Stratford & Graham Developers, L.L.C. The loan is secured by 1,485 acres of unimproved land in Riverside County, California. In the first six months of 1999, the Partnership funded an additional $305,000, increasing the loan balance to $4.1 million. The loan bears interest at 15.0% per annum and matured in June 1999. All principal and interest 11 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued) were due at maturity. The borrower did not make the required principal and interest payments and the loan was classified as nonperforming at June 30, 1999. The Partnership has begun foreclosure proceedings. The Partnership expects to incur no loss on foreclosure as the fair value of the collateral property, less estimated costs of sale, exceeds the carrying value of the note. In October 1998, the Partnership funded three loans to JNC or affiliated entities. The first JNC loan of $1.0 million was secured by a second lien on 3.5 acres of land in Dallas, Texas, the guaranty of the borrower and the personal guarantees of its partners. The loan bore interest at 14.0% per annum and matured in October 1999. All principal and interest were due at maturity. This loan was paid in full in July 1999. The second loan, also $1.0 million, was secured by a second lien on 2.9 acres of land in Dallas, Texas, the guaranty of the borrower and the personal guarantees of its partners. The loan bore interest at 14.0% per annum and matured in October 1999. All principal and interest were due at maturity. This loan was paid in full in March 1999. The third loan, in the amount of $2.1 million was to Frisco Panther Partners, Ltd. The loan is secured by a second lien on 408.2 acres of land in Frisco, Texas, the guaranty of the borrower and the personal guarantees of its partners. The loan bears interest at 14.0% per annum and matures in October 1999. All principal and interest are due at maturity. This loan is cross-collateralized with other JNC loans funded by the Partnership. In January 1999, the Partnership received a paydown of $820,000 on the Frisco Panther Partners, Ltd. loan. In March 1998, the Partnership ceased receiving the required payments on a $3.0 million note receivable secured by an office building in Dallas, Texas. In October 1998, the Partnership began foreclosure proceedings. In March 1999, the Partnership received payment in full, including accrued but unpaid interest. In December 1998, the Partnership funded $3.3 million of a $5.0 million loan commitment to JNC. The loan is secured by a second lien on 1,791 acres of land in Denton County, Texas, and a second lien on 220 acres of land in Tarrant County, Texas. The loan bears interest at 12.0% per annum and matures in December 1999. All principal and interest are due at maturity. The loan is cross-collateralized with other JNC loans funded by the Partnership. In January 1999, the Partnership received a $1.3 million paydown. In first half of 1999, the Partnership funded an additional $3.0 million. At December 1998, the Partnership's one wraparound mortgage note receivable was in default. The Partnership has been vigorously pursuing its rights under the loan agreement. If the Partnership should be unsuccessful, and the underlying lien holder forecloses the collateral property, the Partnership will incur no loss in excess of previously established reserves. 12 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued) In April 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 and by 100% of the general and limited partner interest in Partners Capital, Ltd. and a 50% profits interest in subsequent land sales. Also in April 1999, ART funded $1.8 million of 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. and a profits interest in subsequent land sales. Related Party. In February 1999, GCLP funded a $5.0 million unsecured loan to Davister Corp., which at July 31, 1999, owned approximately 15.8% of the outstanding shares of the Company's Common Stock. The loan bears interest at 12.0% per annum and matures in February 2000. All principal and interest are due at maturity. The loan is guaranteed by Basic Capital Management, Inc. ("BCM"), ART's advisor. NOTE 4. REAL ESTATE In January 1999, GCLP sold the 199 unit Olde Town Apartments in Middleton, Ohio, for $4.6 million, receiving net cash of $4.4 million after the payment of various closing costs, including a real estate brokerage commission of $136,000 to Carmel Realty, Inc. ("Carmel Realty"), an affiliate of BCM, the Company's advisor. A gain of $2.2 million was recognized on the sale. In February 1999, ART purchased Frisco Bridges land, a 336.8 acre parcel of unimproved land in Collin County, Texas, for $46.8 million, paying $7.8 million in cash and obtained mortgage financing totaling $39.0 million. Seller financing in the amount of $22.0 million, secured by 191.5 acres of the parcel, bears interest at prime plus 2.0%, currently 9.75% per annum, requires monthly interest only payments and matures in January 2000. A mortgage in the amount of $15.0 million, secured by 125.0 acres of the parcel, bears interest at the prime rate plus 4.5%, currently 12.25% per annum, required principal reduction payments of $1.0 million on each of May 1, June 1, and July 1, and requires principal reduction payments of $1.0 million on each of August 1, September 1 and October 1, and $3.0 million on November 1, 1999 in addition to monthly interest payments and matures in February 2000. Another mortgage in the amount of $2.0 million, secured by 13.5 acres of the parcel, bears interest at 14% per annum, requires monthly interest only payments and matures in January 2000. ART's Double O land in Las Colinas, Texas and its Desert Wells land in Palm Desert, California, are pledged as additional collateral for these loans. ART drew down $6.0 million under its line of credit with the GCLP for a portion of the cash requirement. See NOTE 7. "NOTES PAYABLE." A real estate brokerage commission of $1.4 million was paid to Carmel Realty. Also in February 1999, ART sold a 4.6 acre tract of its Plano Parkway land parcel for $1.2 million. ART received net cash of $1.1 million 13 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. REAL ESTATE (Continued) after the payment of various closing costs, including a real estate brokerage commission of $36,000 to Carmel Realty. Simultaneously with the sale, the mortgage debt secured by such land parcel was refinanced in the amount of $7.1 million. The new mortgage bears interest at the prime rate plus 4.5%, currently 12.25% per annum, requires monthly interest only payments and matures in January 2000. The net cash from the sale and refinancing along with an additional $921,000 was used to payoff the $8.9 million seller financing secured by the land parcel. A mortgage brokerage and equity refinancing fee of $71,000 was paid to BCM. A gain of $473,000 was recognized on the sale. In February 1999, GCLP sold the 225 unit Santa Fe Apartments in Kansas City, Missouri, for $4.6 million, receiving net cash of $4.3 million after the payment of various closing costs, including a real estate brokerage commission of $137,000 to Carmel Realty. A gain of $706,000 was recognized on the sale. Also in February 1999, GCLP sold the 480 unit Mesa Ridge Apartments in Mesa, Arizona, for $19.5 million, receiving net cash of $793,000 after the payment of various closing costs, including a real estate brokerage commission of $585,000 to Carmel Realty and remitting $17.8 million to the lender to hold in escrow pending a substitution of collateral. In May 1999, the 259 unit Bavarian Woods Apartments and the 149,855 sq. ft. Westwood Shopping Center were approved as substitute collateral. GCLP received net cash of $7.8 million after paying off $7.2 million in mortgage debt secured by the Bavarian Woods Apartments and Westwood Shopping Center, funding required escrows and closing costs on the two properties, and paying down $2.2 million on the Mesa Ridge debt, including a $133,000 prepayment penalty. A gain of $10.2 million was recognized on the sale. In March 1999, ART sold a 13.0 acre tract of its Rasor land parcel for $1.6 million, receiving no net cash after paying down by $1.5 million the mortgage debt secured by such land parcel and the payment of various closing costs, including a real estate brokerage commission of $48,000 to Carmel Realty. A gain of $979,000 was recognized on the sale. Also in March 1999, ART sold two tracts totaling 9.9 acres of its Mason/Goodrich land parcel for $956,000, receiving net cash of $33,000 after paying down by $860,000 the mortgage debt secured by such land parcel and the payment of various closing costs, including a real estate brokerage commission of $29,000 to Carmel Realty. A gain of $432,000 was recognized on the sale. Further in March 1999, ART sold, in a single transaction, a 13.7 acre tract of its McKinney II land parcel and a 20.0 acre tract of its McKinney IV land parcel for $7.7 million, receiving no net cash after paying down by $5.5 million the mortgage secured by such land parcel, the funding of required escrows and the payment of various closing costs, including a real estate brokerage commission of $231,000 to Carmel Realty. A gain of $2.9 million was recognized on the sale. 14 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. REAL ESTATE (Continued) In April 1999, GCLP sold the 166 unit Horizon East Apartments in Dallas, Texas, for $4.0 million, receiving net cash of $1.2 million after paying off $2.6 million in mortgage debt and the payment of various closing costs, including a real estate brokerage commission of $79,000 to Carmel Realty. A gain of $1.8 million was recognized on the sale. Also in April 1999, GCLP sold the 120 unit Lantern Ridge Apartments in Richmond, Virginia, for $3.4 million, receiving net cash of $880,000 after the payment of various closing costs, including a real estate brokerage commission of $103,000 to Carmel Realty. The purchaser assumed the $2.4 million mortgage secured by the property. A gain of $2.3 million was recognized on the sale. In May 1999, ART sold a 15.0 acre tract of its Vista Ridge land parcel for $2.6 million, receiving net cash of $552,000 after paying down by $1.8 million the mortgage secured by such land parcel and the payment of various closing costs, including a real estate brokerage commission of $79,000 to Carmel Realty. A gain of $913,000 was recognized on the sale. Also in May 1999, ART purchased Rowlett Creek land, a 80.4 acre parcel of unimproved land in Collin County, Texas, for $1.6 million. ART paid $400,000 in cash and obtained seller financing of the remaining $1.2 million of the purchase price. The seller financing bears interest at 8.75% per annum, requires quarterly interest only payments and matures in May 2004. A real estate brokerage commission of $94,000 was paid to Carmel Realty. Further in May 1999, ART purchased Leone land, a 8.2 acre parcel of unimproved land in Irving, Texas, for $1.5 million. ART paid $300,000 in cash and obtained seller financing of the remaining $1.2 million of the purchase price. The seller financing bears interest at 8.0% per annum, requires quarterly interest only payments, and matures in May 2003. A real estate brokerage commission of $91,000 was paid to Carmel Realty. In May 1999, a newly-formed controlled partnership in which a wholly-owned subsidiary of ART is the 1.0% managing general partner and ART is the 99% Class B limited partner, purchased the 177,211 sq. ft. Encino Executive Plaza in Los Angeles, California, for $40.1 million. The partnership paid $2.8 million in cash, assumed $34.6 million in mortgage debt, obtained $1.1 million in seller financing and issued 1.6 million Class A limited partner units. The mortgage bears interest at 7.74% per annum, requires monthly payments of principal and interest of $247,500 and matures in May 2008. The seller financing bears interest at 7.0% per annum, requires interest only payments semiannually in July and January, requires principal payments of $369,000 in May 2000 and May 2001 and matures in May 2002. The Class A units accrue a preferred return of $.05 per annum per Class A unit for the first year, $.06 per annum per Class A unit for the second year, $.07 per annum per Class A unit for the third year and $2.09 per annum per Class A unit thereafter, paid quarterly. 15 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. REAL ESTATE (Continued) Also in May 1999, ART sold two tracts of its Plano Parkway land parcel totaling 24.5 acres for $4.9 million. ART received no net cash after paying down by $4.7 million the mortgage debt secured by such land parcel and the payment of various closing costs, including a real estate brokerage commission of $147,000 to Carmel Realty. A gain of $1.1 million was recognized on the sale. In May 1999, ART acquired the remaining joint venture interest in its 3.6 acre Atlanta land parcel for $1.3 million in cash. Subsequently, ART exchanged the Atlanta land parcel for 147.4 acres of land in Nashville, Tennessee and $1.3 million in cash. No gain or loss was recognized on the exchange. Also in May 1999, the Partnership purchased the 27,000 sq. ft. Cooley Office Building in Farmers Branch, Texas, for $3.5 million, paying $1.5 million in cash and obtained mortgage financing of $2.0 million. The mortgage bears interest at a variable rate, currently 8.75% per annum, requires monthly payments of principal and interest of $17,875 and matures in May 2019. A real estate brokerage commission of $35,000 was paid to Carmel Realty. In June 1999, ART sold two tracts of its Frisco Bridges land parcel totaling 77.6 acres for $16.9 million. ART received net cash of $2.7 million after paying off $2.0 million in mortgage debt secured by such land parcel, paying down by $11.0 million another mortgage secured by such land parcel and the payment of various closing costs, including a real estate brokerage commission of $507,000 to Carmel Realty. A gain of $4.2 million was recognized on the sale. Also in June 1999, ART sold a 6.0 acre tract of its Plano Parkway land parcel for $1.6 million. ART received no net cash after paying down by $1.6 million the mortgage debt secured by such land parcel and the payment of various closing costs, including a real estate brokerage commission of $47,000 to Carmel Realty. A gain of $615,000 was recognized on the sale. Further in June 1999, ART sold its Continental Hotel for $25.0 million, receiving a nonrefundable deposit of $5.0 million and providing short term financing of $20.0 million. A gain of $7.9 million was recognized on the sale. In June 1999, ART purchased Vineyards II land, a 18.6 acre parcel of unimproved land in Tarrant County, Texas, for $6.3 million. ART paid $2.3 million in cash and obtained seller financing of the remaining $4.0 million of the purchase price. The seller financing bears interest at 14.5% per annum, requires monthly interest only payments and matures in June 2002. A real estate brokerage commission of $190,000 was paid to Carmel Realty. 16 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. REAL ESTATE (Continued) Also in June 1999, the Partnership purchased the Lake Houston land, 33.58 acres of unimproved land in Harris County, Texas, for $2.5 million in cash. A real estate brokerage commission of $75,000 was paid to Carmel Realty. The Partnership has obtained a construction financing commitment in the amount of $13.7 million, to construct a 312 unit apartment complex on the site. Construction costs are expected to approximate $16.7 million. Construction was begun in July 1999, and is expected to be completed in the second quarter of 2001. Further in June 1999, GCLP sold the 368 unit Barcelona Apartments in Tampa, Florida, for $9.8 million, receiving net cash of $2.2 million after paying off $7.0 million in mortgage debt and the payment of various closing costs, including a real estate brokerage commission of $79,000 to Carmel Realty. A gain of $2.2 million was recognized on the sale. In November 1998, a newly-formed controlled partnership with ART as the Class B limited partner and a wholly-owned subsidiary of ART as the 1% Managing General Partner, purchased two apartments with a total of 423 units in Indianapolis, Indiana, for $7.2 million, paying $14,000 in cash, assuming $5.9 million in mortgage debt and issuing $1.3 million in Class A limited partner units. In June 1999, ART relinquished it's general and Class B limited partner interests. A provision for loss of $2.0 million was recognized. NOTE 5. INVESTMENT IN EQUITY INVESTEES Real estate entities. The Company's investment in equity investees at June 30, 1999, included equity securities of three publicly traded Real Estate Investment Trusts (collectively the "REITs"), Continental Mortgage and Equity Trust ("CMET"), Income Opportunity Realty Investors, Inc. ("IORI") and Transcontinental Realty Investors, Inc. ("TCI"), and interests in real estate joint ventures and partnerships. BCM, the Company's advisor, also serves as advisor to the REITs. The Company 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 8. "MARGIN BORROWINGS." 17 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 5. INVESTMENT IN EQUITY INVESTEES (Continued) The Company's investment in real estate entities, accounted for using the equity method, at June 30, 1999, was as follows:
Equivalent Percentage Carrying Investee of Value of Book Value Market Value Ownership at Investment at at of Investment at Investee June 30, 1999 June 30, 1999 June 30, 1999 June 30, 1999 - -------- ------------- ------------- ------------- ---------------- CMET 41.0% $16,350 $36,407 $24,661 IORI 30.4 3,054 7,033 2,904 TCI 31.0 11,608 30,366 14,905 ------- ------- 31,012 $42,470 ======= Other 6,312 ------- $37,324 =======
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. Management continues to believe that the market value of each of the REITs undervalues their assets and the Company may, therefore, continue to increase its ownership in these entities in 1999. Set forth below is summarized results of operations of equity investees for the six months ended June 30, 1999: Revenues.................................................... $81,122 Equity in income of partnerships............................ 912 Property operating expenses................................. 49,623 Depreciation................................................ 11,251 Interest expense............................................ 25,985 ------- (Loss) before gains on sale of real estate.................. (4,825) Gains on sale of real estate................................ 15,834 ------- Net income.................................................. $11,009 =======
The Company's share of equity investees' loss before gains on the sale of real estate was $1.5 million for the six months ended June 30, 1999, and its share of equity investees' gains on sale of real estate was $4.9 million for the six months ended June 30, 1999. The Company's cash flow from the REITs is dependent on the ability of each of them to make distributions. In the fist six months of 1999, distributions totaling $849,000 were received from the REITs. In the first six months of 1999, ART purchased a total of $35,000 of equity securities of the REITs. 18 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 6. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO Since 1994, the Company has been purchasing equity securities of entities other than those of the REITs and the NRLP to diversify and increase the liquidity of its margin accounts. In the first six months of 1999, the Company purchased $1.2 million and sold $1.5 million of such securities. These equity securities are considered a trading portfolio and are carried at market value. At June 30, 1999, the Company recognized an unrealized decrease in the market value of its trading portfolio securities of $1.9 million. Also in the first six months of 1999, the Company realized a net gain of $69,000 from the sale of trading portfolio securities and received $9,000 in dividends. Unrealized and realized gains and losses on trading portfolio securities are included in other income in the accompanying Consolidated Statements of Operations. NOTE 7. NOTES PAYABLE In February 1999, the Partnership obtained mortgage financing secured by the unencumbered 124,200 sq. ft. Melrose Business Park in Oklahoma City, Oklahoma, in the amount of $900,000, receiving net cash of $870,000 after the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $9,000 to BCM. The mortgage bears interest at a variable rate, currently 8.5% per annum, requires monthly payments of principal and interest of $8,000 and matures in February 2019. Also in February 1999, the Partnership obtained mortgage financing secured by the unencumbered 54,649 sq. ft. 56 Expressway Office Building in Oklahoma City, Oklahoma, in the amount of $1.7 million, receiving net cash of $1.7 million after the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $17,000 to BCM. The mortgage bears interest at a variable rate, currently 8.5% per annum, requires monthly payments of principal and interest of $15,000 and matures in February 2019. In March 1999, ART obtained a second mortgage financing on its Frisco Bridges land parcel in the amount of $2.0 million. In June 1999, the lender advanced an additional $2.0 million. The mortgage bears interest at 12.5% per annum and requires interest and principal to be paid at maturity in June 1999. Also in March 1999, the Las Colinas I term loan lender provided additional financing on ART's Stagliano, Dalho, Bonneau and Valley Ranch III land parcels in the amount of $2.2 million. The proceeds from this financing along with an additional $1.4 million in cash were used to pay off the $3.1 million in mortgage debt secured by such land parcels. A mortgage brokerage and equity refinancing fee of $22,000 was paid to BCM. At March 31, 1999, the mortgage debt secured by ART's McKinney I, II, III, IV, V and Dowdy land parcels in the amount of $15.2 million 19 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 7. NOTES PAYABLE (Continued) matured. ART and the lender reached an agreement to extend the mortgage's maturity to September 1999 in exchange for, among other things, ART's payment of an extension fee. In May 1999, the Partnership obtained mortgage financing secured by the unencumbered 257 unit Pines Apartments in Little Rock, Arkansas, and by a $5.0 million note receivable secured by second liens on two parcels of land in Denton County and Tarrant County, Texas, in the amount of $4.0 million. The Partnership received net cash of $3.9 million after the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $40,000 to BCM. The mortgage bears interest at 14.0% per annum, requires monthly payments of interest only and matures in May 2000. Also in May 1999, the Las Colinas I term loan lender provided additional financing secured by ART's Plano Parkway land parcel in the amount of $2.0 million. The proceeds from this financing along with an additional $831,000 in cash were used to payoff the remaining $2.7 million in mortgage debt secured by such land parcel and the payment of various closing costs. In June 1999, the Partnership obtained mortgage financing secured by the unencumbered 100 unit Stonebridge Apartments in Florissant, Missouri, in the amount of $3.0 million. The Partnership received net cash of $2.9 million after the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $30,000 to BCM. The mortgage bears interest at 8.33% per annum, requires monthly payments of principal and interest of $23,814 and matures in July 2002. Related Party. In 1998 and the first six months of 1999, GCLP funded $92.2 million of a $95.0 million loan commitment to ART. The loan is secured by (1) second liens on an office building in Minnesota, four apartments in Mississippi, and 130.54 acres of land in Texas, (2) by the stock of ART Holdings, Inc., a wholly-owned subsidiary of ART that owns 3,308,535 units of NRLP, and (3) by the stock of NMC. The loan bears interest at 12.0% per annum, requires monthly payments of interest only and matures in November 2003. In February 1999, ART made a $999,000 paydown on the loan. In July 1999, GCLP funded an additional $2.5 million. The loan balance is eliminated in consolidation. In December 1998, in connection with the Litigation Settlement, NMC, the general partner of the Partnership, assumed responsibility for repayment to the Partnership of the $12.4 million paid by the Partnership to the Moorman Litigation plaintiff class members and legal counsel; $184,000 of such amount being paid in March 1999. The loan bears interest at 90 day LIBOR (London InterBank Offered Rate) plus 2.0% per annum, currently 7.0% per annum, adjusted every 90 days and requires annual payments of accrued interest plus principal payments of $500,000 in each of the first three years, $750,000 in each of the next three years, $1.0 20 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 7. NOTES PAYABLE (Continued) million in each of the next three years, with payment in full of the remaining balance in the tenth year. The note is guaranteed by ART. The note matures upon the earlier of the liquidation or dissolution of the Partnership, NMC ceasing to be general partner or ten years from March 24, 1999, the date of the first cash distribution to the Moorman Litigation plaintiff class members. The loan balance is eliminated in consolidation. NOTE 8. MARGIN BORROWINGS The Company has margin arrangements with various brokerage firms which provide for borrowing of up to 50% of the market value of the Company's marketable equity securities. The borrowings under such margin arrangements are secured by equity securities of the REITs, NRLP and the Company's trading portfolio and bear interest rates ranging from 7.0% to 11.0%. Margin borrowing totaled $35.6 million at June 30, 1999. In August 1996, the Company consolidated its existing NRLP margin debt held by various brokerage firms into a single loan. At December 1998, the loan had a principal balance of $5.0 million. In February 1999, the loan was paid off. NOTE 9. INCOME TAXES Financial statement income varies from taxable income principally due to the accounting for income and losses of investees, gains and losses from asset sales, depreciation on owned properties, amortization of discounts on notes receivable and payable and the difference in the allowance for estimated losses. The Company had no taxable income or provision for income taxes in the six months ended June 30, 1999, due to operating loss carryforwards. NOTE 10. OPERATING SEGMENTS Significant differences among the accounting policies of the Company's operating segments as compared to the Company's consolidated financial statements principally involve the calculation and allocation of administrative expenses. Management evaluates the performance of the operating segments and allocates resources to each of them based on their operating income and cash flow. A reconciliation of expenses that are not reflected in the segments is $8.9 million and $4.2 million of administrative expenses for the six months ended June 30, 1999 and 1998, respectively. There are no intersegment revenues and expenses and the Partnership conducts all of its business within the United States. 21 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 10. OPERATING SEGMENTS (Continued) Presented below is the operating income of the reportable operating segments for the six months ended June 30, and segment assets at June 30.
Commercial Pizza 1999 Properties Apartments Hotels Land Parlors Receivables Total - ----------------- ---------- ---------- ------- -------- ------- ----------- -------- Operating revenue......... $ 14,241 $ 50,734 $15,661 $ 1,229 $14,953 $ - $ 96,818 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 -------- -------- ------- -------- ------- ----------- -------- 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 sales.... $ 19,460 $ 7,878 $ 11,379 $ 38,717 ======== ======= ======== ========
22 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 10. OPERATING SEGMENTS (Continued)
Commercial Pizza 1998 Properties Apartments Hotels Land Parlors Receivables Total - ----------------------- ---------- ---------- ------- -------- ------- ----------- -------- Operating revenue............... $ 8,060 $ 3,537 $15,395 $ 316 $14,085 $ - $ 41,393 Operating expenses.............. 4,879 2,984 11,640 1,701 12,005 - 33,209 Interest income................ - - - - - 154 154 Interest expense - notes receivable............ - - - - - - - ------- ------- ------- -------- ------- ----------- -------- Operating income (loss)................ $ 3,181 $ 553 $ 3,755 $(1,385) $ 2,080 $ 154 $ 8,338 ======= ======= ======= ======== ======= =========== ======== Depreciation/ amorti- zation................ $ 695 $ 613 $ 1,145 $ - $ 504 $ - $ 2,957 Interest on debt.................. 2,247 1,932 3,070 10,535 136 - 17,920 Capital expendi- tures................. 3,827 - 870 - 110 - 4,807 Assets................. 53,507 69,589 89,918 185,354 9,758 52,053 460,179 Land Total -------- -------- Sales price............ $ 36,600 $ 36,600 Cost of sales.......... 27,626 27,626 -------- -------- Gain on sale........... $ 8,974 $ 8,974 ======== ========
NOTE 11. 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 interests into 8,000,000 Class A limited partner units. The units are exchangeable into shares of the Company'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 Class A limited partners notified the Company 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 an agreement with the other Class A limited partners to acquire the remaining 7,900,000 Class A units for $1.00 per unit. In April 1999, 900,000 units were purchased and an additional 1.0 million units were purchased in July 1999, and 1.0 million units will be purchased in October 1999 and January 2000 and 2.0 million units in May 2001 and May 2002. Litigation. The Company is involved in various lawsuits arising in the ordinary course of business. In the opinion management, the outcome of these lawsuits will not have a material impact on the Company's financial condition, results of operations or liquidity. 23 AMERICAN REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 12. SUBSEQUENT EVENTS In July 1999, ART sold two tracts totaling 11.8 acres of its Plano Parkway land parcel for $3.8 million. ART received net cash of $1.7 million after paying down its Las Colinas I term loan by $2.0 million and the payment of various closing costs, including a real estate brokerage commission of $112,000 to Carmel Realty. ART will recognized a gain on the sale. Also in July 1999, ART sold two tracts totaling 6.7 acres of its Vista Ridge land parcel for $1.4 million. ART received net cash of $329,000 after paying down by $975,000 the mortgage debt secured by such land parcel and the payment of various closing costs, including a real estate brokerage commission of $43,000 to Carmel Realty. ART will recognize a gain on the sale. Further in July 1999, ART sold a .1 acre tract of its JHL Connell land parcel for $53,000. ART received no net cash after paying down by $49,000 the mortgage debt secured by such land parcel and the payment of various closing costs, including a real estate brokerage commission of $2,000 to Carmel Realty. ART will recognize a gain on the sale. In July 1999, ART purchased Monterey land, a 85.0 acre parcel of unimproved land in Riverside County, California, for $5.7 million. ART paid $1.2 million in cash and obtained seller financing of the remaining $4.5 million of the purchase price. The seller financing bears interest at 9.0% per annum, requires quarterly interest only payments, principal paydowns of $500,000 each in June 2000 and June 2001 and matures in June 2002. A real estate brokerage commission of $337,500 was paid to Carmel Realty. Also in July 1999, ART purchased Wakefield land, a 70.0 acre parcel of unimproved land in Allen, Texas, for $1.3 million. ART paid $700,000 and obtained seller financing of the remaining $600,000 of the purchase price. The seller financing bears interest at 8.5% per annum, requires quarterly interest only payments and matures in July 2004. A real estate brokerage commission of $78,000 was paid to Carmel Realty. Further in July 1999, ART sold a 1.4 acre tract of its Valley Ranch land parcel for $163,000. ART received net cash of $150,000 after the payment of various closing costs, including a real estate brokerage commission of $5,000 to Carmel Realty. ART will recognize a gain on the sale. In July 1999, the Partnership received $1.3 million on the collection of a mortgage note receivable, including a $400,000 participation fee. Also in July 1999, the Partnership obtained mortgage financing secured by the unencumbered 76 unit Bridgestone Apartments in Friendswood, Texas, in the amount of $2.1 million, receiving net cash of $2.0 million after the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $21,000 to BCM. The mortgage bears interest at 7.72% per annum, requires monthly payments of principal and interest of $15,144 and matures in August 1999. 24 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 provided opportunities for capital appreciation as well as current income. Liquidity and Capital Resources General. Cash and cash equivalents at June 30, 1999 totaled $6.1 million, compared with $11.5 million at December 31, 1998. Although ART anticipates that during the remainder of 1999 it will generate excess 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, the sale or refinancing of properties and, to the extent available or necessary, borrowings from its advisor and affiliates, which totaled $27.2 million at June 30, 1999, to meet its debt service obligations, pay taxes, interest and other non-property related expenses. At December 31, 1998, notes payable totaling $164.2 million had either scheduled maturities or required principal reduction payments during 1999. During the first six months of 1999, ART either extended, refinanced, paid down, paid off or received commitments from lenders to extend or refinance $55.3 million of the debt scheduled to mature in 1999. Net cash used in operating activities decreased to $6.5 million in the six months ended June 30, 1999, from $9.1 million in the six months ended June 30, 1998. Fluctuations in the components of cash flow used in operating activities are discussed in the following paragraphs. Net cash from pizza operations (sales less cost of sales) in the six months ended June 30, 1999, increased to $2.8 million from $248,000 in 1998. The increase was due to the benefits of a more aggressive marketing and advertising strategy offset in part by record high cheese prices in January 1999. Net cash from property operations (rents collected less payments for expenses applicable to rental income) increased to $34.0 million in the six months ended June 30, 1999 from $5.1 million in 1998. The increases were primarily attributable to the 16 land parcels and 36 apartments purchased by ART in 1998 and the consolidation of the Partnership effective January 1, 1999. See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P." The Company expects an increase in cash flow from property operations during the remainder of 1999. Such increase is expected to be derived from a full year of operations of the 36 apartments that were acquired during 1998 and the consolidation of the Partnership effective January 1, 1999. ART is also expecting substantial land sales and selected property sales to generate additional cash. 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) Interest collected increased to $1.0 million in the six months ended June 30, 1999, from $381,000 in 1998. The increase was attributable to loans funded by the Partnership in 1998 and 1999. Interest paid increased to $39.0 million in the six months ended June 30, 1999, from $16.5 million in 1998. The increase was primarily due to debt incurred or assumed relating to 16 land parcels and 36 apartments purchased by ART in 1998 and the consolidation of the Partnership's operations effective January 1, 1999. Advisory fee paid increased to $2.5 million in the six months ended June 30, 1999, from $1.7 million in 1998. The increase was due to an increase in ART's gross assets, the basis for such fee. General and administrative expenses paid increased to $8.9 million in the six months ended June 30, 1999, from $4.2 million in 1998. The increase was primarily attributable to the consolidation of the Partnership's operations effective January 1, 1999. Distributions from equity investees' decreased to $849,000 in the six months ended June 30, 1999, from $8.5 million in 1998. Included in 1998 distributions were special distributions totaling $6.1 million from TCI and the Partnership that had been accrued at December 31, 1997. Other cash from operating activities increased to $5.3 million in the six months ended June 30, 1999, from a use of $861,000 in 1998. The increase was due to a decrease in property prepaids, other miscellaneous property receivables and property escrows. Real Estate. In January 1999, GCLP sold the 199 unit Olde Town Apartments in Middleton, Ohio, for $4.6 million, receiving net cash of $4.4 million after the payment of various closing costs. In February 1999, ART purchased Frisco Bridges land, a 336.8 acre parcel of unimproved land in Collin County, Texas, for $46.8 million, paying $7.8 million in cash and obtained mortgage and seller financing totaling $39.0 million. Also in February 1999, ART sold a 4.6 acre tract of its Plano Parkway land parcel for $1.2 million. Simultaneously with the sale, the mortgage debt secured by such land parcel was refinanced in the amount of $7.1 million. The net cash from the sale and refinancing along with an additional $921,000 was used to payoff the $8.9 million seller financing secured by the land parcel. Further in February 1999, GCLP sold the 225 unit Santa Fe Apartments in Kansas City, Missouri, for $4.6 million, receiving net cash of $4.3 million after the payment of various closing costs. In February 1999, GCLP sold the 480 unit Mesa Ridge Apartments in Mesa, Arizona, for $19.5 million, receiving net cash of $793,000 after the 26 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) payment of various closing costs and remitting $17.8 million to the lender to hold in escrow pending substitution collateral. In May 1999, the 259 unit Bavarian Woods Apartments and the 149,855 sq. ft. Westwood Shopping Center were approved as substitute collateral. GCLP received net cash of $7.8 million after paying off $7.2 million in mortgage debt secured by the Bavarian Woods Apartments and Westwood Shopping Center, funding required escrows and closing costs on the two properties, and paying down $2.2 million on the Mesa Ridge debt, including a $133,000 prepayment penalty. In March 1999, ART sold a 13.0 acre tract of its Rasor land parcel for $1.6 million, receiving no net cash after paying down by $1.5 million the mortgage debt secured by such land parcel and the payment of various closing costs. Also in March 1999, ART sold two tracts totaling 9.9 acres of its Mason/ Goodrich land parcel for $956,000, receiving net cash of $33,000 after paying down by $860,000 the mortgage debt secured by such land parcel and the payment of various closing costs. Further in March 1999, ART sold in a single transaction, a 13.7 acre tract of its McKinney II land parcel and a 20.0 acre tract of its McKinney IV land parcel for $7.7 million, receiving no net cash after paying down by $5.5 million the mortgage secured by such land parcel, the funding of required escrows and the payment of various closing costs. In April 1999, GCLP sold the 166 unit Horizon East Apartments in Dallas, Texas, for $4.0 million, receiving net cash of $1.2 million after paying off $2.6 million in mortgage debt and the payment of various closing costs. Also in April 1999, GCLP sold the 120 unit Lantern Ridge Apartments in Richmond, Virginia, for $3.4 million, receiving net cash of $880,000 after the payment of various closing costs. In May 1999, ART sold a 15.0 acre tract of its Vista Ridge land parcel for $2.6 million, receiving net cash of $552,000 after paying down by $1.8 million the mortgage secured by such land parcel and the payment of various closing costs. Also in May 1999, ART purchased Rowlett Creek land, a 80.4 acre parcel of unimproved land in Collin County, Texas, for $1.6 million. ART paid $400,000 in cash and obtained seller financing of the remaining $1.2 million of the purchase price. Further in May 1999, ART purchased Leone land, a 8.2 acre parcel of unimproved land in Irving, Texas, for $1.5 million. ART paid $300,000 in cash and obtained seller financing of the remaining $1.2 million of the purchase price. In May 1999, a newly-formed controlled partnership in which a wholly-owned subsidiary of ART is the 1.0% managing general partner and ART is the 99% 27 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) Class B limited partner purchased the 177,211 sq. ft. Encino Executive Plaza in Los Angeles, California, for $40.1 million. The partnership paid $2.8 million in cash, assumed $34.6 million in mortgage debt, obtained $1.1 million in seller financing and issued 1.6 million Class A limited partner units. Also in May 1999, ART sold two tracts of its Plano Parkway land parcel totaling 24.5 acres for $4.9 million. ART received no net cash after paying down by $4.7 million the mortgage debt secured by such land parcel and the payment of various closing costs. In May 1999, ART acquired the remaining joint venture interest in its 3.6 acre Atlanta land parcel for $1.3 million in cash. Subsequently, ART exchanged the Atlanta land parcel for 147.4 acres of land in Nashville, Tennessee and $1.3 million in cash. Also in May 1999, the Partnership purchased the 27,000 sq. ft. Cooley Office Building in Farmers Branch, Texas, for $3.5 million, paying $1.5 million in cash and obtained mortgage financing of $2.0 million. In June 1999, ART sold two tracts of its Frisco Bridges land parcel totaling 77.6 acres for $16.9 million. ART received net cash of $2.7 million after paying off $2.0 million in mortgage debt secured by such land parcel, paying down by $11.0 million another mortgage secured by such land parcel and the payment of various closing costs. Also in June 1999, ART sold a 6.0 acre tract of its Plano Parkway land parcel for $1.6 million. ART received no net cash after paying down by $1.6 million in mortgage debt secured by such land parcel and the payment of various closing costs. Further in June 1999, ART sold its Continental Hotel for $25.0 million, receiving a nonrefundable deposit of $5.0 million and providing short term financing of $20.0 million. In June 1999, ART purchased Vineyards II land, a 18.6 acre parcel of unimproved land in Tarrant County, Texas, for $6.3 million. ART paid $2.3 million in cash and obtained seller financing of the remaining $4.0 million of the purchase price. Also in June 1999, the Partnership purchased the Lake Houston land, 33.58 acres of unimproved land in Harris County, Texas, for $2.5 million in cash. Further in June 1999, GCLP sold the 368 unit Barcelona Apartments in Tampa, Florida, for $9.8 million, receiving net cash of $2.2 million after paying off $7.0 million in mortgage debt and the payment of various closing costs. 28 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) In July 1999, ART sold two tracts totaling 11.8 acres of its Plano Parkway land parcel for $3.8 million. ART received net cash of $1.7 million after paying down its Las Colinas I term loan by $2.0 million and the payment of various closing costs. Also in July 1999, ART sold two tracts totaling 6.7 acres of its Vista Ridge land parcel for $1.4 million. ART received net cash of $329,000 after paying down by $975,000 the mortgage debt secured by such land parcel and the payment of various closing costs. Further in July 1999, ART sold a .1 acre tract of its JHL Connell land parcel for $53,000. ART received no net cash after paying down by $49,000 the mortgage debt secured by such land parcel and the payment of various closing costs. In July 1999, ART purchased Monterey land, a 85.0 acre parcel of unimproved land in Riverside County, California, for $5.7 million. ART paid $1.2 million in cash and obtained seller financing of the remaining $4.5 million of the purchase price. Also in July 1999, ART purchased Wakefield land, a 70.0 acre parcel of unimproved land in Allen, Texas, for $1.3 million. ART paid $700,000 in cash and obtained seller financing of the remaining $600,000 of the purchase price. Further in July 1999, ART sold a 1.4 acre tract of its Valley Ranch land parcel for $163,000. ART received net cash of $150,000 after the payment of various closing costs. Notes Receivable. Principal payments were received totaling $13.2 million in the six months ended June 30, 1999. In February 1999, GCLP funded a $5.0 million unsecured loan to Davister Corp., which at July 31, 1999, owned approximately 15.8% of the outstanding shares of the Company's Common Stock. The loan is guaranteed by BCM, the Company's advisor. In 1998, the Partnership funded a $6.0 million loan to Centura Holdings, LLC, a subsidiary of Centura Tower, Ltd. The loan is secured by 6.4109 acres of land in Farmers Branch, Texas. In February 1999, the Partnership funded an additional $37,500. Also in 1998, the Partnership funded a $3.7 million loan to JNC. The loan was secured by a contract to purchase 387 acres of land in Collin County, Texas, the guaranty of the borrower and the personal guarantees of its partners. In January 1999, ART purchased the contract from JNC and acquired the land. In connection with purchase, GCLP funded an additional $6.0 million of its $95.0 million loan commitment to ART. A portion of the funds were used to payoff the $3.7 million loan, including accrued but unpaid interest, a $1.3 million paydown of the JNC line of credit and a $820,000 paydown of the JNC Frisco Panther Partners, Ltd. loan. 29 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) In 1997 and 1998, the Partnership funded a $3.8 million loan to Stratford & Graham Developers, LLC. The loan is secured by 1,485 acres of unimproved land in Riverside County, California. In the first half of 1999, the Partnership funded an additional $305,000, increasing the loan balance to $4.1 million. Also in 1998, the Partnership funded $3.3 million of a $5.0 million loan commitment to JNC. The loan is secured by a second lien on 1,791 acres of land in Denton County, Texas, and a second lien on 220 acres of land in Tarrant County, Texas. In January 1999, the Partnership received a $1.3 million paydown on the loan. In the first half of 1999, the Partnership funded an additional $3.0 million. During 1998 and the first half of 1999, the Partnership funded a total of $26.0 million of a $52.5 million loan commitment to Centura Tower, Ltd. The loan is secured by a mortgage on 2.244 acres of land and a building under construction in Farmers Branch, Texas. In July 1999, the Partnership funded an additional $4.9 million. In 1997, 1998 and 1999, the Partnership funded a $1.6 million loan commitment to Bordeaux. The loan is secured by (1) a 100% interest in Bordeaux, which owns a shopping center in Oklahoma City, Oklahoma; (2) 100% of the stock of Bordeaux Investments One, Inc., which owns approximately 6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and (3) the personal guarantees of the Bordeaux partners. In the second quarter of 1999, the loan was modified increasing the loan commitment to $2.1 million and the Partnership funded an additional $33,000. In July 1999, the Partnership funded an additional $193,000. In April 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 and by 100% of the general and limited partner interest in Partners Capital, Ltd. and a profits interest in subsequent land sales. Also in April 1999, ART funded $1.8 million of 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. and a profits interest in subsequent land sales. Notes Payable. In February 1999, the Partnership obtained mortgage financing secured by the unencumbered 54,649 sq. ft. 56 Expressway Office Building in Oklahoma City, Oklahoma, in the amount of $1.7 million. The Partnership received net cash of $1.7 million after the payment of various closing costs. Also in February 1999, the Partnership obtained mortgage financing secured by the unencumbered 124,200 sq. ft. Melrose Business Park in Oklahoma City, Oklahoma, in the amount of $900,000. The Partnership received net cash of $870,000 after the payment of various closing costs. 30 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) In March 1999, ART obtained a second mortgage financing on its Frisco Bridges land in the amount of $2.0 million and an additional $2.0 million in June 1999. Also in March 1999, the Las Colinas I term loan lender provided additional financing on ART's Stagliano, Dalho, Bonneau and Valley Ranch III land parcels in the amount of $2.2 million. The proceeds from this financing along with an additional $1.4 million in cash were used to pay off the $3.1 million in mortgage debt secured by such land parcels. In April 1999, ART refinanced the matured mortgage debt secured by its Yorktown land in the amount of $4.8 million, receiving net cash of $580,000 after paying off $4.0 million in mortgage debt and the payment of various closing costs. At March 31, 1999, the mortgage debt secured by ART's McKinney I, II, III, IV, V and Dowdy land in the amount of $15.2 million matured. ART and the lender reached an agreement to extend the mortgage's maturity to September 1999, in exchange for, among other things, ART's payment of an extension fee. In May 1999, the Partnership obtained mortgage financing secured by the unencumbered 257 unit Pines Apartments in Little Rock, Arkansas, and by a $5.0 million note receivable secured by second liens on two parcels of land in Denton County and Tarrant County, Texas in the amount of $4.0 million. The Partnership received net cash of $3.9 million after the payment of various closing costs. Also in May 1999, the Las Colinas I term loan lender provided additional financing secured by ART's Plano Parkway land parcel in the amount of $2.0 million. The proceeds from this financing along with an additional $831,000 in cash were used to payoff the remaining $2.7 million in mortgage debt secured by such land parcel and the payment of various closing costs. In June 1999, the Partnership obtained mortgage financing secured by the unencumbered 100 unit Stonebridge Apartments in Florissant, Missouri, in the amount of $3.0 million. The Partnership received net cash of $2.9 million after the payment of various closing costs. In July 1999, the Partnership obtained mortgage financing secured by the unencumbered 76 unit Bridgestone Apartments in Friendswood, Texas, in the amount of $2.1 million. The Partnership received net cash of $2.0 million after the payment of various closing costs. Equity Investments. During the fourth quarter of 1988, ART began purchasing shares of REITs that have the same advisor as the Company. It is anticipated that additional equity securities of the REITs will be acquired in the future through open-market and negotiated transactions to the extent that ART's liquidity permits. 31 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) Equity securities of the REITs and NRLP held by the Company may be deemed to be "restricted securities" under Rule 144 of the Securities Act of 1933 ("Securities Act"). Accordingly, the Company may be unable to sell such equity securities other than in a registered public offering or pursuant to an exemption under the Securities Act for a one-year period after they are acquired. Such restrictions may reduce the Company's ability to realize the full fair market value of such investments if it attempted to dispose of such securities in a short period of time. The Company's cash flow from its REIT investments is dependent on the ability of each of the entities to make distributions. The Company received distributions totaling $849,000 in the six months ended June 30, 1999, from the REITs. The Company has margin arrangements with various brokerage firms which provide for borrowing up to 50% of the market value of the Company's marketable equity securities. The borrowings under such margin arrangements are secured by equity securities of the REITs, NRLP and the Company's trading portfolio and bear interest rates ranging from 7.0% to 11.0%. Margin borrowing totaled $35.6 million at June 30, 1999. ART expects that it will be necessary for it to sell $66.5 million, $48.0 million and $17.0 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, would either sell other of its assets to pay such debt or return the property to the lender. Management reviews the carrying values of the Company'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. 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 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 32 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Commitments and Contingencies (Continued) 8,000,000 Class A units. 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 April 1999, 900,000 units were purchased and 1.0 million units were purchased in July 1999 and 1.0 million units will be purchased in October 1999 and January 2000 and 2.0 million units in May 2001 and May 2002. Results of Operations For the three and six months ended June 30, 1999, the Company reported net income of $949,000 and a loss of $8.2 million, compared to net income of $14.8 million and $5.7 million for the three and six months ended June 30, 1998. The primary factors contributing to the Company's results are discussed in the following paragraphs. Pizza parlor sales and cost of sales were $7.8 million and $6.6 million, respectively, for the three months ended June 30, 1999 compared to $7.3 million and $6.2 million in 1998. Sales and cost of sales were $15.0 million and $12.8 million for the six months ended June 30, 1999, compared to $14.1 million and $12.0 million in 1998. The increased sales were primarily attributable to the effects of a more aggressive marketing and advertising strategy, offset by an increase in cost of sales attributable to record high cheese prices in January 1999. Cheese prices returned to more historic levels in February 1999, but began escalating again late in the second quarter of 1999. Rents increased to $41.6 million and $81.9 million in the three and six months ended June 30, 1999, from $15.7 million and $27.3 million in 1998. Rents from commercial properties increased to $14.2 million for six months ended June 30, 1999, from $8.0 million in 1998. Rent from hotels of $15.7 million in the six months ended June 30, 1999 approximated the $15.4 million in 1998. Rent from apartments increased to $50.7 million in the six months ended June 30, 1999, compared to $3.5 million in 1998. The increase in commercial property rents was primarily attributable to the consolidation of the Partnership's operations effective January 1, 1999 and the increase in apartment rent was due to the 36 apartments acquired by ART in 1998 and the consolidation of the Partnership's operations effective January 1, 1999. Rental income is expected to increase significantly in 1999 as a result of the consolidation of the Partnership's operations. See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P." Property operations expense increased to $25.5 million and $53.4 million in the three and six months ended June 30, 1999 from $11.5 million and $21.2 million in 1998. Property operations expense for commercial properties increased to $7.5 million in the six months ended June 30, 1999 from $4.9 million in 1998. Hotel property operations expense of $11.0 million in the six months ended June 30, 1999 approximated the $11.6 million in 1998. Land property operations expense increased to $5.2 million in the six months ended June 30, 1999 from $1.8 million in 1998. Apartments property operations expense increased to $29.8 million in the 33 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) six months ended June 30, 1999 from $3.0 million in 1998. The increase in commercial property operations expense was primarily due to the consolidation of the Partnership's operations effective January 1, 1999. The increase for land was primarily due to the 16 land parcels acquired in 1998. The increase for apartments was due to the 36 apartments acquired in 1998 and the consolidation of the Partnership's operations effective January 1, 1999. Property operations expense is expected to increase significantly in the remainder of 1999 as a result of the consolidation of the Partnership's operations. Interest income from mortgage notes receivable increased to $1.8 million and $3.7 million in the three and six months ended June 30, 1999 from $16,000 and $154,000 in 1998. The increase is attributable to loans funded by the Partnership in 1998. Interest income is expected to increase significantly in the remainder of 1999 as a result of the consolidation of the Partnership's operations. Other income was 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 compared to losses of $399,000 and $608,000 in 1998. An unrealized decrease in market value of trading portfolio securities of $60,000 and $1.9 million was recognized in the three and six months ended June 30, 1999 compared to $970,000 and $1.4 million in 1998. See NOTE 6. "MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO." Interest expense increased to $24.4 million and $45.5 million in the three and six months ended June 30, 1999, from $13.0 million and $22.5 million in 1998. Of the increase, $7.0 million and $13.8 million was attributable to the consolidation of the Partnership's operations effective January 1, 1999, $3.1 million and $4.8 million was due to 16 parcels of land acquired in 1998, $2.1 million was due to the four land parcels acquired in 1999 and for the six months ended June 30, 1999 $798,000 was due to the 36 apartments acquired in 1998. In the remainder of 1999, interest expense is expected to continue to rise due to a full year of operations from the 36 apartments acquired in 1998 and the consolidation of the Partnership's operations. Depreciation expense increased to $4.5 million and $9.0 million in the three and six months ended June 30, 1999, from $1.7 million and $3.0 million in 1998. The increases were attributable to the consolidation of the Partnership's operations effective January 1, 1999, and the acquisition of 36 apartments in 1998. See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P." Advisory fees increased to $1.4 million and $2.5 million in the three and six months ended June 30, 1999, from $949,000 and $1.7 million in 1998. The increases were attributable to an increase in ART's gross assets, the basis for such fee. Such fee is expected to increase as ART's gross assets increase. 34 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) General and administrative expenses increased to $4.8 million and $8.9 million in the three and six months ended June 30, 1999, from $1.9 million and $4.2 million in 1998. The increases were primarily attributable to the consolidation of the Partnership's operations effective January 1, 1999. In the three and six months ended June 30, 1999, a provision for loss of $2.0 million was recognized. Such loss relates to the June 1999, relinquishment by ART of its general and Class B limited partner interests in a controlled partnership that owned two apartments in Indianapolis, Indiana. There was no provision for loss in 1998. See NOTE 4. "REAL ESTATE." Minority interest increased to $6.9 million and $15.4 million in the three and six months ended June 30, 1999 from $445,000 and $933,000 in 1998. The increase was attributable to the consolidation of the Partnership. See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P." Equity in income of investees decreased to $4.1 million and $3.4 million in the three and six months ended June 30, 1999 from $19.0 million and $21.3 million in 1998. The decreases in equity income were attributable to the consolidation of the Partnership and the lack of gains from the sale of real estate in the REITs. See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P." 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 1999, the Company 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, the Partnership 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. For the three and six months ended June 30, 1998, the Company recognized gains on the sale of real estate totaling $9.0 million from: (1) 21.3 acres of Parkfield land; (2) Lewisville land; (3) 21.2 acres of Chase Oaks land; (4) 150.0 acres of Rasor land; (5) Palm Desert land; and (6) 39.4 acres of Valley Ranch land. 35 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. Management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on the Company's business, assets or results of operations. Inflation The effects of inflation on the Company's operations are not quantifiable. Revenues from property operations fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect the sales values of properties and, correspondingly, the ultimate gains to be realized by the Company from property sales. Year 2000 BCM has informed management that its computer hardware operating system and computer software have been certified as year 2000 compliant. Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of BCM that performs property management services for the Company's properties, has informed management that effective January 1, 1999, it began using year 2000 compliant computer hardware and property management software for ART's commercial properties. With regard to the Company's apartments, Carmel, Ltd. has informed management that its subcontractors are also using year 2000 compliant computer hardware and property management software. The Company has not incurred nor does it expect to incur any costs related to its computer hardware and accounting and property management computer software being modified, upgraded or replaced to make it year 2000 compliant. Such costs have been or will be borne by either BCM, Carmel, Ltd. or the property management subcontractors of Carmel, Ltd. Management has completed its evaluation of the Company's computer controlled building systems, such as security, elevators, heating and cooling, etc. to determine what systems are not year 2000 compliant. Management believes that necessary modifications are insignificant and do not require significant expenditures to make the affected systems year 2000 compliant, as enhanced operating systems are readily available. 36 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Year 2000 (Continued) The Company has or will have in place the year 2000 compliant systems that will allow it to operate. The risks the Company faces are that certain of its vendors will not be able to supply goods or services and that financial institutions and taxing authorities will not be able to accurately apply payments made to them. Management believes that other vendors are readily available and that financial institutions and taxing authorities will, if necessary, apply monies received manually. The likelihood of the above having a significant impact on the Company's operations is negligible. ------------------------ PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: The following exhibits are filed herewith or incorporated by reference as indicated below. Exhibit Number Description - ------- ---------------------------------------------------------------------- 27.0 Financial Data Schedule, filed herewith. (b) Reports on Form 8-K as follows: None. 37 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 16, 1999 By: /s/ Karl L. Blaha ------------------------- ----------------------------------- Karl L. Blaha President Date: August 16, 1999 By: /s/ Thomas A. Holland ------------------------- ----------------------------------- Thomas A. Holland Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 38 AMERICAN REALTY TRUST, INC. EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the Six Months Ended June 30, 1999 Exhibit Page Number Description Number - ------- ------------------------------------------------------------ ------ 27.0 Financial Data Schedule 40 39 EX-27.0 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 6,075 690 94,777 2,577 0 0 973,670 204,407 966,509 0 800,827 0 6,102 135 22,186 966,509 14,953 81,865 12,798 53,401 9,017 2,027 45,540 (8,178) 0 (8,178) 0 0 0 (8,178) (.87) (.87)
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