10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2000 ------------------ Commission File Number 1-15663 ------- AMERICAN REALTY INVESTORS, INC. ----------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Nevada 75-2847135 ------------------------------- ----------------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1800 Valley View Lane, Suite 300, Dallas, Texas 75234 ------------------------------------------------------------------------------ (Address of Principal Executive Offices) (Zip Code) (469) 522-4200 ---------------------------------------- (Registrant's Telephone Number, Including Area Code) 10670 North Central Expressway, Suite 300, Dallas, Texas 75231 ---------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, If Changed from Last Report) 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 12,381,540 ---------------------------- --------------------------------- (Class) (Outstanding at October 27, 2000) 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ----------------------------- The accompanying Consolidated Financial Statements have not been audited by independent certified public accountants but in the opinion of the management of American Realty Investors, Inc. ("ARI"), 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 INVESTORS, INC. CONSOLIDATED BALANCE SHEETS September 30, December 31, 2000 1999 -------------- ------------ (dollars in thousands, except per share) Assets ------ Notes and interest receivable Performing ($10,814 in 2000 and $14,331 in 1999 from affiliates).................................. $ 13,474 $ 38,272 Nonperforming....................................... 2,927 2,909 -------- -------- 16,401 41,181 Less - allowance for estimated losses................ (2,577) (2,577) -------- -------- 13,824 38,604 Real estate held for sale............................ 253,562 319,636 Real estate held for investment, net of accumulated depreciation ($151,499 in 2000 and $183,757 in 1999)............................................... 405,144 451,994 Pizza parlor equipment, net of accumulated depreciation ($3,004 in 2000 and $2,294 in 1999).... 7,358 6,872 Marketable equity securities, at market value........ 263 394 Cash and cash equivalents............................ 6,754 2,479 Investments in equity investees...................... 41,878 47,686 Intangibles, net of accumulated amortization ($2,117 in 2000 and $1,652 in 1999)................. 13,958 14,305 Other assets (including $15,290 in 2000 from affiliates)......................................... 46,896 37,576 -------- -------- $789,637 $919,546 ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 2 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS - Continued September 30, December 31, 2000 1999 ------------ ------------ (dollars in thousands, except per share) Liabilities and Stockholders' Equity ------------------------------------ Liabilities Notes and interest payable ($5,784 in 2000 and $13,477 in 1999 to affiliates)....................... $633,627 $706,196 Margin borrowings..................................... 14,561 33,264 Accounts payable and other liabilities ($4,700 in 2000 and $12,409 in 1999 to affiliate)............... 30,269 45,983 -------- -------- 678,457 785,443 Minority interest..................................... 43,484 87,837 Stockholders' equity Preferred Stock, $2.00 par value, authorized 50,000,000 shares, issued and outstanding Series A, 2,600,000 shares in 2000 and 1999 (liquidation preference $26,000)................... 4,600 4,600 Series E, 50,000 shares in 2000 (liquidation preference $500)................................... 100 -- Common Stock, $.01 par value; authorized 100,000,000 shares, issued 12,381,540 shares in 2000 and 13,496,688 in 1999................................... 124 135 Paid-in capital....................................... 107,214 85,854 Accumulated (deficit)................................. (44,315) (44,295) Treasury stock at cost, 2,741,646 shares in 2000 and 2,737,216 shares in 1999............................. (27) (28) -------- -------- 67,696 46,266 -------- -------- $789,637 $919,546 ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 3 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (dollars in thousands, except per share) Property revenue Rents.............................. $ 34,708 $ 40,260 $ 105,211 $ 122,125 Property operations expenses....... 23,776 27,377 70,451 80,778 ----------- ----------- ----------- ----------- Operating income................. 10,932 12,883 34,760 41,347 Land operations Sales.............................. 89,285 17,434 108,238 62,158 Cost of sales...................... 65,674 11,396 81,116 44,741 ----------- ----------- ----------- ----------- Gain on land sales............... 23,611 6,038 27,122 17,417 Pizza parlor operations Sales.............................. 8,124 7,800 24,388 22,753 Cost of sales...................... 6,798 6,711 20,138 19,509 ----------- ----------- ----------- ----------- Gross margin..................... 1,326 1,089 4,250 3,244 Income from operations............... 35,869 20,010 66,132 62,008 Other income Interest income.................... 283 1,331 3,295 5,029 Equity in income of investees...... 2,577 1,874 2,873 5,270 Gain on sale of real estate........ 3,474 42,552 51,706 69,890 Other.............................. 606 300 419 (740) ----------- ----------- ----------- ----------- 6,940 46,057 58,293 79,449 Other expenses Interest........................... 19,580 22,988 60,153 68,528 Depreciation and amortization...... 4,001 4,479 12,909 13,496 General and administrative......... 3,198 3,839 12,030 12,689 Advisory fee to affiliate.......... 1,197 1,472 3,821 3,958 Litigation settlement.............. -- -- -- 275 Provision for loss................. -- 45 -- 2,072 Minority interest.................. 4,953 23,188 32,219 38,561 ----------- ----------- ----------- ----------- 32,929 56,011 121,132 139,579 ----------- ----------- ----------- ----------- Income before income taxes........... 9,880 10,056 3,293 1,878 Provision for income taxes........... (1,652) -- (1,652) -- ----------- ----------- ----------- ----------- Net income........................... 8,228 10,056 1,641 1,878 Preferred dividend requirement....... (590) (570) (1,661) (1,704) ----------- ----------- ----------- ----------- Net income (loss) applicable to Common shares...................... $ 7,638 $ 9,486 $ (20) $ 174 =========== =========== =========== =========== Earnings per share Net income......................... $ .76 $ .88 $ -- $ .02 =========== =========== =========== =========== Weighted average Common shares used in computing earnings per share.... 10,013,087 10,759,309 10,496,364 10,753,600 =========== =========== =========== ===========
The accompanying notes are an integral part of these Consolidated Financial Statements. 4 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Nine Months Ended September 30, 2000
Series A Series E Preferred Preferred Common Treasury Paid-in Accumulated Stockholders' Stock Stock Stock Stock Capital (Deficit) Equity --------- --------- ----- ----- ------- --------- ------- (dollars in thousands, except per share) Balance, January 1, 2000.............. $ 4,600 $ -- $ 135 (28) $ 85,854 (44,295) $ 46,266 Preferred dividends Series A Preferred Stock ($.75 per share)........................... -- -- -- -- -- (1,639) (1,639) Series E Preferred Stock ($.42 per share)........................... -- -- -- -- -- (22) (22) Retirement of Treasury Stock.......... -- -- (20) 36 (16) -- -- Repurchase of Common Stock............ -- -- -- -- (746) -- (746) Sale of Series E Preferred Stock...... -- 100 -- -- 400 -- 500 Common Stock issued in exchange for NRLP partnership units.............. -- -- 9 (35) 21,722 -- 21,696 Net income............................ -- -- -- -- -- 1,641 1,641 --------- --------- ------ -------- -------- --------- --------- Balance, September 30, 2000........... $ 4,600 $ 100 $ 124 $ (27) $107,214 $ (44,315) $ 67,696 ========= ========= ====== ======== ======== ========= ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 5 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, ---------------------- 2000 1999 ---------- ---------- (dollars in thousands) Cash Flows From Operating Activities Rents collected.................................... $ 105,131 $ 120,986 Pizza parlor sales collected....................... 24,422 23,445 Interest collected................................. 4,553 3,716 Distributions received from equity investees' operating cash flow............................... 1,869 935 Payments for property operations................... (81,625) (93,939) Payments for pizza parlor operations............... (20,030) (20,092) Interest paid...................................... (55,855) (54,754) Advisory fee paid to affiliate..................... (3,821) (3,958) Distributions to minority interest holders......... (6,159) (3,805) Purchase of marketable equity securities........... (5,307) (2,180) Proceeds from sale of marketable equity securities. 5,170 2,648 General and administrative expenses paid........... (12,030) (12,738) Other.............................................. 10,110 5,500 -------- -------- Net cash (used in) operating activities........ (33,572) (34,236) Cash Flows From Investing Activities Collections on notes receivable.................... 39,930 19,187 Pizza parlor equipment purchased................... (1,120) (740) Proceeds from sale of real estate.................. 125,218 166,907 Notes receivable funded............................ (17,260) (40,942) Earnest money/escrow deposits...................... (5,424) 18,944 Investment in real estate entities................. 3,828 (366) Acquisition of real estate......................... (19,015) (48,094) Construction and development....................... (9,415) -- Real estate improvements........................... (8,587) (20,005) -------- -------- Net cash provided by investing activities...... 108,155 94,891
The accompanying notes are an integral part of these Consolidated Financial Statements. 6 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Nine Months Ended September 30, ---------------------- 2000 1999 --------- --------- (dollars in thousands) Cash Flows from Financing Activities Proceeds from notes payable........................... $ 136,321 $ 112,730 Payments on notes payable............................. (152,871) (175,048) Deferred borrowing costs.............................. (6,690) (5,947) Net (payments) to/advances from affiliates............ (34,208) 3,489 Issuance of Series I Preferred Stock.................. 500 -- Margin borrowings, net................................ (10,953) (3,814) Common dividends paid................................. -- (545) Preferred dividends paid.............................. (1,661) (1,704) Sale of Preferred Stock............................... -- 500 Repurchase of Common Stock............................ (746) -- --------- --------- Net cash (used in) financing activities............ (70,308) (70,339) Net increase (decrease) in cash and cash equivalents...................................... 4,275 (9,684) Cash and cash equivalents, beginning of period......... 2,479 11,523 --------- --------- Cash and cash equivalents, end of period............... $ 6,754 $ 1,839 ========= ========= Reconciliation of net income to net cash (used in) operating activities Net income............................................ 1,641 1,878 Adjustments to reconcile net income to net cash (used in) operating activities Depreciation and amortization....................... 20,930 23,353 Provision for loss.................................. -- 2,072 Gain on sale of real estate......................... (78,828) (87,307) Distributions from equity investees' operating cash flow......................................... 1,869 935 Distributions to minority interest holders.......... 6,159 3,805 Equity in (income) of investees..................... (2,873) (5,270) Decrease in marketable equity securities............ 131 2,159 (Increase) decrease in accrued interest receivable. 1,258 (1,605) Decrease in other assets............................ 4,640 13,817 (Decrease) in accrued interest payable.............. (3,723) (6,640) Increase in accounts payable and other liabilities.. 15,224 18,567 --------- --------- Net cash (used in) operating activities........... $ (33,572) $ (34,236) ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 7 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued For the Nine Months Ended September 30, ---------------------- 2000 1999 ---------- ---------- (dollars in thousands) Schedule of noncash investing and financing activities Notes payable from acquisition of real estate........... $ 6,262 $70,133 Notes payable assumed by buyer on sale of properties.... 32,460 6,776 Notes receivable from sale of real estate............... 2,790 -- Conversion of note receivable to partnership interest. -- 22,678 Retirement of Common Stock.............................. 20 -- Provision for loss...................................... -- 2,072 Exchange of real estate at carrying value............... 2,989 -- Common Stock in exchange for NRLP units................. 27,353 -- The accompanying notes are an integral part of these Consolidated Financial Statements. 8 AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION ------------------------------- The accompanying Consolidated Financial Statements have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Dollar amounts in tables are in thousands, except per share amounts. Certain balances for 1999 have been reclassified to conform to the 2000 presentation. Operating results for the nine month period ended September 30, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information, refer to the Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K for American Realty Trust, Inc. ("ART") for the year ended December 31, 1999 (the "1999 Form 10-K"). NOTE 2. TRANSACTION WITH AMERICAN REALTY TRUST, INC. AND NATIONAL ------------------------------------------------------------------- REALTY, L.P. ------------ On November 3, 1999, National Realty, L.P. ("NRLP") and ART jointly announced their agreement to combine, in a tax-free exchange, under the ownership of a new company, American Realty Investors, Inc. ("ARI"). The share exchange and merger was subject to a vote of stockholders/unitholders of both entities. Approval required the vote of the unitholders holding a majority of NRLP's outstanding units, and the vote of the stockholders holding a majority of ART's outstanding shares of common and preferred stock. At special meetings held on March 21, 2000, the NRLP unitholders and ART stockholders approved the merger proposal. The transaction was closed on August 2, 2000. NRLP unitholders, except for ART, received one share of ARI common stock for each unit of NRLP held. ART stockholders received .91 shares of ARI common stock for each share of ART common stock held. Each share of ART preferred stock was converted into one share of preferred stock of ARI, having substantially the same rights as ART's preferred stock. The ART shares of common stock ceased trading on the New York Stock Exchange on August 2, 2000. ARI common stock commenced trading on the New York Stock Exchange on August 3, 2000. For accounting purposes, the merger was treated as the purchase of NRLP by ART; accordingly, the historical financial statements presented for ARI are those of ART. NOTE 3. NOTES RECEIVABLE -------------------------- In January 2000, a $365,000 note receivable was collected in full, including accrued but unpaid interest. In March 2000, ARI collected in full, including accrued but unpaid interest, a $942,000 note receivable. In August 1999, a $2.6 million loan was funded to JNC Enterprises, Inc. ("JNC"). The loan was subsequently split into two pieces. The loans were secured by second liens on 3.5 acre and 1.2561 acre parcels of land in Dallas, Texas, the guarantee of the borrower and the 9 AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. NOTES RECEIVABLE (Continued) -------------------------- personal guarantees of its shareholders. The loans bore interest at 16.0% per annum and matured in February 2000. All principal and interest were due at maturity. In March 2000, the $2.0 million loan secured by the 3.5 acre land parcel was collected in full, including accrued but unpaid interest. In April 2000, the remaining loan, with a principal balance of $600,000, was collected in full, including accrued but unpaid interest. In September 1999, in conjunction with the sale of two apartments, $2.1 million in purchase money financing was provided, secured by limited partnership interests in two limited partnerships owned by the buyer. The financing bore interest at 16.0% per annum, required monthly payments of interest only at 6.0%, beginning in February 2000 and a $200,000 principal paydown in December 1999, which was not received, and matured in August 2000. ARI had the option to obtain the buyer's general and limited partnership interests in the collateral partnerships in full satisfaction of the financing. In March 2000, ARI agreed to forbear foreclosing on the collateral securing the note, and released one of the partnership interests, in exchange for payment of $250,000 and executed deeds of trusts on certain properties owned by the borrower. In March 2000, the borrower made a $1.1 million payment, upon receipt of which ARI returned the deeds of trust and terminated the option agreement. The borrower executed a replacement promissory note for the remaining note balance of $1.0 million, which is unsecured, non-interest bearing and matures in April 2003. In April 2000, ARI funded a $100,000 loan to the borrower. The loan is secured by five second lien deeds of trust, is non-interest bearing and matures in September 2001. In December 1999, a note with a principal balance of $1.2 million and secured by a pledge of a partnership interest in a partnership which owns real estate in Addison, Texas, matured. The maturity date was extended to April 2000 in exchange for an increase in the interest rate to 14.0% per annum. All other terms remained the same. Negotiations are in process to further modify and extend the loan. In June 1998, a $4.2 million loan was funded to Cuchara Partners, Ltd. and Ski Rio Partners, Ltd., affiliates of JNC. The loan was secured by (1) a first lien on approximately 450 acres of land in Huerfano County, Colorado, known as Cuchara Valley Mountain Ski Resort; (2) an assignment of a $2.0 million promissory note secured by approximately 2,623 acres of land in Taos County, New Mexico, known as Ski Rio Resort; and (3) a pledge of all related partnership interests. The loan bore interest at 16.0% per annum and had an extended maturity of March 2000. All principal and interest were due at maturity. In the fourth quarter of 1998, $109,000 was received on the sale of 11 parcels of the collateral property in Taos, New Mexico. In August and September 1999, paydowns totaling $3.3 million were received. The loan had a principal balance of $1.6 million at March 31, 2000. In April 2000, the loan was collected in full, including accrued but unpaid interest. 10 AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. NOTES RECEIVABLE (Continued) -------------------------- In August 1998, ARI funded a $635,000 loan to La Quinta Partners, LLC. The loan was secured by interest bearing accounts prior to being used as escrow deposits toward the purchase of a total of 956 acres of land in La Quinta, California, and the personal guarantee of the manager of the borrower. The loan had an extended maturity of November 1999. All principal and interest were due at maturity. In November and December 1998, $250,000 in principal paydowns were received. In the second quarter of 1999, the loan was modified, increasing the interest rate to 15.0% per annum and extending the maturity date to November 1999. Accrued but unpaid interest was added to the principal balance, increasing it by $42,000 to $402,000. In the fourth quarter of 1999, an additional $2,000 was funded, increasing the loan's principal balance to $404,000 at March 31, 2000. In March 2000, $25,000 in interest was collected and the loan's maturity was extended to April 2000. The borrower did not make the required payments and the loan was classified as nonperforming. ARI has begun legal proceedings to collect the balance due. No loss is expected in excess of previously established reserves if ARI is unable to collect the balance due. In October 1998, ARI funded a $2.1 million loan to Frisco Panther Partners, Ltd., an affiliate of JNC. The loan was secured by a second lien on 408.23 acres of land in Frisco, Texas, the guaranty of the borrower and the personal guarantees of its partners. The loan bore interest at 16.0% per annum and had an extended maturity of March 2000. All principal and interest were due at maturity. In April 2000, the loan was collected in full, including accrued but unpaid interest. In December 1998, ARI funded $3.3 million of a $5.0 million loan commitment to JNC. In January 1999, a $1.3 million paydown was received and subsequently in 1999 an additional $3.0 million was funded, increasing the loan balance to $5.0 million. The loan was secured by a second lien on 1,791 acres of land in Denton County, Texas, and a second lien on 91 acres of land in Collin County, Texas. The loan bore interest at 16.0% per annum, and had an extended maturity of March 2000. All principal and interest were due at maturity. At March 31, 2000, the loan had a principal balance of $5.0 million. In April 2000, the loan was collected in full, including accrued but unpaid interest. In conjunction with the April 2000 JNC loan payoffs, described above, ARI paid off $5.0 million in mortgage debt secured by the notes. In June 2000, ARI sold the 124,322 sq.ft. Marina Playa Office Building in Santa Clara, California, for $25.8 million, receiving $7.6 million in cash and providing financing of $18.8 million. Also in June 2000, ARI sold the note receivable, net of the underlying debt, for $6.2 million, retaining a $3.9 million participation. In August 2000, the remaining balance of the note was collected in full, including accrued but unpaid interest. In July 2000, ARI sold 749.1 acres of its Keller land for $10.0 million, receiving $8.7 million in cash and providing purchase money financing of the remaining $1.3 million of the purchase price. Through September 2000, $481,000 has been repaid. 11 AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. NOTES RECEIVABLE (Continued) -------------------------- In August 2000, ARI sold 20.5 acres of Mason Goodrich land for $3.6 million, receiving $1.8 million in cash and providing purchase money financing of the remaining $1.5 million of the purchase price. Related Party. In 1998, a loan commitment of $1.8 million was funded to Warwick of Summit, Inc. ("Warwick"). The loan was secured by a second lien on a shopping center in Rhode Island, by 100% of the stock of the borrower and by the personal guarantee of the principal shareholder of the borrower. The loan bears interest at 14.0% per annum and has an extended maturity of December 2000. All principal and interest are due at maturity. In December 1999, the borrower sold the collateral property and $810,000 of the net proceeds of the sale were paid to ARI of which $386,000 was applied to accrued interest and the remaining $424,000 was applied to principal reducing the principal balance to $1.7 million. Escrowed monies of $377,000 are to be received in 2000. Through September 2000, $50,000 has been received. The loan is currently unsecured. Richard D. Morgan, a Warwick shareholder, was a Director of the general partner of NRLP, and since August 3, 2000, serves as a Director of ARI. Beginning in 1997 and through January 1999, a $1.6 million loan commitment was funded to Bordeaux Investments Two, L.L.C. ("Bordeaux"). The loan is secured by (1) a 100% membership interest in Bordeaux, which owns a shopping center in Oklahoma City, Oklahoma; (2) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and (3) the personal guarantees of the Bordeaux partners. The loan bears interest at 14.0% per annum. In November 1998, the loan was modified to allow interest payments based on monthly cash flow of the collateral property and the maturity date was extended to December 1999. In the second quarter of 1999, the loan was again modified, increasing the loan commitment to $2.1 million and an additional $33,000 was funded. In the third quarter of 1999, an additional $213,000 was funded. The property has had no cash flow; therefore, interest on the loan ceased being accrued in the second quarter of 1999. In October 1999, a $724,000 paydown was received, which was applied first to accrued but unpaid interest due of $261,000, then to principal, reducing the loan balance to $1.4 million. The note was further modified, changing the loan commitment to $1.5 million, the maturity date to December 2000, and payments to net revenues of the shopping center. Richard D. Morgan, a Bordeaux member, was a Director of the general partner of NRLP, and since August 3, 2000, serves as a Director of ARI. In 1999, ARI funded a $2.0 million loan commitment to Lordstown, L.P. The loan is secured by a second lien on land in Ohio and Florida, by 100% of the general and limited partner interest in Partners Capital, Ltd., the limited partner of Lordstown, L.P., and a profits interest in subsequent land sales. A corporation controlled by Richard D. Morgan, is the general partner of Lordstown, L.P. Mr. Morgan was a director of the general partner of NRLP, and since August 3, 2000, serves as a Director of ARI. 12 AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. NOTES RECEIVABLE (Continued) -------------------------- In 1999, ARI funded a $2.4 million loan commitment to 261, L.P. The loan is secured by 100% of the general and limited partner interest in Partners Capital, Ltd., the 99% limited partner of 261, L.P., and a profits interest in subsequent land sales. A corporation controlled by Richard D. Morgan is the general partner of 261, L.P., and Mr. Morgan was a director of the general partner of NRLP, and since August 3, 2000, serves as a Director of ARI. In August 2000, the loan was collected in full, including accrued but unpaid interest. In February 1999, ARI funded $5.0 million under an unsecured line of credit to One Realco Corporation, which at September 30, 2000, owned approximately 12.3% of the outstanding shares of ARI's common stock. The line of credit bears interest at 12.0% per annum and originally matured in February 2000. All principal and interest were due at maturity. The line of credit is guaranteed by Basic Capital Management, Inc. ("BCM"), ARI's advisor. In March 2000, the line was modified and extended, increasing the loan commitment to $11.0 million, and an additional $1.2 million was funded. The maturity date was extended to February 2002. In exchange for the modification and extension, the borrower paid all accrued but unpaid interest and pledged collateral consisting of a $10.0 million promissory note secured by the stock of World Trade Company, Ltd., which owns a hotel in Bulgaria. In July 2000, the line was again modified, increasing the loan commitment to $15.0 million. In September 2000, the line of credit with a then principal balance of $14.6 million was paid in full, including accrued and unpaid interest. In September 2000, ARI acquired 100% of the stock of World Trade Company, Ltd. See NOTE 4. "REAL ESTATE." During 1998 and 1999, ARI funded a total of $31.0 million of a $52.5 million loan commitment to Centura Tower, Ltd. ("Centura"). The loan was secured by 2.244 acres of land and an office building under construction in Farmers Branch, Texas. In August 1999, ARI exercised its option contained in the loan agreement, and obtained a combined 80% general and limited partnership interest in Centura in exchange for a $24.1 million capital contribution through conversion of a portion of its note receivable to an equity interest. ARI has contracted to purchase an additional 10.0% limited partnership interest in both Centura and NLP/CH, Ltd., a Centura affiliated partnership that owns land adjacent to the office building, for a total of $1.3 million. Through October 2000, $763,000 has been paid. NOTE 4. REAL ESTATE ---------------------- In 2000, ARI sold the following properties:
Net Units/ Sales Cash Debt Gain on Property Location Sq.Ft./Acres Price Received Discharged Sale ------------------ --------------- ------------ ------- -------- ------------- ------- First Quarter Apartments Summerwind Reseda, CA 172 Units $9,000 $3,082 $5,568 /(1)/ $6,684 Windtree Reseda, CA 159 Units 8,350 2,911 5,063 /(1)/ 6,170 Whispering Pines Canoga Park, CA 102 Units 5,300 1,597 3,437 /(1)/ 3,106
13 AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. REAL ESTATE (Continued) ---------------------
Net Units/ Sales Cash Debt Gain on Property Location Sq.Ft./Acres Price Received Discharged Sale ----------------- ----------------- ----------------- ------------ -------- ------------ ---------- Shopping Center Katella Plaza Orange, CA 62,290 Sq.Ft. $ 1,814 $ 283 $ 1,188 $ 194 Land Duchense Duchense, UT 420 Acres 43 42 -- 16 Frisco Bridges Collin County, TX 15.00 Acres 2,675 706 2,000 297 Frisco Bridges Collin County, TX 19.74 Acres 2,971 -- --/(2)/ -- Mason/Goodrich Houston, TX 1.1 Acres 129 -- 116 70 Mason/Goodrich Houston, TX 12.8 Acres 2,536 -- 1,803 1,783 Nashville Nashville, TN 2.6 Acres 405 -- 345 225 Rasor Plano, TX 43.01 Acres 1,850 -- 1,604 58 Second Quarter Apartments Pines Little Rock, AR 257 Units 4,650 1,281 3,063 2,441 Four Seasons Denver, CO 384 Units 16,600 6,543 9,220/(1)/ 8,191 Sherwood Glen Urbandale, IA 180 Units 6,250 1,244 4,626/(1)/ 4,161 Office Building Marina Playa Santa Clara, CA 124,205 Sq.Ft. 25,750 7,737 7,766 17,395 Land Rasor Plano, TX 5.4 Acres 915 -- 915 705 Salmon River Salmon River, ID 3.0 Acres 45 44 -- 38 Valley Ranch Irving, TX 22.4 Acres 1,455 -- 1,375 (585) Parkfield Denver, CO 2.6 Acres 615 (1) 584 512 Frisco Bridges Collin County, TX 24.3 Acres 4,194 (435) 4,000 259 Vista Business Park Travis County, TX 5.4 Acres 620 14 577 173 McKinney Corners II Collin County, TX 14.6 Acres 500 (599) 1,050 (40) Third Quarter Apartments Fair Oaks Euless, TX 208 Units 6,850 609 5,711 3,364 Land Mason/Goodrich Houston, TX 6.8 Acres 1,198 114 991 807 McKinney Corners I,II,III,IV,V Collin County, TX 82.0 Acres 9,150 613 8,123 1,638 Parkfield Denver, CO 326.8 Acres 13,164 7,969 3,279 3,768 Rasor Plano, TX 41.1 Acres 3,779 3,587 -- 1,902 Pantex Collin County, TX 182.5 Acres 8,160 -- 4,546/(1)/ 959 Rowlett Creek Collin County, TX 80.4 Acres 2,262 919 1,173 462 Vann Cattle Collin County, TX 126.6 Acres 3,564 1,872 1,471 1,257 Mastenbrook Collin County, TX 157.9 Acres 4,445 1,890 2,275 747 Wakefield Collin County, TX 70.3 Acres 1,981 1,239 612 478 Nashville Nashville, TN 3.0 Acres 523 19 450 310 Keller Tarrant County, TX 749.1 Acres 10,000 3,892 4,500 3,373 Frisco Bridges Collin County, TX 127.4 Acres 27,500 7,411 18,570 6,954 Mason/Goodrich Houston, TX 20.5 Acres 3,560 497 1,308 956
------------ (1) Debt assumed by purchaser. (2) Exchanged for 3.25 acres of Clark land. 14 AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. REAL ESTATE (Continued) --------------------- In 1999, ARI sold the following properties:
Net Units/ Sales Cash Debt Gain on Property Location Sq.Ft./Acres Price Received Discharged Sale ---------- ----------- ------------ ------- -------- ---------- --------- First Quarter Apartments Olde Towne Middleton, Ohio 199 Units $ 4,600 $4,400 $ $ 2,200 Santa Fe Kansas City, MO 225 Units 4,600 4,300 -- 706 Mesa Ridge Mesa, AZ 480 Units 19,500 8,593 9,400 10,200 Land Plano Parkway Collin County, TX 4.6 Acres 1,200 -- 1,100 473 Rasor Plano, TX 13.0 Acres 1,600 -- 1,500 979 Mason/Goodrich Houston, TX 9.9 Acres 956 33 860 432 McKinney Corners McKinney, TX 23.7 Acres 7,700 -- 5,500 2,900 Second Quarter Apartments Horizon East Dallas, TX 166 Units 4,000 1,200 2,600 1,800 Lantern Ridge Richmond, VA 120 Units 3,400 880 2,400 2,300 Barcelona Tampa, FL 368 Units 9,800 2,200 7,000 2,200 Land Vista Ridge Lewisville, TX 15.0 Acres 2,600 552 1,800 913 Plano Parkway Collin County, TX 24.5 Acres 4,900 -- 4,700 1,100 Frisco Bridges Collin County, TX 27.6 Acres 16,900 2,700 13,000 4,200 Plano Parkway Collin County, TX 6.0 Acres 1,600 -- 1,600 615 Hotel Continental Las Vegas, NV 400 Rooms 25,000 5,000 -- 7,900 Third Quarter Apartments Country Place Round Rock, TX 152 Units 6,000 1,300 4,300 3,300 Lake Nora Indianapolis, IN 588 Units 29,100 2,700 24,500 15,100 Fox Club Indianapolis, IN 336 Units Oakhollow Austin, TX 409 Units 35,500 7,800 22,200 24,200 Windridge Austin, TX Land JHL Connell Carrollton, TX .13 Acres 53 -- 49 23 Plano Parkway Collin County, TX 11.8 Acres 3,800 1,700 2,000 1,900 Vista Ridge Lewisville, TX 6.7 Acres 1,400 329 975 584 Valley Ranch Irving, TX 1.4 Acres 163 159 -- 128 Keller Tarrant County, TX 2.1 Acres 185 91 90 158 Sun City Sun City, TX 26.5 Acres 260 240 -- 180 Katrina Palm Desert, CA 121.2 Acres 6,600 5,500 -- 186 Frisco Bridges Collin County, TX 13.6 Acres 2,600 -- 2,100 403 Plano Parkway Collin County, TX 6.2 Acres 900 208 650 (40) Keller, Scout and Scoggins Tarrant County, TX 185.6 Acres 3,500 758 2,500 1,800 Vista Ridge Lewisville, TX 1.3 Acres 715 665 -- 538
15 AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. REAL ESTATE (Continued) -------------------- In 2000, ARI purchased the following properties:
Net Units/Sq.Ft. Purchase Cash Debt Interest Maturity Property Location Acres/Rooms Price Paid Incurred Rate Date ------------------- ------------------ ------------ -------- ------- ------------ --------- -------- First Quarter Land Clark Farmers Branch, TX 3.25 Acres $ 2,989 $ -- $ -- /(2)/ -- % -- Kelly lots Collin County, TX .75 Acres 130 20 100 /(1)/ 10.0 03/10 Mastenbrook Collin County, TX 157.86 Acres 3,200 704 2,400 /(1)/ 9.0 09/00 Second Quarter Land Sladek Travis County, TX 63.3 Acres 712 316 427 /(1)/ 10.0 05/04 Third Quarter Hotel Grand Hotel Sofia(3) Sofia, Bulgaria 145 Rooms 17,975 17,975 -- -- --
------------ (1) Seller financing. (2) Exchanged for 19.74 acres of Frisco Bridges land. (3) Related Party. In September 2000, ARI purchased 100% of the outstanding stock of World Trade Company, Ltd. from One Realco Corporation, for $18.0 million in cash. World Trade Company owns a hotel in Sofia, Bulgaria. In 1999, ARI purchased the following properties:
Net Units/ Purchase Cash Debt Interest Maturity Property Location Sq.Ft./Acres Price Paid Incurred Rate Date ------------------ -------------------- -------------- -------- ------- -------- --------- -------- First Quarter Land Frisco Bridges Collin County, TX 336.8 Acres $46,800 $7,800 $39,000 10.25% 01/00 Second Quarter Land Rowlett Creek Collin County, TX 80.4 Acres 1,600 400 1,200 8.75 05/04 Leone Irving, TX 8.2 Acres 1,500 300 1,200 8.00 05/03 Vineyards II Tarrant County, TX 18.6 Acres 6,300 2,300 4,000 14.50 06/02 Lake Houston Harris County, TX 33.58 Acres 2,500 2,500 -- -- -- Office Building Encino Executive Plaza Los Angeles, CA 177,211 Sq.Ft. 40,100 2,800 34,600 7.74 05/08 Cooley Farmers Branch, TX 27,000 Sq.Ft. 3,500 1,500 2,000 9.00 05/19 Third Quarter Land Monterey Riverside County, CA 85.0 Acres 5,600 1,100 4,500 9.00 06/02 Wakefield Allen, TX 70.0 Acres 1,300 688 612 8.50 07/04
16 AMERICAN REALTY INVESTORS, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 5. INVESTMENTS IN EQUITY INVESTEES ----------------------------------------- Real estate entities. ARI's investment in real estate entities at September 30, 2000, included equity securities of two publicly traded real estate investment trusts, Income Opportunity Realty Investors, Inc. ("IORI") and Transcontinental Realty Investors, Inc. ("TCI"), and interests in real estate joint venture partnerships. BCM, ARI's advisor, serves as advisor to IORI and TCI. ARI accounts for its investment in IORI and TCI and the joint venture partnerships using the equity method. Substantially all of the equity securities of IORI and TCI are pledged as collateral for borrowings. See NOTE 9. "MARGIN BORROWINGS." ARI's investment in real estate entities, accounted for using the equity method, at September 30, 2000 was as follows:
Percentage Carrying Equivalent of ARI's Value of Investee Market Value Ownership at Investment at Book Value at of Investment at Investee September 30, 2000 September 30, 2000 September 30, 2000 September 30, 2000 -------- ------------------- ------------------ ------------------ ------------------ IORI 27.00% $ 8,293 $11,102 $ 2,154 TCI 24.73% 26,874 47,058 13,141 ------- ------- 35,167 $15,295 ======= Other 6,711 ------- $41,878 =======
The difference between the carrying value of ARI'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 IORI and TCI undervalues their assets and ARI may, therefore, continue to increase its ownership in these entities. Set forth below is summarized results of operations of equity investees for the nine months ended September 30, 2000: Revenues.................................... $116,111 Equity in income of partnerships............ (71) Property operating expenses................. 75,448 Depreciation................................ 16,729 Interest expense............................ 39,359 -------- (Loss) before gains on sale of real estate.. (15,496) Gain on sale of real estate................. 50,440 -------- Net income.................................. $ 34,944 ======== ARI's share of equity investees' loss before gains on the sale of real estate was $2.5 million for the nine months ended September 30, 2000, and its share of equity investees' gains on sale of real estate was $13.3 million for the nine months ended September 30, 2000. 17 AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 5. INVESTMENTS IN EQUITY INVESTEES (Continued) --------------------------------------- ARI's cash flow from IORI and TCI is dependent on the ability of each of them to make distributions. In the nine months ended September 30, 2000, distributions totaling $1.5 million were received from IORI and TCI. In the first nine months ended September 30, 2000, ARI purchased a total of $976,000 of equity securities of IORI and TCI. In June 2000, ARI sold its partnership interest in Vestavia Lake Apartments in Orlando, Florida, resulting in a gain of $787,000 included in equity income of investees on the Statement of Operations. Elm Fork Ranch, L.P. In September 1997, a newly formed limited partnership, of which ARI is a 1% general partner and 21.5% limited partner, purchased a 422.4 acre parcel of unimproved land in Denton County, Texas, for $16.0 million in cash. ARI contributed $3.6 million in cash with the remaining $12.4 million being contributed by the other limited partners. The partnership agreement designates ARI as the managing general partner. In September 1997, the partnership obtained financing of $6.5 million secured by the 422.4 acres of land. The mortgage bears interest at 10% per annum, requires quarterly payments of interest only and matures in September 2001. The net financing proceeds were distributed to the partners, ARI receiving $2.9 million of its initial investment. The partnership agreement also provides that the limited partners receive a 12% preferred cumulative return on their investment before any sharing of partnership profits occurs. One Realco, one of the limited partners in the partnership owns approximately 12.3% of the outstanding shares of ARI's Common Stock. In June 2000, ARI sold its partnership interest for $2.0 million with an option to repurchase the interest at any time prior to December 31, 2000 for $2.0 million plus an amount equal to 20% times the number of days from the date of agreement to the exercise date. ARI intends to exercise the option, and, therefore, has recognized neither gain nor (loss) on the sale. NOTE 6. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO -------------------------------------------------------- Since 1994, ARI has been purchasing equity securities of entities other than those of the REITs and NRLP to diversify and increase the liquidity of its margin accounts. In the first nine months of 2000, ARI purchased $5.3 million and sold $5.2 million of such securities. These equity securities are considered a trading portfolio and are carried at market value. At September 30, 2000, ARI recognized an unrealized decrease in the market value of its trading portfolio securities of $267,000. Also in the first nine months of 2000, ARI realized a net loss of $747,000 from the sale of trading portfolio securities and received no dividends. Unrealized and realized gains and losses on trading portfolio securities are included in other income in the accompanying Consolidated Statements of Operations. 18 AMERICAN REALTY INVESTORS, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 7. NOTES PAYABLE --------- ------------- In 2000, ARI financed/refinanced or obtained second mortgage financing on the following:
Net Acres/ Debt Debt Cash Interest Maturity Property Location Units/Sq.Ft. Incurred Discharged Received Rate Date -------------- ------------------ -------------- ------------- ---------- -------- --------- -------- First Quarter Land Centura, Clark and Woolley Farmers Branch, TX 10.08 Acres $ 7,150 $ -- $ 6,960 14.00% 03/03 Frisco Bridges Collin County, TX 127.41 Acres 18,000 11,900 6,190 13.00 03/01 Frisco Bridges Collin County, TX 62.84 Acres 7,800 4,985 2,432 14.00 03/02 Nashville Nashville, TN 144.82 Acres 10,000 2,034 7,039 15.50 07/00 Second Quarter Apartments Rockborough Denver, CO 345 Units 2,222 -- 1,942 8.37 11/10 Confederate Point Jacksonville, FL 206 Units 7,440 5,879 1,039 8.12 05/07 Whispering Pines Topeka, KS 320 Units 7,530 6,829 302 8.12 05/07 Chateau Bayou Ocean Springs, MS 122 Units 1,007 -- 988 8.36 05/10 Waters Edge Gulfport, MS 238 Units 7,532 3,993 3,447 8.08 05/07 Land Katy Harris County, TX 130.6 Acres 4,250 4,042 (9) 13.00 05/01 Third Quarter Office Buildings Centura Tower Farmers Branch, TX 410,910 Sq.Ft. 15,000 -- 14,612 16.9 07/02 Fourth Quarter Land Tree Farm Dallas, TX 10.36 Acres $ 8,000/(1)/ $ -- $ 7,750 14.0% 10/01 Thompson Farmers Branch, TX 3.99 Acres /(1)/ Tomlin Farmers Branch, TX 9.00 Acres /(1)/ Lacy Longhorn Farmers Branch, TX 17.12 Acres /(1)/ Kelly Fort Worth, TX 30.13 Acres /(1)/ McKinney Corners McKinney, TX 10.98 Acres /(1)/
----------- (1) Single note, with all properties as collateral. NOTE 8. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC. ------------------------------------------------------------ Fees and cost reimbursement to affiliates for the nine months ended: September 30, 2000 ------------- Property and construction management fees*.. $ 1,932 Loan placement fees......................... 530 Real estate commissions..................... 4,487 Leasing commissions......................... 877 Reimbursement of administrative expenses.... 2,680 ------- $10,506 ======= ----------------- * Net of property management fees paid to subcontractors, other than Regis Realty, Inc., which is owned by an affiliate of BCM. 19 AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 9. MARGIN BORROWINGS -------------------------- ARI has margin arrangements with various brokerage firms which provide for borrowing of up to 50% of the market value of marketable equity securities. The borrowings under such margin arrangements are secured by equity securities of IORI and TCI and ARI's trading portfolio and bear interest rates ranging from 7.0% to 11.0%. Margin borrowings totaled $14.6 million at September 30, 2000. In June 2000, 1.6 million shares of TCI stock and 54,000 shares of IORI stock held as collateral on margin loans were sold to satisfy margin calls resulting in losses totaling $7.9 million. These losses are included in equity income of investees on the Statement of Operations. See NOTE 5. "INVESTMENT IN EQUITY INVESTEES." In April 2000, ARI obtained a security loan in the amount of $5.0 million with a financial institution. ARI received net cash of $4.6 million after various closing costs. The loan bears interest at 1% plus prime per annum (currently 10.5%), requires monthly payments of interest only and matures April 2001. The loan is secured by 1,050,000 shares of ARI Common Stock held by BCM, ARI's advisor. In June 2000, TCI advanced ARI $9.0 million. The loan was secured by 409,934 shares of IORI common stock. The loan bore interest at 15% per annum and matured in October 2000. All principal and interest were due at maturity. A paydown of $3.2 million plus accrued interest was made in September 2000 with the remainder of the loan plus accrued interest being paid in October 2000. NOTE 10. INCOME TAXES --------------------- Financial statement income varies from taxable income principally due to the accounting for income and losses of investees, gains and losses from asset sales, depreciation on owned properties, amortization of discounts on notes receivable and payable and the difference in the allowance for estimated losses. ARI had no taxable income or provision for income taxes in the nine months ended September 30, 1999. For the nine months ended September 30, 2000, a provision for income taxes in the amount of $1.7 million was recorded. NOTE 11. OPERATING SEGMENTS --------------------------- Significant differences among the accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation and allocation of administrative expenses. Management evaluates the performance of each of the operating segments and allocates resources to them based on their net operating income and cash flow. Expenses that are not reflected in the segments are $12.0 million of general and administrative expenses for the nine months ended September 30, 2000 and $12.7 million for 1999. Excluded from operating segment assets are assets of $92.1 million in 2000 and $76.6 million in 1999, which are not identifiable with an operating segment. There are no intersegment revenues and expenses and ARI conducted all of its business prior to September 30, 2000, within the United States. 20 AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 11. OPERATING SEGMENTS (Continued) --------------------------- Presented below are ARI's reportable segments operating income for the nine months ended September 30, and segment assets at September 30.
Commercial Pizza 2000 Properties Apartments Hotels Land Parlors Receivables Total --------- ---------- ---------- -------- --------- -------- ----------- --------- Rents................. $ 23,831 $ 53,003 $25,501 $ 2,876 $24,388 $ -- $129,599 Property operating expenses............. 14,838 30,743 17,758 7,112 20,138 -- 90,589 Interest income....... -- -- -- -- -- 3,295 3,295 Interest expense - notes receivable..... -- -- -- -- -- -- -- -------- -------- ------- -------- ------- ------- -------- Segment operating income............... $ 8,993 $ 22,260 $ 7,743 $ (4,236) $ 4,250 $ 3,295 $ 42,305 ======== ======== ======= ======== ======= ======= ======== Depreciation/ amortization......... $ 5,234 $ 4,752 $ 1,941 $ -- $ 982 $ -- $ 12,909 Interest on debt...... 12,869 15,716 3,704 20,917 854 -- 54,060 Capital expenditures.. 4,404 10,827 495 2,276 1,120 -- 19,122 Assets................ 171,490 148,560 87,966 253,562 22,108 13,824 697,510
Commercial Property Sales: Properties Apartments Land Total ---------- ---------- --------- --------- Sales price $27,564 $57,000 $108,238 $192,802 Cost of sale 9,975 22,883 81,116 113,974 ------- ------- -------- -------- Gain on sale $17,589 $34,117 $ 27,122 $ 78,828 ======= ======= ======== ========
Commercial Pizza 1999 Properties Apartments Hotels Land Parlors Receivables Total -------- ---------- ---------- -------- --------- -------- ----------- --------- Rents................... $ 22,136 $ 74,727 $24,965 $ 297 $22,753 $ -- $144,878 Property operating expenses............... 11,887 44,711 17,716 6,464 19,509 -- 100,287 Interest income......... -- -- -- -- -- 5,029 5,029 Interest expense - notes receivable....... -- -- -- -- -- 784 784 -------- -------- ------- -------- ------- ------- -------- Segment operating income (loss).......... $ 10,249 $ 30,016 $ 7,249 $ (6,167) $ 3,244 $ 4,245 $ 48,836 ======== ======== ======= ======== ======= ======= ======== Depreciation/ amortization........... $ 3,086 $ 7,558 $ 1,884 $ -- $ 968 $ -- $ 13,496 Interest on debt........ 7,404 24,427 3,582 17,640 695 -- 53,748 Capital expenditures.... 6,726 408 1,279 1,149 740 -- 10,302 Assets.................. 176,388 214,310 71,939 314,210 21,357 64,519 862,723
Property Sales: Apartments Hotels Land Total -------------- ---------- ------- -------- -------- Sales price............. $116,350 $25,000 $ 19,461 $160,811 cost of sales........... 54,338 17,122 2,044 73,504 -------- ------- -------- -------- Gain on sale............ $ 62,012 $ 7,878 $ 17,417 $ 87,307 ======== ======= ======== ========
NOTE 12. COMMITMENTS AND CONTINGENCIES --------------------------------------- In 1996, ARI was admitted to the Valley Ranch, L.P. partnership as general partner and Class B Limited Partner. The existing general and limited partners converted their general and limited partner interest into 8,000,000 Class A units. The units are exchangeable into shares of ARI's Series B Cumulative Convertible Preferred Stock at the rate of 100 Class A units for each share of Series B Preferred Stock. In February 1999, the limited partner notified ARI that it intended to convert 100,000 Class A units into 1,000 shares of Series E Preferred Stock. In 21 AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 12. COMMITMENTS AND CONTINGENCIES (Continued) --------------------------------------- March 1999, ARI purchased the 100,000 of the Class A units for $100,000. ARI subsequently reached an agreement with the other Class A unitholders to acquire the remaining 7,900,000 Class A units for $1.00 per unit. In 1999 and the first quarter of 2000, a total of 4,000,000 units were purchased, and an additional 2,000,000 units will be purchased in May 2001 and May 2002. In the second quarter of 2000, ARI obtained second mortgage financing secured by three of its apartments totaling $17.1 million. On October 3, 2000, IORI entered into a stock option agreement which provided IORI and ARI with an option to purchase 1,858,900 shares of common stock of TCI from a third party. On October 19, 2000, IORI assigned all of its rights to purchase such shares to ARI. ARI may exercise the option between January 1, 2001 and April 13, 2001. The total cost to purchase the shares is $30.7 million. In October 2000, ARI paid $5.6 million of the option price. Litigation. ARI is involved in various lawsuits arising in the ordinary course of business. In the opinion of ARI's management, the outcome of these lawsuits will not have a material impact on ARI's financial condition, results of operations or liquidity. NOTE 13. SUBSEQUENT EVENTS --------------------------- In October 2000, ARI obtained new mortgage financing of $8.0 million secured by six parcels of undeveloped land, receiving net cash of $7.7 million after payment of various closing costs. In October 2000, ARI acquired a 100% interest in EQK Realty Investors, I ("EQK"), a real estate investment trust headquartered in Atlanta, Georgia, for $1.1 million in cash and $1.25 million in Series A Preferred Stock (125,000 shares). Subsequently, EQK acquired from ARI a shopping center in Lubbock, TX. -------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ------------------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- Introduction ------------ ARI's predecessor, ART, was organized in 1961 to provide investors with a professionally managed, diversified portfolio of equity real estate and mortgage loan investments selected to provide opportunities for capital appreciation as well as current income. Transaction with American Realty Trust, Inc. and National Realty, L.P. On November 3, 1999, NRLP and ART jointly announced their agreement to combine, in a tax free exchange, under the ownership of a new company to be named ARI. The share exchange and merger was subject to a vote of stockholders/unitholders of both entities. Approval required the vote of the unitholders holding a majority of NRLP's outstanding units, and 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Introduction (Continued) ------------ the vote of the stockholders holding a majority of ART's outstanding shares of common and preferred stock. At special meetings held on March 21, 2000, the NRLP unitholders and ART stockholders approved the merger proposal. The transaction was closed on August 2, 2000. NRLP unitholders, except for ART, received one share of ARI common stock for each unit of NRLP held. ART stockholders received .91 shares of ARI common stock for each share of ART common stock held. Each share of ART preferred stock converted into one share of preferred stock of ARI, having substantially the same rights as ART's preferred stock. The ART shares of common stock ceased trading on the New York Stock Exchange on August 2, 2000. ARI common stock commenced trading on the New York Stock Exchange on August 3, 2000. Liquidity and Capital Resources ------------------------------- General. Cash and cash equivalents at September 30, 2000, totaled $6.8 million, compared with $2.5 million at December 31, 1999. Although ARI anticipates that during the remainder of 2000 it will generate excess cash flow from property operations, as discussed below, such excess cash is not sufficient to discharge all of ARI's debt obligations as they mature. ARI will therefore continue to rely on externally generated funds, including borrowings against its investments in various real estate entities, refinancing of properties and, to the extent necessary, borrowings to meet its debt service obligations, pay taxes, interest and other non-property related expenses. At December 31, 1999, notes payable totaling $196.9 million had either scheduled maturities or required principal reduction payments during 2000. During the first nine months of 2000, ARI either extended, refinanced, paid down, paid off or received commitments from lenders to extend or refinance $148.9 million of the debt scheduled to mature in 2000. Net cash used in operating activities improved to a use of $33.6 million in the nine months ended September 30, 2000, from a use of $34.2 million in the nine months ended September 30, 1999. Fluctuations in the components of cash flow from operations are discussed in the following paragraphs. Net cash from property operations (rents collected less payments for expenses applicable to rental income) decreased to $23.5 million in the nine months ended September 30, 2000, from $27.0 million in 1999. The decrease is primarily attributable to the sale of seven apartments in 2000 and 14 apartments in 1999. ARI expects a decrease in cash flow from property operations during the remainder of 2000. Such decrease is expected to result from the continued selective sale of income producing properties. Net cash from pizza operations (sales less cost of sales) increased to $4.4 million in the nine months ended September 30, 2000, from $3.4 million in the nine months ended September 30, 1999. 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Liquidity and Capital Resources (Continued) ------------------------------- Interest collected increased to $4.6 million in the nine months ended September 30, 2000, from $3.7 million in 1999. The increase was attributable to loans funded in 1999. Interest paid increased slightly to $55.9 million in the nine months ended September 30, 2000, from $54.8 million in 1999. Advisory fees paid of $3.8 million in the nine months ended September 30, 2000, approximated the $4.0 million in 1999. General and administrative expenses of $12.0 million in the nine months ended September 30, 2000, approximated the $12.7 million in 1999. ARI's cash flow from its investment in IORI and TCI is dependent on the ability of each of the entities to make distributions. ARI received distributions from IORI and TCI totaling $1.9 million in the first nine months of 2000 compared to $935,000 in 1999. Other cash from operating activities increased to $10.1 million in the nine months ended September 30, 2000, from $5.5 million in 1999. The increase was due to a decrease in property prepaids, other miscellaneous property receivables and property escrows. In the first nine months of 2000, ARI received a total $11.8 million on the collection of seven mortgage notes receivable, $26.5 million on the payoff of four mortgage notes receivable, and $1.6 million in partial paydowns of two mortgage notes receivable. In 2000, ARI sold the following properties:
Net Units/ Sales Cash Debt Property Location Sq.Ft./Acres Price Received Discharged ------------------ ----------------- ------------- ------- -------- ------------- First Quarter Apartments Summerwind Reseda, CA 172 Units $9,000 $3,082 $ 5,568 /(1)/ Windtree Reseda, CA 159 Units 8,350 2,911 5,063 /(1)/ Whispering Pines Canoga Park, CA 102 Units 5,300 1,597 3,437 /(1)/ Shopping Center Katella Plaza Orange, CA 62,290 Sq.Ft. 1,814 283 1,188 Land Duchense Duchense, UT 420 Acres $ 43 $ 42 $ -- Frisco Bridges Collin County, TX 15.00 Acres 2,675 706 2,000 Frisco Bridges Collin County, TX 19.74 Acres 2,971 -- -- /(2)/ Mason/Goodrich Houston, TX 1.1 Acres 129 -- 116 Mason/Goodrich Houston, TX 12.8 Acres 2,536 -- 1,803 Nashville Nashville, TN 2.6 Acres 405 -- 345 Rasor Plano, TX 43.01 Acres 1,850 -- 1,604
24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Liquidity and Capital Resources (Continued) -------------------------------
Net Units/ Sales Cash Debt Property Location Sq.Ft./Acres Price Received Discharged ------------------------- ------------------ -------------- ------ -------- ------------ Second Quarter Apartments Pines Little Rock, AR 257 Units 4,650 1,281 3,063 Four Seasons Denver, CO 384 Units 16,600 6,543 9,220/(1)/ Sherwood Glen Urbandale, IA 180 Units 6,250 1,244 4,626/(1)/ Office Building Marina Playa Santa Clara, CA 124,205 Sq.Ft. 25,750 7,627 7,766 Land Rasor Plano, TX 5.4 Acres 915 -- 915 Salmon River Salmon River, ID 3.0 Acres 45 44 -- Valley Ranch Irving, TX 22.4 Acres 1,455 -- 1,375 Parkfield Denver, CO 2.6 Acres 615 (1) 584 Frisco Bridges Collin County, TX 24.3 Acres 4,194 (435) 4,000 Vista Business Park Travis County, TX 5.4 Acres 620 14 577 McKinney Corners II Collin County, TX 14.6 Acres 500 (599) 1,050 Third Quarter Apartments Fair Oaks Euless, TX 208 Units 6,850 609 5,711 Land Mason/Goodrich Houston, TX 6.8 Acres 1,198 114 991 McKinney Corners I, II, III, IV and V Collin County, TX 82.0 Acres 9,150 613 8,123 Parkfield Denver, CO 326.8 Acres 13,164 7,969 3,279 Rasor Plano, TX 41.1 Acres 3,779 3,587 -- Pantex Collin County, TX 182.5 Acres 8,160 -- 4,546(1) Rowlett Creek Collin County, TX 80.4 Acres 2,262 919 1,173 Vann Cattle Collin County, TX 126.6 Acres 3,564 1,872 1,471 Mastenbrook Collin County, TX 157.9 Acres 4,445 1,890 2,275 Wakefield Collin County, TX 70.3 Acres 1,981 1,239 612 Nashville Nashville, TN 3.0 Acres 523 19 450 Keller Tarrant County, TX 749.1 Acres 10,000 3,892 4,500 Frisco Bridges Collin County, TX 127.4 Acres 27,500 7,411 18,570 Mason/Goodrich Houston, TX 20.5 Acres 3,560 497 1,308
------------------ (1) Debt assumed by purchaser. (2) Exchanged for 3.25 acres of Clark land. In 2000, ARI financed/refinanced or obtained second mortgage financing on the following:
Net Acres/ Debt Cash Debt Property Location Units/Sq.Ft. Incurred Received Discharged ---------------- ------------------ ------------ -------- -------- ---------- First Quarter Land Centura, Clark and Woolley Farmers Branch, TX 10.08 Acres $ 7,150 $6,960 $ -- Frisco Bridges Collin County, TX 127.41 Acres 18,000 6,190 11,900 Frisco Bridges Collin County, TX 62.84 Acres 7,800 2,432 4,985 Nashville Nashville, TN 144.82 Acres 10,000 7,039 2,034
25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ---------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Liquidity and Capital Resources (Continued) -------------------------------
Net Acres/ Debt Cash Debt Property Location Units/Sq.Ft. Incurred Received Discharged ------------------- ------------------ -------------- ------------- -------- ---------- Second Quarter Apartments Rockborough Denver, CO 345 Units $ 2,222 $ 1,942 $ -- Confederate Point Jacksonville, FL 206 Units 7,440 1,039 5,879 Whispering Pines Topeka, KS 320 Units 7,530 302 6,829 Chateau Bayou Ocean Springs, MS 122 Units 1,007 988 -- Waters Edge Gulfport, MS 238 Units 7,532 3,447 3,993 Land Katy Harris County, TX 130.6 Acres 4,250 (9) 4,042 Third Quarter Office Buildings Centura Tower Farmers Branch, TX 410,910 Sq.Ft. 15,000 14,612 -- Fourth Quarter Land Tree Farm Dallas, TX 10.36 Acres $ 8,000 /(1)/ 7,750 -- Thompson Farmers Branch, TX 3.99 Acres /(1)/ Tomlin Farmers Branch, TX 9.00 Acres /(1)/ Lacy Longhorn Farmers Branch, TX 17.12 Acres /(1)/ Kelly Fort Worth, TX 30.13 Acres /(1)/ McKinney Corners McKinney, TX 10.98 Acres /(1)/
ARI has margin arrangements with various brokerage firms which provide for borrowing up to 50% of the market value of ARI's marketable equity securities. The borrowings under such margin arrangements are secured by equity securities of IORI, TCI and ARI's trading portfolio and bear interest rates ranging from 7.0% to 11.0%. Margin borrowing totaled $14.6 million at September 30, 2000. In June 2000, 1.6 million shares of TCI stock and 54,000 shares of IORI stock held as collateral on margin loans were sold to satisfy margin calls resulting in losses totaling $7.9 million. These losses are included in equity income of investees on the Statement of Operations. See NOTE 5. "INVESTMENTS IN EQUITY INVESTEES." Management expects that it will be necessary for ARI to sell $65.0 million, $25.2 million and $11.0 million of its land holdings during each of the next three years to satisfy the debt on such land as it matures. If ARI 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, ARI would either sell other of its assets to pay such debt or return the property to the lender. Management reviews the carrying values of ARI'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 26 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Liquidity and Capital Resources (Continued) ------------------------------- impairment is found to exist, a provision for loss is recorded by a charge against earnings. ARI'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, ARI was admitted to the Valley Ranch, L.P. partnership, as general partner and Class B Limited Partner. The existing general and limited partners converted their general and limited partner interest into 8,000,000 Class A units. The units are exchangeable into shares of ARI's Series B Cumulative Convertible Preferred Stock at the rate of 100 Class A units for each share of Series B Preferred Stock. In February 1999, the limited partner notified ARI that it intended to convert 100,000 Class A units into 1,000 shares of Series B Preferred Stock. In March 1999, ARI purchased the 100,000 Class A units for $100,000. ARI subsequently reached agreement with the Class A unitholder to acquire the remaining 7,900,000 Class A units for $1.00 per unit. In 1999 and the first quarter of 2000, a total of 4,000,000 units were purchased, and an additional 2,000,000 units will be purchased in May 2001 and May 2002. On October 3, 2000, IORI entered into a stock option agreement which provided IORI and ARI with an option to purchase 1,858,900 shares of common stock of TCI from a third party. On October 19, 2000, IORI assigned all of its rights to purchase such shares to ARI. ARI may exercise the option between January 1, 2001 and April 13, 2001. The total cost to purchase the shares is $30.7 million. In October 2000, ARI paid $5.6 million of the option price. Results of Operations --------------------- For the nine months ended September 30, 2000, ARI reported net income of $1.6 million, compared to net income of $1.9 million for the nine months ended September 30, 1999. The primary factors contributing to ARI's net income are discussed in the following paragraphs. Pizza parlor sales and cost of sales were $8.1 million and $6.8 million, respectively, in the three months ended September 30, 2000 and $24.4 million and $20.1 million for the nine months ended September 30, 2000 compared to $7.8 million and $6.7 million, respectively, for the three months ended September 30, 1999 and $22.8 million and $19.5 million for the nine months ended September 30, 1999. The increased sales were primarily attributable to the effects of a more aggressive marketing and advertising strategy. Rents decreased to $34.7 million and $105.2 million in the three and nine months ended September 30, 2000, from $40.3 million and $122.1 million in 1999. Rents from commercial properties increased to $23.8 million for the nine months ended September 30, 2000, from $22.1 million in 1999, rent from hotels increased to $25.5 million in the nine months ended September 30, 2000, from $25.0 million in 1999 and rent from apartments decreased to $53.0 million in the nine months ended September 30, 2000, from $74.7 million in 1999. The increase in commercial property rents was primarily attributable to the purchase of Encino 27 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Results of Operations (Continued) --------------------- Executive Plaza in May 1999 and the decrease in apartment rent was due to the sale of seven apartments in 2000 and 14 apartments in 1999. Rental income is expected to decrease significantly in the remainder of 2000 as a result of the income producing properties sold in 1999 and 2000. Property operations expense decreased to $23.8 million and $70.4 million in the three and nine months ended September 30, 2000, from $27.4 million and $80.8 million in 1999. Property operations expense for commercial properties increased to $14.8 million in the nine months ended September 30, 2000, from $11.9 million in 1999. For hotels, property operations expense increased to $17.8 million in the nine months ended September 30, 2000, from $17.7 million in 1999. For land, property operations expense increased to $7.1 million in the nine months ended September 30, 2000 from $6.5 million in 1999. For apartments, property operations expense decreased to $30.7 million in the nine months ended September 30, 2000, from $44.7 million in 1999. The increase in commercial property operations expense was primarily due to the purchase of Encino Executive Plaza in May 1999. The increase in land operating expenses was primarily due to increased property taxes. The decrease in property operations expense for apartments was due to the sale of seven apartments in 2000 and 14 apartments in 1999. Property operations expense is expected to decrease significantly in the remainder of 2000 as a result of the properties sold in 1999 and 2000. Interest income from notes receivable decreased to $283,000 and $3.3 million in the three and nine months ended September 30, 2000 from $1.3 million and $5.0 million in 1999. The decrease is due to the collection of mortgage notes receivable and related accrued but unpaid interest at maturity in 2000. Other income increased to $606,000 and $419,000 in the three and nine months ended September 30, 2000, improved from income of $300,000 in the three months ended September 30, 1999, and a loss of $740,000 in the nine months ended September 30, 1999. ARI recognized an unrealized decrease in market value of its trading portfolio securities of $267,000 in the nine months ended September 30, 2000, compared to $1.8 million in 1999. See NOTE 6. "MARKETABLE EQUITY SECURITIES -TRADING PORTFOLIO." Interest expense decreased to $19.6 million and $60.2 million in the three and nine months ended September 30, 2000 from $23.0 million and $68.5 million in 1999. The decrease was attributable to the sale of seven apartments in 2000 and 14 apartments and 22 parcels of land in 1999. In the remainder of 2000, interest expense is expected to continue to decrease due to the properties sold in 1999 and 2000. Depreciation expense decreased to $4.0 million and $12.9 million in the three and nine months ended September 30, 2000, from the $4.5 million and $13.5 million in 1999. This decrease was due to the sale of seven apartments in 2000 and 14 apartments in 1999. Advisory fees of $1.2 million and $3.8 million in the three and nine months ended September 30, 2000, approximated the $1.5 million and $4.0 million in 1999. 28 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Results of Operations (Continued) --------------------- General and administrative expenses of $3.2 million and $12.0 million in the three and nine months ended September 30, 2000, approximated the $3.8 million and $12.7 million in 1999. Minority interest decreased to $5.0 million and $32.2 million in the three and nine months ended September 30, 2000, from $23.2 million and $38.6 million in 1999. The decrease is attributable to the decreased earnings of NRLP in the first seven months of 2000. Minority interest will continue to decrease in the fourth quarter with ARI's acquisition of the minority interest in NRLP effective August 3, 2000. See NOTE 2. "TRANSACTION WITH AMERICAN REALTY TRUST, INC. AND NATIONAL REALTY, L.P." Equity in income of investees increased to $2.6 million and decreased to $2.9 million in the three and nine months ended September 30, 2000, from $1.9 million and $5.3 million in 1999. The three month increase in equity income was attributable to gains from the sale of properties, while the nine month decrease in equity income was attributable to the loss associated with the sale of TCI and IORI stock. In 2000, ARI sold the following properties: Units/ Gain on Property Location Sq.Ft./Acres Sale ------------------ ----------------- -------------- ------- First Quarter Apartments Summerwind Reseda, CA 172 Units $ 6,684 Windtree Reseda, CA 159 Units 6,170 Whispering Pines Canoga Park, CA 102 Units 3,106 Shopping Center Katella Plaza Orange, CA 62,290 Sq.Ft. 194 Land Duchense Duchense, UT 420 Acres 16 Frisco Bridges Collin County, TX 15.00 Acres 297 Frisco Bridges Collin County, TX 19.74 Acres -- Mason/Goodrich Houston, TX 1.1 Acres 70 Mason/Goodrich Houston, TX 12.8 Acres 1,783 Nashville Nashville, TN 2.6 Acres 225 Rasor Plano, TX 43.01 Acres 58 Second Quarter Apartments Pines Little Rock, AR 257 Units 2,441 Four Seasons Denver, CO 384 Units 8,191 Sherwood Glen Urbandale, IA 180 Units 4,161 Office Building Marina Playa Santa Clara, CA 124,205 Sq.Ft. 17,285 29 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Results of Operations (Continued) --------------------- Units/ Gain on Property Location Sq.Ft./Acres Sale --------------------- ------------------ ------------ ------- Land Rasor Plano, TX 5.4 Acres 705 Salmon River Salmon River, ID 3.0 Acres 38 Valley Ranch Irving, TX 22.4 Acres (585) Parkfield Denver, CO 2.6 Acres 512 Frisco Bridges Collin County, TX 24.3 Acres 259 Vista Business Park Travis County, TX 5.4 Acres 173 McKinney Corners II Collin County, TX 14.6 Acres (40) Third Quarter Apartments Fair Oaks Euless, TX 208 Units 3,364 Land Mason/Goodrich Houston, TX 6.8 Acres 807 McKinney Corners I, II, III, IV and V Collin County, TX 82.0 Acres 1,638 Parkfield Denver, CO 326.8 Acres 3,768 Rasor Plano, TX 41.1 Acres 1,902 Pantex Collin County, TX 182.5 Acres 959 Rowlett Creek Collin County, TX 80.4 Acres 462 Vann Cattle Collin County, TX 126.6 Acres 1,257 Mastenbrook Collin County, TX 157.9 Acres 747 Wakefield Collin County, TX 70.3 Acres 478 Nashville Nashville, TN 3.0 Acres 310 Keller Tarrant County, TX 749.1 Acres 3,373 Frisco Bridges Collin County, TX 127.4 Acres 6,954 Mason/Goodrich Houston, TX 20.5 Acres 956 In 1999, ARI sold the following properties: Units/ Gain on Property Location Sq.Ft./Acres Sale ------------------ ----------------- ------------ ------- First Quarter Apartments Olde Towne Middleton, Ohio 199 Units $ 2,200 Santa Fe Kansas City, MO 225 Units 706 Mesa Ridge Mesa, AZ 480 Units 10,200 Land Plano Parkway Collin County, TX 4.6 Acres 473 Rasor Plano, TX 13.0 Acres 979 Mason/Goodrich Houston, TX 9.9 Acres 432 McKinney Corners McKinney, TX 23.7 Acres 2,900 30 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Results of Operations (Continued) --------------------- Units/ Gain on Property Location Sq.Ft./Acres Sale ------------------- ------------------ ------------ ------- Second Quarter Apartments Horizon East Dallas, TX 166 Units 1,800 Lantern Ridge Richmond, VA 120 Units 2,300 Barcelona Tampa, FL 368 Units 2,200 Land Vista Ridge Lewisville, TX 15.0 Acres 913 Plano Parkway Collin County, TX 24.5 Acres 1,100 Frisco Bridges Collin County, TX 27.6 Acres 4,200 Plano Parkway Collin County, TX 6.0 Acres 615 Hotel Continental Las Vegas, NV 400 Rooms 7,900 Third Quarter Apartments Country Place Round Rock, TX 152 Units 3,300 Lake Nora Indianapolis, IN 588 Units 12,700 Fox Club Indianapolis, IN 336 Units Oakhollow Austin, TX 409 Units 24,200 Windridge Austin, TX Land JHL Connell Carrollton, TX .13 Acres 23 Plano Parkway Collin County, TX 11.8 Acres 1,900 Vista Ridge Lewisville, TX 6.7 Acres 584 Valley Ranch Irving, TX 1.4 Acres 128 Keller Tarrant County, TX 2.1 Acres 158 Sun City Sun City, TX 26.5 Acres 180 Katrina Palm Desert, CA 121.2 Acres 186 Frisco Bridges Collin County, TX 13.6 Acres 403 Plano Parkway Collin County, TX 6.2 Acres (40) Keller, Scout and Scoggins Tarrant County, TX 185.6 Acres 1,800 Vista Ridge Lewisville, TX 1.3 Acres 538 Environmental Matters --------------------- Under various federal, state and local environmental laws, ordinances and regulations, ARI may be potentially liable for removal or remediation costs, as well as certain other potential costs relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery for personal injury associated with such materials. 31 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Environmental Matters (Continued) --------------------- Management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on ARI's business, assets or results of operations. Inflation --------- The effects of inflation on ARI's operations are not quantifiable. Revenues from apartment operations fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect the sales values of properties and the ultimate gains to be realized from property sales. To the extent that inflation affects interest rates, earnings from short-term investments and the cost of new borrowings as well as the cost of variable interest rate debt will be affected. Year 2000 --------- Even though January 1, 2000, has passed and no adverse impact from the transition to the year 2000 was experienced, no assurance can be provided that ARI's suppliers and tenants have not been affected in a manner not yet apparent. As a result, management will continue to monitor ARI's year 2000 compliance and the year 2000 compliance of its suppliers and tenants. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS ------------------------------------------------------------------- At September 30, 2000, ARI's exposure to a change in interest rates on its debt is as follows: Weighted Effect of 1% Average Increase In Balance Interest Rate Base Rates ---------- --------------- ------------- (Amounts in thousands, except per share) Notes payable: Variable rate.................. $96,866 9.20% $967 Total decrease in ARI's annual net income..................... $967 ==== Per share....................... $.09 ==== 32 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ----------------------------------------- (a) Exhibits: Exhibit Number Description ------ ------------------------------------------------------- 3.0 Certificate of Restatement of Articles of Incorporation of American Realty Investors, Inc., dated August 3, 2000. 3.1 Certificate of Correction of Restated Articles of Incorporation of American Realty Investors, Inc., dated August 29, 2000 27.0 Financial Data Schedule, filed herewith. (b) Reports on Form 8-K as follows: A Current Report on Form 8-K, dated August 2, 2000, was filed with respect to ITEM 2. "ACQUISITION OR DISPOSITION OF ASSETS," and ITEM 7. "FINANCIAL STATEMENTS AND EXHIBITS," which reports ART's reorganization and combination with National Realty, L.P. 33 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 INVESTORS, INC. Date: November 14, 2000 By: /s/ Karl L. Blaha ------------------------- ----------------------------------- Karl L. Blaha President Date: November 14, 2000 By: /s/ Mark W. Branigan -------------------------- ----------------------------------- Mark W. Branigan Executive Vice President and Chief Financial Officer (Principal Financial Officer) 34 AMERICAN REALTY INVESTORS, INC. EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the Quarter ended September 30, 2000 Exhibit Page Number Description Number ------- -------------------------------------------------- ------ 3.0 Certificate of Restatement of Articles of Incorporation of American Realty Investors, Inc., dated August 3, 2000. 3.1 Certificate of Correction of Restated Articles of Incorporation of American Realty Investors, Inc., dated August 29, 2000. 27.0 Financial Data Schedule. 35