-----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, SNdzr3XKDohJ+ZPPk7tNX1Rfl1XfyTiodXeaheJTadoCq4YckTTwt28bFPe1mvMp F5uPxpJAZ/rqfRG/wUxJKQ== 0000930661-01-000821.txt : 20010330 0000930661-01-000821.hdr.sgml : 20010330 ACCESSION NUMBER: 0000930661-01-000821 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSCONTINENTAL REALTY INVESTORS INC CENTRAL INDEX KEY: 0000733590 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 946565852 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09240 FILM NUMBER: 1584275 BUSINESS ADDRESS: STREET 1: 10670 N CENTRAL EXPRWY STE 300 CITY: DALLAS STATE: TX ZIP: 75231 BUSINESS PHONE: 2146924700 MAIL ADDRESS: STREET 1: 10670 N CENTRAL EXPRWY STREET 2: SUITE 300 CITY: DALLAS STATE: TX ZIP: 75231 FORMER COMPANY: FORMER CONFORMED NAME: JOHNSTOWN CONSOLIDATED REALTY TRUST /CA/ DATE OF NAME CHANGE: 19890815 FORMER COMPANY: FORMER CONFORMED NAME: JOHNSTOWN CONSOLIDATED REALTY TRUST DATE OF NAME CHANGE: 19861005 10-K405 1 0001.txt FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K [X]ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Year Ended December 31, 2000 Commission File Number 1-9240 ---------------- Transcontinental Realty Investors, Inc. (Exact Name of Registrant as Specified in Its Charter) Nevada 94-6565852 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1800 Valley View Lane, 75234 Suite 300, Dallas, Texas (Zip Code) (Address of Principal Executive Offices) (469) 522-4200 (Registrant's Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which Common Stock, $.01 par value registered New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: NONE ---------------- 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 at least the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 2, 2001, the Registrant had 8,636,354 shares of Common Stock outstanding. Of the total shares outstanding 3,401,903 were held by other than those who may be deemed to be affiliates, for an aggregate value of $40,822,836 based on the last trade as reported on the New York Stock Exchange on March 2, 2001. The basis of this calculation does not constitute a determination by the Registrant that all of such persons or entities are affiliates of the Registrant as defined in Rule 405 of the Securities Act of 1933, as amended. Documents Incorporated by Reference: Consolidated Financial Statements of Income Opportunity Realty Investors, Inc. Commission File No. 1-14784 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- INDEX TO ANNUAL REPORT ON FORM 10-K
Page ---- PART I Item 1. Business...................................................... 3 Item 2. Properties.................................................... 5 Item 3. Legal Proceedings............................................. 16 Item 4. Submission of Matters to a Vote of Security Holders........... 17 PART II Market for Registrant's Common Equity and Related Stockholder Item 5. Matters....................................................... 17 Item 6. Selected Financial Data....................................... 19 Management's Discussion and Analysis of Financial Condition Item 7. and Results of Operations..................................... 20 Quantitative and Qualitative Disclosures Regarding Market Item 7A. Risk.......................................................... 25 Item 8. Financial Statements and Supplementary Data................... 26 Changes in and Disagreements with Accountants on Accounting Item 9. and Financial Disclosure...................................... 62 PART III Item 10. Directors, Executive Officers and Advisor of the Registrant... 62 Item 11. Executive Compensation........................................ 67 Security Ownership of Certain Beneficial Owners and Item 12. Management.................................................... 69 Item 13. Certain Relationships and Related Transactions................ 70 PART IV Exhibits, Consolidated Financial Statements, Schedules and Item 14. Reports on Form 8-K........................................... 71 Signature Page.......................................................... 73
2 PART I ITEM 1. BUSINESS Transcontinental Realty Investors, Inc. ("TCI"), a Nevada corporation, is the successor to a California business trust, which was organized on September 6, 1983 and commenced operations on January 31, 1984. On November 30, 1999, TCI acquired all of the outstanding shares of beneficial interest of Continental Mortgage and Equity Trust ("CMET"), a real estate company, in a tax-free exchange of shares, issuing 1.181 shares of its Common Stock for each outstanding CMET share. Prior to January 1, 2000, TCI elected to be treated as a Real Estate Investment Trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). During the third quarter of 2000, due to a concentration of ownership TCI no longer met the requirement for tax treatment as a REIT. Under the Code, TCI can not re-qualify for REIT tax status for at least five years. TCI's real estate at December 31, 2000, consisted of 140 properties held for investment, three partnership properties and four properties held for sale which were primarily obtained through foreclosure. In 2000, TCI purchased 18 properties held for investment. TCI's mortgage notes receivable portfolio at December 31, 2000, consisted of six mortgage loans. In addition, TCI has an interest in a partnership which holds a wraparound mortgage note receivable. TCI's real estate and mortgage notes receivable portfolios are more fully discussed in ITEM 2. "PROPERTIES." Business Plan and Investment Policy TCI's business is investing in real estate through direct equity ownership and partnerships and financing real estate and real estate related activities through investments in mortgage loans, including first, wraparound and junior mortgage loans. TCI's real estate is located throughout the continental United States. Information regarding TCI's real estate and mortgage notes receivable portfolios is set forth in ITEM 2. "PROPERTIES", and in Schedules III and IV to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." TCI's business is not seasonal. Management has determined to continue to pursue a balanced investment policy, seeking both current income and capital appreciation. With respect to new real estate investments, management's plan of operation is to consider all types of real estate with an emphasis on properties generating current cash flow. Management expects to invest in and improve these properties to maximize both their immediate and long-term value. Management will also consider the development of apartment properties in selected markets primarily in Texas. Management also expects to consider property sales opportunities for properties in stabilized real estate markets where TCI's properties have reached their potential. Management also expects to be an opportunistic seller of properties in markets that have become overheated, i.e. an abundance of buyers. Management's operating strategy with regard to TCI's properties is to maximize each property's operating income by aggressive property management through closely monitoring expenses while at the same time making property renovations and/or improvements where appropriate. While such expenditures increase the amount of revenue required to cover operating expenses, management believes that such expenditures are necessary to maintain or enhance the value of the properties. Management does not expect that TCI will seek to fund or acquire new mortgage loans in 2001. However, TCI may originate mortgage loans in conjunction with providing purchase money financing of a property sale. Management intends to service and hold for investment the mortgage notes in TCI's portfolio. However, TCI may borrow against its mortgage notes, using the proceeds from such borrowings for property acquisitions or for general working capital needs. Management also intends to pursue TCI's rights vigorously with respect to mortgage notes that are in default. TCI's Articles of Incorporation impose no limitations on its investment policy 3 with respect to mortgage loans and does not prohibit it from investing more than a specified percentage of its assets in any one mortgage loan. Management of the Company Although the Board of Directors is directly responsible for managing the affairs of TCI and for setting the policies which guide it, its day-to-day operations are performed by Basic Capital Management, Inc. ("BCM"), a contractual advisor under the supervision of the Board. The duties of BCM include, among other things, locating, investigating, evaluating and recommending real estate and mortgage note investment and sales opportunities, as well as financing and refinancing sources. BCM also serves as a consultant in connection with TCI's business plan and investment decisions made by the Board. BCM is a company owned by a trust for the benefit of the children of Gene E. Phillips. Mr. Phillips serves as a representative of his children's trust, which owns BCM and in such capacity, had, until June 2000, substantial contact with the management of BCM and input with respect to its performance of advisory services to TCI. BCM is more fully described in ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT--The Advisor." BCM has been providing advisory services to TCI since March 28, 1989. Renewal of BCM's advisory agreement was approved by the Board of Directors on August 18, 2000. BCM also serves as advisor to Income Opportunity Realty Investors, Inc. ("IORI") and American Realty Investors, Inc. ("ARI"). The Directors of TCI are also directors of IORI. Karl L. Blaha, President of TCI, also serves as President of ARI, IORI, and BCM and the officers of TCI also serve as officers of ARI, IORI, and BCM. As of March 2, 2001, TCI owned approximately 22.8% of IORI's outstanding shares of common stock and ARI owned approximately 24.7% and BCM owned approximately 13.5% of the outstanding shares of TCI's Common Stock. Since February 1, 1990, affiliates of BCM have provided property management services to TCI. Currently, Triad Realty Services, Ltd. ("Triad") provides such property management services. Triad subcontracts with other entities for the provision of property-level management services to TCI. The general partner of Triad is BCM. The limited partners of Triad are Gene E. Phillips and GS Realty Services, Inc. ("GS Realty"), which is a company not affiliated with Mr. Phillips or BCM. Triad subcontracts the property-level management and leasing of 52 of TCI's commercial properties and the two commercial properties owned by real estate partnerships in which TCI and IORI are partners to Regis Realty, Inc. ("Regis"), a related party, which is a company owned by GS Realty. Regis is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad. Regis also is entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. Regis Hotel Corporation, a related party, manages TCI's four hotels. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT--The Advisor." TCI has no employees. Employees of BCM render services to TCI. Competition The real estate business is highly competitive and TCI competes with numerous entities engaged in real estate activities (including certain entities described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Related Party Transactions"), some of which have greater financial resources than those of TCI. Management believes that success against such competition is dependent upon the geographic location of the property, the performance of property-level managers in areas such as marketing, collections and control of operating expenses, the amount of new construction in the area and the maintenance and appearance of the property. Additional competitive factors with respect to commercial properties are the ease of access to the property, the adequacy of related facilities, such as parking, and sensitivity to market conditions in setting rent levels. With respect to apartments, competition is also based upon the design and mix of units and the ability to provide a community atmosphere for the tenants. Management believes that beyond general economic circumstances and trends, the rate at which properties are renovated or the rate new properties are developed in the vicinity of each of TCI's properties also are competitive factors. 4 To the extent that TCI seeks to sell any of its properties, the sales prices for such properties may be affected by competition from other real estate entities and financial institutions also attempting to sell their properties located in areas in which TCI's properties are located, as well as by aggressive buyers attempting to penetrate or dominate a particular market. As described above and in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Related Party Transactions," the officers and Directors of TCI also serve as officers or directors of certain other entities, also advised by BCM, and which have business objectives similar to those of TCI. TCI's Directors, officers and advisor owe fiduciary duties to such other entities as well as to TCI under applicable law. In determining to which entity a particular investment opportunity will be allocated, the officers, Directors and advisor consider the respective investment objectives of each such entity and the appropriateness of a particular investment in light of each such entity's existing real estate portfolio. To the extent that any particular investment opportunity is appropriate to more than one of the entities, the investment opportunity will be allocated to the entity which has had funds available for investment for the longest period of time or, if appropriate, the investment may be shared among all or some of the entities. In addition, as also described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Certain Business Relationships," TCI also competes with other entities which are affiliates of BCM and which have investment objectives similar to TCI's and that may compete with it in purchasing, selling, leasing and financing of real estate and real estate related investments. In resolving any potential conflicts of interest which may arise, BCM has informed management that it intends to continue to exercise its best judgment as to what is fair and reasonable under the circumstances in accordance with applicable law. Certain Factors Associated with Real Estate and Related Investments TCI is subject to all the risks incident to ownership and financing of real estate and interests therein, many of which relate to the general illiquidity of real estate investments. These risks include, but are not limited to, changes in general or local economic conditions, changes in interest rates and the availability of permanent mortgage financing which may render the purchase, sale or refinancing of a property difficult or unattractive and which may make debt service burdensome, changes in real estate and zoning laws, increases in real estate taxes, federal or local economic or rent controls, floods, earthquakes, hurricanes and other acts of God and other factors beyond the control of management or BCM. The illiquidity of real estate investments may also impair the ability of management to respond promptly to changing circumstances. Management believes that such risks are partially mitigated by the diversification by geographic region and property type of TCI's real estate and mortgage notes receivable portfolios. However, to the extent new property investments or mortgage lending is concentrated in any particular region or property type, the advantages of diversification may be mitigated. ITEM 2. PROPERTIES TCI's principal offices are located at 1800 Valley View Lane, Suite 300, Dallas, Texas 75234 and are, in the opinion of management, suitable and adequate for TCI's present operations. Details of TCI's real estate and mortgage notes receivable portfolios at December 31, 2000, are set forth in Schedules III and IV, respectively, to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." The discussions set forth below under the headings "Real Estate" and "Mortgage Loans" provide certain summary information concerning TCI's real estate and mortgage notes receivable portfolios. TCI's real estate portfolio consists of properties held for investment, properties held for sale, which were primarily obtained through foreclosure of the collateral securing mortgage notes receivable and investments in partnerships. The discussion set forth below under the heading "Real Estate" provides certain summary information concerning TCI's real estate and further summary information with respect to its properties held for investment, properties held for sale and its investment in partnerships. 5 At December 31, 2000, none of TCI's properties, mortgage notes receivable or investment in partnerships exceeded 10% of total assets. At December 31, 2000, 88% of TCI's assets consisted of properties held for investment, less than 1% consisted of properties held for sale, 1% consisted of mortgage notes and interest receivable and less than 1% consisted of investments in partnerships. The remaining 10% of TCI's assets were invested in cash, cash equivalents, marketable equity securities and other assets. The percentage of TCI's assets invested in any one category is subject to change and no assurance can be given that the composition of TCI's assets in the future will approximate the percentages listed above. TCI's real estate is geographically diverse. At December 31, 2000, TCI held investments in apartments and commercial properties in each of the geographic regions of the continental United States, although its apartments and commercial properties were concentrated in the Southeast and Southwest regions, as shown more specifically in the table under "Real Estate" below. At December 31, 2000, TCI held mortgage notes receivable secured by apartments and commercial properties in the Southwest and Midwest regions of the continental United States, as shown more specifically in the table under "Mortgage Loans" below. 6 Geographic Regions TCI has divided the continental United States into the following geographic regions. Northeast region comprised of the states of Connecticut, Delaware, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont, and the District of Columbia. TCI owns a commercial property in this region. Southeast region comprised of the states of Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee and Virginia. TCI owns 7 apartments and 20 commercial properties in this region. Southwest region comprised of the states of Arizona, Arkansas, Louisiana, New Mexico, Oklahoma and Texas. TCI owns 45 apartments and 22 commercial properties in this region. Midwest region comprised of the states of Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, West Virginia and Wisconsin. TCI owns 4 apartments, 4 commercial properties and 3 hotels in this region. Mountain region comprised of the states of Colorado, Idaho, Montana, Nevada, Utah and Wyoming. TCI owns an apartment and 3 commercial properties in this region. Pacific region comprised of the states of California, Oregon and Washington. TCI owns 4 apartments, a hotel and 6 commercial properties in this region. Excluded from the above are 23 parcels of unimproved land, as described below. Real Estate At December 31, 2000, approximately 90% of TCI's assets were invested in real estate. TCI invests in real estate located throughout the continental United States, either on a leveraged or nonleveraged basis. TCI's real estate portfolio consists of properties held for investment, investments in partnerships and properties held for sale (which were primarily obtained through foreclosure of the collateral securing mortgage notes receivable). Types of Real Estate Investments. TCI's real estate consists of commercial properties (office buildings, industrial warehouses and shopping centers), hotels and apartments having established income-producing capabilities. In selecting real estate for investment, the location, age and type of property, gross rents, lease terms, financial and business standing of tenants, operating expenses, fixed charges, land values and physical condition are among the factors considered. TCI may acquire properties subject to or assume existing debt and may mortgage, pledge or otherwise obtain financing for its properties. The Board of Directors may alter the types of and criteria for selecting new real estate investments and for obtaining financing without a vote of stockholders. TCI typically invests in developed real estate. However, TCI has recently invested in apartment development and construction. To the extent that TCI continues to invest in development and construction projects, it will be subject to business risks, such as cost overruns and construction delays, associated with such higher risk projects. At December 31, 2000, TCI had under construction a 29,000 sq. ft. aircraft hanger in Addison, Texas. In the opinion of management, the properties owned by TCI are adequately covered by insurance. 7 The following table sets forth the percentages, by property type and geographic region, of TCI's real estate (other than four hotels in the Pacific and Midwest regions and 23 parcels of unimproved land, as described below) at December 31, 2000.
Commercial Region Apartments Properties ------ ---------- ---------- Pacific................................................ 3% 4% Midwest................................................ 8 10 Northeast.............................................. -- 1 Southwest.............................................. 76 48 Southeast.............................................. 13 31 Mountain............................................... -- 6 --- --- 100% 100% === ===
The foregoing table is based solely on the number of apartment units and amount of commercial square footage and does not reflect the value of TCI's investment in each region. TCI owns 23 parcels of unimproved land, 2 parcels of 4.79 acres and 4.66 acres in the Southeast region and 21 parcels of .67 acres, .68 acres, 14.39 acres, 2.89 acres, 2.14 acres, 4.7 acres, 6.8 acres, 22.99 acres, 36.4 acres, 36.38 acres, 97.97 acres, 55.8 acres, 160.38 acres, 97.0 acres, 101.94 acres, 16.16 acres, 128 acres, 17.07 acres, 9.96 acres, 108.9 acres and 18,000 sq. ft. in the Southwest region. See Schedule III to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" for a detailed description of TCI's real estate portfolio. A summary of activity in TCI's owned real estate portfolio during 2000 is as follows: Owned properties at January 1, 2000..................................... 144 Properties purchased.................................................... 18 Property obtained through foreclosure................................... 1 Property under construction............................................. 1 Properties sold......................................................... (20) --- Owned properties at December 31, 2000................................... 144 ===
8 Properties Held for Investment. Set forth below are TCI's properties held for investment and the monthly rental rate for apartments, the average annual rental rate for commercial properties and the average daily room rate and room revenue divided by total available rooms for hotels and occupancy at December 31, 2000, 1999 and 1998 for apartments and commercial properties and average occupancy during 2000, 1999 and 1998 for hotels:
Rent Per Square Foot Occupancy % Units/ ----------------------- -------------- Property Location Square Footage 2000 1999 1998 2000 1999 1998 - -------- ----------------- ------------------------- ------- ------- ------- ---- ---- ---- Apartments 4242 Cedar Springs...... Dallas, TX 76 Units/60,600 Sq. Ft. $ .87 $ .84 $ .82 92 99 99 4400.................... Midland, TX 92 Units/94,472 Sq. Ft. .49 .49 .49 91 85 98 Apple Lane.............. Lawrence, KS 75 Units/30,000 Sq. Ft. 1.00 * * 97 * * Arbor Point............. Odessa, TX 195 Units/178,920 Sq. Ft. .39 .37 .42 95 95 78 Ashton Way.............. Midland, TX 178 Units/138,964 Sq. Ft. .41 .41 .41 95 78 93 Autumn Chase............ Midland, TX 64 Units/58,652 Sq. Ft. .52 * * 97 * * Bent Tree............... Addison, TX 204 Units/196,300 Sq. Ft. .72 .71 .70 95 93 93 Camelot................. Largo, FL 120 Units/141,024 Sq. Ft. .54 .53 .51 99 92 100 Carseka................. Los Angeles, CA 54 Units/37,068 Sq. Ft. 1.28 1.12 1.01 96 98 97 Cliffs of Eldorado...... McKinney, TX 208 Units/182,288 Sq. Ft. .84 .84 .92 95 91 80 Country Crossing........ Tampa, FL 227 Units/199,952 Sq. Ft. .58 .56 .54 94 95 91 Coventry................ Midland, TX 120 Units/105,608 Sq. Ft. .42 .42 .42 98 78 91 El Chapparal............ San Antonio, TX 190 Units/174,220 Sq. Ft. .69 .67 .66 93 99 91 Fairway View Estates.... El Paso, TX 264 Units/204,000 Sq. Ft. .61 .57 * 83 76 * Fairways................ Longview, TX 152 Units/134,176 Sq. Ft. .53 .53 .53 95 78 83 Fontenelle Hills........ Bellevue, NE 338 Units/380,198 Sq. Ft. .65 .63 .60 96 57 99 Forest Ridge............ Denton, TX 56 Units/65,480 Sq. Ft. .64 .64 .62 95 98 88 Fountain Lake........... Texas City, TX 166 Units/161,220 Sq. Ft. .56 .55 .55 86 85 88 Fountains of Waterford.. Midland, TX 172 Units/129,200 Sq. Ft. .53 .53 .35 88 52 2 Gladstell Forest........ Conroe, TX 168 Units/121,536 Sq. Ft. .72 .72 .70 90 90 97 Glenwood................ Addison, TX 168 Units/134,432 Sq. Ft. .80 .78 .74 98 85 96 Grove Park.............. Plano, TX 188 Units/143,556 Sq. Ft. .81 .77 .72 95 95 97 Harper's Ferry.......... Lafayette, LA 122 Units/112,500 Sq. Ft. .58 .57 .55 94 75 95 Heritage................ Tulsa, OK 136 Units/92,464 Sq. Ft. .72 .71 .69 92 89 94 Heritage on the River... Jacksonville, FL 301 Units/289,490 Sq. Ft. .63 .63 .62 98 92 95 Hunters Glen............ Midland, TX 212 Units/174,180 Sq. Ft. .37 .37 .37 91 86 90 In the Pines............ Gainesville, FL 242 Units/294,860 Sq. Ft. .54 .52 .51 97 98 97 Limestone Canyon........ Austin, TX 260 Units/216,000 Sq. Ft. 1.00 .97 * 96 83 * Madison at Bear Creek... Houston, TX 180 Units/138,448 Sq. Ft. .68 .66 .63 92 91 96 McCallum Crossing....... Dallas, TX 322 Units/172,796 Sq. Ft. .97 .96 .93 94 92 95 McCallum Glen........... Dallas, TX 275 Units/159,850 Sq. Ft. .93 .91 .89 93 92 95 Mountain Plaza.......... El Paso, TX 188 Units/220,710 Sq. Ft. .49 .48 .47 94 94 92 Oak Park IV............. Clute, TX 108 Units/78,708 Sq. Ft. .52 .51 .50 88 84 90 Oak Run................. Pasadena, TX 160 Units/128,016 Sq. Ft. .76 .74 .72 97 89 91 Paramount Terrace....... Amarillo, TX 181 Units/123,840 Sq. Ft. .55 * * 94 * * Park at Colonnade....... San Antonio, TX 211 Units/188,000 Sq. Ft. .59 .58 .56 91 86 95 Park Lane............... Dallas, TX 97 Units/87,260 Sq. Ft. .64 .62 .60 93 96 97 Plantation.............. Tulsa, OK 138 Units/103,500 Sq. Ft. .56 .54 * 95 91 * Primrose................ Bakersfield, CA 162 Units/144,836 Sq. Ft. .56 * * 93 * * Quail Creek............. Lawrence, KS 95 Units/113,416 Sq. Ft. .55 * * 97 * * Quail Oaks.............. Balch Springs, TX 131 Units/72,848 Sq. Ft. .77 .73 .68 97 96 96 Sandstone............... Mesa, AZ 238 Units/363,079 Sq. Ft. .90 .88 .33 91 93 94 Somerset................ Texas City, TX 200 Units/163,368 Sq. Ft. .64 .63 .60 91 85 92 South Cochran........... Los Angeles, CA 64 Units/43,100 Sq. Ft. 1.36 1.22 1.06 98 96 99 Southgate............... Odessa, TX 180 Units/151,656 Sq. Ft. .41 .41 .44 96 86 88 Southgreen.............. Bakersfield, CA 80 Units/66,000 Sq. Ft. .77 .70 .57 95 92 95 Stone Oak............... San Antonio, TX 252 Units/187,686 Sq. Ft. .65 .63 .63 94 85 92 Summerfield............. Orlando, FL 224 Units/204,116 Sq. Ft. .70 .67 .66 95 86 91 Summerstone............. Houston, TX 242 Units/188,734 Sq. Ft. .68 .65 .63 93 96 96 Sunchase................ Odessa, TX 300 Units/223,048 Sq. Ft. .43 .43 .44 95 87 92
9
Rent Per Square Foot Occupancy % Units/ ----------------- -------------- Property Location Square Footage 2000 1999 1998 2000 1999 1998 - -------- -------------------- ------------------------- ----- ----- ----- ---- ---- ---- Apartments (continued) Sunset Lake............. Waukegan, IL 414 Units/302,640 Sq. Ft. $ .85 $ .83 $ .81 94 93 91 Terrace Hills........... El Paso, TX 310 Units/233,192 Sq. Ft. .66 .63 .63 93 94 97 Timbers................. Tyler, TX 180 Units/101,666 Sq. Ft. .55 .54 .54 98 93 87 Trails at Windfern...... Houston, TX 240 Units/173,376 Sq. Ft. .71 .68 .64 97 96 96 Treehouse............... Irving, TX 160 Units/153,072 Sq. Ft. .75 .71 .68 94 93 96 Westwood................ Odessa, TX 79 Units/49,001 Sq. Ft. .43 .41 .45 100 91 99 Willow Creek............ El Paso, TX 112 Units/103,140 Sq. Ft. .50 .49 .48 97 77 92 Willo-Wick Gardens...... Pensacola, FL 152 Units/153,360 Sq. Ft. .56 .53 .52 89 80 87 Willow Wick............. North Augusta, SC 104 Units/94,128 Sq. Ft. .56 .55 .52 91 96 99 Woodview................ Odessa, TX 232 Units/165,840 Sq. Ft. .46 .45 .51 96 91 85 Office Buildings 1010 Common............. New Orleans, LA 494,579 Sq. Ft. 10.83 10.45 8.20 32 21 13 225 Baronne............. New Orleans, LA 416,834 Sq. Ft. 9.61 9.32 7.34 76 77 62 4135 Beltline Road...... Addison, TX 90,000 Sq. Ft. 10.17 10.00 * 33 * * 9033 Wilshire........... Los Angeles, CA 44,253 Sq. Ft. 26.08 * * 90 * * Ambulatory Surgery Center................. Sterling, VA 33,832 Sq. Ft. 34.26 * * 100 * * Amoco................... New Orleans, LA 378,244 Sq. Ft. 11.54 11.23 12.02 80 78 79 Atrium.................. Palm Beach, FL 74,603 Sq. Ft. 11.55 11.31 8.86 84 96 99 Bay Plaza............... Tampa, FL 75,780 Sq. Ft. 15.60 15.14 14.48 95 85 87 Bay Plaza II............ Tampa, FL 78,882 Sq. Ft. 12.80 * * 93 * * Bonita Plaza............ Bonita, CA 47,777 Sq. Ft. 18.66 18.78 16.59 92 88 88 Brandeis................ Omaha, NE 319,234 Sq. Ft. 15.87 * * 100 * * Chesapeake Center....... San Diego, CA 57,493 Sq. Ft. 11.21 12.33 * 100 88 * Corporate Pointe........ Chantilly, VA 65,918 Sq. Ft. 18.31 16.85 14.92 100 100 100 Countryside Retail Center................. Sterling, VA 133,422 Sq. Ft. 18.02 * * 89 * * Daley Plaza............. San Diego, CA 62,425 Sq. Ft. 15.44 15.05 14.69 97 100 92 Durham Center........... Durham, NC 207,171 Sq. Ft. 17.79 17.93 17.30 95 78 92 Eton Square............. Tulsa, OK 222,654 Sq. Ft. 10.52 9.78 * 60 86 * Forum................... Richmond, VA 79,791 Sq. Ft. 15.65 15.34 14.82 84 88 81 Harmon.................. Sterling, VA 72,062 Sq. Ft. 19.50 * * 85 * * Hartford................ Dallas, TX 174,513 Sq. Ft. 10.78 10.68 9.93 50 57 57 Institute Place......... Chicago, IL 144,915 Sq. Ft. 14.99 14.47 14.73 100 95 95 Jefferson............... Washington, DC 71,877 Sq. Ft. 31.94 30.94 30.83 89 100 94 Lexington Center........ Colorado Springs, CO 74,603 Sq. Ft. 12.26 11.71 10.93 54 97 80 Mimado.................. Sterling, VA 35,127 Sq. Ft. 19.55 * * 89 * * NASA.................... Clear Lake, TX 78,159 Sq. Ft. 11.74 11.44 10.81 66 66 78 One Steeplechase........ Sterling, VA 103,376 Sq. Ft. 16.64 16.26 15.74 100 100 100 Parkway North........... Dallas, TX 71,041 Sq. Ft. 14.77 7.82 12.62 76 85 78 Plaza Towers............ St. Petersburg, FL 186,281 Sq. Ft. 14.54 14.03 13.33 95 95 100 Remington Tower......... Tulsa, OK 90,009 Sq. Ft. 11.34 10.89 * 86 76 * Savings of America...... Houston, TX 68,634 Sq. Ft. 11.68 11.28 9.70 79 71 89 Valley Rim.............. San Diego, CA 54,194 Sq. Ft. 15.33 15.35 15.81 93 90 88 Venture Center.......... Atlanta, GA 38,272 Sq. Ft. 17.16 16.62 14.74 100 100 71 View Ridge.............. San Diego, CA 25,062 Sq. Ft. 8.43 8.18 7.20 100 91 87 Waterstreet............. Boulder, CO 106,257 Sq. Ft. 19.48 18.83 17.56 90 92 98 Westgrove Air Plaza..... Addison, TX 78,326 Sq. Ft. 12.91 12.69 11.04 90 89 85 Windsor Plaza........... Windcrest, TX 80,522 Sq. Ft. 13.70 13.43 12.85 63 62 49 Industrial Warehouses 5360 Tulane............. Atlanta, GA 30,000 Sq. Ft. 2.60 2.55 2.45 100 100 65 5700 Tulane............. Atlanta, GA 67,850 Sq. Ft. 2.83 2.63 * 77 9 * Addison Hanger.......... Addison, TX 23,650 Sq. Ft. 11.08 11.29 * 51 50 * Addison Hanger II....... Addison, TX 29,000 Sq. Ft. * * * * * * Central Storage......... Dallas, TX 216,035 Sq. Ft. 1.48 1.48 1.48 100 100 100 Encon................... Fort Worth, TX 256,410 Sq. Ft. 2.00 2.00 2.00 100 100 100 Kelly................... Dallas, TX 330,334 Sq. Ft. 3.85 3.74 2.90 100 98 100 McLeod.................. Orlando, FL 110,914 Sq. Ft. 7.86 7.62 7.05 88 91 90 Ogden Industrial........ Ogden, UT 107,112 Sq. Ft. 3.32 3.79 4.12 86 100 86
10
Rent Per Square Foot Occupancy % -------------------- -------------- Property Location Square Footage 2000 1999 1998 2000 1999 1998 - -------- ------------------ --------------- ------ ------ ------ ---- ---- ---- Industrial Warehouses (continued) Plaza on Bachman Creek.. Dallas, TX 80,278 Sq. Ft. $11.13 $11.70 $10.66 79 65 69 Space Center............ San Antonio, TX 101,500 Sq. Ft. 3.09 2.97 2.96 100 83 65 Technology Trading...... Sterling, VA 197,659 Sq. Ft. 6.35 6.17 5.76 92 91 87 Texstar................. Arlington, TX 97,846 Sq. Ft. 2.11 2.11 2.11 100 100 100 Tricon.................. Atlanta, GA 570,877 Sq. Ft. 3.75 3.21 3.59 91 96 98 Shopping Centers Dunes Plaza............. Michigan City, IN 223,869 Sq. Ft. 5.61 5.54 4.84 63 64 43 K-Mart.................. Cary, NC 92,033 Sq. Ft. 3.28 3.28 3.28 100 100 100 Parkway Center.......... Dallas, TX 28,374 Sq. Ft. 14.67 13.60 13.86 100 100 94 Promenade............... Highland Ranch, CO 133,558 Sq. Ft. 10.57 10.34 9.75 73 93 99 Sadler Square........... Amelia Island, FL 70,295 Sq. Ft. 7.15 6.99 6.90 95 96 95 Sheboygan............... Sheboygan, WI 74,532 Sq. Ft. 1.99 1.99 1.99 100 100 100 Other Signature Athletic Club................... Dallas, TX 56,532 Sq. Ft.
Total Room Revenues Divided By Average Room Rate Occupancy % Total Available Rooms ----------------------- -------------- ----------------------- Property Location Rooms 2000 1999 1998 2000 1999 1998 2000 1999 1998 - -------- -------- ----- ------- ------- ------- ---- ---- ---- ------- ------- ------- Hotels Brompton................ Chicago, IL 52 Rooms $131.78 $115.12 $ 98.08 52 60 50 $ 69.10 $ 79.24 $ 67.93 City Suites............. Chicago, IL 45 Rooms 125.32 111.45 101.13 74 71 68 92.40 69.23 46.54 Majestic Inn............ San Francisco, CA 57 Rooms 170.08 162.58 148.96 79 79 71 133.65 128.76 112.54 Surf.................... Chicago, IL 55 Rooms 120.67 105.27 98.85 65 63 57 77.89 66.62 56.12
Square Property Location Footage/Acres - -------- ------------------ -------------- Land 1013 Common............ New Orleans, LA 18,000 Sq. Ft. Alamo Springs.......... Dallas, TX .678 Acres Dominion............... Dallas, TX 14.39 Acres Eagle Crest............ Farmers Branch, TX 22.99 Acres Folsom................. Dallas, TX 36.38 Acres Lamar/Parmer........... Austin, TX 17.07 Acres Las Colinas............ Las Colinas, TX 4.7 Acres Lemmon Carlisle........ Dallas, TX 2.14 Acres Limestone Canyon II.... Austin, TX 9.96 Acres Manhattan.............. Farmers Branch, TX 108.9 Acres McKinney 36............ Collin County, TX 36.4 Acres Red Cross.............. Dallas, TX 2.89 Acres Sandison............... Collin County, TX 97.97 Acres Solco Allen............ Collin County, TX 55.8 Acres Stacy Road............. Allen, TX 160.38 Acres State Highway 121...... Collin County, TX 101.94 Acres Watters Road........... Collin County, TX 97.00 Acres West End............... Dallas, TX 6.8 Acres Whisenant.............. Collin County, TX 16.16 Acres
- -------- * Property was either purchased or under construction in 1999 or 2000. Occupancy presented here and throughout this ITEM 2. is without reference to whether leases in effect are at, below or above market rates. 11 In 2000, TCI purchased the following properties:
Net Purchase Cash Debt Interest Maturity Property Location Units/Sq.Ft./Acres Price Paid Incurred Rate Date - -------- ------------------ ------------------ -------- ----- -------- -------- -------- (dollars in thousands) Apartments Apple Lane.............. Lawrence, KS 75 Units $ 1,575 $ 595 $ 1,005 8.63% 05/07 Autumn Chase............ Midland, TX 64 Units 1,338 458 936 9.45(1) 04/05 Paramount Terrace....... Amarillo, TX 181 Units 3,250 561 2,865 9.38 09/01 Primrose................ Bakersfield, CA 162 Units 4,100 1,189 3,000 9.25(1) 03/07 Quail Creek............. Lawrence, KS 95 Units 3,250 1,088 2,254 7.44 07/03 Office Building 9033 Wilshire Blvd...... Los Angeles, CA 44,253 Sq. Ft. 9,225 2,536 6,861 8.07 08/09 Bay Plaza II............ Tampa, FL 78,882 Sq. Ft. 4,825 4,786 -- -- -- Brandeis................ Omaha, NE 319,234 Sq. Ft. 14,000 4,052 8,750 9.5 11/03 Countryside Portfolio(2)........... Sterling, VA 265,718 Sq. Ft. 44,940 4,825 36,297 7.75 12/02 Land DF Fund................. Collin County, TX 79.5 Acres 2,545 1,047 1,545 10.00 03/01(3) Folsom.................. Dallas, TX 36.38 Acres 1,750 1,738 -- -- -- Lamar/Parmer............ Austin, TX 17.07 Acres 1,500 517 1,030 10.00 12/00(4) Limestone Canyon II..... Austin, TX 9.96 Acres 504 424 -- -- -- Manhattan............... Farmers Branch, TX 108.9 Acres 10,743 6,144 5,000 14.00 02/01(5) Netzer.................. Collin County, TX 20 Acres 400 418 -- -- --
- -------- (1) Variable interest rate. (2) The Countryside Portfolio consisted of four commercial buildings: the 133,422 sq. ft. Countryside Retail Center, the 72,062 sq. ft. Harmon Office Building, the 35,127 sq. ft. Mimado Office Building and the 25,107 sq. ft. Ambulatory Surgical Center. (3) The DF Fund land was sold in September 2000. (4) The loan was paid off in March 2001. (5) The loan was paid off in June 2000. 12 In 2000, TCI sold the following properties:
Units/ Sales Net Cash Debt Gain on Property Location Sq.Ft./Rooms/Acres Price Received Discharged Sale - -------- ----------------- ------------------ ------- -------- ---------- ------- (dollars in thousands) Apartments Apple Creek............. Dallas, TX 216 Units $ 4,300 $2,155 $1,723 $3,240 Ashley Crest............ Houston, TX 168 Units 3,950 1,102 2,812(1) 706 Country Bend............ Fort Worth, TX 166 Units 4,700 1,894 2,445 1,097 Crescent Place.......... Houston, TX 120 Units 3,485 1,034 2,151 793 Eagle Rock.............. Los Angeles, CA 99 Units 5,600 1,967 3,246 1,021 Fountain Village........ Tucson, AZ 410 Units 11,700 3,088 7,569 5,086 Hunters Bend............ San Antonio, TX 96 Units 1,683 418 1,127(1) 572 Parkwood Knoll.......... San Bernadino, CA 178 Units 9,100 3,007 5,491 2,967 Shadow Run.............. Pinellas Park, FL 276 Units 12,350 2,521 8,653 5,367 Villa Piedra............ Los Angeles, CA 132 Units 7,400 2,348 4,686 2,588 Villas at Countryside... Sterling, VA 102 Units 8,100 2,686 5,334(1) 1,520 Villas at Fairpark...... Los Angeles, CA 49 Units 3,435 792 2,386 1,188 Westgate of Laurel...... Laurel, MD 218 Units 11,290 2,599 7,525(1) 3,575 Woodbridge.............. Denver, CO 194 Units 6,856 3,328 2,845 3,796 Office Building Brookfield Corporate Center................. Chantilly, VA 63,504 Sq. Ft. 4,850 1,729 2,838 1,455 Industrial Warehouse Shady Trail............. Dallas, TX 42,900 Sq. Ft. 900 340 521 206 Hotel Chateau Charles......... Lake Charles, LA 245 Rooms 1,000 928 -- 633 Land Allen(2)................ Allen, TX 5.49 Acres 370 86 281 184 McKinney(3)............. McKinney, TX 255 Acres 8,783 5,035 4,423 2,091 Watters/Hwy. 121(4)..... McKinney, TX 24.06 Acres 3,620 3,620 -- 3,089
- -------- (1) Debt assumed by purchaser. (2) The Allen sale consisted of tracts of three land parcels: a 2.62 acre tract of the Stacy Road land parcel; a 2.23 acre tract of the Sandison land parcel; and, a .64 acre tract of the Whisenant land parcel. (3) The McKinney sale included three land parcels: the 20 acre Netzer land parcel; the 79.54 acre DF Fund land parcel; and the 156.19 acre OPUBCO land parcel. (4) The Watters/Highway 121 sale consisted of a six acre tract of the Watters land parcel and a 18.061 acre tract of the State Highway 121 land parcel. In 2000, TCI financed/refinanced the following properties:
Debt Debt Net Cash Interest Maturity Property Location Units/Sq.Ft. Incurred Discharged Received Rate Date - -------- --------------- --------------- -------- ---------- -------- -------- -------- (dollars in thousands) Apartments Camelot................. Largo, FL 120 Units $3,800 $ -- $3,100 8.85%(1) 12/05 Crescent Place.......... Houston, TX 120 Units 2,165 1,722 370 7.04(1) 03/30 Country Crossing........ Tampa, FL 227 Units 3,825 2,645 985 9.65(1) 06/03 Fontenelle Hills(2)..... Bellevue, NE 338 Units 2,010 -- 1,967 8.51 06/10 Madison @ Bear Creek.... Houston, TX 180 Units 3,500 2,625 730 7.04(1) 03/30 Office Buildings Bay Plaza II............ Tampa, FL 78,882 Sq. Ft. 3,600 -- 3,400 8.44(1) 01/06 Jefferson............... Washington, DC 71,876 Sq. Ft. 9,875 8,955 557 9.50 07/25 Technology Trading...... Sterling, VA 197,659 Sq. Ft. 6,300 3,881 2,065 8.26(1) 05/05 Venture Center.......... Atlanta, GA 38,772 Sq. Ft. 2,700 1,113 1,592 8.75 03/10 Westgrove Air Plaza..... Addison, TX 78,326 Sq. Ft. 2,087 1,180 742 9.02(1) 01/05 Industrial Warehouses 5360 Tulane............. Atlanta, GA 67,850 Sq. Ft. 375 208 134 9.65(1) 04/03 Kelly................... Dallas, TX 330,406 Sq. Ft. 5,000 2,173 2,628 9.50(1) 10/03 Space Center............ San Antonio, TX 101,500 Sq. Ft. 1,125 691 402 9.65(1) 04/03
- -------- (1) Variable interest rate. (2) Second lien financing. 13 Properties Held for Sale. Set forth below are TCI's properties held for sale, primarily obtained through foreclosure.
Property Location Acres - -------- ------------------ ----------- Land Fiesta........................................... San Angelo, TX .6657 Acres Fruitland........................................ Fruitland Park, FL 4.66 Acres Moss Creek....................................... Greensboro, NC 4.79 Acres Round Mountain................................... Austin, TX 128 Acres
Partnership Properties. Set forth below are the properties owned by partnerships which TCI accounts for using the equity method and the monthly rental rate for apartments and the average annual rental rate for commercial properties and occupancy thereof at December 31, 2000, 1999 and 1998:
Rent Per Square Foot Occupancy % -------------------- -------------- Property Location Units/ Square Footage 2000 1999 1998 2000 1999 1998 - -------- ------------------ ----------------------- ------ ------ ------ ---- ---- ---- Apartment Lincoln Court........... Dallas, TX 55 Units/40,063 Sq. Ft. $ 1.16 $ 1.14 $ 1.08 94 92 95 Office Building Prospect Park #29....... Rancho Cordova, CA 40,807 Sq. Ft. 20.42 16.56 17.91 100 100 100 Shopping Center Chelsea Square.......... Houston, TX 70,275 Sq. Ft. 9.31 8.95 8.61 77 85 81
TCI owns a noncontrolling combined 55% limited and general partnership interest in Jor-Trans Investors Limited Partnership ("Jor-Trans") which owns the Lincoln Court Apartments. TCI is a 30% general partner in Sacramento Nine ("SAC 9"), which owns the Prospect Park #29 Office Building. In 2000, TCI received $103,000 in operating distributions from SAC 9. TCI is a 63.7% limited partner and IORI is a 36.3% general partner in the Tri-City Limited Partnership ("Tri-City") which owns the Chelsea Square Shopping Center. In February 2000, the Chelsea Square Shopping Center was financed in the amount of $2.1 million. Tri-City received net cash of $2.0 million after the payment of various closing costs. The mortgage bore interest at a fixed rate of 10.24% per annum until February 2001, and a variable rate thereafter, currently 10% per annum, requires monthly payments of principal and interest of $20,601 and matures in February 2005. TCI received a distribution of $1.3 million of the net financing proceeds. See ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Related Party Transactions." Mortgage Loans In addition to investments in real estate, a portion of TCI's assets are invested in mortgage notes receivable, principally secured by real estate. TCI may originate mortgage loans in conjunction with providing purchase money financing of property sales. Management intends to service and hold for investment the mortgage notes in TCI's portfolio. TCI's mortgage notes receivable consist of first, wraparound and junior mortgage loans. Types of Mortgage Activity. TCI has originated its own mortgage loans, as well as acquired existing mortgage notes either directly from builders, developers or property owners, or through mortgage banking firms, commercial banks or other qualified brokers. BCM, in its capacity as a mortgage servicer, services TCI's mortgage notes. TCI's investment policy is described in ITEM 1. "BUSINESS--Business Plan and Investment Policy." Types of Properties Securing Mortgage Notes. The properties securing TCI's mortgage notes receivable portfolio at December 31, 2000, consisted of an apartment, six office buildings, a mobile home park and unimproved land. The Board of Directors may alter the types of properties securing or collateralizing mortgage 14 loans in which TCI invests without a vote of stockholders. TCI's Articles of Incorporation impose certain restrictions on transactions with related parties, as discussed in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." At December 31, 2000, TCI's mortgage notes receivable portfolio included five mortgage loans with an aggregate principal balance of $6.2 million secured by income-producing real estate located in the Midwest and Southwest regions of the continental United States and one loan with a principal balance of $2.5 million secured by unimproved land. At December 31, 2000, 1% of TCI's assets were invested in notes and interest receivable. The following table sets forth the percentages (based on the mortgage note principal balance) by property type and geographic region, of the income producing properties that serve as collateral for TCI's mortgage notes receivable at December 31, 2000. See Schedule IV to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" for further details of TCI's mortgage notes receivable portfolio.
Commercial Region Apartments Properties Total ------ ---------- ---------- ----- Southwest........................................ 16% 82% 98% Midwest.......................................... -- 2 2 --- --- --- 16% 84% 100% === === ===
A summary of the activity in TCI's mortgage notes receivable portfolio during 2000 is as follows: Mortgage notes receivable at January 1, 2000............................. 9 Loans paid off........................................................... (5) Loans funded............................................................. 4 Loans foreclosed......................................................... (2) --- Mortgage notes receivable at December 31, 2000........................... 6 ===
During 2000, $20.4 million was collected in full payment of five mortgage notes and $132,000 in principal payments were received on other mortgage notes. At December 31, 2000, less than 1% of TCI's assets were invested in mortgage notes secured by non-income producing real estate, comprised of a second lien mortgage note secured by unimproved land: 442 acres in Tarrant County, Texas, 1,130 acres in Denton County, Texas, and 26 acres in Collin County, Texas. First Mortgage Loans. TCI invests in first mortgage notes, with short, medium or long-term maturities. First mortgage loans generally provide for level periodic payments of principal and interest sufficient to substantially repay the loan prior to maturity, but may involve interest-only payments or moderate amortization of principal and a "balloon" principal payment at maturity. With respect to first mortgage loans, the borrower is required to provide a mortgagee's title policy or an acceptable legal title opinion as to the validity and the priority of the mortgage lien over all other obligations, except liens arising from unpaid property taxes and other exceptions normally allowed by first mortgage lenders in the relevant area. TCI may grant participating in first mortgage loans that it originates to other lenders. The following discussion briefly describes events that affected previously funded first mortgage loans during 2000. In February 2000, a mortgage loan acquired in the acquisition of Continental Mortgage and Equity Trust, with a principal balance of $28,000 was paid off including accrued but unpaid interest. In December 1999, TCI provided $8.5 million of purchase money financing in conjunction with the sale of 253 acres of unimproved land in McKinney and Collin County, Texas. The note receivable bore interest at 8.5% 15 per annum, required a $1.0 million principal pay down in February 2000, required payment of all accrued interest in June 2000 and required payment of all principal and accrued interest at maturity in September 2000. The loan was repaid in accordance with the terms. The sale had originally been recorded under the cost recovery method. In conjunction with the loan payoff, TCI recognized a previously deferred gain on the sale of $4.8 million. Junior Mortgage Loans. TCI may invest in junior mortgage loans, which are secured by mortgages that are subordinate to one or more prior liens either on the fee or a leasehold interest in real estate. Recourse on such loans ordinarily includes the real estate on which the loan is made, other collateral and personal guarantees by the borrower. The Board of Directors restricts investment in junior mortgage loans, excluding wraparound mortgage loans, to not more than 10% of TCI's assets. At December 31, 2000, less than 1% of TCI's assets were invested in junior and wraparound mortgage loans. The following discussion briefly describes the junior mortgage loans that TCI originated as well as events that affected previously funded junior mortgage loans during 2000. In August 1998, a mortgage note receivable with a principal balance of $2.0 million and a carrying value of $207,000 and secured by a second lien on a shut-down hotel in Lake Charles, Louisiana became delinquent. To protect its interest, TCI purchased the first lien mortgage for $149,000. Foreclosure proceedings were commenced and title to the property was received in February 2000. No loss was incurred on foreclosure, as the estimated fair market value of the property, less estimated costs of sale, exceeded the carrying value of the mortgage notes receivable. In June 2000, the property was sold for an amount in excess of its carrying value. In December 2000, TCI funded a $2.5 million mortgage loan secured by a second lien on unimproved land: 442 acres in Tarrant County, Texas, 1,130 acres in Denton County, Texas, and 26 acres in Collin County, Texas. The note receivable bears interest at 18.0% per annum, requires monthly interest only payments of $37,500 and matures in June 2001. Also in December 2000, TCI funded a $3.0 million mortgage loan secured by a second lien on four office buildings in San Antonio, Texas. The note receivable bears interest at 16.0% per annum, requires monthly interest only payments of $40,000 and matures in June 2001. Related Party. In June 2000, a $3.0 million loan was funded to Basic Capital Management, Inc. ("BCM"), TCI's advisor. The loan was secured by 108,802 shares of IORI Common Stock. IORI is also advised by BCM. The loan bore interest at 15.0% per annum and matured in October 2000. All principal and interest were due at maturity. The loan and all accrued but unpaid interest was paid off in August 2000. Also in June 2000, a $9.0 million loan was funded to American Realty Trust, Inc. ("ART"), an affiliate of BCM. The loan was secured by 409,934 shares of IORI Common Stock. The loan bore interest at 15.0% per annum and matured in October 2000. All principal and interest were due at maturity. The loan and all accrued but unpaid interest was paid off in October 2000. Partnership mortgage loans. TCI owns a 60% general partner interest and IORI owns a 40% general partner interest in Nakash Income Associates ("NIA"), which owns a wraparound mortgage note receivable secured by a building occupied by a Wal-Mart in Maulden, Missouri. TCI received distributions of $69,000 from NIA in 2000 and advanced $19,000 to the partnership. ITEM 3. LEGAL PROCEEDINGS Olive Litigation In February 1990, TCI, together with National Income Realty Trust, CMET and IORI three real estate entities which, at the time, had the same officers, directors or trustees and advisor as TCI, entered into a settlement (the "Settlement") of a class and derivative action entitled Olive et al. v. National Income Realty Trust et al., relating to the operation and management of each of the entities. On April 23, 1990, the Court granted final approval of the terms of the Settlement. The Settlement was modified in 1994 (the "Modification"). 16 On January 27, 1997, the parties entered into an Amendment to the Modification effective January 9, 1997 (the "Olive Amendment"). The Olive Amendment provided for the settlement of additional matters raised by plaintiffs' counsel in 1996. The Court issued an order approving the Olive Amendment on July 3, 1997. The Olive Amendment provided that TCI's Board retain a management/compensation consultant or consultants to evaluate the fairness of the BCM advisory contract and any contract of its affiliates with TCI, CMET and IORI, including, but not limited to, the fairness to TCI, CMET and IORI of such contracts relative to other means of administration. In 1998, the Board engaged a management/compensation consultant to perform the evaluation which was completed in September 1998. In 1999, plaintiffs' counsel asserted that the Board did not comply with the provision requiring such engagement and requested that the Court exercise its retained jurisdiction to determine whether there was a breach of this provision of the Olive Amendment. In January 2000, the Board engaged another management compensation consultant to perform the required evaluation again. The evaluation was completed in April 2000 and was provided to plaintiffs' counsel. The Board believes that any alleged breach of the Olive Amendment has been fully remedied by the Board's engagement of this second consultant. Although several status conferences on this matter were held, there has been no court order resolving whether there was any breach of the Olive Amendment. In October 2000, plaintiffs' counsel asserted that the stock option agreement to purchase TCI shares, which was entered into by IORI in October 2000 with Gotham Partners, breached a provision of the Modification. As a result of this assertion, IORI assigned all of its rights to purchase the TCI shares under this stock option agreement to an affiliate of TCI, ARI. The Board believes that the provisions of the Settlement, Modification and the Olive Amendment terminated on April 28, 1999. However, the Court has ruled that certain provisions continue to be effective after the termination date. This ruling has been appealed by TCI and IORI. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ---------------- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER STOCKHOLDER MATTERS TCI's Common Stock is traded on the New York Stock Exchange ("NYSE") using the symbol "TCI". The following table sets forth the high and low sales prices as reported in the consolidated reporting system of the NYSE.
Quarter Ended High Low ------------- --------- --------- March 31, 2001 (through March 2, 2001)................... $12 35/64 $ 8 1/4 March 31, 2000........................................... 13 10 13/16 June 30, 2000............................................ 13 1/2 2 7/8 September 30, 2000....................................... 16 11 1/2 December 31, 2000........................................ 16 8 7/8 March 31, 1999........................................... 16 3/8 11 5/8 June 30, 1999............................................ 12 1/2 11 3/8 September 30, 1999....................................... 13 7/16 10 7/8 December 31, 1999........................................ 13 1/8 11 1/4
17 As of March 2, 2001, the closing price of TCI's Common Stock as reported in the consolidated reporting system of the NYSE was $12.00 per share. As of March 2, 2001, TCI's Common Stock was held by 8,447 holders of record. TCI paid dividends in 2000 and 1999 as follows:
Amount Date Declared Record Date Payable Date Per Share ------------- ------------------ ------------------ --------- February 10, 2000............ March 15, 2000 March 31, 2000 $.18 June 6, 2000................. June 15, 2000 June 30, 2000 .18 September 8, 2000............ September 19, 2000 September 29, 2000 .18 March 4, 1999................ March 15, 1999 March 31, 1999 .15 June 2, 1999................. June 14, 1999 June 30, 1999 .15 September 9, 1999............ September 20, 1999 October 5, 1999 .15 November 22, 1999............ December 15, 1999 December 31, 1999 .15
TCI reported to the Internal Revenue Service that 100% of the dividends paid in 2000 represented ordinary income and 100% of the dividends paid in 1999 represented capital gains. In December 1989, the Board of Directors approved a share repurchase program, authorizing the repurchase of a total of 687,000 shares of TCI's Common Stock. In October 2000, the Board increased this authorization to 1,409,000 shares. Through December 31, 2000, a total of 409,765 shares had been repurchased at a cost of $3.3 million. No shares were repurchased in 2000. 18 ITEM 6. SELECTED FINANCIAL DATA
For the Years Ended December 31, ---------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- (dollars in thousands, except per share) EARNINGS DATA Rents................... $ 139,357 $ 82,039 $ 69,829 $ 54,462 $ 45,405 Property expense........ 78,061 44,497 38,282 32,424 28,491 ---------- ---------- ---------- ---------- ---------- Operating income........ 61,296 37,542 31,547 22,038 16,914 Other income............ 1,814 555 739 2,311 1,453 Other expense........... 83,878 48,395 38,320 33,154 28,008 Gain on sale of real estate................. 50,550 40,517 12,940 21,404 1,579 ---------- ---------- ---------- ---------- ---------- Net income (loss)....... 29,782 30,219 6,906 12,599 (8,062) Preferred dividend requirement............ (22) (30) (1) -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss) applicable to Common shares................. $ 29,760 $ 30,189 $ 6,905 $ 12,599 $ (8,062) ========== ========== ========== ========== ========== Basic and Diluted Earnings Per Share Net income (loss) applicable to Common shares................. $ 3.45 $ 7.05 $ 1.78 $ 3.22 $ (2.02) ========== ========== ========== ========== ========== Dividends per Common share.................. $ .54 $ .60 $ .60 $ .28* $ .28 Weighted average Common shares outstanding..... 8,631,621 4,283,574 3,876,797 3,907,221 3,994,687 - -------- * Does not include a special dividend of $1.00 per share. For the Years Ended December 31, ---------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- (dollars in thousands, except per share) BALANCE SHEET DATA Real estate held for investment, net........ $ 639,040 $ 599,746 $ 347,389 $ 269,845 $ 217,010 Real estate held for sale, net.............. Foreclosed............ 1,824 1,790 1,356 1,356 910 Other................. -- -- -- 3,630 2,089 Notes and interest receivable, net........ 8,172 11,530 1,493 3,947 8,606 Total assets............ 731,885 714,195 382,203 319,135 244,971 Notes and interest payable................ 501,734 503,406 282,688 222,029 158,692 Stockholders' equity.... 200,560 179,112 91,132 86,133 78,959 Book value per share.... $ 23.22 $ 20.76 $ 23.35 $ 22.15 $ 20.11
TCI purchased 18 properties in 2000, for a total of $103.9 million, 10 properties for a total of $51.2 million and obtained an additional 64 properties through merger with CMET in 1999, purchased 22 properties in 1998 for a total of $91.0 million, 15 properties in 1997 for a total of $60.0 million and six properties in 1996 for a total of $7.7 million. TCI sold 20 properties in 2000, for a total of $113.5 million, 11 properties in 1999 for a total of $117.4 million, five properties in 1998 for a total of $31.8 million, five properties in 1997 for a total $29.1 million and five properties in 1996 for a total of $8.9 million. See ITEM 2. "PROPERTIES--Real Estate" and ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction TCI invests in real estate through acquisitions, leases and partnerships and in mortgage loans on real estate, including first, wraparound and junior mortgage loans. TCI is the successor to a California business trust organized on September 6, 1983, which commenced operations on January 31, 1984. On November 30, 1999, TCI acquired all of the outstanding shares of beneficial interest of CMET, a real estate company, in a tax-free exchange of shares, issuing 1.181 shares of its Common Stock for each outstanding CMET share. TCI accounted for the merger as a purchase. Prior to January 1, 2000, TCI elected to be treated as a Real Estate Investment Trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). During the third quarter of 2000, due to a concentration of ownership TCI no longer met the requirement for tax treatment as a REIT. Liquidity and Capital Resources Cash and cash equivalents at December 31, 2000, totaled $22.3 million compared with $41.3 million at December 31, 1999. The principal reasons for the decrease in cash are discussed in the paragraphs below. TCI's principal sources of cash have been and will continue to be from property operations, proceeds from property sales, the collection of mortgage notes receivable, borrowings and to a lesser extent, distributions from partnerships. Management anticipates that TCI's cash at December 31, 2000, and cash that will be generated in 2001 from property operations, will not be sufficient to meet all of TCI's cash requirements. Management intends to selectively sell income producing real estate, refinance real estate and additional borrowings against real estate to meet its cash requirements. Net cash used in operations was $1.1 million in 2000 compared to $4.1 million provided by operations in 1999. The primary factors contributing to TCI's use of cash in its operations are discussed in the following paragraphs. Cash flow from property operations (rents collected less payments for property operating expenses) increased to $56.7 million in 2000 from $37.2 million in 1999. An increase of $4.3 million was due to the purchase of 15 income producing properties in 2000 and seven income producing properties in 1999, an increase of $24.5 million was due to the properties obtained in the acquisition of CMET and an increase of $1.9 million was due to increased apartment and commercial property occupancy and rental rates, and control of operating expenses. These increases were partially offset by a decrease of $6.8 million due to the sale of 18 income producing properties in 2000 and 1999 and a decrease of $4.3 million from the hotel operations. Management believes that this trend of increased cash flow from property operations will continue as a result of increased rental rates in both apartments and commercial properties and increased commercial property occupancy. Interest collected increased to $1.0 million in 2000 from $449,000 in 1999. This increase was due to loans funded in 2000. Interest collected is expected to decrease in 2001 due to a lower notes receivable balance. Interest paid increased to $45.1 million in 2000 from $25.5 million in 1999. An increase of $5.4 million was due to 37 properties being purchased on a leveraged basis in 2000 and 1999 and refinancings and financings of unencumbered properties during 2000 and 1999. An additional increase of $17.5 million was due to the acquisition of CMET. These increases were partially offset by a decrease of $3.3 million due to properties sold in 2000 and 1999. Interest paid will continue to increase if additional properties are purchased on a leveraged basis. 20 Advisory and net income fees paid to affiliate increased to $10.5 million in 2000 from $4.0 million in 1999. The increase is due to the increase in assets from the merger with CMET and accrued net income fees in 1999 and paid in 2000. Advisory fees are expected to increase as additional properties are purchased. General and administrative expenses paid increased to $7.9 million in 2000 from $3.5 million in 1999. This increase was due to increased legal fees, insurance and taxes. Distributions were received from equity investees operating cash flow of $172,000 in 2000 and $331,000 in 1999. See NOTE 7. "INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES." Management expects that funds from existing cash resources, selective sales of income producing properties, refinancing of real estate, and additional borrowings against real estate will be sufficient to meet TCI's cash requirements associated with its current and anticipated level of operations, maturing debt obligations and existing commitments. To the extent that TCI's liquidity permits or financing sources are available, management intends to make new real estate investments. In 2000, TCI received cash of $20.4 million from the collection of four mortgage notes receivable, $131,000 in mortgage receivable principal payments, net cash of $63.0 million from new mortgage borrowings and refinancings and an additional $80.0 million from property sales. In 2000, $32.5 million in cash was expended on property purchases and a total of $107.5 million in principal payments on mortgage debt. Scheduled principal payments on notes payable of $109.8 million are due in 2001. For those mortgages that mature in 2001, management intends to either seek to extend the due dates one or more years, or refinance the debt on a long-term basis. Management also intends to sell income producing properties to retire mortgage debt as it becomes due. Management believes it will continue to be successful in obtaining loan extensions or refinancings. In the first quarter of 2001, TCI entered into a joint venture to invest in the construction and part ownership of a 165 room hotel in Wroclaw, Poland. TCI plans to invest 4.0 million Euro dollars ($3.7 million) in the joint venture for a 66.7% interest. In the first quarter of 2001, TCI also sold a 1.82 acre tract of the McKinney 36 land parcel, the 136 unit Heritage Apartments, a 35,935 sq. ft. warehouse that is included in the Kelly portfolio, the 56 unit Forest Ridge Apartments and the 211 unit Park at Colonnade Apartments. TCI received net cash of $2.5 million from the sales. See NOTE 21. "SUBSEQUENT EVENTS." TCI paid dividends to its Common stockholders totaling $4.7 million or $.54 per share in 2000 and $3.0 million or $.60 per share in 1999. Management reviews the carrying values of TCI's properties and mortgage notes receivable at least annually and whenever events or a change in circumstances indicate that impairment may exist. Impairment is considered to exist if, in the case of a property, the future cash flow from the property (undiscounted and without interest) is less than the carrying amount of the property. For notes receivable impairment is considered to exist if it is probable that all amounts due under the terms of the note will not be collected. If impairment is found to exist, a provision for loss is recorded by a charge against earnings. The note receivable review includes an evaluation of the collateral property securing such note. The property review generally includes: (1) selective property inspections; (2) a review of the property's current rents compared to market rents; (3) a review of the property's expenses; (4) a review of maintenance requirements; (5) a review of the property's cash flow; (6) discussions with the manager of the property; and (7) a review of properties in the surrounding area. Results of Operations 2000 Compared to 1999. TCI had net income of $29.8 million in 2000, as compared to $30.2 million in 1999. Net income for 2000 included gains on the sale of real estate of $50.6 million. Net income for 1999 included gains on the sale of real estate of $40.5 million. Fluctuations in the components of revenue and expense between 2000 and 1999 are discussed below. 21 Rents increased to $139.4 million in 2000 from $82.0 million in 1999. Of the increase, $2.5 million was due to the completion of the Limestone Canyon Apartments in December 1999; $8.5 million was due to properties purchased or obtained through foreclosure in 2000 and 1999; $57.4 million was due to the properties obtained in the acquisition of CMET and the remaining $2.1 million was primarily due to increased apartment and commercial property occupancy and rental rates. These increases were partially offset by a decrease of $10.6 million due to properties sold in 2000 and 1999, and a decrease of $2.5 million from the four hotels. Property operating expenses increased to $78.1 million in 2000 from $44.5 million in 1999. Of the increase, $4.3 million was due to properties purchased in 2000 and 1999 and $32.8 million was due to the properties obtained in the acquisition of CMET. These increases were partially offset by a decrease of $3.8 million due to properties sold in 2000 and 1999. Rents are expected to remain constant or increase in 2001 due to anticipated increases in apartment rental rates, increased commercial property occupancy and a full year of operations of the properties acquired during 2000 being offset by properties sold in 2001. See NOTE 21. "SUBSEQUENT EVENTS." Interest and other income increased to $2.4 million in 2000 from $453,000 in 1999. The increase in interest income was due to the funding of notes receivable in 2000. Interest income in 2001 is expected to decrease due to the collection of five mortgage notes in 2000. See NOTE 4. "NOTES AND INTEREST RECEIVABLE." Interest expense increased to $48.0 million in 2000 from $27.7 million in 1999. Of this increase, $4.5 million was due to properties purchased in 2000 and 1999, $17.5 million was due to the properties obtained in the acquisition of CMET and $843,000 was due to property financings and refinancings during 2000 and 1999. These increases were partially offset by a decrease of $3.3 million due to properties sold and mortgages paid off in 2000 and 1999. Interest expense is expected to remain constant or decrease in 2001 due to anticipated increases from property refinancings being offset by reductions from property sales. Depreciation expense increased to $19.7 million in 2000 from $11.7 million in 1999. Of the increase, $1.6 million was due to properties purchased in 2000 and 1999, $7.4 million was due to properties obtained in the acquisition of CMET and the remainder from property additions and tenant improvements. These increases were partially offset by a decrease of $1.7 million due to properties sold in 2000 and 1999. Depreciation expense is expected to remain constant or decrease in 2001 due to reductions in depreciation from properties sold, being offset by depreciation from properties acquired in 2001. Advisory and net income fees increased to $7.7 million in 2000 from $5.7 million in 1999. The increase was due to an increase in the advisory fee from an increase in gross assets, the basis for the fee. The increase in gross assets was due in part to the assets obtained in the acquisition of CMET. Net income fees of $2.4 million in 2000 approximated $2.5 million in 1999. See NOTE 13. "ADVISORY AGREEMENT." General and administrative expenses increased to $8.5 million in 2000 from $3.3 million in 1999. The increase was primarily due to legal fees incurred on litigation related matters, taxes and an increase in advisor cost reimbursements. General and administrative expenses are expected to approximate 2000 in 2001. Equity losses from investees were $556,000 in 2000 compared to income of $102,000 in 1999. The decrease was primarily due to increased operating expenses of IORI, an equity investee. Equity income is expected to increase in 2001, as IORI sells assets. See NOTE 7. "INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES." In 2000, gains on sale of real estate totaling $50.6 million were realized; $572,000 on the sale of Hunters Bend Apartments, a $4.8 million previously deferred gain on the sale of McKinney land, TCI's share of gains recognized by an equity affiliate of $4.6 million, $3.6 million on the sale of Westgate of Laurel Apartments, $3.2 million on the sale of Apple Creek Apartments, $1.2 million on the sale of Villas at Fair Park Apartments, $633,000 on the sale of Chateau Charles Hotel, $1.5 million on the sale of Brookfield Warehouses, $1.5 million 22 on the sale of Villas at Countryside Apartments, $706,000 on the sale of Ashley Crest Apartments, $206,000 on the sale of Shady Trail Warehouse, $1.0 million on the sale of Eagle Rock Apartments, $184,000 on the sale of a portion of the Allen land parcel, $3.8 million on the sale of Woodbridge Apartments, $2.1 million on the sale of the McKinney land, $3.1 million on the sale of a portion of the Watters Road/Highway 121 land parcel, $5.4 million on the sale of Shadow Run Apartments, $3.0 million on the sale of Parkwood Knoll Apartments, $2.6 million on the sale of Villa Piedra Apartments, $1.1 million on the sale of Country Bend Apartments, $5.1 million on the sale of Fountain Village Apartments, and $793,000 on the sale of Crescent Place Apartments. See NOTE 3. "REAL ESTATE." In 1999, gains on sale of real estate totaling $40.5 million were realized; $1.9 million on the sale of Mariner's Pointe Apartments, $8.3 million on the sale of 74 New Montgomery Office Building, $675,000 on the sale of Republic land, $5.2 million on the sale of Parke Long Industrial Warehouse, $153,000 on the sale of a portion of the Moss Creek land parcel, $5.3 million on the sale of Corporate Center Industrial Warehouse, $747,000 on the sale of Laws land, $4.4 million on the sale of Sullyfield Industrial Warehouse, $5.6 million on the sale of Spa Cove Apartments, $4.7 million on the sale of Woods Edge Apartments and $3.6 million, TCI's share of the gains realized by three equity investees on the sale of two shopping centers and two office buildings. See NOTE 3. "REAL ESTATE" and NOTE 7. "INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES." 1999 Compared to 1998. TCI had net income of $30.2 million in 1999, as compared to $6.9 million in 1998. Net income for 1999 included gains on the sale of real estate of $40.5 million. Net income for 1998 included gains on the sale of real estate of $12.9 million. Fluctuations in the components of revenue and expense between 1999 and 1998 are discussed below. Rents increased to $82.0 million in 1999 from $69.8 million in 1998. An increase of $8.2 million was due to properties purchased or obtained through foreclosure in 1998 and 1999; $5.5 million was due to the properties obtained in the acquisition of CMET and the remaining $3.8 million was due to increased apartment and commercial property occupancy and rental rates. These increases were partially offset by a decrease of $5.1 million due to properties sold in 1998 and 1999. Property operating expenses increased to $44.5 million in 1999 from $38.3 million in 1998. Of the increase, $5.1 million was due to properties purchased in 1998 and 1999 and $4.1 million was due to the properties obtained in the acquisition of CMET. This increase was partially offset by a decrease of $2.8 million due to properties sold in 1998 and 1999. Interest and other income decreased to $453,000 in 1999 from $807,000 in 1998. The decrease in interest income was due to eight mortgage notes receivable being collected in 1998 and 1999 and the foreclosure of the collateral property securing a note in 1998. Interest expense increased to $27.7 million in 1999 from $22.8 million in 1998. Of this increase, $3.9 million was due to properties purchased in 1999 and 1998, $2.1 million was due to the properties obtained in the acquisition of CMET and $333,000 was due to property financings and refinancings during 1999 and 1998. These increases were partially offset by a decrease of $1.5 million due to properties sold and mortgages paid off in 1999 and 1998. Depreciation expense increased to $11.7 million in 1999 from $10.7 million in 1998. An increase of $1.8 million was attributable to property purchases in 1999 and 1998, $634,000 was due to the completion of construction of an apartment in 1999, and the remainder from property additions and tenant improvements. These increases were partially offset by a decrease of $1.5 million due to properties sold in 1999 and 1998. Advisory and net income fees increased to $5.7 million in 1999 from $2.5 million in 1998. The increase was due to an increase in the net income fee in 1999 due to an increase in net income and an increase in the advisory fee due to an increase in gross assets, the basis for the fee. See NOTE 13. "ADVISORY AGREEMENT." 23 General and administrative expenses increased to $3.3 million in 1999 from $2.3 million in 1998. The increase was primarily due to legal fees incurred on litigation related to damage to an office building prior to its sale and an increase in advisory cost reimbursements. See NOTE 2. "ACQUISITION OF CONTINENTAL MORTGAGE AND EQUITY TRUST". Equity in income of investees increased to $102,000 in 1999 from a loss of $68,000 in 1998. The increase was primarily due to increased operating expenses of IORI, an equity investee. See NOTE 7. "INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES." In 1999, gains on sale of real estate totaling $40.5 million were realized, $1.9 million on the sale of Mariner's Pointe Apartments, $8.3 million on the sale of 74 New Montgomery Office Building, $675,000 on the sale of Republic land, $5.2 million on the sale of Parke Long Industrial Warehouse, $153,000 on the sale of a portion of the Moss Creek land, $5.3 million on the sale of Corporate Center Industrial Warehouse, $747,000 on the sale of Laws land, $4.4 million on the sale of Sullyfield Industrial Warehouse, $5.6 million on the sale of Spa Cove Apartments, $4.7 million on the sale of Woods Edge Apartments and $3.6 million, TCI's share of the gains realized by three equity investees on the sale of two shopping centers and two office buildings. See NOTE 3. "REAL ESTATE" and NOTE 7. "INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES." In 1998, gains on sale of real estate totaling $12.9 million were realized, a $2.1 million previously deferred gain upon collection of a mortgage note receivable related to a prior property sale that had been recorded under the cost recovery method, $671,000 from the collection of a mortgage note receivable that had been written off in a prior year, $5.9 million on the sale of Chesapeake Ridge Office Building, $3.4 million on the sale of Northtown Mall, $219,000 on the sale of Denton Drive Industrial Warehouse, $350,000 on the sale of a portion of the Moss Creek land, and $356,000, TCI's share of the gain realized by an equity investee on the sale of its two apartments. Environmental Matters Under various federal, state and local environmental laws, ordinances and regulations, TCI may be potentially liable for removal or remediation costs, as well as certain other potential costs, relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery for personal injury associated with such materials. Management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on TCI's business, assets or results of operations. Inflation The effects of inflation on TCI's operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect sales values of properties and the ultimate gain to be realized from property sales. To the extent that inflation affects interest rates, TCI's earnings from short-term investments, the cost of new financings as well as the cost of variable interest rate debt will be affected. Tax Matters For the years 1999 and 1998, TCI elected and in the opinion of management, qualified to be taxed as a REIT as defined under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. During the third quarter of 2000, due to a concentration in ownership, TCI no longer met the requirements for tax treatment as a REIT under the Code. Under the Code, TCI is prohibited from re-qualifying for REIT tax status for at least five years. 24 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK TCI's future operations, cash flow and fair values of financial instruments are partially dependent upon the then existing market interest rates and market equity prices. Market risk is the changes in the market rates and prices, and the effect of the changes on future operations. Market risk is managed by matching a property's anticipated net operating income to an appropriate financing. The following table contains only those exposures that existed at December 31, 2000. Anticipation of exposures or risk on positions that could possibly arise was not considered. TCI's ultimate interest rate risk and its effect on operations will depend on future capital market exposures, which cannot be anticipated with a probable assurance level. Dollars in thousands. Assets Trading Instruments- Equity Price Risk Marketable securities at market value........ $ 10,177 Non-trading Instruments- Equity Price Risk Notes receivable Variable interest rate-fair value...... $ 1,173
2001 2002 2003 2004 2005 Thereafter Total ------- ------- ------- ------- ------- ---------- -------- Instrument's maturities........... $ -- $ -- $ -- $ 1,369 $ -- $ -- $ 1,369 Instrument's amortization......... -- -- -- -- -- -- -- Interest............. 130 130 130 65 -- -- 455 Average rate......... 9.5% 9.5% 9.5% 9.5% -- % -- Fixed interest rate-fair value.................. $ 7,491 2001 2002 2003 2004 2005 Thereafter Total ------- ------- ------- ------- ------- ---------- -------- Instrument's maturities........... $ 6,730 $ 148 $ -- $ -- $ -- $ -- $ 6,878 Instrument's amortization......... 61 49 45 50 54 162 421 Interest............. 622 41 30 25 21 22 761 Average rate......... 15.9% 8.5% 10.4% 10.4% 10.4% 10.4% Liabilities Non-trading Instruments- Equity Price Risk Notes payable $132,621 Variable interest rate-fair value 2001 2002 2003 2004 2005 Thereafter Total ------- ------- ------- ------- ------- ---------- -------- Instrument's maturities........... $48,636 $ 5,611 $20,145 $11,885 $27,806 $ 9,660 $123,743 Instrument's amortization......... 991 745 663 672 501 5,579 9,151 Interest............. 10,221 7,474 6,120 4,917 3,090 14,557 46,379 Average rate......... 9.4% 9.3% 9.3% 9.4% 9.3% 8.6% Fixed interest rate-fair value $351,824 2001 2002 2003 2004 2005 Thereafter Total ------- ------- ------- ------- ------- ---------- -------- Instrument's maturities........... $54,531 $33,570 $19,679 $51,442 $12,296 $144,979 $316,497 Instrument's amortization......... 5,611 4,805 4,228 5,419 4,593 24,867 49,523 Interest............. 27,393 23,634 19,207 17,843 13,927 50,404 152,408 Average rate......... 8.4% 8.2% 8.2% 8.1% 8.0% 8.2%
25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Certified Public Accountants....................... 27 Consolidated Balance Sheets--December 31, 2000 and 1999.................. 28 Consolidated Statements of Operations--Years Ended December 31, 2000, 1999 and 1998........................................................... 29 Consolidated Statements of Stockholders' Equity--Years Ended December 31, 2000, 1999 and 1998..................................................... 30 Consolidated Statements of Cash Flows--Years Ended December 31, 2000, 1999 and 1998........................................................... 31 Notes to Consolidated Financial Statements............................... 33 Schedule III--Real Estate and Accumulated Depreciation................... 53 Schedule IV--Mortgage Loans on Real Estate............................... 60
All other schedules are omitted because they are not required, are not applicable or the information required is included in the Consolidated Financial Statements or the notes thereto. 26 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors of Transcontinental Realty Investors, Inc. We have audited the accompanying consolidated balance sheets of Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. We have also audited the schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe our audits provide a reasonable basis for our opinion. As described in Note 20, Transcontinental Realty Investors, Inc.'s management has indicated its intent to both sell income producing properties and refinance or extend debt secured by real estate, to meet its liquidity needs. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with generally accepted accounting principles. Also, in our opinion, the schedules referred to above present fairly, in all material respects, the information set forth therein. BDO Seidman, LLP Dallas, Texas March 20, 2001 27 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS
December 31, ------------------ 2000 1999 -------- -------- (dollars in thousands, except per share) Assets Real estate held for investment............................ $727,227 $684,732 Less--accumulated depreciation............................. (88,187) (84,986) -------- -------- 639,040 599,746 Foreclosed real estate held for sale....................... 1,824 1,790 Notes and interest receivable Performing................................................ 8,709 11,691 Nonperforming, nonaccruing................................ -- 382 -------- -------- 8,709 12,073 Less--allowance for estimated losses....................... (537) (543) -------- -------- 8,172 11,530 Investment in real estate entities......................... 5,287 2,310 Investment in marketable equity securities of affiliate, at market.................................................... 10,177 13,954 Cash and cash equivalents.................................. 22,323 41,266 Other assets (including $14,058 in 2000 and $10,585 in 1999 from affiliates and related parties)...................... 45,062 43,599 -------- -------- $731,885 $714,195 ======== ======== Liabilities and Stockholders' Equity Liabilities Notes and interest payable................................. $501,734 $503,406 Other liabilities (including $1,580 in 2000 and $2,356 in 1999 to affiliates and related parties)................... 23,722 31,280 -------- -------- 525,456 534,686 Commitments and contingencies Minority interest.......................................... 4,369 397 Series B; $.01 par value; authorized, 300,000 shares; issued and outstanding 300,000 shares (liquidation preference $1,500)....................................... 1,500 -- Stockholders' equity Preferred Stock Series A; $.01 par value; authorized, 6,000 shares; issued and outstanding 5,829 shares (liquidation preference $583).................................................... -- -- Common Stock, $.01 par value; authorized, 10,000,000 shares; issued and outstanding 8,636,354 shares in 2000 and 8,626,611 shares in 1999.............................. 86 86 Paid-in capital............................................ 278,245 278,119 Accumulated distributions in excess of accumulated earnings.................................................. (74,712) (99,811) Unrealized (loss) gain on marketable equity securities of affiliate................................................. (3,059) 718 -------- -------- 200,560 179,112 -------- -------- $731,885 $714,195 ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 28 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, ---------------------------------- 2000 1999 1998 ---------- ---------- ---------- (dollars in thousands, except per share) Property revenue Rents (including $2,263 in 2000 and $1,653 in 1999 from affiliates and related parties)................................. $ 139,357 $ 82,039 $ 69,829 Property expense Property operations (including $4,321 in 2000, $2,864 in 1999 and $2,753 in 1998 to affiliates and related parties)....... 78,061 44,497 38,282 ---------- ---------- ---------- Operating income.......................... 61,296 37,542 31,547 Other income Interest and other income................. 2,370 453 807 Income (loss) from equity investees....... (556) 102 (68) Gain on sale of real estate............... 50,550 40,517 12,940 ---------- ---------- ---------- 52,364 41,072 13,679 Other expense Interest.................................. 47,997 27,697 22,797 Depreciation.............................. 19,702 11,694 10,691 Advisory fee to affiliate................. 5,258 3,219 1,962 Net income fee to affiliate............... 2,415 2,450 558 General and administrative (including $2,146 in 2000, $1,367 in 1999 and $1,121 in 1998 to affiliates)................... 8,506 3,335 2,312 ---------- ---------- ---------- 83,878 48,395 38,320 ---------- ---------- ---------- Net income................................. 29,782 30,219 6,906 Preferred dividend requirement............. (22) (30) (1) ---------- ---------- ---------- Net income applicable to Common shares..... $ 29,760 $ 30,189 $ 6,905 ========== ========== ========== Basic and diluted earnings per share Net income applicable to Common shares..... $ 3.45 $ 7.05 $ 1.78 ========== ========== ========== Weighted average Common shares used in computing earnings per share.............. 8,631,621 4,283,574 3,876,797 ========== ========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. 29 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Distributions Accumulated Common Stock in Excess of Other ----------------- Paid-in Accumulated Comprehensive Stockholders' Shares Amount Capital Earnings Income Equity --------- ------ -------- ------------- ------------- ------------- (dollars in thousands, except shares) Balance, January 1, 1998................... 3,889,200 $ 39 $217,688 $(131,594) $ -- $ 86,133 Issuance of Series A Preferred Stock 5,829 shares................. -- -- 583 -- -- 583 Repurchase of Common Stock.................. (21,950) -- (336) -- -- (336) Sale of Common Stock under dividend reinvestment plan...... 11,213 -- 152 -- -- 152 Common dividends ($.60 per share)............. -- -- -- (2,306) -- (2,306) Net income.............. -- -- -- 6,906 -- 6,906 --------- ---- -------- --------- ------- -------- Balance, December 31, 1998................... 3,878,463 39 218,087 (126,994) -- 91,132 Comprehensive income Unrealized gain on market-able equity securities of affiliate............. -- -- -- -- 718 718 Net income............. -- -- -- 30,219 -- 30,219 -------- 30,937 Sale of Common Stock under dividend reinvestment plan...... 4,578 -- 53 -- -- 53 Shares issued in conjunction with acquisition of Continental Mortgage and Equity Trust....... 4,743,570 47 59,979 -- -- 60,026 Common dividends ($.60 per share)............. -- -- -- (3,006) -- (3,006) Preferred dividends ($5.00 per share)...... -- -- -- (30) -- (30) --------- ---- -------- --------- ------- -------- Balance, December 31, 1999................... 8,626,611 86 278,119 (99,811) 718 179,112 Comprehensive income Unrealized (loss) on market- able equity securities of affiliate............. -- -- -- -- (3,777) (3,777) Net income............. -- -- -- 29,782 -- 29,782 -------- 26,005 Sale of Common Stock under dividend reinvestment plan...... 9,743 -- 126 -- -- 126 Common dividends ($.54 per share)............. -- -- -- (4,661) -- (4,661) Preferred dividends ($3.77 per share)...... -- -- -- (22) -- (22) --------- ---- -------- --------- ------- -------- Balance, December 31, 2000................... 8,636,354 $ 86 $278,245 $ (74,712) $(3,059) $200,560 ========= ==== ======== ========= ======= ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 30 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, ----------------------------- 2000 1999 1998 --------- -------- -------- (dollars in thousands) Cash Flows from Operating Activities Rents collected (including $1,040 in 1999 from affiliates).................................... $ 136,767 $ 81,244 $ 69,307 Interest collected (including $411 in 2000 from affiliates).................................... 1,008 449 807 Interest paid................................... (45,142) (25,543) (21,179) Payments for property operations (including $4,321 in 2000, $2,864 in 1999 and $2,753 in 1998 to affiliates and related parties)........ (80,148) (44,039) (39,474) Advisory and net income fee paid to affiliate... (10,486) (3,958) (4,125) General and administrative expenses paid (including $2,146 in 2000, $1,367 in 1999 and $1,121 in 1998 to affiliates).................. (7,936) (3,488) (2,705) Distributions from operating cash flow of equity investees...................................... 172 331 482 Other........................................... 4,676 (905) 306 --------- -------- -------- Net cash provided by (used in) operating activities................................... (1,089) 4,091 3,419 Cash Flows from Investing Activities Collections on notes receivable (including $12,000 in 2000 from affiliates)............... 20,532 37 2,892 Funding of notes receivable (including $12,000 in 2000 from affiliates)....................... (17,500) -- (149) Real estate improvements and construction....... (14,664) (21,826) (9,595) Proceeds from sale of real estate............... 79,869 104,210 31,807 Refunds/(deposits) on pending purchase.......... 1,887 (2,912) (3,796) Deferred merger costs........................... -- -- (519) Acquisitions of real estate (including $2,741 in 2000, $1,815 in 1999 and $3,468 in 1998 to affiliates and related parties)................ (32,450) (45,510) (77,395) Distributions from investing cash flow of equity investees...................................... 1,296 4,709 701 Contributions to equity investees............... (3,974) (111) (21) --------- -------- -------- Net cash provided by (used in) investing activities................................... 34,996 38,597 (56,075) Cash Flows from Financing Activities Payments on notes payable....................... $(107,547) $(99,163) $(34,555) Proceeds from notes payable..................... 63,009 91,959 81,058 Reimbursements to advisor....................... (2,634) -- (61) Dividends paid.................................. (4,683) (3,036) (6,196) Shares of Common Stock repurchased.............. -- -- (336) Deferred financing costs (including ($464 in 2000, $422 in 1999 and $341 in 1998 to affiliates).................................... (1,121) (1,740) (1,634) Sale of Common Stock under dividend reinvestment plan........................................... 126 53 152 --------- -------- -------- Net cash provided by (used in) financing activities................................... (52,850) (11,927) 38,428 --------- -------- -------- Net increase (decrease) in cash and cash equivalents..................................... (18,943) 30,761 (14,228) Cash and cash equivalents, beginning of year..... 41,266 10,505 24,733 --------- -------- -------- Cash and cash equivalents, end of year........... $ 22,323 $ 41,266 $ 10,505 ========= ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 31 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, --------------------------- 2000 1999 1998 ------- --------- ------- (dollars in thousands) Reconciliation of net income to net cash provided by (used in) operating activities Net income................................... $29,782 $ 30,219 $ 6,906 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization................ 19,702 13,470 11,488 Equity in (income) loss of equity investees.. 556 (102) 68 Gain on sale of real estate.................. (50,550) (40,517) (12,940) Distributions from operating cash flow of equity...................................... 172 331 482 (Increase) in interest receivable............ (28) (1) -- (Increase) decrease in other assets.......... (1,463) (7,093) (2,036) Increase in interest payable................. 299 375 821 Increase (decrease) in other liabilities..... 441 7,409 (1,370) ------- --------- ------- Net cash provided by (used in) operating activities................................ $(1,089) $ 4,091 $ 3,419 ======= ========= ======= Schedule of noncash investing and financing activities Carrying value of real estate acquired through foreclosure in satisfaction of notes receivable.................................. $ 318 $ -- $ 2,514 Notes payable from purchase of real estate... 58,949 6,848 -- Series A Preferred Stock issued in conjunction with purchase of real estate.... -- -- 583 Series B Preferred Stock issued in conjunction with purchase of real estate.... 1,500 -- -- Debt assumed from sales of real estate....... 16,798 9,680 -- Acquisition of Continental Mortgage and Equity Trust Carrying value of notes and interest receivable.................................. $ -- $ 390 $ -- Carrying value of real estate................ -- 258,787 -- Carrying value of equity investees........... -- 267 -- Carrying value of investment in marketable equity securities of affiliate.............. -- 13,236 -- Carrying value of other assets............... -- 20,640 -- Carrying value of notes and interest payable..................................... -- (220,860) -- Carrying value of other liabilities.......... -- (13,242) --
The accompanying notes are an integral part of these Consolidated Financial Statements. 32 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accompanying Consolidated Financial Statements of Transcontinental Realty Investors, Inc. and consolidated entities have been prepared in conformity with generally accepted accounting principles, the most significant of which are described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES." These, along with the remainder of the Notes to Consolidated Financial Statements, are an integral part of the Consolidated Financial Statements. The data presented in the Notes to Consolidated Financial Statements are as of December 31 of each year and for the year then ended, unless otherwise indicated. Dollar amounts in tables are in thousands, except per share amounts. Certain balances for 1999 and 1998 have been reclassified to conform to the 2000 presentation. NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and company business. Transcontinental Realty Investors, Inc. ("TCI"), a Nevada corporation, is successor to a California business trust which was organized on September 6, 1983, and commenced operations on January 31, 1984. TCI invests in real estate through direct ownership, leases and partnerships and it also invests in mortgage loans on real estate. Basis of consolidation. The Consolidated Financial Statements include the accounts of TCI and controlled subsidiaries and partnerships. All significant intercompany transactions and balances have been eliminated. Accounting estimates. In the preparation of Consolidated Financial Statements in conformity with generally accepted accounting principles it was necessary for management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expense for the year then ended. Actual results could differ from those estimates. Interest recognition on notes receivable. It is TCI's policy to cease recognizing interest income on notes receivable that have been delinquent for 60 days or more. In addition, accrued but unpaid interest income is only recognized to the extent that the net realizable value of the underlying collateral exceeds the carrying value of the receivable. Allowance for estimated losses. Valuation allowances are provided for estimated losses on notes receivable considered to be impaired. Impairment is considered to exist when it is probable that all amounts due under the terms of the note will not be collected. Valuation allowances are provided for estimated losses on notes receivable to the extent that the Company's investment in the note exceeds the estimated fair value of the collateral securing such note. Real estate held for investment and depreciation. Real estate held for investment is carried at cost. Statement of Financial Accounting Standards No. 121 ("SFAS No. 121") requires that a property be considered impaired, if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property. If impairment exists, an impairment loss is recognized, by a charge against earnings, equal to the amount by which the carrying amount of the property exceeds the fair value of the property. If impairment of a property is recognized, the carrying amount of the property is reduced by the amount of the impairment, and a new cost for the property is established. Such new cost is depreciated over the property's remaining useful life. Depreciation is provided by the straight- line method over estimated useful lives, which range from five to 40 years. Real estate held for sale. Foreclosed real estate is initially recorded at new cost, defined as the lower of original cost or fair value minus estimated costs of sale. SFAS No. 121 also requires that properties held for sale be reported at the lower of carrying amount or fair value less costs of sale. If a reduction in a held for sale 33 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) property's carrying amount to fair value less costs of sale is required, a provision for loss is recognized by a charge against earnings. Subsequent revisions, either upward or downward, to a held for sale property's estimated fair value less costs of sale is recorded as an adjustment to the property's carrying amount, but not in excess of the property's carrying amount when originally classified as held for sale. A corresponding charge against or credit to earnings is recognized. Properties held for sale are not depreciated. Revenue recognition on the sale of real estate. Sales of real estate are recognized when and to the extent permitted by Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No. 66"). Until the requirements of SFAS No. 66 for full profit recognition have been met, transactions are accounted for using either the deposit, the installment, the cost recovery or the financing method, whichever is appropriate. Investment in noncontrolled equity investees. The equity method is used to account for investments in partnerships which TCI does not control and for its investment in the shares of common stock of Income Opportunity Realty Investors, Inc., ("IORI"). Under the equity method, an initial investment, recorded at cost, is increased by a proportionate share of the investee's operating income and any additional advances and decreased by a proportionate share of the investee's operating losses and distributions received. Operating segments. Management has determined reportable operating segments to be those that are used for internal reporting purposes, which disaggregates operations by type of real estate. Fair value of financial instruments. The following assumptions were used in estimating the fair value of notes receivable, marketable equity securities and notes payable. For performing notes receivable, the fair value was estimated by discounting future cash flows using current interest rates for similar loans. For nonperforming notes receivable, the estimated fair value of TCI's interest in the collateral property was used. For marketable equity securities, fair value was based on the year end closing market price of the security. For notes payable, the fair value was estimated using current rates for mortgages with similar terms and maturities. Cash equivalents. For purposes of the Consolidated Statements of Cash Flows, all highly liquid debt instruments purchased with an original maturity of three months or less were considered to be cash equivalents. Earnings per share. Income per share is presented in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Income per share is computed based upon the weighted average number of shares of Common Stock outstanding during each year. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the year. Dilutive common equivalent shares consist of stock options. Employee stock option plans. Employee stock options are presented in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Compensation cost is limited to the excess of the quoted market price. No compensation cost is recorded if the quoted market price is below the exercise price. NOTE 2. ACQUISITION OF CONTINENTAL MORTGAGE AND EQUITY TRUST On November 30, 1999, TCI acquired all of the outstanding shares of beneficial interest of Continental Mortgage and Equity Trust ("CMET") in a tax free exchange of shares. TCI issued 1.181 shares of its Common Stock for each outstanding CMET share. The acquisition was accounted for as a purchase. The consolidation of TCI's accounts with those of CMET resulted in an increase in TCI's net real estate of $258.8 million. This amount was allocated to the individual real estate assets based on their relative individual fair market values. 34 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Pro forma operating results for 1999 and 1998, as if CMET had been acquired on January 1, of each year would have been:
1999 1998 -------- -------- Revenues.................................................... $143,579 $134,879 Property operating expenses................................. (79,295) (75,650) Interest.................................................... (47,273) (44,159) Depreciation................................................ (19,150) (17,954) Advisory fee................................................ (4,952) (3,282) Net income fee.............................................. (3,083) (662) General and administrative expenses......................... (5,442) (4,617) Provision for losses........................................ -- 506 -------- -------- (Loss) from operations...................................... (15,616) (10,939) Equity in income of investees............................... 302 445 Gains on sale of real estate................................ 47,117 18,642 -------- -------- Net income.................................................. $ 31,803 $ 8,148 ======== ========
NOTE 3. REAL ESTATE In 2000, TCI purchased the following properties:
Units/ Purchase Net Cash Debt Interest Maturity Property Location Sq.Ft./Acres Price Paid Incurred Rate Date - -------- ------------------ --------------- -------- -------- -------- -------- -------- Apartments Apple Lane.............. Lawrence, KS 75 Units $ 1,575 $ 595 $ 1,005 8.63% 05/07 Autumn Chase............ Midland, TX 64 Units 1,338 458 936 9.45(1) 04/05 Paramount Terrace....... Amarillo, TX 181 Units 3,250 561 2,865 9.38 09/01 Primrose................ Bakersfield, CA 162 Units 4,100 1,189 3,000 9.25(1) 03/07 Quail Creek............. Lawrence, KS 95 Units 3,250 1,088 2,254 7.44 07/03 Office Building 9033 Wilshire........... Los Angeles, CA 44,253 Sq. Ft. 9,225 2,536 6,861 8.07 08/09 Bay Plaza II............ Tampa, FL 78,882 Sq. Ft. 4,825 4,786 -- -- -- Brandeis................ Omaha, NE 319,234 Sq. Ft. 14,000 4,052 8,750 9.5 11/03 Countryside Portfolio(2)........... Sterling, VA 265,718 Sq. Ft. 44,940 4,825 36,297 7.75 12/02 Land DF Fund................. Collin County, TX 79.5 Acres 2,545 1,047 1,545 10.00 03/01(3) Folsom.................. Dallas, TX 36.38 Acres 1,750 1,738 -- -- -- Lamar/Parmer............ Austin, TX 17.07 Acres 1,500 517 1,030 10.00 12/00(4) Limestone Canyon II..... Austin, TX 9.96 Acres 504 424 -- -- -- Manhattan............... Farmers Branch, TX 108.9 Acres 10,743 6,144 5,000 14.00 02/01(5) Netzer.................. Collin County, TX 20 Acres 400 418 -- -- --
(1) Variable interest rate. (2) The Countryside Portfolio consisted of four commercial buildings: the 133,422 sq. ft. Countryside Retail Center, the 72,062 sq. ft. Harmon Office Building, the 35,127 sq. ft. Mimado Office Building and the 25,107 sq. ft. Ambulatory Surgical Center. (3) The DF Fund land was sold in September 2000. (4) The mortgage loan was paid off in March 2001. (5) The mortgage loan was paid off in June 2000. 35 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In 2000, TCI sold the following properties:
Units/Sq.Ft. Sales Net Cash Debt Gain on Property Location Rooms/Acres Price Received Discharged Sale - -------- ----------------- -------------- ------- -------- ---------- ------- Apartments Apple Creek............. Dallas, TX 216 Units $ 4,300 $2,155 $1,723 $3,240 Ashley Crest............ Houston, TX 168 Units 3,950 1,102 2,812(1) 706 Country Bend............ Fort Worth, TX 166 Units 4,700 1,894 2,445 1,097 Crescent Place.......... Houston, TX 120 Units 3,485 1,034 2,151 793 Eagle Rock.............. Los Angeles, CA 99 Units 5,600 1,967 3,246 1,021 Fountain Village........ Tucson, AZ 410 Units 11,700 3,088 7,569 5,086 Hunters Bend............ San Antonio, TX 96 Units 1,683 418 1,127(1) 572 Parkwood Knoll.......... San Bernadino, CA 178 Units 9,100 3,007 5,491 2,967 Shadow Run.............. Pinellas Park, FL 276 Units 12,350 2,521 8,653 5,367 Villa Piedra............ Los Angeles, CA 132 Units 7,400 2,348 4,686 2,588 Villas at Countryside... Sterling, VA 102 Units 8,100 2,686 5,334(1) 1,520 Villas at Fairpark...... Los Angeles, CA 49 Units 3,435 792 2,386 1,188 Westgate of Laurel...... Laurel, MD 218 Units 11,290 2,599 7,525(1) 3,575 Woodbridge.............. Denver, CO 194 Units 6,856 3,328 2,845 3,796 Office Building Brookfield Corporate Center................. Chantilly, VA 63,504 Sq. Ft. 4,850 1,729 2,838 1,455 Industrial Warehouse Shady Trail............. Dallas, TX 42,900 Sq. Ft. 900 340 521 206 Hotel Chateau Charles......... Lake Charles, LA 245 Rooms 1,000 928 -- 633 Land Allen(2)................ Allen, TX 5.49 Acres 370 86 281 184 McKinney(3)............. McKinney, TX 255 Acres 8,783 5,035 4,423 2,091 Watters/Hwy. 121(4)..... McKinney, TX 24.06 Acres 3,620 3,620 -- 3,089
- -------- (1) Debt assumed by purchaser. (2) The Allen sale consisted of tracts of three land parcels: a 2.62 acre tract of the Stacy Road land parcel; a 2.23 acre tract of the Sandison land parcel; and, a .64 acre tract of the Whisenant land parcel. (3) The McKinney sale included three land parcels: the 20 acre Netzer land parcel; the 79.54 acre DF Fund land parcel; and the 156.19 acre OPUBCO land parcel. (4) The Watters/Highway 121 sale consisted of a six acre tract of the Watters land parcel and an 18.061 acre tract of the State Highway 121 land parcel. 36 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In 1999, TCI purchased the following properties:
Units/ Purchase Net Cash Debt Interest Maturity Property Location Sq.Ft./Acres Price Paid Incurred Rate Date - -------- ------------- --------------- -------- -------- -------- -------- -------- Apartments Fairway View Estates.... El Paso, TX 264 Units $ 5,150 $ 1,550 $3,600 7.63% 04/04 Plantation.............. Tulsa, OK 138 Units 3,225 1,200 2,000 8.82(2) 01/03 Office Buildings 4135 Belt Line.......... Addison, TX 90,000 Sq. Ft. 4,450 950 3,500 9.50 06/01 Chesapeake Center....... San Diego, CA 57,493 Sq. Ft. 5,188 2,200 3,000(1) 8.88 07/02 Eton Square............. Tulsa, OK 222,654 Sq. Ft. 14,000 3,500 10,500 8.50 10/04 Remington Tower......... Tulsa, OK 90,009 Sq. Ft. 4,550 938 3,612(1) 7.38 05/05 Industrial Warehouse Addison Hangar.......... Addison, TX 23,650 Sq. Ft. 2,200 550 1,650 8.61% 12/04 Land Alamo Springs........... Dallas, TX .68 Acres 1,272 521(1) 750 16.50 09/01 Dominion................ Dallas, TX 14.39 Acres 3,557 1,157 2,400 15.00 09/00(3) Red Cross............... Dallas, TX 2.89 Acres 7,600 3,340 4,260 13.25 10/00(4)
- -------- (1) Debt assumed by purchaser. (2) Variable interest rate. (3) The Dominion mortgage loan was paid off in August 2000. (4) The Red Cross mortgage loan was paid off in October 2000. In 1999, TCI sold the following properties:
Sales Net Cash Debt Gain on Property Location Units/Sq.Ft./Acres Price Received Discharged Sale - -------- ------------------ ------------------ ------- -------- ---------- ------- Apartments Mariner's Pointe........ St. Petersburg, FL 368 Units $ 6,700 $ 2,628 $ 3,856 $1,868 Spa Cove................ Annapolis, MD 303 Units 19,910 7,617 11,884 5,600 Woods Edge.............. Rockville, MD 162 Units 11,130 4,808 6,046 4,670 Office Buildings 74 New Montgomery....... San Francisco, CA 109,497 Sq. Ft. 19,300 12,397 6,494 8,284 Town and Country........ Houston, TX 64,089 Sq. Ft. 1,480 198 1,230 800(1) Industrial Warehouses Corporate Center........ Ashburn, VA 177,563 Sq. Ft. 12,325 5,201 6,830 5,339 Parke Long.............. Chantilly, VA 216,131 Sq. Ft. 15,100 22,347 7,593 5,174 Sulleyfield............. Chantilly, VA 243,813 Sq. Ft. 16,500 7,416 8,727 4,437 Land Laws.................... Dallas, TX 1.41 Acres 2,950 2,930 -- 747 McKinney Corners........ McKinney, TX 251.68 Acres 10,067 8,306 1,500 4,800(1) Moss Creek.............. Guillford, NC 42.0 Acres 160 159 -- 153 Republic................ Dallas, TX 0.93 Acres 1,826 506 1,245 675
- -------- (1) Sale recorded on cost recovery method with gain deferred, until TCI provided purchase money financing collected. See NOTE 4. "NOTES AND INTEREST RECEIVABLE." 37 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 4. NOTES AND INTEREST RECEIVABLE Notes and interest receivable consisted of the following:
2000 1999 ---------------- ----------------- Estimated Estimated Fair Book Fair Book Value Value Value Value --------- ------ --------- ------- Notes receivable Performing................................ $8,664 $8,668 $11,712 $11,676 Nonperforming, nonaccruing................ -- -- 1,723 385 ------ ------ ------- ------- $8,664 8,668 $13,435 12,061 ====== ======= Interest receivable......................... 41 12 ------ ------- $8,709 $12,073 ====== =======
Interest income is not recognized on nonperforming notes receivable. For the years 1999 and 1998, unrecognized interest income on nonperforming notes totaled $26,000 and $175,000, respectively. Notes receivable at December 31, 2000, mature from 2001 through 2008 with interest rates ranging from 8.0% to 18.0% per annum, with a weighted average rate of 14.1%. Notes receivable are generally nonrecourse and are generally collateralized by real estate. Scheduled principal maturities of $6.7 million are due in 2001. In February 2000, a mortgage loan with a principal balance of $28,000 was paid off, including accrued but unpaid interest. In December 2000, TCI funded a $2.5 million mortgage loan secured by a second lien on unimproved land, 442 acres in Tarrant County, Texas, 1,130 acres in Denton County, Texas, and 26 acres in Collin County, Texas. The note receivable bears interest at 18.0% per annum, requires monthly payments interest only and matures in June 2001. Also in December 2000, TCI funded a $3.0 million mortgage loan secured by a second lien on four office buildings in San Antonio, Texas. The note receivable bears interest at 16.0% per annum, requires monthly payments of interest only and matures in June 2001. In March 1999, TCI accepted $33,000 as early discounted payoffs of four mortgage notes receivable with a combined principal balance of $55,000. TCI incurred no loss on the discounted payoffs in excess of the reserve previously established. In June 1999, eight notes receivable with a combined principal balance of $571,000 were written off as uncollectible. No loss was incurred in excess of the reserve previously established. At December 31, 1999, mortgage notes receivable with a combined principal balance of $4.6 million and a carrying value of $356,000, secured by first and second liens on a closed hotel in Lake Charles, Louisiana were in default. Title to the collateral property was obtained in February 2000 through foreclosure. No loss was incurred on foreclosure as the estimated fair value of the property, less estimated costs of sale, exceeded the carrying value of the mortgage notes receivable. In June 2000, the property was sold for an amount in excess of its carrying value. In December 1999, TCI provided $1.2 million of purchase money financing in conjunction with the sale of the Town and Country Office Building in Houston, Texas. The note receivable bears interest at 8.5% per annum, 38 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) requires monthly payments of interest only, matures in December 2001 and is secured by a first lien on the property sold. Also in December 1999, TCI provided $8.5 million of purchase money financing in conjunction with the sale of 253 acres of unimproved land in McKinney and Collin County, Texas. The note receivable bore interest at 8.5% per annum, required a $1.0 million principal paydown in February 2000, required payment of all accrued interest in June 2000 and required payment of all principal and accrued interest at maturity in September 2000. The loan was repaid in accordance with its terms. The sale had originally been recorded under the cost recovery method with the gain being deferred until the note receivable was collected. In conjunction with the loan payoff, TCI recognized a previously deferred gain on the sale of $4.8 million. In 1998, TCI collected $2.1 million in full settlement of a note receivable and accrued but unpaid interest. The note receivable originated from a 1995 sale that had been recorded under the cost recovery method with the gain being deferred until the note receivable was collected. In conjunction with the loan payoff, TCI recognized the previously deferred gain of $2.1 million was recognized on collection of the note. Related Party. In June 2000, TCI funded a $3.0 million loan to Basic Capital Management, Inc. ("BCM"), TCI's advisor. The loan was secured by 108,802 shares of IORI common stock. IORI is also advised by BCM. The loan bore interest at 15.0% per annum and matured in October 2000. All principal and interest were due at maturity. The loan and all accrued but unpaid interest was paid off in August 2000. Also in June 2000, TCI funded a $9.0 million loan to American Realty Trust, Inc. ("ART"), an affiliate of BCM. The loan was secured by 409,934 shares of IORI. The loan bore interest at 15.0% per annum and matured in October 2000. All principal and interest were due at maturity. The loan and all accrued but unpaid interest was paid off in October 2000. NOTE 5. ALLOWANCE FOR ESTIMATED LOSSES Activity in the allowance for estimated losses was as follows:
2000 1999 1998 ---- ----- ---- Balance January 1,........................................ $543 $ 886 $891 Amounts charged off..................................... (6) (593) (5) CMET allowance.......................................... -- 250 -- ---- ----- ---- Balance December 31,...................................... $537 $ 543 $886 ==== ===== ====
NOTE 6. INVESTMENT IN MARKETABLE EQUITY SECURITIES Marketable equity securities consist of 746,972 shares of common stock of American Realty Investors, Inc. ("ARI"), approximately 5.3% of ARI's outstanding shares. ARI is a publicly held real estate company.
2000 1999 ------- ------- American Realty Investors, Inc. ("ARI")..................... $10,177 $13,954 ======= =======
The ARI Common Stock is considered available-for-sale and is carried at fair value, year end market price. The ARI Common Stock is an acquired CMET asset. The officers of TCI are also officers of ARI. TCI's advisor also serves as advisor to ARI and IORI. At December 31, 2000, ARI owned approximately 24.7% of TCI's outstanding shares of Common Stock. 39 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 7. INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES Investment in equity method real estate entities consisted of the following:
2000 1999 ------ ------ Income Opportunity Realty Investors, Inc. ("IORI")........... $4,326 $ 606 Tri-City Limited Partnership ("Tri-City").................... 524 1,799 Nakash Income Associates ("NIA")............................. (650) (659) Sacramento Nine ("SAC 9").................................... 490 489 Other........................................................ 597 75 ------ ------ $5,287 $2,310 ====== ======
TCI owns an approximate 22.8% interest in IORI, a publicly held Real Estate Investment Trust ("REIT"), having a market value of $12.3 million at December 31, 2000. At December 31, 2000, IORI had total assets of $96.2 million and owned seven apartments in Texas, seven office buildings (four in California, two in Texas and one in Virginia) and two parcels of unimproved land in Texas. In 2000, IORI sold three apartments, two office buildings and two parcels of unimproved land for a total of $66.0 million, receiving net cash of $30.4 million after paying off $33.6 million in mortgage debt and the payment of various closing costs. IORI recognized gains of $19.6 million on the sales of which TCI's equity share was $4.3 million. IORI also recognized a previously deferred gain on a prior year's sale of $1.2 million of which TCI's equity share was $225,000. In 1999, IORI sold a shopping center in Boca Raton, Florida, for $3.2 million, receiving net cash of $1.5 million after paying off $1.3 million in mortgage debt and the payment of various closing costs. IORI recognized a gain of $490,000 on the sale of which TCI's equity share was $111,000. In 1998, IORI recognized a gain on sale of real estate of $180,000, its share of gains recognized by an equity investee, of which TCI's equity share was $40,000. TCI owns a 63.7% limited partner interest and IORI owns a 36.3% general partner interest in Tri-City which, at December 31, 2000, owned a shopping center in Houston, Texas. In February 2000, the Chelsea Square Shopping Center was financed in the amount of $2.1 million. Tri-City received net cash of $2.0 million after the payment of various closing costs. The mortgage bore interest at a fixed rate of 10.24% per annum until February 2001, and a variable rate thereafter, currently 10% per annum, requires monthly payments of principal and interest of $20,601 and matures in February 2005. TCI received a distribution of $1.3 million of the net financing proceeds. In 1999, Tri-City sold a shopping center in Ft. Worth, Texas, and an office building in Carrollton, Texas, for a total of $7.2 million, receiving net cash of $5.4 million after paying off $1.3 million in mortgage debt and the payment of various closing costs. TCI received a distribution of $3.5 million of the net cash. Tri-City recognized gains of $2.9 million on the sales of which TCI's equity share was $1.8 million. In 1998, Tri-City sold two apartments for a total of $3.3 million, receiving net cash of $1.4 million after paying off $1.9 million in mortgage debt and the payment of various closing costs. TCI received a distribution of $701,000 of the net cash. Tri-City recognized a gain of $496,000 on the sales, of which TCI's equity share was $316,000. TCI owns a non-controlling 60% general partner interest and IORI owns a 40% general partner interest in NIA, which owns a wraparound mortgage note receivable. The NIA partnership agreement requires the consent of both partners for any material changes in the operations of NIA. TCI is a non-controlling 30% general partner in SAC 9, which, at December 31, 2000, owned an office building in Rancho Cordova, California. In 1999, SAC 9 sold an office building in Rancho Cordova, California, for $7.4 million, receiving net cash of $4.0 million after paying off $3.2 million in mortgage debt and the payment of various closing costs. TCI received a distribution of $1.2 million of the net cash. SAC 9 recognized a gain of $4.7 million on the sale of which TCI's equity share was $1.4 million. 40 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Set forth below are summarized financial data for the entities accounted for using the equity method:
2000 1999 -------- -------- Real estate, net of accumulated depreciation ($9,540 in 2000 and $12,216 in 1999)........ $ 93,170 $ 92,745 Notes receivable............................. 2,402 902 Other assets................................. 8,973 5,605 Notes payable................................ (59,485) (65,876) Other liabilities............................ (1,815) (4,691) -------- -------- Shareholders/partners' capital............... $ 43,245 $ 28,685 ======== ======== TCI's share of the above equity investee capital accounts was $10.3 million in 2000 and $8.0 million in 1999. 2000 1999 1998 -------- -------- ------- Rents and interest income.................... $ 16,245 $ 20,675 $17,566 Depreciation................................. (2,917) (3,152) (2,703) Operating expenses........................... (10,835) (8,123) (9,202) Interest expense............................. (5,559) (7,609) (6,274) -------- -------- ------- Income (loss) before gain on sale of real estate...................................... (3,066) 1,791 (613) Gain on sale of real estate.................. 20,878 8,020 496 -------- -------- ------- Net income (loss)............................ $ 17,812 $ 9,811 $ (117) ======== ======== ======= TCI's equity share of: 2000 1999 1998 -------- -------- ------- Income (loss) before gain on sale of real estate...................................... $ (556) $ 102 $ (68) Gain on sale of real estate.................. 4,572 3,569 356 -------- -------- ------- Net income................................... $ 4,016 $ 3,671 $ 288 ======== ======== =======
NOTE 8. NOTES AND INTEREST PAYABLE Notes and interest payable consisted of the following:
2000 1999 ------------------ ------------------ Estimated Estimated Fair Book Fair Book Value Value Value Value --------- -------- --------- -------- Notes payable.......................... $484,445 $498,914 $482,770 $500,884 ======== ======== Interest payable....................... 2,820 2,522 -------- -------- $501,734 $503,406 ======== ========
41 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Scheduled principal payments are due as follows: 2001................................................................ $109,769 2002................................................................ 44,731 2003................................................................ 44,715 2004................................................................ 69,418 2005................................................................ 45,196 Thereafter.......................................................... 185,085 -------- $498,914 ========
Notes payable at December 31, 2000, bore interest at rates ranging from 7.2% to 16.5% per annum, and mature between 2001 and 2037. The mortgages were collateralized by deeds of trust on real estate having a net carrying value of $593.1 million. In 2000, TCI financed/refinanced the following properties:
Debt Debt Net Cash Interest Maturity Property Location Units/Sq.Ft. Incurred Discharged Received Rate Date - -------- --------------- --------------- -------- ---------- -------- -------- -------- Apartments Camelot................. Largo, FL 120 Units $3,800 $ -- $3,100 8.85%(1) 12/05 Crescent Place.......... Houston, TX 120 Units 2,165 1,722 370 7.04(1) 03/30 Country Crossing........ Tampa, FL 227 Units 3,825 2,645 985 9.65(1) 06/03 Fontenelle Hills........ Bellevue, NE 338 Units 2,010(2) -- 1,967 8.51 06/10 Madison @ Bear Creek.... Houston, TX 180 Units 3,500 2,625 730 7.04(1) 03/30 Office Buildings Bay Plaza II............ Tampa, FL 78,882 Sq. Ft. 3,600 -- 3,400 8.44(1) 01/06 Jefferson............... Washington, DC 71,876 Sq. Ft. 9,875 8,955 557 9.50 07/25 Technology Trading...... Sterling, VA 197,659 Sq. Ft. 6,300 3,881 2,065 8.26(1) 05/05 Venture Center.......... Atlanta, GA 38,772 Sq. Ft. 2,700 1,113 1,592 8.75 03/10 Westgrove Air Plaza..... Addison, TX 78,326 Sq. Ft. 2,087 1,180 742 9.02(1) 01/05 Industrial Warehouses 5360 Tulane............. Atlanta, GA 67,850 Sq. Ft. 375 208 134 9.65(1) 04/03 Kelly................... Dallas, TX 330,406 Sq. Ft. 5,000 2,173 2,628 9.50(1) 10/03 Space Center............ San Antonio, TX 101,500 Sq. Ft. 1,125 691 402 9.65(1) 04/03
- -------- (1) Variable interest rate. (2) Second lien on property. 42 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In 1999, TCI financed/refinanced the following properties:
Debt Debt Net Cash Interest Maturity Property Location Units/Sq.Ft. Incurred Discharged Received Rate Date - -------- -------------------- --------------- -------- ---------- -------- -------- -------- Apartments Arbor Pointe............ Midland, TX 195 Units $1,580 $1,085 $ 583 6.95%(/1/) 12/29 Coventry Pointe......... Midland, TX 120 Units 1,250 443 238 6.95 (/1/) 12/29 Southgate............... Midland, TX 180 Units 1,820 1,336 717 6.95 (/1/) 12/29 Summerstone............. Houston, TX 242 Units 5,280 4,887 258 7.67 08/09 Villa Piedra............ Los Angeles, CA 132 Units 4,722 3,460 1,083 8.63 (/1/) 10/02 Villas at Fairpark...... Los Angeles, CA 49 Units 2,400 1,499 847 9.00 (/1/) 09/06 Office Buildings Lexington Center........ Colorado Springs, CO 74,603 Sq. Ft. 4,300 4,000 136 7.75 (/1/) 04/04 Waterstreet............. Boulder, CO 106,257 Sq. Ft. 13,300 7,881 5,110 7.76 04/09 Industrial Warehouse Texstar................. Arlington, TX 97,846 Sq. Ft. 1,300 1,150 33 8.50 04/09 Shopping Center Sadler Square........... Amelia Island, FL 70,295 Sq. Ft. 2,910 1,976 401 7.96 04/09
- -------- (1) Variable interest rate. NOTE 9. PREFERRED STOCK TCI's Series A Cumulative Convertible Preferred Stock consists of a maximum of 6,000 shares with a par value of $.01 per share and a liquidation preference of $100.00 per share. Dividends are payable at the rate of $5.00 per year or $1.25 per quarter to stockholders of record on the 15th day of each March, June, September and December when and as declared by the Board of Directors. The Series A Preferred Stock may be converted, after November 1, 2003, into Common Stock at the daily average closing price of the Common Stock for the prior five trading days. At December 31, 2000 and 1999, 5,829 shares of Series A Preferred Stock were issued and outstanding. TCI's Series B Cumulative Convertible Preferred Stock consists of a maximum 300,000 shares with a par value of $.01 per share and a liquidation preference of $5.00 per share. Dividends are payable at the rate of $.38 per share or $.095 per quarter to stockholders of record on the tenth day of each March, June, September and December when and as declared by the Board of Directors. After October 25, 2001, the Series B Preferred Stock may be converted into Common Stock at the daily average closing price of the Common Stock for the prior five trading days or is redeemable for cash at the option of the holder. At December 31, 2000, 300,000 shares of Series B Preferred Stock were issued and outstanding. NOTE 10. DIVIDENDS TCI paid dividends on its Common Stock of $4.7 million ($.54 per share) in 2000, $3.0 million ($.60 per share) in 1999 and $2.3 million ($.60 per share) in 1998. TCI reported to the Internal Revenue Service that 100% of the dividends paid in 2000 represented ordinary income and that 100% of the dividends paid in 1998 and 1999 represented capital gains. NOTE 11. STOCK OPTIONS In October 2000, TCI's stockholders approved the 2000 Stock Option Plan ("2000 Plan"). The 2000 Plan is administered by the Stock Option Committee, which currently consists of three Independent Directors of TCI. The exercise price per share of an option will not be less than 100% of the fair market value per share on the 43 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) date of grant thereof. As of December 31, 2000, TCI had 300,000 shares of Common Stock reserved for issuance under the 2000 Plan. No options have been granted un the 2000 Plan. In October 2000, TCI's stockholders approved the Director's Stock Option Plan (the "Director's Plan") which provides for options to purchase up to 140,000 shares of TCI's Common Stock. Options granted pursuant to the Director's Plan are immediately exercisable and expire on the earlier of the first anniversary of the date on which a Director ceases to be a Director or 10 years from the date of grant. Each Independent Director was granted an option to purchase 5,000 Common shares at an exercise price of $14.875 per share on October 10, 2000, the date stockholders approved the plan. On January 1, 2001, each Independent Director was granted an option to purchase 5,000 Common shares at an exercise price of $8.875 per Common share. Each Independent Director will be awarded an option to purchase an additional 5,000 shares on January 1 of each year.
2000 ------------------ Number of Exercise Shares Price --------- -------- Outstanding at January 1,................................. -- $ -- Granted................................................... 25,000 14.875 Canceled.................................................. -- -- ------ Outstanding at December 31,............................... 25,000 $14.875 ======
At December 31, 2000, 25,000 options were exercisable at an exercise price of $14.875 per Common share. TCI applies Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its option plans. All share options issued by TCI have exercise prices equal to the market price of the shares at the dates of grant. Accordingly, no compensation cost has been recognized for its option plans. Had compensation cost for TCI's option plans been determined based on the fair value at the grant dates consistent with the method of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation," TCI's net income (loss) and net income (loss) per share would have been the pro forma amounts indicated below.
2000 --------------------- As Reported Pro Forma ----------- --------- Net income applicable to Common shares................ $29,760 $29,537 Net income applicable to Common shares, per share..... 3.45 3.42
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
2000 ---- Dividend yield......................................................... 6.08% Expected volatility.................................................... 65% Risk-free interest rate................................................ 5.75% Expected lives (in years).............................................. 9 Forfeitures............................................................ 10%
The weighted average fair value per share of options granted in 2000 was $8.93. 44 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 12. RENTS UNDER OPERATING LEASES Operations include the leasing of commercial properties (office buildings, industrial warehouses and shopping centers). The leases thereon expire at various dates through 2020. The following is a schedule of minimum future rents on non-cancelable operating leases at December 31, 2000: 2001................................................................ $ 53,001 2002................................................................ 43,124 2003................................................................ 32,729 2004................................................................ 23,995 2005................................................................ 16,623 Thereafter.......................................................... 32,233 -------- $201,705 ========
NOTE 13. ADVISORY AGREEMENT Basic Capital Management, Inc. ("BCM"), an affiliate, has served as TCI's advisor since March 28, 1989. BCM is a company owned by a trust for the benefit of the children of Gene E. Phillips. Mr. Phillips serves as a representative of his children's trust which owns BCM and, in such capacity, had, until June 2000, substantial contact with the management of BCM and input with respect to its performance of advisory services to TCI. On August 18, 2000, the Board of Directors approved the renewal of the Advisory Agreement with BCM. Renewals of the Advisory Agreement with BCM do not require the approval of stockholders but do require the approval of the Board of Directors. Under the Advisory Agreement, BCM is required to annually formulate and submit for Board approval a budget and business plan containing a twelve-month forecast of operations and cash flow, a general plan for asset sales and purchases, lending, foreclosure and borrowing activity and other investments. BCM is required to report quarterly to the Board on TCI's performance against the business plan. In addition, all transactions require prior Board approval unless they are explicitly provided for in the approved business plan or are made pursuant to authority expressly delegated to BCM by the Board. The Advisory Agreement also requires prior Board approval for the retention of all consultants and third party professionals, other than legal counsel. The Advisory Agreement provides that BCM shall be deemed to be in a fiduciary relationship to the stockholders and contains a broad standard governing BCM's liability for losses incurred by TCI. The Advisory Agreement provides for BCM to be responsible for the day-to-day operations and to receive an advisory fee comprised of a gross asset fee of .0625% per month (.75% per annum) of the average of the gross asset value (total assets less allowance for amortization, depreciation or depletion and valuation reserves) and an annual net income fee equal to 7.5% of net income. The Advisory Agreement also provides for BCM to receive an annual incentive sales fee. BCM or an affiliate of BCM is to receive an acquisition commission for supervising the purchase or long-term lease of real estate. BCM or an affiliate of BCM is to receive a mortgage or loan acquisition fee with respect to the purchase of any existing mortgage loan. BCM or an affiliate of BCM is also to receive a mortgage brokerage and equity refinancing fee for obtaining loans to or refinancing of TCI's properties. In addition, BCM receives reimbursement of certain expenses incurred by it in the performance of advisory services for TCI. The Advisory Agreement requires BCM or any affiliate of BCM to pay to TCI one-half of any compensation received from third parties with respect to the origination, placement or brokerage of any loan made by TCI. 45 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Under the Advisory Agreement, all or a portion of the annual advisory fee must be refunded if the Operating Expenses of TCI (as defined in the Advisory Agreement) exceed certain limits specified in the Advisory Agreement. The effect of this limitation was to require that BCM refund $664,000 of the annual advisory fee for 1998. BCM was not required to refund any of its 1999 or 2000 advisory fee. Additionally, if management were to request that BCM render services other than those required by the Advisory Agreement, BCM or an affiliate of BCM would be separately compensated for such additional services on terms to be agreed upon from time to time. As discussed in NOTE 14. "PROPERTY MANAGEMENT," Triad Realty Services, Ltd. ("Triad"), an affiliate of BCM, provides property management services and as discussed in NOTE 15. "REAL ESTATE BROKERAGE," Regis Realty, Inc. ("Regis"), a related party, provides, on a non-exclusive basis, brokerage services. NOTE 14. PROPERTY MANAGEMENT Triad provides property management services for a fee of 5% or less of the monthly gross rents collected on residential properties and 3% or less of the monthly gross rents collected on commercial properties under its management. Triad subcontracts with other entities for property-level management services at various rates. The general partner of Triad is BCM. The limited partners of Triad are Gene E. Phillips and GS Realty Services, Inc. ("GS Realty"), a related party, which is a company not affiliated with either Mr. Phillips or BCM. Triad subcontracts to Regis, a related party, which is a company owned by GS Realty, the property-level management and leasing of 52 of TCI's commercial properties, its four hotels and the commercial property owned by Tri-City. Regis is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad. NOTE 15. REAL ESTATE BROKERAGE Regis also provides brokerage services on a non-exclusive basis. Regis is entitled to receive a commission for property purchases and sales, in accordance with a sliding scale of total brokerage fees to be paid by TCI. 46 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 16. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC. Revenue, fees and cost reimbursements to BCM and its affiliates:
2000 1999 1998 ------ ------- ------ Fees Advisory........................................... $5,258 $ 3,219 $1,962 Net income......................................... 2,415 2,450 558 Property acquisition............................... 1,024 1,815 3,468 Real estate brokerage.............................. 331 2,727 767 Mortgage brokerage and equity refinancing.......... 464 422 341 Property and construction management and leasing commissions*...................................... -- 3,608 2,753 ------ ------- ------ $9,492 $14,241 $9,849 ====== ======= ====== Cost reimbursements.................................. $2,146 $ 1,367 $1,121 ====== ======= ====== Hotel lease revenue.................................. $2,237 $ 1,653 $ -- ====== ======= ====== Fees paid to GS Realty, a related party: 2000 ------ Fees Property acquisition............................... $2,326 Real estate brokerage.............................. 3,250 Property and construction management and leasing commissions....................................... 4,321 ------ $9,897 ======
- -------- *Net of property management fees paid to subcontractors, other than Regis and affiliates of BCM. NOTE 17. INCOME TAXES For the years 1999 and 1998, TCI had elected and qualified to be treated as a Real Estate Investment Trust ("REIT"), as defined in Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and as such, it was not taxed for federal income tax purposes on that portion of its taxable income which was distributed to stockholders. During the third quarter of 2000, due to a concentration of ownership, TCI no longer met the requirements for tax treatment as a REIT under the Code, and is prohibited for re-qualifying for REIT tax status for at least five years. TCI had a loss for federal income tax purposes (after utilization of operating loss carryforwards) in 2000, 1999 and 1998; therefore, it recorded no provision for income taxes. TCI's tax basis in its net assets differs from the amount at which its net assets are reported for financial statement purposes, principally due to the accounting for gains and losses on property sales, the difference in the allowance for estimated losses, depreciation on owned properties and investments in equity method real estate entities. At December 31, 2000, TCI's tax basis in its net assets exceeded their basis for financial statement purposes by $59.4 million. As a result, aggregate future income for income tax purposes will be less than such amount for financial statement purposes. Additionally, at December 31, 2000, TCI had tax net operating loss carryforwards of $64.1 million expiring through the year 2018. At December 31, 2000, TCI had a deferred tax benefit of $45.6 million due to tax deductions available to it in future years. However, due to, among other factors, the lack of consistent estimates of deferred tax liabilities, such deferred tax benefit has been offset by the recording of a deferred tax liability of an equal amount. 47 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 18. 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 general and 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. Items of income that are not reflected in the segments are interest, equity in partnerships and gains on sale of real estate totaling $11.2 million and $555,000 for 2000 and 1999, respectively. Expenses that are not reflected in the segments are general and administrative expenses, non-segment interest expense and advisory incentive sales and net income fees totaling $16.2 million and $9.0 million for 2000 and 1999, respectively. Excluded from operating segment assets are assets of $91.0 million at December 31, 2000, and $112.7 million at December 31, 1999, which are not identifiable with an operating segment. There are no intersegment revenues and expenses and all business is conducted in the United States. See NOTE 3. "REAL ESTATE" and NOTE 4. "NOTES AND INTEREST RECEIVABLE." Presented below is the operating income of each operating segment and each segments' assets for the years 2000 and 1999.
Commercial Land Properties Apartments Hotels Total ------- ---------- ---------- ------- -------- 2000 Rents................... $ 723 $ 61,191 $ 74,700 $ 2,743 $139,357 Property operating expenses............... 1,097 31,853 44,898 213 78,061 ------- -------- -------- ------- -------- Segment operating income................. $ (374) $ 29,338 $ 29,802 $ 2,530 $ 61,296 ======= ======== ======== ======= ======== Depreciation............ $ -- $ 11,311 $ 7,395 $ 996 $ 19,702 Interest................ 3,342 21,790 21,284 1,581 47,997 Real estate improvements........... 117 11,700 1,302 1,545 14,664 Assets.................. 59,281 344,657 216,995 19,931 640,864 Property Sales price............. $12,775 $ 5,750 $ 93,949 $ 1,000 $113,474 Cost of sales........... (7,411) (4,089) (60,433) (367) (72,300) ------- -------- -------- ------- -------- Gain on sale............ $ 5,364 $ 1,661 $ 33,516 $ 633 $ 41,174(1) ======= ======== ======== ======= ========
- -------- (1) Excludes a previously deferred gain of $4.8 million on the sale of land as well as TCI's share of gains recognized by IORI, an equity affiliate, of $4.6 million. 48 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commercial Land Properties Apartments Hotels Total ------- ---------- ---------- ------- -------- 1999 Rents................... $ 855 $ 33,909 $ 42,162 $ 5,113 $ 82,039 Property operating expenses............... 917 14,583 26,374 2,623 44,497 ------- -------- -------- ------- -------- Operating income (loss)................. $ (62) $ 19,326 $ 15,788 $ 2,490 $ 37,542 ======= ======== ======== ======= ======== Depreciation............ $ -- $ 6,086 $ 4,872 $ 736 $ 11,694 Interest................ 1,891 11,332 13,032 1,442 27,697 Real estate improvements........... 52 6,303 1,758 2,243 10,356 Construction expenditures........... -- -- 11,470 -- 11,470 Assets.................. 48,253 272,648 261,252 19,383 601,536 Property Sales Commercial Land Properties Apartments Total ------- ---------- ---------- -------- Sales price............. $14,544 $ 64,305 $ 37,910 $116,759 Cost of sales........... 8,179 40,251 25,773 74,203 ------- -------- -------- -------- Gains on sales.......... $ 6,365(1) $ 24,054(1) $ 12,137 $ 42,556 ======= ======== ======== ======== - -------- (1) Includes deferred gains from a land sale and from a commercial property sale accounted for using the cost recovery method. See NOTE 3. "REAL ESTATE." Commercial Properties Apartments Hotels Total ---------- ---------- ------- -------- 1998 Rents................... $ 31,282 $ 35,400 $ 3,147 $ 69,829 Property operating expenses............... 14,291 21,987 2,004 38,282 -------- -------- ------- -------- Operating income........ $ 16,991 $ 13,413 $ 1,143 $ 31,547 ======== ======== ======= ======== Depreciation and amortization........... $ 6,268 $ 4,115 $ 308 $ 10,691 Interest................ 11,753 10,415 629 22,797 Real estate improvements........... 5,287 4,130 178 9,595 Assets.................. 173,936 156,933 17,876 348,745 Property Sales Commercial Land Properties Total ------- ---------- -------- Sales price............. $ 375 $ 33,665 $ 34,040 Cost of sales........... 25 24,234 24,259 ------- -------- -------- Gains on sales.......... $ 350 $ 9,431 $ 9,781 ======= ======== ========
49 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 19. QUARTERLY RESULTS OF OPERATIONS The following is a tabulation of TCI's quarterly results of operations for the years 2000 and 1999 (unaudited):
Three Months Ended ---------------------------------------------- March 31, June 30, September 30, December 31, --------- -------- ------------- ------------ 2000 Rents.......................... $34,041 $34,559 $35,121 $35,636 Property expense............... 18,396 18,321 19,872 21,472 ------- ------- ------- ------- Operating income............. 15,645 16,238 15,249 14,164 Interest income................ 404 588 936 442 Income (loss) in equity partnerships.................. 7 (299) (185) (79) Gain on sale of real estate.... 8,951 8,856 11,755 20,988 ------- ------- ------- ------- 9,362 9,145 12,506 21,351 Other expense.................. 20,651 19,608 20,864 22,755 ------- ------- ------- ------- Net income (loss).............. 4,356 5,775 6,891 12,760 Preferred dividend requirement................... (7) (7) (8) -- ------- ------- ------- ------- Net income applicable to Common shares........................ $ 4,349 $ 5,768 $ 6,883 $12,760 ======= ======= ======= ======= Basic and Diluted Earnings Per Share Net income applicable to Common shares........................ $ .50 $ .67 $ .80 $ 1.48 ======= ======= ======= ======= In the first quarter of 2000, gains on sale of real estate totaling $9.0 million were recognized on the sale of Hunters Bend Apartments, Westgate of Laurel Apartments and a previous deferred gain on the sale of McKinney land. In the second quarter of 2000, gains on sale of real estate totaling $8.9 million were recognized on the sale of Apple Creek Apartments, Villas at Fairpark Apartments, Chateau Charles Hotel, and TCI's share of gain recognized by IORI, an equity investee. In the third quarter of 2000, gains on sale of real estate totaling $11.8 million were recognized on the sale of Brookfield Corporate Center, Ashley Crest Apartments, a portion of the Allen land, Eagle Rock Apartments, Shady Trail Warehouse, McKinney land, Woodbridge Apartments and Villas at Countryside Apartments. In the fourth quarter of 2000, gains on sale of real estate totaling $21.0 million were recognized on the sale of Shadow Run Apartments, a portion of the Watters Road/Highway 121 land, Parkwood Knoll Apartments, Villa Piedra Apartments, Country Bend Apartments, Fountain Village Apartments and Crescent Place Apartments. See NOTE 3. "REAL ESTATE" and NOTE 7. "INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES." Three Months Ended ---------------------------------------------- March 31, June 30, September 30, December 31, --------- -------- ------------- ------------ 1999 Rents.......................... $19,093 $20,073 $18,445 $24,428 Property expense............... 10,320 10,158 9,676 14,343 ------- ------- ------- ------- Operating income............. 8,773 9,915 8,769 10,085 Interest income................ 102 38 174 139 Income (loss) in equity partnerships.................. 25 57 (1) 21 Gain on sale of real estate.... 1,868 8,705 7,482 22,462 ------- ------- ------- ------- 1,995 8,800 7,655 22,622 Other expense.................. 10,479 11,117 11,303 15,496 ------- ------- ------- ------- Net income (loss).............. 289 7,598 5,121 17,211 Preferred dividend requirement................... (7) (7) (9) (7) ------- ------- ------- ------- Net income applicable to Common shares........................ $ 282 $ 7,591 $ 5,112 $17,204 ======= ======= ======= ======= Earnings Per Share Net income applicable to Common shares........................ $ .07 $ 1.96 $ 1.32 $ 3.70 ======= ======= ======= =======
50 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In the first quarter of 1999, a gain on sale of real estate of $1.9 million was recognized on the sale of Mariner's Pointe Apartments. In the second quarter, a gain on sale of real estate of $8.7 million was recognized on the sale of the 74 New Montgomery Office Building and TCI's share of a gain recognized by an equity investee on the sale of a shopping center. In the third quarter, gains on sale of real estate totaling $7.5 million were recognized on the sale of Parke Long Industrial Warehouse, Republic land and TCI's share of a gain recognized by an equity investee on the sale of a shopping center. In the fourth quarter, gains on sale of real estate totaling $22.5 million were recognized on the sale of the Corporate Center Industrial Warehouse, Laws land, Moss Creek land, Spa Cove Apartments, Woods Edge Apartments, Sullyfield Industrial Warehouse and TCI's share of a gain recognized by an equity investee on the sale of an office building. See NOTE 3. "REAL ESTATE" and NOTE 7. "INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES." NOTE 20. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY Olive Litigation. In February 1990, TCI, together with CMET, IORI and National Income Realty Trust, three real estate entities with, at the time, the same officers, directors or trustees and advisor as TCI, entered into a settlement (the "Settlement") of a class and derivative action entitled Olive et al. v. National Income Realty Trust et al., relating to the operation and management of each of the entities. On April 23, 1990, the Court granted final approval of the terms of the Settlement. The Settlement was modified in 1994 (the "Modification"). On January 27, 1997, the parties entered into an Amendment to the Modification effective January 9, 1997 (the "Olive Amendment"). The Olive Amendment provided for the settlement of additional matters raised by plaintiffs' counsel in 1996. The Court issued an order approving the Olive Amendment on July 3, 1997. The Olive Amendment provided that TCI's Board retain a management/compensation consultant or consultants to evaluate the fairness of the BCM advisory contract and any contract of its affiliates with TCI, CMET and IORI, including, but not limited to, the fairness to TCI, CMET and IORI of such contracts relative to other means of administration. In 1998, the Board engaged a management/compensation consultant to perform the evaluation which was completed in September 1998. In 1999, plaintiffs' counsel asserted that the Board did not comply with the provision requiring such engagement and requested that the Court exercise its retained jurisdiction to determine whether there was a breach of this provision of the Olive Amendment. In January 2000, the Board engaged another management/compensation consultant to perform the required evaluation again. This evaluation was completed in April 2000 and was provided to plaintiffs' counsel. The Board believes that any alleged breach of the Olive Amendment has been fully remedied by the Board's engagement of the second consultant. Although several status conferences have been held on this matter, there has been no Court order resolving whether there was any breach of the Olive Amendment. The Board believes that the provisions of the Settlement, the Modification and Olive Amendment terminated on April 28, 1999. However, the Court has ruled that certain provisions continue to be effective after the termination date. This ruling has been appealed by TCI and IORI. Liquidity. Although management anticipates that TCI will generate excess cash from operations in 2001, due to increased rental rates and occupancy at its properties, such excess, however, will not be sufficient to discharge all of TCI's debt obligations as they mature. Management intends to selectively sell income producing real estate, refinance real estate and incur additional borrowings against real estate to meet its cash requirements. Other Litigation. TCI is also involved in various other lawsuits arising in the ordinary course of business. Management is of the opinion that the outcome of these lawsuits will have no material impact on TCI's financial condition, results of operations or liquidity. 51 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 21. SUBSEQUENT EVENTS In February 2001, TCI entered into a joint venture to invest in the construction and part ownership of a 165 room hotel in Wroclaw, Poland. TCI will invest 4.0 million Euro dollars ($3.7 million) and guarantee a 16 million Euro dollars ($15.0 million) mortgage loan for the project. TCI will hold a 66.7% interest. Completion of the hotel is scheduled for December 2001. In the first quarter of 2001, TCI sold the following properties:
Units/ Sales Net Cash Debt Gain on Property Location Sq.Ft./Acres Price Received Discharged Sale - -------- --------------- -------------- ------ -------- ---------- ------- Apartments Heritage................ Tulsa, OK 136 Units $3,100 $206 $1,948 $1,575 Forest Ridge............ Denton, TX 56 Units 2,000 682 1,151 1,014 Park at Colonnade....... San Antonio, TX 211 Units 5,800 927 4,066 1,603 Industrial Warehouse Zodiac(1)............... Dallas, TX 35,935 Sq. Ft. 762 183 564 167 Land McKinney 36............. McKinney, TX 1.82 Acres 476 476 -- 355
- -------- (1) Part of the Kelly Portfolio of warehouses. 52 SCHEDULE III TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000
Cost Capitalized Subsequent to Gross Amounts of Which Initial Cost Acquisition Carried at End of Year ------------------- -------------------- --------------------------- Building & Building & (1) Accumulated Property/Location Encumbrances Land Improvements Improvements Other Land Improvements Total Depreciation - ----------------- ------------ ------ ------------ ------------ ------- ------ ------------ ------- ------------ (dollars in thousands) Held for Investment: Apartments 4242 Cedar Springs, Dallas, TX.............. $ 1,329 $ 372 $ 1,117 $ 51 $ (200)(/2/) $ 372 $ 968 $ 1,340 $ 268 4400, Midland, TX.............. 1,090 349 1,396 -- -- 349 1,396 1,745 93 Apple Lane, Lawrence, KS.... 981 168 1,510 -- -- 168 1,510 1,678 38 Arbor Point, Odessa, TX...... 1,565 321 1,285 526 -- 321 1,811 2,132 518 Ashton Way, Midland, TX..... 1,090 384 1,536 52 -- 384 1,588 1,972 125 Autumn Chase, Midland, TX..... 928 141 1,265 -- -- 141 1,265 1,406 24 Bent Tree, Addison, TX..... 6,112 1,702 6,808 85 -- 1,702 6,893 8,595 555 Camelot, Largo, FL.............. 3,800 1,230 2,870 235 (281)(/2/) 1,230 2,824 4,055 647 Carseka, Los Angeles, CA..... 1,478 460 1,840 119 -- 460 1,959 2,419 263 Cliffs of Eldorado, McKinney, TX.... 10,547 2,647 10,589 -- -- 2,647 10,589 13,236 596 Country Crossings, Tampa, FL....... 3,807 772 2,444 196 (358)(/2/) 772 2,282 3,054 625 Coventry, Midland, TX..... 1,238 236 369 184 -- 236 553 789 174 El Chapparal, San Antonio, TX.............. 4,238 279 2,821 574 (330)(/2/) 279 3,065 3,344 1,439 Fairway View Estates, El Paso, TX........ 3,510 548 4,935 260 -- 548 5,195 2,042 283 Fairways, Longview, TX.... 1,928 657 1,532 119 (266)(/2/) 657 1,385 5,744 397 Fontenelle Hills, Bellevue, NE.............. 12,513 1,320 11,883 394 (1,360)(/2/) 1,320 10,917 12,327 910 Forest Ridge, Denton, TX...... 1,155 212 849 85 (137)(/2/) 212 797 1,009 259 Fountain Lake, Texas City, TX.. 2,508 861 2,585 19 (254)(/2/) 861 2,350 3,211 445 Fountains of Waterford, Midland, TX..... 482 311 1,243 1,538 -- 311 2,781 3,092 662 Gladstell Forest, Conroe, TX.............. 2,455 504 2,015 190 -- 504 2,205 2,709 393 Glenwood, Addison, TX..... 2,576 877 3,506 37 (370)(/2/) 877 3,173 4,050 363 Grove Park, Plano, TX....... 4,610 942 3,767 54 (447)(/2/) 942 3,374 4,316 439 Harper's Ferry, Lafayette, LA... 1,768 349 1,398 223 -- 349 1,621 1,970 472 Heritage, Tulsa, OK.............. 1,948 148 839 83 (300)(/4/) 88 682 771 183 Heritage on the River, Jacksonville, FL.............. 7,761 2,070 6,211 296 (719)(/2/) 2,070 5,788 7,858 972 Hunters Glen, Midland, TX..... 1,895 519 2,075 321 -- 519 2,396 2,915 297 In the Pines, Gainesville, FL.............. 5,619 1,288 5,154 496 (573)(/2/) 1,288 5,077 6,365 1,212 Limestone Canyon, Austin, TX.............. 13,000 1,998 -- 11,470 1,895 (/5/) 1,998 13,365 16,140 354 Madison at Bear Creek, Houston, TX.............. 3,475 738 2,950 86 (286)(/2/) 738 2,750 3,488 328 McCallum Crossing, Dallas, TX...... 8,167 2,005 6,017 95 (653)(/2/) 2,005 5,459 7,464 1,064 McCallum Glen, Dallas, TX...... 5,031 1,257 5,027 96 (488)(/2/) 1,257 4,635 5,892 727 Life on Which Depreciation In Latest Statement of Date of Date Operation is Property/Location Construction Acquired Computed - ----------------- ------------ -------- ------------ Held for Investment: Apartments 4242 Cedar Springs, Dallas, TX.............. 1984 06/92 5-40 years 4400, Midland, TX.............. 1981 04/98 40 years Apple Lane, Lawrence, KS.... 1989 01/00 40 years Arbor Point, Odessa, TX...... 1975 08/96 5-40 years Ashton Way, Midland, TX..... 1978 04/98 5-40 years Autumn Chase, Midland, TX..... 1985 04/00 40 years Bent Tree, Addison, TX..... 1979 01/98 5-40 years Camelot, Largo, FL.............. 1975 08/93 5-40 years Carseka, Los Angeles, CA..... 1971 11/96 5-40 years Cliffs of Eldorado, McKinney, TX.... 1997 10/98 40 years Country Crossings, Tampa, FL....... 1973 04/93 5-40 years Coventry, Midland, TX..... 1977 08/96 5-40 years El Chapparal, San Antonio, TX.............. 1963 01/88 5-40 years Fairway View Estates, El Paso, TX........ 1977 03/99 40 years Fairways, Longview, TX.... 1980 03/93 5-40 years Fontenelle Hills, Bellevue, NE.............. 1971/1975 04/98 5-40 years Forest Ridge, Denton, TX...... 1975 11/91 5-40 years Fountain Lake, Texas City, TX.. 1975 12/94 5-40 years Fountains of Waterford, Midland, TX..... 1977 05/98 5-40 years Gladstell Forest, Conroe, TX.............. 1985 06/95 5-40 years Glenwood, Addison, TX..... 1975 11/96 5-40 years Grove Park, Plano, TX....... 1979 06/96 5-40 years Harper's Ferry, Lafayette, LA... 1972 02/92 5-40 years Heritage, Tulsa, OK.............. 1966 05/90 5-40 years Heritage on the River, Jacksonville, FL.............. 1973 12/95 5-40 years Hunters Glen, Midland, TX..... 1982 01/98 5-40 years In the Pines, Gainesville, FL.............. 1972 12/94 5-40 years Limestone Canyon, Austin, TX.............. 1997 07/98 40 years Madison at Bear Creek, Houston, TX.............. 1975 01/97 5-40 years McCallum Crossing, Dallas, TX...... 1985 03/94 5-40 years McCallum Glen, Dallas, TX...... 1986 07/95 5-40 years
53 SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000
Cost Capitalized Subsequent to Gross Amounts of Which Initial Cost Acquisition Carried at End of Year ------------------ -------------------- --------------------------- Building & Building & (1) Accumulated Property/Location Encumbrances Land Improvements Improvements Other Land Improvements Total Depreciation - ----------------- ------------ ----- ------------ ------------ ------- ------ ------------ ------- ------------ (dollars in thousands) Mountain Plaza, El Paso, TX..... $4,363 $ 837 $3,347 $ 139 $ -- $ 837 $ 3,486 $ 4,323 $ 310 Oak Park IV, Clute, TX....... -- 224 674 27 (95)(/2/) 224 606 830 134 Oak Run, Pasadena, TX.... 4,408 788 3,152 78 (370)(/2/) 788 2,860 3,647 352 Paramount Terrace, Amarillo, TX.... 2,846 340 3,061 -- -- 340 3,061 3,402 51 Park at Colonnade, San Antonio, TX..... 4,074 887 3,546 384 (329)(/2/) 887 3,601 4,488 653 Park Lane, Dallas, TX...... 1,119 175 978 112 (187)(/2/) 175 903 1,078 334 Plantation, Tulsa, OK....... 1,993 344 3,096 -- -- 344 3,096 3,440 84 Primrose, Bakersfield, CA.............. 2,983 428 3,852 -- -- 428 3,852 4,280 72 Quail Creek, Lawrence, KS.... 2,223 343 3,090 -- -- 343 3,090 3,434 90 Quail Oaks, Balch Springs, TX.............. 1,220 90 2,160 152 (187)(/2/) 90 2,125 2,215 954 Sandstone, Mesa, AZ.............. 5,701 1,656 6,625 95 -- 1,656 6,720 8,376 586 Somerset, Texas City, TX........ 3,056 936 2,811 158 (452)(/2/) 936 2,517 3,452 583 South Cochran, Los Angeles, CA.............. 1,891 540 2,162 56 -- 540 2,218 2,759 534 Southgate, Odessa, TX...... 1,803 335 1,338 318 -- 335 1,656 1,991 372 Southgreen, Bakersfield, CA.............. 2,452 755 3,021 -- -- 755 3,021 3,776 158 Stone Oak, San Antonio, TX..... 2,930 649 2,598 263 (409)(/2/) 649 2,452 3,101 892 Summerfield, Orlando, FL..... 4,590 1,175 4,698 136 -- 1,175 4,834 6,009 841 Summerstone, Houston, TX..... 5,230 1,155 4,618 272 -- 1,155 4,890 6,045 955 Sunchase, Odessa, TX...... 2,064 742 2,967 458 -- 742 3,425 4,167 480 Sunset Lake, Waukegan, IL.... 7,363 1,626 6,544 593 (1,060)(/2/) 1,626 6,077 7,703 1,465 Terrace Hills, El Paso, TX..... 6,300 1,286 5,145 167 -- 1,310 5,288 6,598 531 Timbers, Tyler, TX.............. 1,707 497 1,988 -- -- 497 1,988 2,485 153 Trails at Windfern, Houston, TX..... 3,737 870 3,479 63 (436)(/2/) 870 3,106 3,976 339 Treehouse, Irving, TX...... 2,651 716 2,865 260 -- 716 3,125 3,841 419 Westwood, Odessa, TX...... -- 85 341 108 -- 85 449 534 117 Willow Creek, El Paso, TX........ 1,720 608 1,832 76 (156)(/2/) 608 1,752 2,359 337 Will-O-Wick, Pensacola, FL... 3,154 747 2,990 174 (281)(/2/) 747 2,883 1,499 519 Willow Wick, North Augusta, SC.............. 2,007 324 1,305 39 (170)(/2/) 324 1,174 3,630 190 Woodview, Odessa, TX...... 2,119 716 2,864 102 -- 716 2,966 3,682 230 Office Buildings 1010 Commons, New Orleans, LA.............. 8,425 143 15,011 14,701 (1,218)(/2/) 2,113 26,524 28,637 1,334 225 Baronne, New Orleans, LA..... 7,400 1,162 10,457 5,655 (1,293)(/2/) 1,162 14,820 15,982 1,648 Life on Which Depreciation In Latest Statement of Date of Date Operation is Property/Location Construction Acquired Computed - ----------------- ------------ -------- ------------ Mountain Plaza, El Paso, TX..... 1972 01/98 5-40 years Oak Park IV, Clute, TX....... 1981 06/94 5-40 years Oak Run, Pasadena, TX.... 1982 12/96 5-40 years Paramount Terrace, Amarillo, TX.... 1983 05/00 40 years Park at Colonnade, San Antonio, TX..... 1975 07/96 5-40 years Park Lane, Dallas, TX...... 1972 12/90 5-40 years Plantation, Tulsa, OK....... 1968 12/99 40 years Primrose, Bakersfield, CA.............. 1979 04/00 40 years Quail Creek, Lawrence, KS.... 1969 01/00 40 years Quail Oaks, Balch Springs, TX.............. 1982 02/87 5-40 years Sandstone, Mesa, AZ.............. 1986 10/97 5-40 years Somerset, Texas City, TX........ 1985 12/93 5-40 years South Cochran, Los Angeles, CA.............. 1928 05/91 5-40 years Southgate, Odessa, TX...... 1976 08/96 5-40 years Southgreen, Bakersfield, CA.............. 1985 12/98 40 years Stone Oak, San Antonio, TX..... 1978 03/90 5-40 years Summerfield, Orlando, FL..... 1971 11/94 5-40 years Summerstone, Houston, TX..... 1984 12/93 5-40 years Sunchase, Odessa, TX...... 1981 10/97 5-40 years Sunset Lake, Waukegan, IL.... 1969 09/94 5-40 years Terrace Hills, El Paso, TX..... 1985 03/97 5-40 years Timbers, Tyler, TX.............. 1973 12/97 40 years Trails at Windfern, Houston, TX..... 1975 05/97 5-40 years Treehouse, Irving, TX...... 1974 05/97 5-40 years Westwood, Odessa, TX...... 1977 08/96 5-40 years Willow Creek, El Paso, TX........ 1972 05/94 5-40 years Will-O-Wick, Pensacola, FL... 1974 05/95 5-40 years Willow Wick, North Augusta, SC.............. 1968 09/94 5-40 years Woodview, Odessa, TX...... 1974 05/98 5-40 years Office Buildings 1010 Commons, New Orleans, LA.............. 1971 03/98 5-40 years 225 Baronne, New Orleans, LA..... 1960 03/98 5-40 years
54 SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000
Cost Capitalized Subsequent to Gross Amounts of Which Initial Cost Acquisition Carried at End of Year ------------------- -------------------- --------------------------- Building & Building & (1) Accumulated Property/Location Encumbrances Land Improvements Improvements Other Land Improvements Total Depreciation - ----------------- ------------ ------ ------------ ------------ ------- ------ ------------ ------- ------------ (dollars in thousands) 4135 Beltline, Addison, TX..... $ 3,500 $ 476 $ 4,280 $ -- $ -- $ 476 $ 4,280 $ 4,756 $ 229 9033 Wilshire Blvd., Los Angeles, CA..... 6,819 956 8,609 -- -- 956 8,608 9,564 161 Ambulatory Surgery Center, Sterling, VA.... 6,802 908 8,170 -- -- 908 8,170 9,078 51 AMOCO, New Orleans, LA..... 15,000 895 3,582 6,082 (1,149)(/2/) 1,233 8,177 9,410 2,872 Atrium, Palm Beach, FL....... 3,959 1,147 4,590 141 -- 1,147 4,731 5,878 321 Bay Plaza, Tampa, FL....... 2,661 895 3,582 213 (384)(/2/) 895 3,410 4,305 388 Bay Plaza II, Tampa, FL....... 3,600 506 4,550 -- -- 506 4,550 5,055 66 Bonita Plaza, Bonita, CA...... 4,999 1,168 4,670 984 -- 1,168 5,654 6,822 681 Brandeis, Omaha, NE.............. 8,750 1,451 13,061 -- -- 1,451 13,061 14,512 49 Chesapeake Center, San Diego, CA....... 2,389 546 5,013 438 -- 546 5,451 5,997 192 Corporate Point, Chantilly, VA... 3,862 830 3,321 871 -- 830 4,193 5,022 958 Countryside Retail Center, Sterling, VA.... 21,307 2,088 18,791 -- (/11/) 2,088 18,791 20,879 117 Daley Plaza, San Diego, CA....... 3,378 973 3,889 678 -- 973 4,567 5,540 476 Durham Center, Durham, NC...... 14,419 4,233 16,932 1,496 (1,362)(/2/) 4,233 17,066 21,299 1,699 Eton Square, Tulsa, OK....... 10,351 1,469 13,219 183 -- 1,469 13,403 14,872 423 Forum, Richmond, VA.............. 5,266 1,360 5,439 1,043 -- 1,360 6,482 7,842 1,910 Harmon, Sterling, VA.... 8,132 1,054 9,487 -- -- 1,054 9,487 10,541 59 Hartford, Dallas, TX...... -- 630 2,520 845 -- 630 3,365 3,995 820 Institute Place Lofts, Chicago, IL.............. 5,819 665 7,057 560 -- 665 7,617 8,282 4,102 Jefferson, Washington, DC.. 9,846 2,774 11,096 1,009 (883)(/2/) 2,774 11,222 13,996 1,419 Lexington Center, Colorado Springs, CO..... 4,223 1,103 4,413 471 -- 1,103 4,884 5,987 573 Mimado, Sterling, VA.... -- 582 5,236 -- -- 582 5,236 5,818 33 NASA, Houston, TX.............. -- 410 3,319 (745) (272)(/2/) 172 2,540 2,712 1,518 One Steeplechase, Sterling, VA.... 7,993 1,380 5,520 2,807 72 (/5/) 1,380 8,399 9,778 3,032 Parkway North, Dallas, TX...... 3,900 1,173 4,692 833 -- 1,173 5,524 6,697 537 Plaza Towers, St. Petersburg, FL.............. 7,149 1,760 12,617 7,299 (4,379)(/3/) 1,241 16,056 17,297 9,930 Remington Tower, Tulsa, OK....... 3,541 480 4,351 126 -- 480 4,477 4,957 156 Savings of America, Houston, TX..... 1,222 338 1,353 617 -- 338 1,971 2,309 409 Signature Athletic Club, Dallas, TX...... 2,633 1,075 2,921 849 (439)(/2/) 1,075 3,331 4,406 320 Valley Rim, San Diego, CA....... 3,586 1,078 4,311 38 -- 1,078 4,349 5,427 287 Venture Center, Atlanta, GA..... 2,677 411 2,746 421 -- 411 3,167 3,578 1,066 View Ridge, San Diego, CA....... 1,294 393 1,572 147 -- 393 1,719 2,112 138 Life on Which Depreciation In Latest Statement of Date of Date Operation is Property/Location Construction Acquired Computed - ----------------- ------------ -------- ------------ 4135 Beltline, Addison, TX..... 1981/1982 06/99 40 years 9033 Wilshire Blvd., Los Angeles, CA..... 1957 04/00 5-40 years Ambulatory Surgery Center, Sterling, VA.... 07/00 40 years AMOCO, New Orleans, LA..... 1974 06/97 5-40 years Atrium, Palm Beach, FL....... 1985 06/98 40 years Bay Plaza, Tampa, FL....... 1988 07/97 5-40 years Bay Plaza II, Tampa, FL....... 1985 06/00 40 years Bonita Plaza, Bonita, CA...... 1991 09/97 5-40 years Brandeis, Omaha, NE.............. 1921 11/00 40 years Chesapeake Center, San Diego, CA....... 1984 07/99 40 years Corporate Point, Chantilly, VA... 1992 10/94 5-40 years Countryside Retail Center, Sterling, VA.... 09/00 40 years Daley Plaza, San Diego, CA....... 1981 05/98 5-40 years Durham Center, Durham, NC...... 1988 07/97 5-40 years Eton Square, Tulsa, OK....... 1985 09/99 40 years Forum, Richmond, VA.............. 1987 10/92 2-40 years Harmon, Sterling, VA.... 09/00 40 years Hartford, Dallas, TX...... 1980 11/94 2-40 years Institute Place Lofts, Chicago, IL.............. 1910 01/93 2-40 years Jefferson, Washington, DC.. 1979 02/97 5-40 years Lexington Center, Colorado Springs, CO..... 1986 12/97 3-40 years Mimado, Sterling, VA.... 09/00 40 years NASA, Houston, TX.............. 1979 10/85 5-40 years One Steeplechase, Sterling, VA.... 1987 12/92 5-40 years Parkway North, Dallas, TX...... 1980 02/98 2-40 years Plaza Towers, St. Petersburg, FL.............. 1979 11/85 1-40 years Remington Tower, Tulsa, OK....... 1982 09/99 40 years Savings of America, Houston, TX..... 1979 03/97 3-40 years Signature Athletic Club, Dallas, TX...... 1985 02/99 5-40 years Valley Rim, San Diego, CA....... 1988 07/98 3-40 years Venture Center, Atlanta, GA..... 1981 07/89 1-40 years View Ridge, San Diego, CA....... 1979 05/98 40 years
55 SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000
Cost Capitalized Subsequent to Gross Amounts of Which Initial Cost Acquisition Carried at End of Year ------------------- ------------------ --------------------------- Building & Building & (1) Accumulated Date of Property/Location Encumbrances Land Improvements Improvements Other Land Improvements Total Depreciation Construction - ----------------- ------------ ------ ------------ ------------ ----- ------ ------------ ------- ------------ ------------ (dollars in thousands) Waterstreet, Boulder, CO..... $13,131 $2,605 $10,420 $1,059 $ -- $2,605 $11,479 $14,084 $3,362 1988 Westgrove Air Plaza, Addison, TX.............. 4,000 501 2,004 290 (945)(/2/) 211 1,961 2,107 66 1982 Windsor Plaza, Windcrest, TX... -- 1,429 4,441 (458) (257)(/2/) 1,672 3,483 5,155 2,199 1984 Industrial Warehouses 5360 Tulane, Atlanta, GA..... 372 95 514 50 (44)(/2/) 95 520 616 264 1970 5700 Tulane, Atlanta, GA..... -- -- -- 720 (101)(/2/) -- 619 619 62 1998 Addison Hangar, Addison, TX..... 1,620 928 1,481 23 -- 928 1,504 2,432 47 1992 Addison Hanger II, Addison, TX.............. -- -- 1,150 -- -- -- 1,150 1,150 5 2000 Central Storage, Dallas, TX...... 1,147 464 1,856 426 (138)(/2/) 464 2,144 2,608 463 1966 Encon, Fort Worth, TX....... 3,500 984 3,934 -- -- 984 3,935 4,919 320 1958 Kelly, Dallas, TX.............. 4,995 1,136 4,856 473 (486)(/2/) 1,136 4,843 5,979 1,232 1966/1973 McLeod, Orlando, FL.............. 2,047 673 2,693 485 (511)(/2/) 673 2,667 3,340 669 1985 Ogden, Ogden, UT.............. -- 52 1,568 218 (70)(/2/) 52 1,716 1,768 639 1979 Space Center, San Antonio, TX.............. 1,116 247 1,332 135 (131)(/2/) 247 1,337 1,584 659 1970 Technology Trading, Sterling, VA.... 6,255 1,199 4,796 1,226 -- 1,199 6,022 7,221 1,245 1987 Texstar, Arlington, TX... 1,255 333 1,331 216 -- 333 1,547 1,880 345 1967 Tricon, Atlanta, GA.............. 9,826 2,761 6,442 1,723 -- 2,761 8,165 10,926 2,438 1971 Shopping Centers Dunes Plaza, Michigan City, IN.............. 3,197 1,230 5,430 2,083 (482)(/6/) 1,343 6,919 8,262 2,082 1978 K-Mart, Cary, NC.............. 1,852 1,358 1,157 162 -- 1,358 1,319 2,677 88 1981 Parkway Center, Dallas, TX...... 1,725 273 1,876 444 -- 273 2,319 2,592 933 1979 Plaza on Bachman Creek, Dallas, TX.............. 2,312 734 2,935 1,031 -- 731 3,969 4,700 385 1986 Promenade, Highlands Ranch, CO.............. 7,388 1,749 6,995 82 (679)(/2/) 1,749 6,398 8,147 932 1985 Sadler Square, Amelia Island, FL.............. 2,851 679 2,715 134 -- 679 2,849 3,528 619 1987 Sheboygan, Sheboygan, WI... 599 242 1,371 45 -- 242 1,416 1,657 298 1977 Hotels Brompton, Chicago, IL..... 2,345 572 2,365 1,419 -- 572 3,786 4,357 262 1995 City Suites, Chicago, IL..... 3,913 950 3,847 1,028 -- 950 4,875 5,825 449 1995 Majestic Inn, San Francisco, CA.............. 5,449 1,139 4,555 1,149 -- 1,139 5,703 6,842 1,860 1902 Surf, Chicago, IL.............. 3,886 945 3,851 1,179 -- 945 5,030 5,975 496 1995 Life on Which Depreciation In Latest Statement of Date Operation is Property/Location Acquired Computed - ----------------- -------- ------------ Waterstreet, Boulder, CO..... 09/91 2-40 years Westgrove Air Plaza, Addison, TX.............. 10/97 5-40 years Windsor Plaza, Windcrest, TX... 11/86 5-40 years Industrial Warehouses 5360 Tulane, Atlanta, GA..... 11/97 5-40 years 5700 Tulane, Atlanta, GA..... 11/97 40 years Addison Hangar, Addison, TX..... 12/99 40 years Addison Hanger II, Addison, TX.............. 12/99 40 years Central Storage, Dallas, TX...... 04/96 5-40 years Encon, Fort Worth, TX....... 10/97 40 years Kelly, Dallas, TX.............. 03/95 5-40 years McLeod, Orlando, FL.............. 09/94 5-40 years Ogden, Ogden, UT.............. 01/86 5-40 years Space Center, San Antonio, TX.............. 11/97 5-40 years Technology Trading, Sterling, VA.... 12/93 3-40 years Texstar, Arlington, TX... 12/93 5-40 years Tricon, Atlanta, GA.............. 02/93 2-40 years Shopping Centers Dunes Plaza, Michigan City, IN.............. 03/92 5-40 years K-Mart, Cary, NC.............. 08/98 40 years Parkway Center, Dallas, TX...... 11/91 1-40 years Plaza on Bachman Creek, Dallas, TX.............. 03/98 5-40 years Promenade, Highlands Ranch, CO.............. 07/96 5-40 years Sadler Square, Amelia Island, FL.............. 11/93 3-40 years Sheboygan, Sheboygan, WI... 05/92 40 years Hotels Brompton, Chicago, IL..... 12/98 5-40 years City Suites, Chicago, IL..... 12/98 5-40 years Majestic Inn, San Francisco, CA.............. 12/90 2-40 years Surf, Chicago, IL.............. 12/98 5-40 years
56 SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000
Cost Capitalized Subsequent to Gross Amounts of Which Initial Cost Acquisition Carried at End of Year --------------------- --------------------- ------------------------------ Building & Building & (1) Property/Location Encumbrances Land Improvements Improvements Other Land Improvements Total - ----------------- ------------ -------- ------------ ------------ -------- -------- ------------ -------- (dollars in thousands) Land 1013 Commons, New Orleans, LA.............. $ -- $ 615 $ -- $ 46 $ (36)(/2/) $ 625 $ -- $ 625 Alamo Springs, Dallas, TX...... 750 1,385 -- -- -- 1,385 -- 1,385 Dominion, Dallas, TX...... -- 3,931 -- -- -- 3,931 -- 3,931 Eagle Crest, Farmers Branch, TX.............. -- 2,500 -- 134 -- 2,634 -- 2,634 Folsom, Dallas, TX.............. -- 1,781 -- -- -- 1,781 -- 1,781 Lamar Parmer, Austin, TX...... 1,030 1,571 -- 94 -- 1,665 -- 1,665 Las Colinas, Las Colinas, TX..... -- 995 -- 5 -- 1,000 -- 1,000 Lemon Carlisle, Dallas, TX...... 1,749 3,576 -- 30 -- 3,606 -- 3,606 Limestone Canyon II, Austin, TX.. -- 428 -- 266 -- 694 -- 694 Manhattan, Farmers Branch, TX.............. -- 11,186 -- -- -- 11,186 -- 11,186 McKinney 36, Collin County, TX.............. 957 2,203 -- -- (126)(/2/) 2,077 -- 2,077 Red Cross, Dallas, TX...... -- 8,383 -- -- -- 8,383 -- 8,383 Sandison, Collin County, TX...... 1,041 5,021 -- -- (392)(/2/)(/10/) 4,629 -- 4,629 Solco Allen, Collin County, TX.............. 305 1,388 -- -- (80)(/2/) 1,308 -- 1,308 Stacy Road, Allen, TX....... 1,347 2,665 -- -- (193)(/2/) 2,472 -- 2,472 State Highway 121, Collin County, TX...... -- 4,354 -- -- (2,581)(/2/)(/10/) 1,773 -- 1,773 Watters Road, Collin County, TX.............. -- 1,787 -- -- (200)(/2/) 1,587 -- 1,587 West End, Dallas, TX...... 5,944 11,405 -- 77 (4,013)(/9/) 7,469 7,469 Whisenant, Collin County, TX.............. 133 631 -- -- (59)(/2/)(/10/) 572 -- 572 -------- -------- -------- ------- -------- -------- -------- -------- Investment Properties...... 497,705 171,134 501,275 85,870 (31,380) 165,684 561,611 727,227 -------- -------- -------- ------- -------- -------- -------- -------- Properties Held for Sale Land Fiesta, San Angelo, TX...... -- 44 -- -- -- 44 -- 44 Fruitland, Fruitland Park, FL.............. -- 253 -- -- (100)(/7/) 153 -- 153 Moss Creek, Greensboro, NC.. -- 85 -- -- -- 85 -- 85 Round Mt, Austin, TX...... -- 5,740 -- -- (4,232)(/2/)(/3/) 1,542 -- 1,542 -------- -------- -------- ------- -------- -------- -------- -------- Properties Held for Sale........ -- 6,122 -- -- (4,332) 1,824 -- 1,824 -------- -------- -------- ------- -------- -------- -------- -------- $497,705 $177,256 $501,275 $85,870 $(35,640) $167,508 $561,611 $729,051 ======== ======== ======== ======= ======== ======== ======== ======== Life on Which Depreciation In Latest Statement of Accumulated Date of Date Operation is Property/Location Depreciation Construction Acquired Computed - ----------------- ------------ ------------ ---------- ------------ Land 1013 Commons, New Orleans, LA.............. $ -- -- 08/98 -- Alamo Springs, Dallas, TX...... -- -- 09/99 -- Dominion, Dallas, TX...... -- -- 03/99 -- Eagle Crest, Farmers Branch, TX.............. -- -- 05/98 -- Folsom, Dallas, TX.............. -- -- 10/00 -- Lamar Parmer, Austin, TX...... -- -- 01/00 -- Las Colinas, Las Colinas, TX..... -- -- 01/96 -- Lemon Carlisle, Dallas, TX...... -- -- 02/98 -- Limestone Canyon II, Austin, TX.. -- -- 06/00 -- Manhattan, Farmers Branch, TX.............. -- -- 02/00 -- McKinney 36, Collin County, TX.............. -- -- 01/98 -- Red Cross, Dallas, TX...... -- -- 05/99 -- Sandison, Collin County, TX...... -- -- 05/98 -- Solco Allen, Collin County, TX.............. -- -- 05/98 -- Stacy Road, Allen, TX....... -- -- 04/97 -- State Highway 121, Collin County, TX...... -- -- 02/97 -- Watters Road, Collin County, TX.............. -- -- 02/97 -- West End, Dallas, TX...... -- -- 08/97 -- Whisenant, Collin County, TX.............. -- -- 05/98 -- ------------ Investment Properties...... 88,187 ------------ Properties Held for Sale Land Fiesta, San Angelo, TX...... -- -- 12/91 -- Fruitland, Fruitland Park, FL.............. -- -- 05/92 -- Moss Creek, Greensboro, NC.. -- -- 12/96 -- Round Mt, Austin, TX...... -- -- 12/86 -- ------------ Properties Held for Sale........ -- ------------ $88,187 ============
- ---- 57 SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000 (1) The aggregate cost for federal income tax purposes is $777.5 million. (2) Purchase accounting basis adjustment. (3) Writedown of property to estimated net realizable value. (4) Escrow deposits deducted from the basis of the property. (5) Construction period interest and taxes. (6) Forgiveness of debt and cash received deducted from the basis of the property, offset by land acquired in 1992. (7) Cash received for easement deducted from the basis of the property. (8) The Sandison land is collateralized with the Solco Allen and Whisenant land. All of the land in McKinney and Collin County, Texas is cross- collateralized and cross defaulted. (9) Cash received for condemnation of part of property. (10) Sale of portion of property. (11) The Countryside Retail Center is collateralized with the Mimado Building. 58 SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION
2000 1999 1998 -------- -------- -------- (dollars in thousands) Reconciliation of Real Estate Balance at January 1,............................. $686,522 $409,986 $331,668 Additions Purchases, improvements and construction........ 122,683 76,659 101,510 Foreclosures.................................... 352 -- 2,514 CMET merger..................................... -- 290,415 -- Deductions Sale of real estate............................. (80,188) (89,463) (25,706) Sale of foreclosed properties................... (318) (1,075) -- -------- -------- -------- Balance at December 31,........................... $729,051 $686,522 $409,986 ======== ======== ======== Reconciliation of Accumulated Depreciation Balance at January 1,............................. $ 84,986 $ 61,241 $ 56,837 Additions Depreciation.................................... 19,702 11,702 10,691 CMET merger..................................... -- 31,628 -- Deductions Sale of real estate............................. (16,501) (19,585) (6,287) -------- -------- -------- Balance at December 31,........................... $ 88,187 $ 84,986 $ 61,241 ======== ======== ========
59 SCHEDULE IV TRANSCONTINENTAL REALTY INVESTORS, INC. MORTGAGE LOANS ON REAL ESTATE December 31, 2000
Principal Amount of Carrying Loans Subject to Interest Maturity Periodic Payment Prior Face Amount Amounts of Delinquent Principal Description Rate Date Terms Liens of Mortgage Mortgage(1) of Interest ----------- -------- -------- ------------------- ------- ----------- ----------- -------------------- (dollars in thousands) FIRST MORTGAGE LOANS Town and Country 8.5% 12/01 Interest only $ -- $1,230 $1,230 $ -- Business Park.......... payments of $8,307 Secured by an office due monthly. building in Houston, TX. WRAPAROUND MORTGAGE LOANS Pinemont................ 10.40% 07/08 Monthly principal 367 467 389 -- Secured by an office and interest building in Houston, payments of $6,281. TX. JUNIOR MORTGAGE LOANS Country Elms............ 8.00% 05/02 Monthly principal -- 380 180 -- Secured by mobile home and interest park in Galesburg, IL. payments of $3,154. JNC Enterprises......... 18.0% 06/01 Interest only 8,200 2,500 2,500 -- Secured by 442 acres of payments of $37,500 unimproved land in due monthly. Tarrant County, TX and 1,130 acres of unimproved land in Denton County, TX and 26 acres of unimproved land in Collin County, TX. ACLP Park Ten........... 16.0% 06/01 Interest only 31,900 3,000 3,000 -- Secured by 4 office payments of $40,000 buildings in San due monthly. Antonio, TX Lincoln Court Varies 06/04 Two notes bearing -- 1,369 1,369 -- Apartments............. interest at prime Secured by apartment plus 1%. Interest building in Dallas, TX. only payments of $4,683 due monthly. ------- ------ ------ ----- $40,467 $8,946 8,668 $ -- ======= ====== ===== Interest................ 41 Allowance for estimated (537) losses................. ------ $8,172 ======
- ------- (1) The aggregate cost for federal income tax purposes is $8.7 million. 60 SCHEDULE IV (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. MORTGAGE LOANS ON REAL ESTATE
2000 1999 1998 -------- ------- ------- (dollars in thousands) Balance at January 1,.............................. $ 12,061 $ 2,379 $ 4,838 Additions New mortgage loans............................... 17,500 9,680 149 CMET merger...................................... -- 631 -- Deductions Collections of principal......................... (20,531) (37) (94) Foreclosed properties and deeds-in-lieu of foreclosure..................................... (356) -- (2,514) Write off of uncollectible mortgage loans........ -- (575) -- Write off of principal due to discount for early payoff.......................................... (6) (17) -- -------- ------- ------- Balance at December 31, ........................... $ 8,668 $12,061 $ 2,379 ======== ======= =======
61 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ---------------- PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT Directors The affairs of Transcontinental Realty Investors, Inc. ("TCI") are managed by a Board of Directors. The Directors are elected at the annual meeting of stockholders or appointed by the incumbent Board and serve until the next annual meeting of stockholders or until a successor has been elected or approved. The Directors of TCI are listed below, together with their ages, terms of service, all positions and offices with TCI or its advisor, Basic Capital Management, Inc. ("BCM"), their principal occupations, business experience and directorships with other companies during the last five years or more. The designation "Affiliated", when used below with respect to a Director, means that the Director is an officer, director or employee of BCM or an officer of TCI. The designation "Independent", when used below with respect to a Director, means that the Director is neither an officer of TCI nor a director, officer or employee of BCM, although TCI may have certain business or professional relationships with such Director as discussed in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Certain Business Relationships." TED P. STOKELY: Age 67, Director (Independent) (since April 1990) and Chairman of the Board (since January 1995). General Manager (since January 1995) of ECF Senior Housing Corporation, a nonprofit corporation; General Manager (since January 1993) of Housing Assistance Foundation, Inc., a nonprofit corporation; Part-time unpaid consultant (since January 1993) and paid consultant (April 1992 to December 1992) of Eldercare Housing Foundation ("Eldercare"), a nonprofit corporation; and Director (since April 1990) and Chairman of the Board (since January 1995) of Income Opportunity Realty Investors, Inc. ("IORI"). R. DOUGLAS LEONHARD: Age 64, Director (Independent) (since January 1998). Director (since November 1998) and Chairman (since October 1999) of Optel, Inc.; Senior Vice President (1986 to 1997) of LaCantera Development Company, a wholly-owned subsidiary of USAA; Senior Vice President (1980 to 1985) of The Woodlands Development Corporation; Vice President and Houston Projects Manager (1973 to 1979) of Friendswood Development Company; Manager in various capacities (1960 to 1973) of Exxon Corp; and Director (since January 1998) of IORI. MARTIN L. WHITE: Age 61, Director (Independent) (since January 1995). Chief Executive Officer (since 1995) of Builders Emporium, Inc.; Chairman and Chief Executive Officer (since 1993) of North American Trading Company Ltd.; President and Chief Operating Officer (since 1992) of Community Based Developers, Inc.; Development Officer and Loan Manager (1986 to 1992) of the City of San Jose, California; Vice President and Director of Programs (1967 to 1986) of Arpact, Inc., a government contractor for small business development and trade; and Director (since January 1995) of IORI. EDWARD G. ZAMPA: Age 65, Director (Independent) (since January 1995). General Partner (since 1976) of Edward G. Zampa and Company; and Director (since January 1995) of IORI. 62 Board Committees The Board of Directors held 17 meetings during 2000. For such year, no incumbent Director attended fewer than 75% of the aggregate of (1) the total number of meetings held by the Board during the period for which he had been a Director and (2) the total number of meetings held by all committees of the Board on which he served during the period that he served. The Board of Directors has an Audit Committee, the function of which is to review TCI's operating and accounting procedures. The current members of the Audit Committee, all of whom are Independent Directors, are Messrs. Stokely, Leonhard and White. The Audit Committee met four times during 2000. The Board of Directors does not have Nominating or Compensation Committees. Executive Officers The following persons currently serve as executive officers of TCI: Karl L. Blaha, President; Mark W. Branigan, Executive Vice President and Chief Financial Officer; Bruce A. Endendyk, Executive Vice President; and David W. Starowicz, Executive Vice President--Acquisitions, Sales and Construction. Their positions with TCI are not subject to a vote of stockholders. Their ages, terms of service, all positions and offices with TCI or BCM, other principal occupations, business experience and directorships with other companies during the last five years or more are set forth below. KARL L. BLAHA: Age 53, President (since September 1999); Executive Vice President--Commercial Asset Management (July 1997 to September 1999); and Executive Vice President and Director of Commercial Management (April 1992 to August 1995). President (since September 1999), Executive Vice President- Commercial Asset Management (July 1997 to September 1999) and Executive Vice President and Director of Commercial Management (April 1992 to August 1995) of BCM and IORI; Director and President (since August 2000) of American Realty Investors, Inc. ("ARI"); Director (since June 1996), President (since October 1993) and Executive Vice President and Director of Commercial Management (April 1992 to October 1993) of American Realty Trust, Inc. ("ART"); Director and President (since 1996) of First Equity Properties, Inc., which is 50% owned by BCM. MARK W. BRANIGAN: Age 46, Executive Vice President and Chief Financial Officer (since August 2000), Vice President--Director of Construction (August 1999 to August 2000) and Executive Vice President-- Residential Asset Management (January 1992 to October 1997). Executive Vice President and Chief Financial Officer (since August 2000), Vice President--Director of Construction (August 1999 to August 2000) and Executive Vice President--Residential Management (January 1992 to October 1997) of BCM, ART and IORI; Executive Vice President and Chief Financial Officer (since August 2000) and Director (since September 2000) of ARI; and real estate consultant (November 1997 to July 1999). BRUCE A. ENDENDYK: Age 52, Executive Vice President (since January 1995). Executive Vice President (since January 1995) of BCM, ART, IORI; Executive Vice President (since August 2000) of ARI; and Management Consultant (November 1990 to December 1994). DAVID W. STAROWICZ: Age 45, Executive Vice President--Acquisitions, Sales and Construction (since March 2001), Executive Vice President--Commercial Asset Management (September 1999 to March 2001) and Vice President (May 1992 to September 1999). Executive Vice President--Acquisitions, Sales and Construction (since March 2001), Executive Vice President--Commercial Asset Management (September 1999 to March 2001), Vice President (May 1992 to September 1999) and Asset Manager (November 1990 to May 1992) of BCM, ART and IORI; Executive Vice President--Commercial Asset Management (since August 2000) of ARI. 63 Officers Although not an executive officer, Robert A. Waldman currently serves as Senior Vice President, Secretary and General Counsel. His position with TCI is not subject to a vote of stockholders. His age, term of service, all positions and offices with TCI or BCM, other principal occupations, business experience and directorships with other companies during the last five years or more is set forth below. ROBERT A. WALDMAN: Age 48, Senior Vice President and General Counsel (since January 1995), Vice President (December 1990 to January 1995) and Secretary (December 1993 to February 1997 and since June 1999). Senior Vice President and General Counsel (since January 1995), Vice President (December 1990 to January 1995) and Secretary (December 1993 to February 1997 and since June 1999) of IORI; Senior Vice President, Secretary and General Counsel (since August 2000) of ARI; Senior Vice President and General Counsel (since January 1995), Vice President (January 1993 to January 1995) and Secretary (since December 1989) of ART; and Senior Vice President and General Counsel (since November 1994), Vice President and Corporate Counsel (November 1989 to November 1994), and Secretary (since November 1989) of BCM. In addition to the foregoing officers, TCI has several vice presidents and assistant secretaries who are not listed herein. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Under the securities laws of the United States, the Directors, executive officers, and any persons holding more than ten percent of TCI's shares of Common Stock are required to report their share ownership and any changes in that ownership to the Securities and Exchange Commission (the "Commission"). Specific due dates for these reports have been established and TCI is required to report any failure to file by these dates during 2000. All of these filing requirements were satisfied by TCI's Directors and executive officers and ten percent holders. In making these statements, TCI has relied on the written representations of its incumbent Directors and executive officers and its ten percent holders and copies of the reports that they have filed with the Commission. The Advisor Although the Board of Directors is directly responsible for managing the affairs of TCI and for setting the policies which guide it, TCI's day-to-day operations are performed by BCM under the supervision of the Board. The duties of BCM include, among other things, locating, investigating, evaluating and recommending real estate and mortgage note investment and sales opportunities as well as financing and refinancing sources. BCM also serves as a consultant to the Board in connection with the business plan and investment decisions made by the Board. BCM has served as TCI's advisor since March 1989. BCM is a company of which Messrs. Blaha, Branigan, Endendyk and Starowicz serve as executive officers. BCM is owned by a trust for the benefit of the children of Gene E. Phillips. Mr. Phillips serves as a representative of his children's trust which owns BCM and, in such capacity, had, until June 2000, substantial contact with the management of BCM and input with respect to its performance of advisory services to TCI. On August 18, 2000, the Board of Directors approved the renewal of the Advisory Agreement with BCM. Renewals of the Advisory Agreement with BCM do not require the approval of stockholders but do require Board approval. Under the Advisory Agreement, BCM is required to annually formulate and submit, for Board approval, a budget and business plan containing a twelve- month forecast of operations and cash flow, a general plan for asset sales and purchases, lending, foreclosure and borrowing activity, and other investments, and BCM is required to report quarterly to the Board on TCI's performance against the business plan. In addition, all transactions require 64 prior Board approval, unless they are explicitly provided for in the approved business plan or are made pursuant to authority expressly delegated to BCM by the Board. The Advisory Agreement also requires prior Board approval for the retention of all consultants and third party professionals, other than legal counsel. The Advisory Agreement provides that BCM shall be deemed to be in a fiduciary relationship to the stockholders; contains a broad standard governing BCM's liability for losses by TCI; and contains guidelines for BCM's allocation of investment opportunities as among itself, TCI and other entities it advises. The Advisory Agreement provides for BCM to be responsible for the day-to-day operations of TCI and to receive an advisory fee comprised of a gross asset fee of .0625% per month (.75% per annum) of the average of the gross asset value (total assets less allowance for amortization, depreciation or depletion and valuation reserves) and an annual net income fee equal to 7.5% of TCI's net income. The Advisory Agreement also provides for BCM to receive an annual incentive sales fee equal to 10% of the amount, if any, by which the aggregate sales consideration for all real estate sold by TCI during such fiscal year exceeds the sum of: (1) the cost of each such property as originally recorded in TCI's books for tax purposes (without deduction for depreciation, amortization or reserve for losses), (2) capital improvements made to such assets during the period owned, and (3) all closing costs, (including real estate commissions) incurred in the sale of such real estate; provided, however, no incentive fee shall be paid unless (a) such real estate sold in such fiscal year, in the aggregate, has produced an 8% simple annual return on the net investment including capital improvements, calculated over the holding period before depreciation and inclusive of operating income and sales consideration and (b) the aggregate net operating income from all real estate owned for each of the prior and current fiscal years shall be at least 5% higher in the current fiscal year than in the prior fiscal year. Additionally, pursuant to the Advisory Agreement BCM or an affiliate of BCM is to receive an acquisition commission for supervising the acquisition, purchase or long-term lease of real estate equal to the lesser of (1) up to 1% of the cost of acquisition, inclusive of commissions, if any, paid to nonaffiliated brokers or (2) the compensation customarily charged in arm's- length transactions by others rendering similar property acquisition services as an ongoing public activity in the same geographical location and for comparable property, provided that the aggregate purchase price of each property (including acquisition fees and real estate brokerage commissions) may not exceed such property's appraised value at acquisition. The Advisory Agreement requires BCM or any affiliate of BCM to pay to TCI, one-half of any compensation received from third parties with respect to the origination, placement or brokerage of any loan made by TCI; provided, however, that the compensation retained by BCM or any affiliate of BCM shall not exceed the lesser of (1) 2% of the amount of the loan commitment or (2) a loan brokerage and commitment fee which is reasonable and fair under the circumstances. The Advisory Agreement also provides that BCM or an affiliate of BCM is to receive a mortgage or loan acquisition fee with respect to the acquisition or purchase of any existing mortgage loan by TCI equal to the lesser of (1) 1% of the amount of the loan purchased or (2) a brokerage or commitment fee which is reasonable and fair under the circumstances. Such fee will not be paid in connection with the origination or funding of any mortgage loan by TCI. Under the Advisory Agreement, BCM or an affiliate of BCM also is to receive a mortgage brokerage and equity refinancing fee for obtaining loans or refinancing on properties equal to the lesser of (1) 1% of the amount of the loan or the amount refinanced or (2) a brokerage or refinancing fee which is reasonable and fair under the circumstances; provided, however, that no such fee shall be paid on loans from BCM or an affiliate of BCM without the approval of TCI's Board of Directors. No fee shall be paid on loan extensions. Under the Advisory Agreement, BCM receives reimbursement of certain expenses incurred by it in the performance of advisory services. 65 Under the Advisory Agreement, all or a portion of the annual advisory fee must be refunded by the Advisor if the Operating Expenses of TCI (as defined in the Advisory Agreement) exceed certain limits specified in the Advisory Agreement based on the book value, net asset value and net income of TCI during the fiscal year. BCM was not required to refund any of the 2000 advisory fee under this provision. Additionally, if management were to request that BCM render services to TCI other than those required by the Advisory Agreement, BCM or an affiliate of BCM separately would be compensated for such additional services on terms to be agreed upon from time to time. As discussed below, under "Property Management", TCI has hired Triad Realty Services, Ltd. ("Triad"), an affiliate of BCM, to provide property management services for TCI's properties. Also as discussed below, under "Real Estate Brokerage" TCI has engaged, on a non- exclusive basis, Regis Realty, Inc. ("Regis"), a related party, to perform brokerage services for TCI. BCM may assign the Advisory Agreement only with the prior consent of TCI. The directors and principal officers of BCM are set forth below. Mickey N. Phillips: Director Ryan T. Phillips: Director Karl L. Blaha: President Executive Vice President and Chief Financial Mark W. Branigan: Officer Executive Vice President--Marketing and Rick D. Conley: Promotion Bruce A. Endendyk: Executive Vice President Executive Vice President--Acquisitions, Sales David W. Starowicz: and Construction Dan S. Allred: Senior Vice President--Land Development Michael E. Bogel: Senior Vice President--Project Manager Senior Vice President, Secretary and General Robert A. Waldman: Counsel
Mickey N. Phillips is Gene E. Phillips' brother and Ryan T. Phillips is Gene E. Phillips' son. Gene E. Phillips serves as a representative of the trust established for the benefit of his children which owns BCM and, in such capacity, had, until June 2000, substantial contact with the management of BCM and input with respect to its performance of advisory services to TCI. Property Management Since February 1, 1990, affiliates of BCM have provided property management services. Currently, Triad provides such property management services for a fee of 5% or less of the monthly gross rents collected on residential properties and 3% or less of the monthly gross rents collected on commercial properties under its management. Triad subcontracts with other entities for the provision of the property-level management services to TCI at various rates. The general partner of Triad is BCM. The limited partners of Triad are Gene E. Phillips and GS Realty Services, Inc. ("GS Realty"), a related party, which is a company not affiliated with either Mr. Phillips or BCM. Triad subcontracts the property-level management and leasing of 52 of TCI's commercial properties, its four hotels and the commercial property owned by a real estate partnership in which TCI and IORI are partners to Regis, a related party, which is a company owned by GS Realty. Regis is entitled to receive property and construction management fees and leasing commissions in accordance with its property-level management agreement with Triad. Real Estate Brokerage Regis also provides real estate brokerage services to TCI (on a non- exclusive basis). Regis is entitled to receive a real estate commission for property purchases and sales in accordance with the following sliding scale of total fees to be paid: (1) maximum fee of 4.5% on the first $2.0 million of any purchase or sale transaction of which no more than 3.5% would be paid to Regis or affiliates; (2) maximum fee of 3.5% on transaction amounts between $2.0 million-$5.0 million of which no more than 3% would be paid to Regis or affiliates; (3) maximum fee of 2.5% on transaction amounts between $5.0 million-$10.0 million of which no more than 2% would be 66 paid to Regis or affiliates; and (4) maximum fee of 2% on transaction amounts in excess of $10.0 million of which no more than 1.5% would be paid to Regis or affiliates. ITEM 11. EXECUTIVE COMPENSATION TCI has no employees, payroll or benefit plans and pays no compensation to its executive officers. The executive officers of TCI, who are also officers or employees of BCM, TCI's advisor, are compensated by BCM. Such executive officers perform a variety of services for BCM and the amount of their compensation is determined solely by BCM. BCM does not allocate the cash compensation of its officers among the various entities for which it serves as advisor. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT--The Advisor" for a more detailed discussion of the compensation payable to BCM. The only remuneration paid by TCI is to the Directors who are not officers or directors of BCM or its affiliated companies. The Independent Directors (1) review the business plan of TCI to determine that it is in the best interest of stockholders, (2) review the advisory contract, (3) supervise the performance of the advisor and review the reasonableness of the compensation paid to the advisor in terms of the nature and quality of services performed, (4) review the reasonableness of the total fees and expenses of TCI and (5) select, when necessary, a qualified independent real estate appraiser to appraise properties acquired. Each Independent Director receives compensation in the amount of $30,000 per year, plus reimbursement for expenses. The Chairman of the Board receives an additional fee of $3,000 per year. In addition, each Independent Director receives an additional fee of $1,000 per day for any special services rendered by him to TCI outside of his ordinary duties as Director, plus reimbursement of expenses. During 2000, $199,000 was paid to the Independent Directors in total Directors' fees for all services, including the annual fee for service during the period January 1, 2000 through December 31, 2000, and 2000 special service fees as follows: Richard W. Douglas, $15,000; Larry E. Harley, $15,000; R. Douglas Leonhard, $34,000; Murray Shaw, $34,000; Ted P. Stokely, $36,000; Martin L. White, $34,000; and Edward G. Zampa, $33,000. Director's Stock Option Plan TCI has established a Director's Stock Option Plan ("Director's Plan") for the purpose of attracting and retaining Directors who are not officers or employees of TCI or BCM. The Director's Plan provides for the grant of options that are exercisable at fair market value of TCI's Common Stock on the date of grant. The Director's Plan was approved by stockholders at their annual meeting on October 10, 2000, following which each then-serving Independent Director was granted options to purchase 5,000 shares of Common Stock of TCI. On January 1 of each year, each Independent Director will receive options to purchase 5,000 shares of Common Stock. The options are immediately exercisable and expire on the earlier of the first anniversary of the date on which a Director ceases to be a Director or 10 years from the date of grant. As of March 1, 2001, TCI had 140,000 shares of Common Stock reserved for issuance under the Director's Stock Option Plan of which options for 50,000 shares were outstanding. 67 Performance Graph The following performance graph compares the cumulative total stockholder return on TCI's shares of Common Stock with the Dow Jones Equity Market Index ("DJ Equity Index") and the Dow Jones Real Estate Investment Index ("DJ Real Estate Index"). The comparison assumes that $100 was invested on December 31, 1995 in TCI's shares of Common Stock and in each of the indices and further assumes the reinvestment of all distributions. Past performance is not necessarily an indicator of future performance. COMPARISION OF FIVE YEAR CUMULATIVE TOTAL RETURN
1995 1996 1997 1998 1999 2000 ------ ------ ------ ------ ------ ------ TCI 100.00 113.04 168.76 148.61 153.85 112.58 DJ Equity Index 100.00 122.02 160.84 200.88 246.53 223.68 DJ Real Estate Index 100.00 134.61 158.95 125.39 118.72 151.39
68 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners. The following table sets forth the ownership of TCI's Common Stock, both beneficially and of record, both individually and in the aggregate, for those persons or entities known to be beneficial owners of more than 5% of the outstanding shares of Common Stock as of the close of business on March 2, 2001.
Amount and Nature of Percent of Name and Address of Beneficial Class Beneficial Owner Ownership (/1/) ------------------- ---------- ---------- American Realty Investors, Inc. ....... 2,135,400 24.7% 1800 Valley View Lane Suite 300 Dallas, Texas 75234 Gotham Partners, LP. ... 1,858,900(/2/) 21.5% 110 East 42nd Street 10th Floor New York, New York 10017 Basic Capital Manage- ment, Inc. ............ 1,163,676 13.5% 1800 Valley View Lane Suite 300 Dallas, Texas 75234
- -------- (1) Percentage is based upon 8,636,354 shares of Common Stock outstanding at March 2, 2001. (2) Includes 1,376,000 shares owned by Gotham Partner, LP, a New York limited partnership, 447,040 shares owned by Gotham International Advisors, LLC, a New York limited liability company and 35,860 shares owned by Gotham Partners II, LP, a New York limited partnership (collectively "Gotham"), which ARI has an option to purchase at any time prior to April 4, 2001. Security Ownership of Management. The following table sets forth the ownership of TCI's Common Stock, both beneficially and of record, both individually and in the aggregate, for the Directors and executive officers of TCI as of the close of business on March 2, 2001.
Amount and Nature of Beneficial Percent of Name and Address of Beneficial Owner Ownership Class(/1/) ------------------------------------ ----------------- ---------- R. Douglas Leonhard.......................... 10,000(/2/) * Ted P. Stokely............................... 10,000(/2/) * Martin L. White.............................. 10,000(/2/) * Edward G. Zampa.............................. 10,000(/2/) * All Directors and Executive Officers as a group (8 individuals)....................... 5,234,451(/3/) 60.6%
- -------- * Less than 10% (1) Percentage is based upon 8,636,354 shares of Common Stock outstanding at March 2, 2001. (2) Each of Messrs. Leonhard, Stokely, White and Zampa have options to purchase 10,000 shares of Common Stock of TCI which are exercisable within 60 days of March 2, 2001. (3) Includes 26,475 shares owned by Syntek Asset Management, L.P., 1,163,676 shares owned by BCM and 2,135,400 shares owned by ARI, and 1,858,900 shares owned by Gotham which ARI has an option to purchase at any time prior to April 4, 2001, of which the executive officers of TCI may be deemed to be beneficial owners by virtue of their positions as executive officers or directors of BCM, ART and ARI. The executive officers of TCI disclaim beneficial ownership of such shares. Each of the directors of ARI may be deemed to be beneficial owners of the shares owned by Gotham and ARI by virtue of their positions as directors of ARI. Each of the directors of BCM may be deemed to be beneficial owners by virtue of their positions as directors of BCM. The directors of ARI and BCM disclaim such beneficial ownership. Also includes 50,000 shares which may be acquired by the Directors of TCI pursuant to the Director Stock Option Plan. 69 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Business Relationships In February 1989, the Board of Directors voted to retain BCM as TCI's advisor. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR TO THE REGISTRANT--The Advisor." BCM is a company of which Messrs. Blaha, Branigan, Endendyk, and Starowicz serve as executive officers. BCM is owned by a trust for the benefit of the children of Gene E. Phillips. Mr. Phillips serves as a representative of his children's trust which owns BCM and, in such capacity, had, until June 2000, substantial contact with the management of BCM and input with respect to BCM's performance of advisory services to TCI. Since February 1, 1991, affiliates of BCM have provided property management services to TCI. Currently, Triad provides such property management services. The general partner of Triad is BCM. The limited partners of Triad are Gene E. Phillips and GS Realty, a related party, which is a company not affiliated with either Mr. Phillips or BCM. Triad subcontracts the property-level management and leasing of 52 of TCI's commercial properties, its four hotels and the commercial properties owned by a real estate partnership in which TCI and IORI are partners to Regis, a related party, which is a company owned by GS Realty. Regis also provides real estate brokerage services for TCI, on a non- exclusive basis, and receives brokerage commissions in accordance with the brokerage agreement. The Directors and officers of TCI also serve as directors and officers of IORI. The Directors owe fiduciary duties to IORI as well as to TCI under applicable law. IORI has the same relationship with BCM as TCI. At December 31, 2000, TCI owned approximately 22.8% of the outstanding common shares of IORI. BCM also serves as advisor to ARI. Messrs. Blaha, Branigan, Endendyk and Starowicz serve as executive officers of ARI. From April 1992 to December 31, 1992, Mr. Stokely was employed as a paid consultant and since January 1, 1993 as a part-time unpaid consultant for Eldercare, a nonprofit corporation engaged in the acquisition of low income and elderly housing. Eldercare has a revolving loan commitment from Syntek West, a company owned by Gene E. Phillips. The Loan Commitment expired in 1998 and was not renewed. Eldercare filed for bankruptcy protection in May 1995, and was reorganized in bankruptcy in February 1996, and has since paid all debts as directed by the Bankruptcy Court. Related Party Transactions Historically, TCI has engaged in and may continue to engage in business transactions, including real estate partnerships, with related parties. Management believes that all of the related party transactions represented the best investments available at the time and were at least as advantageous to TCI as could have been obtained from unrelated third parties. As more fully described in ITEM 2. "PROPERTIES--Real Estate," TCI is a partner with IORI in the Tri-City Limited Partnership and Nakash Income Associates. TCI owns 345,728 shares of IORI's Common Stock, an approximate 22.8% interest. At December 31, 2000, TCI owned 746,972 shares of ARI common stock which were primarily purchased in open market transactions in 1990 and 1991 at a total cost of $1.6 million. The officers of TCI also serve as officers of ARI. BCM also serves as advisor to ARI and at March 2, 2001, ARI owned approximately 24.7% of TCI's outstanding Common Stock. At December 31, 2000, the market value of the ARI common shares was $10.1 million. See ITEM 2. "PROPERTIES--Equity Investments in Real Estate Entities." In 2000, TCI paid BCM, its affiliates and related parties $10.5 million in advisory and net income fees, $464,000 in mortgage brokerage and equity refinancing fees, $2.7 million in property acquisition fees, $3.2 million in real estate brokerage commissions and $4.3 million in property and construction management fees and leasing commissions, net of property management fees paid to subcontractors, other than affiliates of BCM. In addition, as provided in the Advisory Agreement, BCM received cost reimbursements of $2.1 million. 70 Restrictions on Related Party Transactions Article FOURTEENTH of TCI's Articles of Incorporation provides that TCI shall not, directly or indirectly, contract or engage in any transaction with (1) any director, officer or employee of TCI, (2) any director, officer or employee of the advisor, (3) the advisor or (4) any affiliate or associate (as such terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of any of the aforementioned persons, unless (a) the material facts as to the relationship among or financial interest of the relevant individuals or persons and as to the contract or transaction are disclosed to or are known by the Board of Directors or the appropriate committee thereof and (b) the Board of Directors or committee thereof determines that such contract or transaction is fair to TCI and simultaneously authorizes or ratifies such contract or transaction by the affirmative vote of a majority of independent directors of TCI entitled to vote thereon. Article FOURTEENTH defines an "Independent Director" as one who is neither an officer or employee of TCI nor a director, officer or employee of TCI's advisor. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: 1. Consolidated Financial Statements Report of Independent Certified Public Accountants Consolidated Balance Sheets--December 31, 2000 and 1999 Consolidated Statements of Operations--Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity--Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows--Years Ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements 2. Financial Statement Schedules Schedule III--Real Estate and Accumulated Depreciation Schedule IV--Mortgage Loans on Real Estate All other schedules are omitted because they are not applicable or because the required information is shown in the Consolidated Financial Statements or the Notes thereto. 3. Incorporated Financial Statements Consolidated Financial Statements of Income Opportunity Realty Investors, Inc. (incorporated by reference to Item 8 of Income Opportunity Realty Investors, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2000). 71 4. Exhibits The following documents are filed as Exhibits to this Report:
Exhibit Number Description ------- ----------- 3.0 Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to Exhibit No. 3.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). 3.1 Certificate of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to the Registrant's Current Report on Form 8-K, dated June 3, 1996). 3.2 Certificate of Amendment of Articles of Incorporation of Transcontinental Realty Investors, Inc., dated October 10, 2000 (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 3.3 By-Laws of Transcontinental Realty Investors, Inc. (incorporated by reference to Exhibit No. 3.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). 3.4 Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., setting forth the Certificate of Designations, Preferences and Rights of Series A Cumulative Convertible Preferred Stock, dated October 20, 1998 (incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). 3.5 Certificate of Designation of Transcontinental Realty Investors, Inc., setting for the Voting Powers, Designations, References, Limitations, Restriction and Relative Rights of Series B Cumulative Convertible Preferred Stock, dated October 23, 2000 (incorporation by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 10.0 Advisory Agreement dated as of October 15, 1998, between Transcontinental Realty Investors, Inc. and Basic Capital Management, Inc. (incorporated by reference to Exhibit 10.0 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
(b) Reports on Form 8-K: None. 72 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Transcontinental Realty Investors, Inc. Dated: March 29, 2001 /s/ Karl L. Blaha By: _________________________________ Karl L. Blaha President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date --------- ------ ---- /s/ Ted P. Stokely Chairman of the Board and March 29, 2001 ______________________________________ Director Ted P. Stokely /s/ R. Douglas Leonhard Director March 29, 2001 ______________________________________ R. Douglas Leonhard /s/ Martin L. White Director March 29, 2001 ______________________________________ Martin L. White /s/ Edward G. Zampa Director March 29, 2001 ______________________________________ Edward G. Zampa /s/ Mark W. Branigan Executive Vice President March 29, 2001 ______________________________________ and Chief Financial Mark W. Branigan Officer (Principal Financial Officer)
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