10-K 1 d10k.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, 2002 Commission File Number 1-9240 ----------------- Transcontinental Realty Investors, Inc. (Exact Name of Registrant as Specified in Its Charter) Nevada 94-6565852 (State or Other (I.R.S. Employer Jurisdiction of Identification No.) Incorporation or Organization) 1800 Valley View Lane, Suite 300, Dallas, Texas 75234 (Address of Principal (Zip Code) Executive Offices) (469) 522-4200 (Registrant's Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Common Stock, $.01 par New York Stock Exchange value 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] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [_] No [X] The aggregate market value of the shares of voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the closing sales price of the Common Stock on the New York Stock Exchange as of June 28, 2002 (the last business day of the Registrant's most recently completed second fiscal quarter) was $56,525,934 based upon a total of 2,853,079 shares held as of June 28, 2002 by persons believed to be non-affiliates of the Registrant. The basis of the calculation does not constitute a determination by the Registrant as defined in Rule 405 of the Securities Act of 1933, as amended, such calculation, if made as of a date within sixty days of this filing would yield a different value. As of March 19, 2003, there were 8,072,594 shares of common stock outstanding. Documents Incorporated by Reference: Consolidated Financial Statements of Income Opportunity Realty Investors, Inc. Commission File No. 1-14784 Consolidated Financial Statements of American Realty Investors, Inc. Commission File No. 001-15663 ================================================================================ INDEX TO ANNUAL REPORT ON FORM 10-K
Page ---- PART I Item 1. Business............................................................................. 3 Item 2. Properties........................................................................... 6 Item 3. Legal Proceedings.................................................................... 18 Item 4. Submission of Matters to a Vote of Security Holders.................................. 19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 20 Item 6. Selected Financial Data.............................................................. 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 7A. Quantitative and Qualitative Disclosures Regarding Market Risk....................... 30 Item 8. Financial Statements and Supplementary Data.......................................... 32 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 77 PART III Item 10. Directors, Executive Officers and Advisor of the Registrant.......................... 77 Item 11. Executive Compensation............................................................... 82 Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 84 Item 13. Certain Relationships and Related Transactions....................................... 85 PART IV Item 14. Controls and Procedures.............................................................. 87 Item 15. Exhibits, Consolidated Financial Statements, Schedules and Reports on Form 8-K....... 88 Signature Page................................................................................ 90
2 PART I ITEM 1. BUSINESS Transcontinental Realty Investors, Inc. ("TCI"), a Nevada corporation, is the successor to a California business trust that 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 cannot re-qualify for REIT tax status for at least five years. TCI's real estate at December 31, 2002, consisted of 128 properties held for investment, one partnership property and 11 properties held for sale In 2002, TCI purchased 16 properties held for investment. TCI's mortgage notes receivable portfolio at December 31, 2002, consisted of 13 mortgage loans. TCI's real estate and mortgage notes receivable portfolios are more fully discussed in ITEM 2. "PROPERTIES." On October 23, 2001, TCI, Income Opportunity Realty Investors, Inc. ("IORI") and American Realty Investors, Inc. ("ARI") jointly announced a preliminary agreement with the plaintiff's legal counsel of the derivative action entitled Olive et al. v. National Income Realty Trust, et al. for complete settlement of all disputes in the lawsuit (the "Olive Litigation"). In February 2002, the court granted final approval of the proposed settlement (the "Olive Settlement"). Under the Olive Settlement, ARI agreed to either (i) acquire all of the outstanding shares of TCI and IORI not currently owned by ARI for a cash payment or shares of ARI preferred stock or (ii) make a tender offer for all of the outstanding shares of TCI and IORI not currently owned by ARI. On November 15, 2002, ARI commenced the tender offer for the TCI and IORI shares. The tender offer was completed on March 18, 2003. ARI paid $19.00 cash per IORI share and $17.50 cash per TCI share for the stock tendered by non-affiliated stockholders. Pursuant to the tender offers, ARI acquired 1,213,226 TCI shares and 265,036 IORI shares. The completion of the tender offers fulfills the obligations under the Olive Settlement and the Olive Litigation has been dismissed with prejudice. TCI has the same board as IORI and the same advisor as IORI and ARI. Two of the directors of TCI and IORI also serve as directors of ARI. 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 and one property is located in Poland. 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 has also considered 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. 3 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 2003. 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 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 indirectly owned by a trust for the children of Gene E. Phillips. Mr. Phillips is not an officer or director of BCM, but serves as a representative of the trust, is involved in daily consultation with the officers of BCM and has significant influence over the conduct of BCM's business, including the rendering of advisory services and the making of investment decisions for itself and for 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. BCM also serves as advisor to IORI and ARI. The Directors of TCI are also directors of IORI. The officers of TCI also serve as officers of ARI, IORI, and BCM. As of March 19, 2003 and after completion of the tender offer, TCI owned approximately 24.0% of IORI's outstanding shares of common stock and ARI owned approximately 64.5% and BCM owned approximately 14.5% 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 partner of Triad is Highland Realty Services, Inc. ("Highland") a related party. Until December 2002, Triad subcontracted the property-level management and leasing of 45 of TCI's commercial properties to Regis Realty, Inc. ("Regis"), a related party, which was a company owned by GS Realty Services, Inc. Regis was 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 was entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. Since January 1, 2003, Regis Realty I, LLC ("Regis I"), has provided these services. Regis I is owned by Highland. Regis Hotel Corporation, a related party, managed TCI's five hotels, until December 2002. Since January 1, 2003, Regis Hotel I, LLC, has managed TCI's five hotels. The sole member of Regis I and Regis Hotel I, LLC is Highland. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT--The Advisor." TCI has no employees. Employees of BCM render services to TCI. 4 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. 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. 5 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, 2002, are set forth in Schedules III and IV 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. At December 31, 2002, none of TCI's properties, mortgage notes receivable or investment in partnerships exceeded 10% of total assets. At December 31, 2002, 86% of TCI's assets consisted of properties held for investment, 3% consisted of properties held for sale, 3% consisted of mortgage notes and interest receivable and 2% consisted of investments in partnerships. The remaining 6% of TCI's assets were invested in cash, cash equivalents 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, 2002, 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, 2002, 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. [GEOGRAPHIC REGION MAP] 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 five apartments and 18 commercial properties in this region. Southwest region comprised of the states of Arizona, Arkansas, Louisiana, New Mexico, Oklahoma and Texas. TCI owns 47 apartments and 18 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 two apartments, for commercial properties and three hotels in this region. Mountain region comprised of the states of Colorado, Idaho, Montana, Nevada, Utah and Wyoming. TCI owns three commercial properties in this region. Pacific region comprised of the states of California, Oregon and Washington. TCI owns a hotel and two commercial properties in this region. Excluded from the above are 34 parcels of unimproved land and one hotel in Wroclaw, Poland, as described below. Real Estate At December 31, 2002, approximately 92% of TCI's assets were invested in real estate. TCI invests primarily 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's real estate portfolio consists of 140 owned properties. Of the 140 properties, 12 apartments were sold to partnerships controlled by Metra Capital, LLC ("Metra"). See NOTE 6. "NOTES AND INTEREST PAYABLE." Because the Metra sales transaction was accounted for as a finance transaction, TCI continues to account for the 12 properties as owned properties. 7 TCI typically invests in developed real estate. However, TCI has recently invested in unimproved land and 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, 2002, TCI had the following properties under construction:
Additional Construction Amount Amount Loan Property Location Units Expended to Expend Funding -------- --------------- --------- -------- ---------- ------------ Blue Lake Villas....... Waxahachie, TX 186 Units $ 9,226 $ 3,364 $10,736 DeSoto Ranch........... DeSoto, TX 248 Units 10,204 6,944 16,273 Echo Valley............ Dallas, TX 216 Units 4,104 10,115 12,719 River Oaks............. Wiley, TX 180 Units 10,367 1,624 10,023 Sendero Ridge.......... San Antonio, TX 384 Units 21,991 6,670 24,420 Spyglass............... Mansfield, TX 256 Units 14,361 3,642 16,017 Verandas at City View.. Fort Worth, TX 314 Units 10,090 12,860 19,393 Vistas at Pinnacle Park Dallas, TX 332 Units 2,788 18,025 19,149
In 2002, TCI completed the 252 unit Limestone Ranch in Lewisville, Texas, the 284 unit Falcon Lakes Apartments in Arlington, Texas, the 190 unit Tivoli Apartments in Dallas, Texas, the 80 unit Waters Edge IV Apartments in Gulfport, Mississippi and the 165 room Hotel Akademia in Wroclaw, Poland. In the opinion of management, the properties owned by TCI are adequately covered by insurance. 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, one hotel in Poland and 34 parcels of unimproved land, as described below) at December 31, 2002.
Commercial Region Apartments Properties ------ ---------- ---------- Pacific.. -- % 2.00% Midwest.. 1.57 12.11 Southwest 91.03 50.06 Southeast 7.40 30.82 Mountain. -- 5.01 ------ ------ 100.00% 100.00% ====== ======
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 34 parcels of unimproved land, two parcels for a total of 21.23 acres in the Southeast region, one parcel of 25 acres in the Pacific region and 31 parcels for a total of 996.65 acres 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 2002 is as follows: Owned properties at January 1, 2002................ 139 Properties purchased............................... 16 Properties added from consolidation of partnerships 3 Properties sold.................................... (18) --- Owned properties at December 31, 2002.............. 140 ===
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, 2002, 2001 and 2000, for apartments and commercial properties and average occupancy during 2002, 2001 and 2000 for hotels:
Rent Per Square Foot Occupancy % ----------------- -------------- Property Location Units/Square Footage 2002 2001 2000 2002 2001 2000 -------- ------------------ ------------------------- ----- ----- ----- ---- ---- ---- Apartments 4400................... Midland, TX 92 Units/94,472 Sq. Ft. $ .49 $ .49 $ .49 86 95 91 Apple Lane............. Lawrence, KS 75 Units/30,000 Sq. Ft. 1.04 1.04 1.00 93 99 97 Arbor Point............ Odessa, TX 195 Units/178,920 Sq. Ft. .43 .41 .39 87 91 95 Ashton Way............. Midland, TX 178 Units/138,964 Sq. Ft. .43 .43 .41 82 89 95 Autumn Chase........... Midland, TX 64 Units/58,652 Sq. Ft. .54 .53 .52 98 94 97 Bay Walk............... Galveston, TX 192 Units/153,120 Sq. Ft. .74 .74 * 95 92 * Bluelake Villas........ Waxahachie, TX 180 Units/169,746 Sq.Ft. ** ** ** ** ** ** By the Sea............. Corpus Christi, TX 153 Units/123,945 Sq. Ft. .86 .83 * 88 93 * Cliffs of Eldorado..... McKinney, TX 208 Units/182,288 Sq. Ft. .85 .84 .84 86 94 95 Courtyard.............. Midland, TX 133 Units/111,576 Sq. Ft. .45 .43 * 93 89 * Coventry............... Midland, TX 120 Units/105,608 Sq. Ft. .43 .43 .42 91 77 98 DeSoto Ranch........... DeSoto, TX 248 Units/ 240,718 Sq.Ft. ** * * ** * * Echo Valley............ Dallas, TX 216 Units/ ** * * ** * * El Chapparal........... San Antonio, TX 190 Units/174,220 Sq. Ft. $ .72 $ .72 $ .69 79 92 93 Fairway View Estates... El Paso, TX 264 Units/204,000 Sq. Ft. .63 .62 .61 92 86 83 Fairways............... Longview, TX 152 Units/134,176 Sq. Ft. .56 .54 .53 92 93 95 Falcon Lakes........... Arlington, TX 284 Units/207,960 Sq. Ft. .97 ** * 11 ** * Fountain Lake.......... Texas City, TX 166 Units/161,220 Sq. Ft. .62 .59 .56 89 96 86 Fountains of Waterford. Midland, TX 172 Units/129,200 Sq. Ft. .53 .53 .53 85 94 88 Harper's Ferry......... Lafayette, LA 122 Units/112,500 Sq. Ft. .59 .58 .58 83 91 94 Hunters Glen........... Midland, TX 212 Units/174,180 Sq. Ft. .38 .38 .37 81 91 91 In the Pines........... Gainesville, FL 242 Units/294,860 Sq. Ft. .54 .54 .54 93 96 97 Island Bay............. Galveston, TX 458 Units/374,784 Sq. Ft. .81 .81 * 90 87 * Limestone Canyon....... Austin, TX 260 Units/216,000 Sq. Ft. 1.06 1.06 1.00 88 91 96 Limestone Ranch........ Lewisville, TX 252 Units/219,600 Sq. Ft. .94 ** * 91 ** * Lincoln Court.......... Dallas, TX 55 Units/40,063 Sq.Ft. 1.22 1.20 1.16 91 98 94 Marina Landing......... Galveston, TX 256 Units/205,504 Sq. Ft. .82 .87 * 96 90 * Mountain Plaza......... El Paso, TX 188 Units/220,710 Sq. Ft. .51 .49 .49 97 95 94 Oak Park IV............ Clute, TX 108 Units/78,708 Sq. Ft. .56 .54 .52 95 94 88 Paramount Terrace...... Amarillo, TX 181 Units/123,840 Sq. Ft. .59 .57 .55 91 94 94 Plantation............. Tulsa, OK 138 Units/103,500 Sq. Ft. .61 .59 .56 90 93 95 Quail Creek............ Lawrence, KS 95 Units/113,416 Sq. Ft. .58 .57 .55 96 98 97 Quail Oaks............. Balch Springs, TX 131 Units/72,848 Sq. Ft. .83 .81 .77 85 93 97 River Oaks............. Wiley, TX 180 Units/164,604 Sq. Ft. ** ** * ** ** * Sandstone.............. Mesa, AZ 238 Units/146,320 Sq. Ft. .90 .90 .90 83 88 91 Sendero Ridge.......... San Antonio, TX 384 Units/340,880 Sq. Ft. ** ** * ** ** * Somerset............... Texas City, TX 200 Units/163,368 Sq. Ft. .68 .66 .64 87 91 91 Southgate.............. Odessa, TX 180 Units/151,656 Sq. Ft. .43 .42 .41 90 95 96 Spy Glass.............. Mansfield, TX 256 Units/ 239,264 Sq.Ft. ** * * ** * * Stone Oak.............. San Antonio, TX 252 Units/187,686 Sq. Ft. .70 .68 .65 92 91 94 Summerfield............ Orlando, FL 224 Units/204,116 Sq. Ft. .75 .75 .70 89 93 95 Sunchase............... Odessa, TX 300 Units/223,048 Sq. Ft. .49 .44 .43 91 96 95 Terrace Hills.......... El Paso, TX 310 Units/233,192 Sq. Ft. .69 .67 .66 93 91 93 Tivoli................. Dallas, TX 190 Units/168,862 Sq. Ft. .96 ** * 27 ** * Timbers................ Tyler, TX 180 Units/101,666 Sq. Ft. .59 .57 .55 93 92 98 Treehouse.............. Irving, TX 160 Units/153,072 Sq. Ft. .80 .78 .75 94 94 94 Verandas at City View.. Fort Worth, TX 314 Units/295,170 Sq. Ft. ** ** * ** ** * Vistas at Pinnacle Park Dallas, TX 332 Units/276,928 Sq.Ft. ** * * ** * * Waters Edge IV......... Gulfport, MS 80 Units/76,400 Sq. Ft. .76 ** * 74 ** * Westwood............... Odessa, TX 79 Units/49,001 Sq. Ft. .49 .48 .43 80 92 100 Willow Creek........... El Paso, TX 112 Units/103,140 Sq. Ft. .55 .54 .50 94 94 97
9
Rent Per Square Foot Occupancy % -------------------- -------------- Property Location Units/Square Footage 2002 2001 2000 2002 2001 2000 -------- -------------------- ------------------------- ------ ------ ------ ---- ---- ---- Apartments (continued) Willo-Wick Gardens....... Pensacola, FL 152 Units/153,360 Sq. Ft. .54 .54 .56 84 91 89 Willow Wick.............. North Augusta, SC 104 Units/94,128 Sq. Ft. .58 .56 .56 92 97 91 Woodview................. Odessa, TX 232 Units/165,840 Sq. Ft. .51 .48 .46 85 95 96 Office Buildings 1010 Common.............. New Orleans, LA 494,579 Sq. Ft. 12.77 11.28 10.83 74 36 32 225 Baronne.............. New Orleans, LA 416,834 Sq. Ft. 9.89 9.77 9.61 76 75 76 4135 Beltline Road....... Addison, TX 90,000 Sq. Ft. 9.00 10.33 10.17 -- -- 33 9033 Wilshire............ Los Angeles, CA 44,253 Sq. Ft. 29.24 27.67 26.08 63 88 90 Ambulatory Surgery Center Sterling, VA 33,832 Sq. Ft. 23.12 20.37 34.26 100 100 100 Amoco.................... New Orleans, LA 378,244 Sq. Ft. 12.73 12.07 11.54 79 79 80 Atrium................... Palm Beach, FL 74,603 Sq. Ft. 12.73 12.69 11.55 64 82 84 Bay Plaza................ Tampa, FL 75,780 Sq. Ft. 15.85 15.96 15.60 86 99 95 Bay Plaza II............. Tampa, FL 78,882 Sq. Ft. 13.01 13.03 12.80 72 91 93 Bonita Plaza............. Bonita, CA 47,777 Sq. Ft. 20.07 19.50 18.66 91 93 92 Brandeis................. Omaha, NE 319,234 Sq. Ft. 12.98 10.88 15.87 76 89 100 Centura.................. Farmers Branch, TX 410,901 Sq.Ft. 24.02 * * 52 * * Corporate Pointe......... Chantilly, VA 65,918 Sq. Ft. 20.24 19.72 18.31 100 100 100 Countryside Retail Center Sterling, VA 133,422 Sq. Ft. $16.12 $16.02 $18.02 97 89 89 Durham Center............ Durham, NC 207,171 Sq. Ft. 17.79 17.65 17.79 98 94 95 Eton Square.............. Tulsa, OK 222,654 Sq. Ft. 11.35 11.27 10.52 42 63 60 Forum.................... Richmond, VA 79,791 Sq. Ft. 15.32 15.99 15.65 60 70 84 Harmon................... Sterling, VA 72,062 Sq. Ft. 19.79 19.72 19.50 61 70 85 Institute Place.......... Chicago, IL 144,915 Sq. Ft. 17.13 16.23 14.99 88 95 100 Lexington Center......... Colorado Springs, CO 74,603 Sq. Ft. 13.41 12.88 12.26 84 83 54 Mimado................... Sterling, VA 35,127 Sq. Ft. 19.77 19.97 19.55 79 73 89 One Steeplechase......... Sterling, VA 103,376 Sq. Ft. 17.76 17.19 16.64 100 100 100 Parkway North............ Dallas, TX 71,041 Sq. Ft. 17.41 17.00 14.77 72 73 76 Remington Tower.......... Tulsa, OK 90,009 Sq. Ft. 11.96 11.61 11.34 84 88 86 Venture Center........... Atlanta, GA 38,272 Sq. Ft. 18.53 17.85 17.16 71 100 100 Westgrove Air Plaza...... Addison, TX 78,326 Sq. Ft. 13.96 13.54 12.91 66 81 90 Industrial Warehouses 5360 Tulane.............. Atlanta, GA 30,000 Sq. Ft. 2.75 2.75 2.60 100 100 100 5700 Tulane.............. Atlanta, GA 67,850 Sq. Ft. 2.45 2.93 2.83 12 7 77 Addison Hanger........... Addison, TX 23,650 Sq. Ft. 8.12 10.07 11.08 98 86 51 Addison Hanger II........ Addison, TX 29,000 Sq. Ft. 9.33 7.21 * 97 12 * Encon.................... Fort Worth, TX 256,410 Sq. Ft. 3.17 3.08 2.00 100 100 100 Kelly.................... Dallas, TX 259,464 Sq. Ft. 3.67 3.61 3.85 51 94 100 McLeod................... Orlando, FL 110,914 Sq. Ft. 8.03 8.01 7.86 87 92 88 Ogden Industrial......... Ogden, UT 107,112 Sq. Ft. 2.95 2.94 3.32 100 100 86 Space Center............. San Antonio, TX 101,500 Sq. Ft. 3.46 3.18 3.09 84 89 100 Texstar.................. Arlington, TX 97,846 Sq. Ft. 2.19 2.11 2.11 100 100 100 Tricon................... Atlanta, GA 570,877 Sq. Ft. 3.89 3.87 3.75 88 93 91 Shopping Centers Dunes Plaza.............. Michigan City, IN 223,869 Sq. Ft. 5.83 5.81 5.61 69 62 63 K-Mart................... Cary, NC 92,033 Sq. Ft. 3.28 3.28 3.28 100 100 100 Oaktree Village.......... Lubbock, TX 45,623 Sq.Ft. 9.64 * * 92 * * Parkway Center........... Dallas, TX 28,374 Sq. Ft. 15.98 15.08 14.67 73 86 100 Promenade................ Highland Ranch, CO 133,558 Sq. Ft. 12.41 13.06 10.57 81 75 73 Sadler Square............ Amelia Island, FL 70,295 Sq. Ft. 7.41 7.21 7.15 92 93 95 Sheboygan................ Sheboygan, WI 74,532 Sq. Ft. 1.99 2.36 1.99 100 100 100 Other Signature Athletic Club.. Dallas, TX 56,532 Sq. Ft.
10
Total Room Revenues Divided By Average Room Rate Occupancy % Total Available Rooms ----------------------- -------------- --------------------- Property Location Rooms 2002 2001 2000 2002 2001 2000 2002 2001 2000 -------- ----------------- --------- ------- ------- ------- ---- ---- ---- ------ ------ ------- Hotels Willows..... Chicago, IL 52 Rooms $129.76 $130.37 $131.78 49 53 52 $63.35 $69.65 $ 69.10 City Suites. Chicago, IL 45 Rooms 131.46 131.16 125.32 56 61 74 73.38 81.13 92.40 Majestic Inn San Francisco, CA 57 Rooms 141.62 174.85 170.08 37 41 79 52.25 79.10 133.65 The Majestic Chicago, IL 55 Rooms 133.79 129.63 120.67 52 55 65 64.31 71.52 77.89 Akademia.... Wroclaw, Poland 165 Rooms 48.92 ** * 33 ** * 15.97 ** *
Property Location Acres -------- ------------------ ------------ Land 1013 Common........ New Orleans, LA .413 Acres Alamo Springs...... Dallas, TX .678 Acres Centura............ Farmers Branch, TX 8.753 Acres Lakeshore Villas... Humble, TX 16.89 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 Marine Creek....... Ft. Worth, TX 54 Acres Mason Park......... Houston, TX 18 Acres Mercer Crossing.... Farmers Branch, TX 267.12 Acres(1) Nashville.......... Nashville, TN 16.57 Acres Palm Desert........ Palm Desert, CA 25 Acres Rasor.............. Plano, TX 24.5 Acres Seminary West...... Ft. Worth, TX 5.36 Acres West End........... Dallas, TX 6.8 Acres
-------- * Property was purchased in 2001 or 2002. ** Property was under construction. (1) Includes the 2301 Valley Branch, Dominion, Eagle Crest, Folsom, Hollywood Casino, Manhatten, Mira Lago, Pac Trust and Solco-Valley Ranch land parcels. Occupancy presented here and throughout this ITEM 2. is without reference to whether leases in effect are at, below or above market rates. In 2002, TCI purchased the following properties:
Net Units/ Purchase Cash Debt Interest Maturity Property Location Sq.Ft./Acres Price Paid Incurred Rate Date -------- ------------------ -------------- -------- ------ -------- -------- -------- Apartments Blue Lakes Villas(1)...... Waxahachie, TX 186 Units $ 1,012 $1,048 $ -- -- % -- DeSoto Ranch(1)........... DeSoto, TX 248 Units 1,364 1,489 2,246 7.18 12/43 Echo Valley(1)............ Dallas, TX 216 Units 787 788 -- -- -- Spy Glass(1).............. Mansfield, TX 256 Units 1,280 1,042 2,303 7.50 08/43 Vistas at Pinnacle Park(1) Dallas, TX 382 Units 3,202 414 2,788 6.25 07/44 Office Building Centura(2)................ Farmers Branch, TX 410,901 Sq.Ft. 50,000 -- 43,739(3) 13.00(4) 07/03 Shopping Center Oak Tree Village(5)....... Lubbock, TX 45,623 Sq.Ft. 1,467 196 1,389(3) 8.48 11/07 Land 2301 Valley Branch........ Farmers Branch, TX 23.76 Acres 4,165 1,000 3,124 4.00 08/05 Centura(2)................ Farmers Branch, TX 8.75 Acres 13,300 -- 7,150(3) 13.50 03/03 Hollywood Casino(2)....... Dallas, TX 42.64 Acres 16,987 -- 6,222(3) 9.50 03/03 Lakeshore Villas(5)....... Humble, TX 16.89 Acres 947 127 -- -- -- Marine Creek(2)........... Ft. Worth, TX 54 Acres 3,700 -- 1,500(3) 9.00 01/03
11
Net Units/ Purchase Cash Debt Interest Maturity Property Location Sq.Ft./Acres Price Paid Incurred Rate Date -------- --------------- ------------ -------- ---- -------- -------- -------- Land (continued) Mason Park(2)... Houston, TX 18 Acres 2,790 -- 2,600(3) 14.00 02/03(5) Nashville(2).... Nashville, TN 16.57 Acres 1,890 -- 955(3) 15.50 07/03 Palm Desert(2).. Palm Desert, CA 61 Acres 4,625 -- -- -- -- Rasor(5)........ Plano, TX 24.5 Acres 2,319 310 -- -- --
-------- (1) Land purchased for apartment construction. (2) Property received from ARI, a related party, for payment of debt. (3) Assumed debt. (4) Weighted average. The Centura Tower is encumbered by two loans, one for $28.7 million at 10.5% and the other for $15.0 million at 17.9%. (5) Property exchanged with American Realty Investors, Inc. ("ARI"), a related party, for the Plaza on Bachman Creek Retail Center and the reduction of $600,000 in affiliate receivables. In 2002, TCI sold the following properties:
Net Units/ Sales Cash Debt Gain/(Loss) Property Location Sq.Ft./Acres Price Received Discharged on Sale -------- ------------------ -------------- ------- -------- ---------- ----------- Apartments 4242 Cedar Springs....... Dallas, TX 76 Units $ 2,600 $ 971 $1,288 $1,252 Camelot.................. Largo, FL 120 Units 5,263 1,616 3,268 1,517 Country Crossing......... Tampa, FL 227 Units 5,800 1,836 3,726 3,142 Gladstell Forest......... Conroe, TX 168 Units 4,875 1,713 2,360 2,050 Grove Park............... Plano, TX 188 Units 7,425 2,498 4,504 3,341 Heritage on the Park..... Jacksonville, FL 301 Units 12,475 4,317 7,606 5,162 Primrose................. Bakersfield, CA 162 Units 5,000 1,722 2,920 659 Southgreen............... Bakersfield, CA 80 Units 3,600 1,011 2,381 (72) Trails of Windfern....... Houston, TX 240 Units 7,350 2,379 3,654 2,453 Office Building Hartford................. Dallas, TX 174,513 Sq.Ft. 4,000 -- -- -- (1) Jefferson................ Washington, DC 71,877 Sq.Ft. 16,550 5,957 9,679 3,421 NASA..................... Clear Lake, TX 78,159 Sq.Ft. 2,600 2,341 -- 1,341 Plaza Tower.............. St. Petersburg, FL 186,281 Sq.Ft. 17,100 8,313 6,909 8,093 Savings of America....... Houston, TX 68,634 Sq.Ft. 2,800 1,104 1,185 621 Windsor Plaza............ Windcrest, TX 80,522 Sq.Ft. 4,250 3,813 -- 895 Industrial Warehouse Central Storage.......... Dallas, TX 216,035 Sq.Ft. 4,000 2,095 1,063 1,241 Shopping Center Chelsea Square........... Houston, TX 70,275 Sq.Ft. 4,200 1,940 1,986 1,056 Plaza on Bachman Creek(2) Dallas, TX 80,278 Sq.Ft. 4,707 -- -- -- Land Palm Desert.............. Palm Desert, CA 36 Acres 3,600 685 -- 666
-------- (1) Excludes a $920,000 deferred gain from seller financing. See NOTE 3. "NOTES AND INTEREST RECEIVABLE." (2) Property was exchanged with ARI, a related party, for the Oak Tree Village Shopping Center and two parcels of land; the Rasor land parcel and Lakeshore Villas land parcel. 12 In 2002, TCI financed/refinanced the following property:
Net Cash Sq.Ft./ Debt Debt Received/ Interest Maturity Property Location Units/Acres Incurred Discharged (Paid) Rate Date -------- ----------------- -------------- -------- ---------- --------- -------- -------- Apartments Echo Valley.......... Dallas, TX 216 Units $ 1,639(1) $ -- $ 448 6.65% 12/43 Marina Landing....... Galveston, TX 256 Units 11,348 11,397 (699) 5.80 12/37 Metra................ See Below (2) 1,977 Units 30,314 18,822 10,362 7.57 05/12 Paramount Terrace.... Amarillo, TX 181 Units 2,700 2,797 (214) 6.63(3) 07/04 Quail Creek.......... Lawrence, KS 95 Units 3,300 2,157 924 6.63(3) 09/05 Verandas at City View Ft. Worth, TX 314 Units 2,779(4) 2,197 (2,224) 7.00 06/42 Office Building Institute Place...... Chicago, IL 144,915 Sq.Ft. 8,025 5,225 2,434 4.75 12/07 Industrial Warehouse Addison Hanger (5)... Addison, TX 23,650 Sq.Ft. 2,687 1,580 942 6.75(3) 02/07 Shopping Center Sheboygan............ Sheboygan, WI 74,532 Sq.Ft. 600 387 63 6.60 10/05 Land Dominion............. Dallas, TX 14.39 Acres 772 -- 758 13.00 04/03 Manhatten............ Farmers Branch, TX 108.9 Acres 5,846 -- 5,733 13.00 04/03 McKinney 36 (6)...... Collin County, TX 34.58 Acres 425 956 (539) 9.50 04/03 Pac Trust............ Farmers Branch, TX 7.11 Acres 382 -- 370 13.00 04/03 Red Cross............ Dallas, TX 2.89 Acres 4,000 -- -- 5.00 04/04 Sandison (6)......... Collin County, TX 97.97 Acres 1,199 1,040 145 9.50 04/03 Solco-Allen (6)...... Collin County, TX 55.80 Acres 686 305 374 9.50 04/03 Stacy Road (6)....... Allen, TX 160.38 Acres 1,979 1,345 613 9.50 04/03 State Highway 121 (6) Collin County, TX 101.94 Acres 1,475 873 582 9.50 04/03 Watters Road (6)..... Collin County, TX 97.00 Acres 1,189 -- 1,180 9.50 04/03 Whisenant (6)........ Collin County, TX 16.16 Acres 199 133 64 9.50 04/03
-------- (1) The Echo Valley Apartments are under construction. The $1.6 million debt incurred was to fund construction to date. The total construction funding for the project is $12.7 million. (2) In April 2002, TCI sold 12 residential properties to partnerships controlled by Metra Capital, LLC ("Metra"). These properties include: the 75 unit Apple Lane Apartments in Lawrence, Kansas; the 195 unit Arbor Point Apartments in Odessa, Texas; the 264 unit Fairway View Estates Apartments in El Paso, Texas; the 152 unit Fairways Apartments in Longview, Texas; the 166 unit Fountain Lake Apartments in Texas City, Texas; the 172 unit Fountains of Waterford Apartments in Midland, Texas; the 122 unit Harper's Ferry Apartments in Lafayette, Louisiana; the 108 unit Oak Park IV Apartments in Clute, Texas; the 131 unit Quail Oaks Apartments in Balch Springs, Texas; the 300 unit Sunchase Apartments in Odessa, Texas; the 180 unit Timbers Apartments in Tyler, Texas; and the 112 unit Willow Creek Apartments in El Paso, Texas. (3) Variable interest rate. (4) The Verandas at City View Apartments are under construction. The $2.8 million debt incurred was to fund construction to date. The total construction funding for the project is $19.4 million. (5) The mortgage is cross-collateralized with the 29,000 sq. ft. Addison Hanger II in Addison, Texas. (6) The mortgages are cross-collateralized. 13 Properties Held for Sale. Set forth below are TCI's properties held for sale.
Property Location Acres -------- ------------------ ------------ Land Fiesta........... San Angelo, TX .6657 Acres Fruitland........ Fruitland Park, FL 4.66 Acres McKinney 36...... Collin County, TX 34.58 Acres Red Cross........ Dallas, TX 2.89 Acres Round Mountain... Austin, TX 18 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 Whisenant........ Collin County, TX 16.16 Acres
Partnership Properties. TCI accounts for partnership properties using the equity method. Set forth below are the properties owned by partnerships, the average annual rental rate for commercial properties, and occupancy rates at December 31, 2002, 2001 and 2000:
Rent Per Square Foot Occupancy % Square ------------------- ------------- Property Location Footage 2002 2001 2000 2002 2001 2000 -------- ------------------ ------------- ----- ------ ------ ---- ---- ---- Office Building Prospect Park #29 Rancho Cordova, CA 40,807 Sq.Ft. $-- $19.52 $20.42 -- 72% 100%
TCI is a 30% general partner in Sacramento Nine ("SAC 9"), which owns the Prospect Park #29 Office Building. Provision for asset impairment was $2.6 million in 2002. TCI recorded asset impairments of $2.6 million, representing the write down of certain operating properties to current estimated fair value. These assets include the following properties:
Fair Property Costs to Property Location Units/Acres Value Basis Sell Impairment -------- ------------ ----------- ------ -------- -------- ---------- Apartments Apple Lane............ Lawrence, KS 75 Units $1,580 $1,593 $238 $251 Fairway View.......... El Paso, TX 264 Units 5,700 5,242 863 405 Fountains of Waterford Midland, TX 172 Units 1,900 2,006 285 391 Plantation............ Tulsa, OK 138 Units 2,545 3,100 145 700 Sunchase.............. Odessa, TX 300 Units 4,100 3,479 746 125 Land Red Cross............. Dallas, TX 2.89 Acres 8,400 8,348 758 707
The Red Cross land was under contract to sell and the sales price was used as fair value. The fair value determined for four apartments above were agreed upon purchase prices as part of the refinancing transaction with Metra Capital, LLC. The costs to sell were actual fees paid to refinance the properties. TCI is in current negotiations to refinance the Plantation Apartments. Lenders will refinance the property at between 80% and 90% of the value of the property. Currently, the loans are in the range of $2.0 million and $2.4 million. 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. 14 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, 2002, consisted of two apartments, six office buildings, a shopping center, and unimproved land. The Board of Directors may alter the types of properties securing or collateralizing mortgage 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, 2002, TCI's mortgage notes receivable portfolio included nine mortgage loans with an aggregate principal balance of $16.5 million secured by income-producing real estate located in the Midwest, Southeast and Southwest regions of the continental United States, three mortgage loans with an aggregate principal balance of $11.8 million secured by unimproved land in the Pacific and Southwest regions of the continental United States and one loan with a principal balance of $100,000 secured by a partnership interest. At December 31, 2002, 3% 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, 2002. 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 -- % 72.5% 72.5% Southeast 14.1 9.2 23.3 Midwest.. -- 4.2 4.2 ---- ---- ----- 14.1% 85.9% 100.0% ==== ==== =====
A summary of the activity in TCI's mortgage notes receivable portfolio during 2002 is as follows: Mortgage notes receivable at January 1, 2002 Mortgage notes receivable at January 1, 2002 12 Loans paid off........................................................................... (7) Loans funded Loans funded................................................................ 8 -- Mortgage notes receivable at December 31, 2002 Mortgage notes receivable at December 31, 2002...................................................................... 13 ==
During 2002, $11.9 million was collected in full payment of seven mortgage notes and $4.3 million in principal payments were received on other mortgage notes. At December 31, 2002, 1% of TCI's assets were invested in mortgage notes secured by non-income producing real estate, comprised of a first lien mortgage note secured by 36 acres of unimproved land in Palm Desert, California, a second lien mortgage note secured by 1,714 acres of unimproved land in Tarrant County, Texas, a second lien on 21.6 acres of unimproved land in Tarrant County, Texas, and a loan secured by a partnership interest. 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 15 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 participations in first mortgage loans that it originates to other lenders. In July 2001, TCI funded a $1.7 million mortgage loan secured by a first lien on 44.6 acres of unimproved land in Fort Worth, Texas, and a 100% interest in a partnership. The note receivable bears interest at 16.0% per annum, requires monthly interest only payments and matured in June 2002. In September 2002, TCI received $1.3 million on the note. With this payment, TCI agreed to release the lien on the 44.6 acres substituting a second lien on 21.61 acres of unimproved land in Tarrant County, Texas, from the borrower to secure the remaining $689,000 in debt. TCI has extended the maturity to November 2002. As of March 2003, management continued efforts to collect the remaining balance. Junior Mortgage Loans. TCI may invest in junior mortgage loans, 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, 2001, 2% 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 2002. In March 2001, TCI funded a $3.5 million mortgage loan secured by a second lien on a retail center in Montgomery County, Texas. In June 2001, an additional $1.5 million was funded. The note receivable bore interest at 16.0% per annum, required monthly interest only payments of $67,000 and matured in September 2001. In October 2001, TCI extended the loan until February 2002, receiving $100,000 as an extension fee. In December 2001, TCI received a $1.5 million principal payment. In February 2002, TCI sold a $2.0 million senior participation interest in the loan to IORI, a related party. TCI and IORI received 43% and 57%, respectively, of the remaining principal and interest payments. Also in February 2002, TCI extended the loan until April 2002, receiving $23,000 as an extension fee. In April 2002, the loan was extended until July 2002. In July 2002, the loan was extended until September 2002. In August 2002, the loan was paid off, including accrued but unpaid interest. In June 2001, in conjunction with the sale of 275 unit McCallum Glen Apartments in Dallas, Texas, TCI funded a $1.5 million mortgage loan secured by a second lien on the apartments. The note receivable bore interest at 10% per annum, required monthly interest only payments and matured in June 2003. In May 2002, the loan was paid off. TCI agreed to a 5% discount on the note and recognized a loss of $75,000 from the note. TCI also recognized a previously deferred gain on $1.5 million on the sale of the property. In July 2001, TCI agreed to fund a $4.4 million line of credit secured by a second lien on 1,714.16 acres of unimproved land in Tarrant County, Texas. The note receivable bears interest at 15% per annum, requires monthly interest only payments beginning in September 2001 and matures in July 2003. In March 2002, TCI received a $1.8 million principal payment. As of March 2003, TCI has funded $2.4 million of the line of credit. In August 2001, TCI agreed to fund up to $5.6 million loan secured by a second lien on an office building in Dallas, Texas. The note receivable bears interest at a variable rate, currently 9.0% per annum, requires monthly interest only payments and matured in January 2003. As of March 2003, TCI has funded a total of $4.3 million. On January 23, 2003, TCI agreed to extend the maturity date until May 1, 2003. The agreement requires interest to accrue at the default rate of 18%. 16 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 bore interest at 16.0% per annum, required monthly interest only payments of $40,000 and matured in June 2001. The note was extended until November 2001 with a $750,000 loan principal paydown. With this paydown, the note was renegotiated to replace the existing collateral with new collateral consisting of a 120,000 sq. ft. office building and industrial warehouse in Carrollton, Texas. The note bore interest at 16.0% per annum, required monthly payments of interest only and matured in May 2002. In July 2002, the note was paid off, including accrued but unpaid interest. In October 2001, TCI funded a $4.0 million loan secured by a 375,152 sq.ft. office building in St. Louis, Missouri. The note receivable bore interest at 9.0% per annum, required monthly interest only payments of $30,000 and matured in February 2002. In February 2002, TCI extended the loan maturity to February 2003. In August 2002, the note was paid off including accrued but unpaid interest. In January 2002, TCI purchased 100% of the outstanding common shares of ART Two Hickory Corporation ("Two Hickory"), a wholly-owned subsidiary of ARI, a related party, for $4.4 million cash. Two Hickory owns the 96,217 sq. ft. Two Hickory Centre Office Building in Farmers Branch, Texas. ARI has guaranteed that the asset shall produce at least a 12% annual return of the purchase price for a period of three years from the purchase date. If the asset fails to produce the 12% annual return, ARI shall pay TCI any shortfall. In addition, if the asset fails to produce the 12% return for a calendar year and ARI fails to pay the shortfall, TCI may require ARI to repurchase the shares of Two Hickory for the purchase price. Because ARI has guaranteed the 12% return and TCI has the option of requiring ARI to repurchase the entities, management has classified this related party transaction as a note receivable from ARI. In June 2002, the asset was refinanced. TCI received $1.3 million of the proceeds as a principal reduction on its note receivable from ARI. In March 2002, TCI sold the 174,513 sq.ft. Hartford Office Building in Dallas, Texas, for $4.0 million and provided the $4.0 million purchase price as seller financing and an additional $1.4 million line of credit for leasehold improvements in the form of a first lien mortgage note. The note bears interest at a variable interest rate, currently 6.0% per annum, requires monthly interest only payments of $14,667 and matures in March 2007. As of March 2003, TCI has funded $264,000 of the additional line of credit. Also in January 2002, a mortgage loan with a principal balance of $608,000 was paid off, including accrued but unpaid interest. With the payoff of the note, TCI recognized a previously deferred gain on the sale of the property of $608,000. In April 2002, TCI purchased 100% of the following entities: ART One Hickory Corporation ("One Hickory"), Garden Confederate Point, LP ("Confederate Point"), Garden Foxwood, LP ("Foxwood"), and Garden Woodsong, LP ("Woodsong"), all wholly-owned subsidiaries of ARI, a related party, for $10.0 million. One Hickory owns the 120,615 sq. ft. One Hickory Centre Office Building in Farmers Branch, Texas. Confederate Point owns the 206 unit Confederate Apartments in Jacksonville, Florida. Foxwood owns the 220 unit Foxwood Apartments in Memphis, Tennessee. Woodsong owned the 190 unit Woodsong Apartments in Smyrna, Georgia. ARI has guaranteed that these assets shall produce at least a 12% return annually of the purchase price for a period of three years from the purchase date. If the assets fail to produce the 12% return, ARI shall pay TCI any shortfall. In addition, if the assets fail to produce the 12% return for a calendar year and ARI fails to pay the shortfall, TCI may require ARI to repurchase the entities for the purchase price. Because ARI has guaranteed the 12% return and TCI has the option of requiring ARI to repurchase the entities, management has classified this related party transaction as a note receivable from ARI. Also in April 2002, a mortgage loan with a principal balance of $155,000 was paid off, including accrued but unpaid interest. In July 2002, the Woodsong Apartments were sold. ARI received $2.6 million from the proceeds as payment of principal and accrued but unpaid interest on the note receivable. The funds were received by ARI and the affiliate receivable balance was increased. 17 In July 2002, TCI entered into an agreement to fund up to $300,000 under a revolving line of credit secured by 100% interest in a partnership of the borrower. The line of credit bears interest at 12.0% per annum, requires monthly interest only payments and matures in June 2005. As of March 2003, TCI has funded $175,000 of the line of credit. In September 2002, TCI sold a 36 acre tract of the Palm Desert land parcel for $3.6 million and provided $2.7 million as seller financing in the form of a first lien mortgage note. The note bears interest at 8.0% per annum, requires quarterly interest only payments of $54,000 and matures in September 2004. In March 2003, the note was sold to a financial institution for $2.6 million. 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. 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. (the "Olive Litigation"), 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 "First Amendment"). The First Amendment provided for the settlement of additional matters raised by plaintiffs' counsel in 1996. The Court issued an order approving the First Amendment on July 3, 1997. The First 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 First 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 First 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 First Amendment. In June 2000, plaintiffs' counsel asserted that loans made by TCI to BCM and American Realty Trust, Inc. breached the provision of the Modification. The Board believes that the provisions of the Settlement, Modification and the First Amendment terminated on April 28, 1999. However, the Court has ruled that certain provisions continue to be effective after the termination date. This ruling was appealed by TCI and IORI. On October 23, 2001, TCI, Income Opportunity Realty Investors, Inc. ("IORI") and American Realty Investors, Inc. ("ARI") jointly announced a preliminary agreement with the plaintiff's legal counsel for complete settlement of all disputes in the lawsuit. In February 2002, the court granted final approval of the proposed 18 settlement (the "Second Amendment"). Under the Second Amendment, the appeal has been dismissed with prejudice and ARI agreed to either (i) acquire all of the outstanding shares of IORI and TCI not currently owned by ARI for a cash payment or shares of ARI preferred stock or (ii) make a tender offer for all of the outstanding common shares of IORI and TCI not currently owned by ARI. Under the merger, ARI would pay $17.50 cash per TCI share and $19.00 cash per IORI share for the stock held by non-affiliated stockholders. ARI would issue one share of Series G Preferred Stock with a liquidation value of $20.00 per share for each share of TCI Common Stock for stockholders who affirmatively elect to receive ARI preferred stock in lieu of cash. ARI would issue one share of Series H Preferred Stock with a liquidation value of $21.50 per share for each share of IORI Common Stock for stockholders who affirmatively elect to receive ARI preferred stock in lieu of cash. Each share of Series G Preferred Stock would be convertible into 2.5 shares of ARI Common Stock during a 75-day period that commences fifteen days after the date of the first ARI Form 10-Q filing that occurs after the closing of the merger transaction. Upon the acquisition of IORI and TCI shares, TCI and IORI would become wholly-owned subsidiaries of ARI. The transaction was subject to the negotiation of a definitive merger agreement and a vote of the shareholders of all three entities. TCI has the same board as IORI and the same advisor as IORI and ARI. Two of the directors of TCI and IORI also serve as directors for ARI. On November 15, 2002, ARI commenced, through subsidiaries, a tender offer for shares of common stock of TCI and IORI. The price per share was $17.50 for TCI shares and $19.00 for IORI shares. The tender offers were made to cure a default under the settlement resulting from ARI's failure to timely complete the SEC review process of the registration statement for the proposed mergers with TCI and IORI. The tender offers were completed on March 19, 2003. ARI acquired 265,036 IORI shares and 1,213,226 TCI shares. The completion of the tender offer fulfills the obligations under the Second Amendment and the Olive Litigation has been dismissed with prejudice. ARI has deferred further action on the mergers. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED 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, 2003 (through March 19, 2003) $17.65 $16.23 March 31, 2002......................... 16.82 15.50 June 30, 2002.......................... 20.55 16.27 September 30, 2002..................... 21.82 16.20 December 31, 2002...................... 18.00 15.80 March 31, 2001......................... 12.60 8.19 June 30, 2001.......................... 16.00 8.95 September 30, 2001..................... 14.75 11.70 December 31, 2001...................... 16.85 11.80
As of March 19, 2003, the closing price of TCI's Common Stock as reported in the consolidated reporting system of the NYSE was $17.55 per share. As of March 19, 2003, TCI's Common Stock was held by 5,234 holders of record. TCI paid no dividends in 2002 or 2001, and management believes no dividends will be paid in 2003. In December 2000, the Board of Directors determined not to pay a fourth quarter dividend to holders of TCI's Common Stock. The non-payment decision was based on the Board determining that TCI needed to retain cash for acquisitions that were anticipated in 2001 and 2002. 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, 2001, a total of 409,765 shares had been repurchased at a cost of $3.3 million. No shares were repurchased in 2001. In September 2001, the Board approved a private block purchase of 593,200 shares of Common Stock for a total cost of $9.5 million. Securities Authorized for Issuance Under Equity Compensation Plans The following table provides information as of December 31, 2002 regarding compensation plans (including individual compensation arrangements) under which equity securities of TCI are authorized for issuance.
Number of Securities Remaining Available for Number of Securities to Weighted-Average Future Issuance Under Equity be Issued Upon Exercise Exercise Price of Compensation Plans of Outstanding Options, Outstanding Options, (Excluding Securities Warrants and Rights Warrants and Rights Reflected in Column (a)) ----------------------- -------------------- ---------------------------- Plan Category (a) (b) (c) ------------- ----------------------- -------------------- ---------------------------- 2000 Stock Option Plan approved by stockholders...................... -- -- 300,000 Directors Stock Option Plan approved by stockholders................... -- -- 80,000 -- -- ------- Total............................... -- -- 380,000 == == =======
20 ITEM 6. SELECTED FINANCIAL DATA
For the Years Ended December 31, ---------------------------------------------------------- 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- (dollars in thousands, except per share) EARNINGS DATA Rents................................... $ 109,726 $ 115,439 $ 133,173 $ 73,469 $ 69,761 Property expense........................ 71,018 68,510 74,608 38,959 38,282 ---------- ---------- ---------- ---------- ---------- Operating income........................ 38,708 46,929 58,565 34,510 31,479 Other income............................ 313 2,924 1,814 555 1,095 Other expense........................... 75,923 79,078 81,594 45,324 38,321 Gain on real estate..................... -- 48,333 50,550 40,517 12,653 ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations (36,902) 19,108 29,335 30,258 6,906 Discontinued operations................. 41,753 703 447 (39) -- ---------- ---------- ---------- ---------- ---------- Net income (loss)....................... 4,851 19,811 29,782 30,219 6,906 Preferred dividend requirement.......... (190) (172) (22) (30) (1) ---------- ---------- ---------- ---------- ---------- Net income (loss) applicable to Common shares......................... $ 4,661 $ 19,639 $ 29,760 $ 30,189 $ 6,905 ========== ========== ========== ========== ========== Basic and Diluted Earnings Per Share Basic.................................. $ .58 $ 2.32 $ 3.45 $ 7.05 $ 1.78 Diluted................................ $ .58 $ 2.28 $ 3.45 $ 7.05 $ 1.78 Dividends per Common share.............. $ -- $ -- $ .54 $ .60 $ .60 Weighted Average Common Shares Outstanding Basic.................................. 8,057,361 8,478,377 8,631,621 4,283,574 3,876,797 Diluted................................ 8,057,361 8,615,465 8,637,290 4,283,574 3,876,797 For the Years Ended December 31, ---------------------------------------------------------- 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- (dollars in thousands, except per share) BALANCE SHEET DATA Real estate held for investment, net.... $ 736,977 $ 622,171 $ 639,040 $ 599,746 $ 347,389 Real estate held for sale............... 22,510 516 1,824 1,790 1,356 Notes and interest receivable, net...... 27,953 22,049 8,172 11,530 1,493 Total assets............................ 858,489 709,152 731,885 714,195 382,203 Notes and interest payable.............. 586,628 461,037 501,734 503,406 282,688 Stockholders' equity.................... 222,394 216,768 200,560 179,112 91,132 Book value per share.................... $ 27.55 $ 26.95 $ 23.22 $ 20.76 $ 23.35
TCI purchased 16 properties for a total of $107.7 million in 2002, 17 properties for a total of $62.5 million in 2001, 18 properties for a total of $103.9 million in 2000, 10 properties for a total of $51.2 million and obtained an additional 64 properties through merger with CMET in 1999, and purchased 22 properties in 1998 for a total of $91.0 million. TCI sold 18 properties and a partial land parcel for a total of $117.6 million in 2002, 22 properties, one warehouse in the Kelly portfolio and three partial land parcels in 2001 for a total of $161.5 million, 20 properties in 2000 for a total of $113.5 million, 11 properties in 1999 for a total of $117.4 million, and five properties in 1998 for a total of $31.8 million. See ITEM 2. "PROPERTIES--Real Estate" and ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." 21 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, TCI no longer met the requirement for tax treatment as a REIT due to a concentration of ownership. Critical Accounting Policies Critical accounting policies are those that are both important to the presentation of TCI's financial condition and results of operations and require management's most difficult, complex or subjective judgements. TCI's critical accounting policies relate to the evaluation of impairment of long-lived assets and the evaluation of the collectibility of accounts and notes receivable. If events or changes in circumstances indicate that the carrying value of a rental property to be held and used or land held for development may be impaired, management performs a recoverability analysis based on estimated undiscounted cash flows to be generated from the property in the future. If the analysis indicates that the carrying value is not recoverable from future cash flows the property is written down to estimated fair value and an impairment loss is recognized. If management decides to sell rental properties or land held for development, management evaluates the recoverability of the carrying amounts of the assets. If the evaluation indicates that the carrying value is not recoverable from estimated net sales proceeds, the property is written down to estimated fair value less costs to sell and an impairment loss is recognized within income from continuing operations. TCI's estimates of cash flow and fair values of the properties are based on current market conditions and consider matters such as rental rates and occupancies for comparable properties, recent sales data for comparable properties and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers. TCI's estimates are subject to revision as market conditions and TCI's assessments of them change. In the second and third quarter of 2002, TCI recognized $1.9 million and $700,000 as impairment losses. TCI's allowance for doubtful accounts receivable and notes receivable is established based on analysis of the risk of loss on specific accounts. The analysis places particular emphasis on past due accounts. Management considers such information as the nature and age of the receivable, the payment history of the tenant or other debtor, the financial condition of the tenant or other debtor and TCI's assessment of its ability to meet its lease or interest obligations. TCI's estimate of the required allowance, which is reviewed on a quarterly basis, is subject to revision as these factors change and is sensitive to the effects of economic and market conditions. 22 Obligations and Commitments TCI has contractual obligations and commitments primarily with regards to the payment of mortgages. The following table aggregates TCI's expected contractual obligations and commitments subsequent to December 31, 2002. (Dollars in thousands)
PAYMENTS DUE BY PERIOD ------------------------------------------------------------ 2003 2004 2005 2006 2007 Thereafter Total -------- ------- ------- ------- ------- ---------- -------- Variable interest rate notes Instrument's maturities.... $ 70,505 $26,604 $19,550 $ 1,659 $ 9,709 $ 6,392 $134,419 Instrument's amortization.. 2,124 1,868 1,262 815 713 7,540 14,322 Interest................. 5,509 3,307 2,123 1,374 1,182 8,621 22,116 Fixed interest rate notes Instrument's maturities.... 125,996 48,480 11,564 21,392 17,827 73,762 299,021 Instrument's amortization.. 10,637 4,327 4,150 4,157 3,919 107,481 134,671 Interest................. 27,328 25,019 22,449 21,522 19,185 286,643 402,146 Principal payments.......... 209,262 81,279 36,526 28,023 32,168 195,175 582,433
Liquidity and Capital Resources Cash and cash equivalents were $10.6 million, $10.3 million and $22.3 million at December 31, 2002, 2001 and 2000, respectively. The principal reasons for the change 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, 2002, along with cash that will be generated in 2003 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 or extend real estate debt and seek additional borrowings against real estate to meet its cash requirements. Historically, management has been successful at extending its current maturity obligations. Net cash used in operations was $9.1 million in 2002, $895,000 in 2001 and $1.1 million in 2000. 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) was $43.9 million in 2002, $56.0 million in 2001, and $56.6 million in 2000. Of the decrease in property cash flow from 2001 to 2002, $4.3 million and $6.3 million was due to the sale of 16 commercial properties and 24 apartments, respectively in 2002 and 2001, $628,000, $646,000 and $821,000 was due to the lower occupancies at TCI's commercial, apartment and hotel properties, respectively, $125,000 was due to increases in property taxes at TCI's land properties, $453,000 was due to the purchase of 13 land parcels in 2002 and 2001, and $275,000 was due to the completion of the hotel in Poland. These decreases were offset by increases of $1.3 million, and $1.5 million from the purchase of two commercial properties and five apartments, respectively in 2002 and 2001. In 2001, decreases in cash flow of $8.6 million were due to the sale of 29 apartments in 2001 and 2000, and $2.7 million was due to the sale of eight commercial properties and one industrial warehouse in the Kelly portfolio in 2001 and 2000. These decreases were offset by increases in cash flow from property operations of which $900,000 and $2.7 million were from the purchase of 10 existing apartments and seven commercial properties in 2001 and 2000, and $2.5 million and $4.5 million were due to increases in rents at TCI's apartments and commercial properties, respectively. Management believes that this trend of decreased cash flow from property operations will continue as a result of TCI's selling of income producing properties to meet its cash requirements. 23 Interest collected was $3.2 million in 2002, $1.6 million in 2001, and $1.0 million in 2000. These increases were due to TCI funding seven loans in 2002, eight loans in 2001 and two loans in the fourth quarter in 2000. Interest collected is expected to decrease in 2003 due to the payoff of seven loans in 2002. Interest paid was $41.4 million in 2002, $39.5 million in 2001 and $45.1 million in 2000. Of the increase in interest paid from 2001 to 2002, $1.4 million, $51,000 and $1.3 million was due to the refinancing of 12 land parcels, 3 commercial and 17 apartment properties, respectively in 2002 and 2001, $631,000, $3.6 million, $2.7 million was due to the purchase of 13 land parcels, 2 commercial properties and 5 apartments, respectively in 2002 and 2001, and $259,000 was due to default interest payments at TCI's Chicago hotels. These increases were offset by decreases of $2.2 million and $4.3 million due to the sale of 16 commercial properties and 24 apartments, respectively in 2002 and 2001, and $212,000, $1.1 million and $229,000 was due to principal paydowns and lower variable interest rates at TCI's land, commercial and apartment properties, respectively. In 2001, decreases of $6.8 million was due to the sale of 40 properties subject to debt in 2001 and 2000, $1.3 million was due to lower variable interest rates, and $1.5 million was due to principal paydowns. These decreases were offset by increases of $3.8 million due to the purchase of 18 properties subject to debt in 2001 and 2000 and $200,000 was due to the refinancing of 14 properties in 2001 and 2000. Interest paid will continue to decrease as TCI sells properties subject to debt. Advisory and net income fees paid to affiliate was $4.5 million in 2002, $7.9 million in 2001 and $10.5 million in 2000. The decreases were due to a decrease in net income. Advisory and net income fees are expected to decrease as additional properties are sold. TCI paid incentive fees of $2.9 million to an affiliate in 2001. No such fee was paid in 2002 or 2000. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT." General and administrative expenses paid were $8.9 million in 2002, $10.9 million in 2001 and $7.9 million in 2000. The decrease in 2002 was due to decreases in consulting fees, taxes and cost reimbursements. Increases in 2001 of $1.8 million, $615,000, $249,000, and $219,000 were due to increases in consulting fees, legal fees, taxes, and insurance, respectively. Distributions were received from equity investees operating cash flow of $646,000 in 2001 and $172,000 in 2000. See NOTE 5. "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 2002, TCI received cash of $12.3 million from the collection of seven mortgage notes receivable, $3.8 million in mortgage receivable principal payments and paydowns, net cash of $176.1 million from new mortgage borrowings and refinancings and an additional $106.1 million from property sales. In 2002, $12.7 million was expended on property purchases, $104.2 million in cash was expended on construction projects, of which $97.4 million was funded by additional borrowings, $7.0 million was expended on capital improvements, and a total of $95.7 million in principal payments were made on mortgage debt. Also in 2002, TCI made net cash advances to affiliates and related parties of $46.0 million. In repayment of these advances, TCI received $14.5 million in notes receivable, real estate valued at $93.9 million with corresponding debt of $62.2 million assumed at a weighted average interest rate of 12.7% and TCI was credited with $5.3 million against construction supervision and other fees owed by TCI for TCI's apartments under construction. The remaining net cash funding is still due and payable. 24 In 2001, TCI received cash of $3.7 million from the collection of two mortgage notes receivable, $2.3 million in mortgage receivable principal payments, net cash of $29.1 million from new mortgage borrowings and refinancings and an additional $100.8 million from property sales. In 2001, $19.7 million in cash was expended on property purchases, $24.5 million in cash was expended on construction projects, $9.1 million was expended on capital improvements, and a total of $66.1 million in principal payments were made on mortgage debt. 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. TCI paid dividends to its Common stockholders totaling $4.7 million or $.54 per share in 2000. In 2001, TCI repurchased 593,200 shares of Common Stock in a private block purchase for a total cost of $9.5 million. Scheduled principal payments on notes payable of $209.3 million are due in 2003. For those mortgages that mature in 2003, 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. 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 TCI had net income of $4.9 million in 2002, including gains on sale of real estate totaling $43.9 million, $19.8 million in 2001, including gains on sale of real estate totaling $48.9 million, and $29.8 million in 2000, including gains on sale of real estate totaling $50.6 million. Fluctuations in the components of revenues and expense between 2002, 2001 and 2000 are discussed below. Rents were $109.7 million in 2002, $115.4 million in 2001, and $133.2 million in 2000. Of the decrease in rents from 2001 to 2002, $3.9 million and $10.8 million was due to the sale of six commercial properties and 15 apartments, respectively in 2001, $608,000 and $1.5 million was due to lower occupancies at TCI's apartments and hotels, respectively. These decreases were offset by increases of $3.0 million, and $5.4 million from the purchase of two commercial properties and five apartments, respectively in 2002 and 2001, $1.9 million and $1.0 million was due to the completion of four apartments and one hotel, respectively in 2002, and $623,000 was due to increased rents at TCI's commercial properties. Of the decrease in rents from 2000 to 2001, $3.2 million and $20.4 million was due to the sale of eight commercial properties and 29 apartments, respectively in 2001 and 2000. These decreases were offset by increases of $2.4 million from the purchase of 17 apartments in 2001 and 2000, and $1.9 million was due to increased rents and occupancies at TCI's apartments. In 2000, TCI leased its four U.S. hotels to Regis Hotel Corporation, an affiliate to BCM, at an annual base rent totaling 25 $503,477 per year plus 30% of the hotel's gross revenues. Beginning January 1, 2001, TCI no longer leased the hotels and recognized revenues based on the operations of the hotels. From this change, rents increased at TCI's hotels by $4.4 million. Rents are expected to decrease in 2003 as TCI selectively sells income producing properties in 2003. Property operations expenses were $71.0 million in 2002, $68.5 million in 2001, and $74.6 million in 2000. Of the increase in property operations from 2001 to 2002, $435,000, $1.7 million and $3.9 million was due to the purchase of 13 land parcels, two commercial properties and five apartments, respectively in 2002 and 2001, $1.9 million and $1.3 million was due to the completion of four apartments and one hotel, respectively in 2002, and $1.1 million and $1.8 million was due to increases in operating expenses at TCI's commercial properties and apartments, respectively in 2002 and 2001. These increases were offset by decreases of $1.9 million and $6.9 million due to the sale of six commercial properties and 15 apartments, respectively in 2001, and $455,000 was due to the lower operating expenses at TCI's hotels. Of the decrease in property operations from 2000 to 2001, $7.6 million due to the sale of 29 apartments in 2001 and 2000. Property operating expenses are expected to increase as TCI continues to construct apartments in 2003. Interest and other income was $4.1 million in 2002, $2.9 million in 2001, and $2.4 million in 2000. The increase in 2002 was due to TCI funding seven loans in 2002. The increase in 2001 was primarily due to TCI funding two loans in the fourth quarter of 2000 and eight loans in 2001. Interest income in 2003 is expected to decrease due to the payoff of seven of TCI's loans in 2002. Prior to the first quarter of 2001, TCI accounted for its investment in ARI, an affiliate, as an available for sale marketable security. In the first quarter of 2001, TCI began accounting for its investment in ARI using the equity method. Equity losses of investees was $3.8 million in 2002, $6.0 million in 2001, and $556,000 in 2000. The losses from equity investees are primarily attributed to increased operating losses for IORI and ARI. Equity losses are expected to increase with decreases in operating income from ARI and IORI as ARI and IORI continue to sell income producing properties. Interest expense was $38.9 million in 2002, $36.8 million in 2001, and $46.5 million in 2000. Of the increase in interest expense from 2001 to 2002, $838,000, $4.0 million, $2.5 million and $550,000 was due to the purchase of six land parcels, two commercial properties, five apartments and one hotel, respectively subject to debt in 2002 and 2001, $713,000, $56,000 and $1.5 million was due to the financing and refinancing of four land parcels held for investment, three commercial properties and 17 apartments, respectively in 2002, $374,000 was due to an increase in the interest rate at TCI's Chicago hotels from TCI's default in a debt covenant, and $510,000 was due to an interest swap agreement TCI entered into in 2002. These increases were offset by decreases of $1.8 million and $3.3 million due to the sale of six commercial properties and 15 apartments, respectively in 2001, and $121,000, $1.9 million and $271,000 was due to the principal paydowns and lower variable rates at TCI's land, commercial and apartment properties, respectively. Of the decrease in interest from 2000 to 2001, $6.0 million was due to the sale of 29 apartments in 2001 and 2000, $1.4 million was due to the sale of eight commercial properties and one industrial warehouse in the Kelly portfolio in 2001 and 2000, and $289,000 was due to land loan payoffs and principal paydowns in 2001 and 2000. Of the remaining decrease, $263,000 was due to lower variable interest rates at TCI's apartments, $1.3 million was due to lower variable interest rates at TCI's commercial properties and $278,000 was due to lower variable interest rates at TCI's hotels. Interest expense is expected to increase or remain constant as TCI completes construction projects and increases its debt by refinancings. Depreciation expense was $19.0 million in 2002, and $17.1 million in 2001, and $18.9 million 2000. Of the increase in depreciation expense from 2001 to 2002, $528,000 and $687,000 was due to the purchase of two commercial properties and five apartments, respectively in 2002 and 2001, $255,000 and $187,000 was due to the completion of four apartments and one hotel in 2002, and $1.8 million was due to tenant and building improvements at TCI's commercial properties. These increases were offset by decreases of $673,000 and $907,000 due to the sale of six commercial properties and 15 apartments, respectively in 2001. The decrease in depreciation expense from 2000 to 2001 is primarily due to the sale of 29 apartments in 2001. Depreciation expense is expected to increase or remain constant as TCI completes construction projects during 2003. 26 Provision for asset impairment was $2.6 million in 2002. TCI recorded asset impairments of $2.6 million, representing the write down of certain operating properties to current estimated fair value. These assets include the following properties:
Fair Property Costs to Property Location Units/Acres Value Basis Sell Impairment ---------------------- ------------ ----------- ------ -------- -------- ---------- Apartments Apple Lane............ Lawrence, KS 75 Units $1,580 $1,593 $238 $251 Fairway View.......... El Paso, TX 264 Units 5,700 5,242 863 405 Fountains of Waterford Midland, TX 172 Units 1,900 2,006 285 391 Plantation............ Tulsa, OK 138 Units 2,545 3,100 145 700 Sunchase.............. Odessa, TX 300 Units 4,100 3,479 746 125 Land Red Cross............. Dallas, TX 2.89 Acres 8,400 8,348 758 707
The Red Cross land was under contract to sell and the sales price was used as fair value. The fair value determined for four apartments above were agreed upon purchase prices as part of the refinancing transaction with Metra Capital, LLC. The costs to sell were actual fees paid to refinance the properties. TCI is in current negotiations to refinance the Plantation Apartments. Lenders will refinance the property at between 80% and 90% of the value of the property. Currently, the loans are in the range of $2.0 million and $2.4 million. Advisory fee expense was $4.5 million in 2002, and $5.3 million in 2001 and 2000. The decrease in 2002, was due to a $1.4 million operating expense refund from BCM. See NOTE 11. "ADVISORY AGREEMENT." This decrease was offset by an increase in advisor fees due to a 20% increase in gross assets, the basis of the fee. Advisory fees are expected to decrease as TCI sells properties. Net income fee to affiliate was $374,000 in 2002, $1.9 million in 2001, and $2.4 million in 2000. The net income fee is payable to TCI's advisor based on 7.5% of TCI's net income. Incentive fee to affiliate was $3.2 million in 2001. The incentive fee is payable to TCI's advisor based on 10% of aggregate sales consideration less TCI's cost of all properties sold during the year. No incentive fee was paid in 2000 or 2002. Realized losses on investments of $3.1 million were recognized in 2001. TCI recognized a previously unrealized loss on ARI's marketable equity securities of $3.1 million in 2001. General and administrative expenses were $8.8 million in 2002, $11.5 million in 2001, and $8.5 million in 2000. The decrease in 2002, was due to decreases in consulting fees, taxes and cost reimbursements to the advisor. In 2001, increases of $1.8 million, $615,000, $249,000, and $219,000 were due to increases in consulting fees, legal fees, taxes, and insurance, respectively. General and administrative expenses are expected to remain constant or decrease from decreased litigation and consulting fees. 27 Income from discontinued operations was $41.7 million in 2002, $703,000 in 2001, and $ 447,000 in 2000. Income from discontinued operations relates to 18 properties that TCI sold during 2002, and one parcel of land designated as held for sale. The following table summarizes revenue and expense information for these properties sold and held-for-sale.
For the Year Ended December 31, ------------------------------- 2002 2001 2000 ------- ------- ------ Revenue Rental.................................................... $13,063 $20,719 $6,489 Property operations....................................... 9,156 12,552 3,562 ------- ------- ------ 3,907 8,167 2,927 Expenses Interest.................................................. 4,489 4,639 1,580 Depreciation.............................................. 1,623 2,825 900 ------- ------- ------ 6,112 7,464 2,480 ------- ------- ------ Net income (loss) from discontinued operations before gains on sale of real estate................................... (2,205) 703 447 Gain on sale of operations................................ 38,945 -- -- Equity in investees gain on sale of real estate........... 5,013 -- -- ------- ------- ------ Net income from discontinued operations.................... $41,753 $ 703 $ 447 ======= ======= ======
Discontinued operations have not been segregated in the consolidated statements of cash flows. Therefore, amounts for certain captions will not agree with respective consolidated statements of operations. In 2002, 2001 and 2000, gains on sale of real estate totaling $43.9 million, $48.9 million and $50.6 million were recognized. See NOTE 2. "REAL ESTATE." Related Party Transactions Historically, TCI, ARI, BCM and IORI have each 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 parties. Operating Relationships TCI received rents of $88,000 in 2002, $120,000 in 2001 and $70,000 in 2000 from BCM for BCM's lease at Addison Hanger. BCM owns a corporate jet that is housed at the hanger and TCI has available space at the hanger. Property Transactions In January 2002, TCI purchased 100% of the outstanding common shares of ART Two Hickory Corporation from ARI, for $4.4 million. See NOTE 3. "NOTES AND INTEREST RECEIVABLE." The purchase price was determined based upon the market value of the property exchanged, using a market rate multiple of net operating income ("cap rate") of 7.0%. The business purpose of the transaction was for TCI to make an equity investment in Two Hickory anticipating a profitable return. 28 In February 2002, TCI sold a $2.0 million senior participation interest in a loan to IORI. See NOTE 3. "NOTES AND INTEREST RECEIVABLE." Management determined that TCI could benefit from the increase in cash and decrease its notes receivable outstanding portfolio. In March 2002, TCI paid cash of $600,000 and received from ARI two parcels of land, a 24.5 acre tract of Rasor land, a 16.89 acre tract of Lakeshore Villas land, and the 45,623 sq. ft. Oaktree Village Shopping Center in exchange for the 80,278 sq. ft. Plaza on Bachman Creek Shopping Center. The exchange value prices for the shopping centers were determined based on a cap rate of 10.5% and the value for the Rasor and Lakeshore Villas land was determined on appraised rates of $3.36 and $1.29, respectively, per square foot. The business purpose of the transaction was for TCI to construct apartments on the Rasor and Lakeshore Villas land and to give ample value for the property TCI exchanged, the Oaktree Shopping Center was added to the transaction. In April 2002, TCI purchased 100% of the following entities from ARI: Garden Confederate Point, L.P., Garden Foxwood, L.P., Garden Woodsong, L.P. and ART One Hickory Corporation for $10.0 million. See NOTE 3. "NOTES AND INTEREST RECEIVABLE." The purchase price for these entities was determined based on a cap rate of 8.41% for the partnerships and 7.0% for ART One Hickory Corporation. The business purpose of the transaction was for TCI to make an equity investment in the entities anticipating a profitable return. In June 2002, TCI purchased Centura Tower, Ltd. partnership, which owns the Centura Tower Office Building from ARI for $50.0 million. See NOTE 2. "REAL ESTATE." The purchase price for the Centura Tower was determined based on appraised value and replacement cost. The business purpose of the transaction was for TCI to acquire a Class A office building with significant upside potential anticipating a profitable return. Also in June 2002, TCI purchased five parcels of unimproved land from ARI: the Hollywood Casino, Marine Creek, Mason Park, Nashville and Palm Desert land parcels. See NOTE 2. "REAL ESTATE." The purchase price of the Hollywood Casino land was determined based on an appraised rate of $9.10 per square foot. The business purpose of the transaction was for TCI to consolidate its holdings within the Mercer Crossing development. The purchase price for the Marine Creek, Mason Park, Nashville and Palm Desert land parcels was determined based on appraised rates of $2.00, $3.56, $4.00 and $1.48 per square foot, respectively. The business purpose of the transaction was for TCI to develop apartments on these four tracts of land. In December 2002, TCI purchased NLP/CH, Ltd. partnership, which owns the Centura land parcel from ARI. See NOTE 2. "REAL ESTATE." The purchase price was determined based on an appraised rate of $34.89 per square foot. The business purpose of the transaction was for TCI to construct apartments on the land adjacent to its Centura Tower office building. 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 29 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 year 1999, 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. 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. TCI is exposed to interest rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. TCI does not hold financial instruments for trading or other speculative purposes, but rather issues these financial instruments to finance its portfolio of real estate assets. TCI's interest rate sensitivity position is managed by TCI's finance department. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. TCI's earnings are affected as changes in short-term interest rates impact its cost of variable rate debt and maturing fixed rate debt. A large portion of TCI's market risk is exposure to short-term interest rates from variable rate borrowings. The impact on TCI's financial statements of refinancing fixed debt that matured during 2002 was not material. As permitted, management intends to convert a significant portion of those borrowings from variable rates to fixed rates in 2003. If market interest rates for variable rate debt average 100 basis points more in 2003 than they did during 2002, TCI's interest expense would increase, and income would decrease by $1.2 million. This amount is determined by considering the impact of hypothetical interest rates on TCI's borrowing cost. This analysis did not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in TCI's financial structure. 30 The following table contains only those exposures that existed at December 31, 2002. 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 Notes receivable Variable interest rate-fair value...................... $ 4,258 2003 2004 2005 2006 2007 Thereafter Total -------- ------- ------- ------- ------- ---------- -------- Instrument's maturities...... $ 4,258 $ -- $ -- $ -- $ -- $ -- $ 4,258 Instrument's amortization.... -- -- -- -- -- -- -- Interest................... 26 -- -- -- -- -- 26 Average rate............... 7.25% -- % -- % -- -- -- Fixed interest rate-fair value $ 24,719 2003 2004 2005 2006 2007 Thereafter Total -------- ------- ------- ------- ------- ---------- -------- Instrument's maturities...... $ 4,274 $15,274 $ 150 $ -- $ 4,180 $ -- $ 23,878 Instrument's amortization.... 45 50 55 62 68 31 311 Interest................... 2,306 1,366 280 265 70 -- 4,287 Average rate............... 11.14% 10.39% 6.51% 6.23% 6.45% 10.40% Liabilities Non-trading Instruments-Equity Price Risk Notes payable Variable interest rate-fair value...................... $107,937 2003 2004 2005 2006 2007 Thereafter Total -------- ------- ------- ------- ------- ---------- -------- Instrument's maturities...... $ 70,505 $26,604 $19,550 $ 1,659 $ 9,709 $ 6,392 $134,419 Instrument's amortization.... 2,124 1,868 1,262 815 713 7,540 14,322 Interest................... 5,509 3,307 2,123 1,374 1,182 8,621 22,116 Average rate............... 5.80% 4.90% 4.80% 5.20% 5.00% 5.20% Fixed interest rate-fair value $529,134 2003 2004 2005 2006 2007 Thereafter Total -------- ------- ------- ------- ------- ---------- -------- Instrument's maturities...... $125,996 $48,480 $11,564 $21,392 $17,827 $ 85,614 $310,873 Instrument's amortization.... 10,637 4,327 4,150 4,157 3,919 107,481 134,671 Interest................... 27,328 25,019 22,449 21,522 19,185 286,643 402,146 Average rate............... 9.10% 7.50% 7.40% 7.40% 7.30% 7.00%
31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Financial Statements Report of Independent Certified Public Accountants........................................... 33 Consolidated Balance Sheets--December 31, 2002 and 2001...................................... 34 Consolidated Statements of Operations--Years Ended December 31, 2002, 2001 and 2000.......... 35 Consolidated Statements of Stockholders' Equity--Years Ended December 31, 2002, 2001 and 2000 36 Consolidated Statements of Cash Flows--Years Ended December 31, 2002, 2001 and 2000.......... 37 Notes to Consolidated Financial Statements................................................... 39 Financial Statement Schedules Schedule III--Real Estate and Accumulated Depreciation....................................... 68 Schedule IV--Mortgage Loans on Real Estate................................................... 75
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. 32 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, 2002 and 2001 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted in the United States of America. 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 that our audits provide a reasonable basis for our opinion. As described in Note 21, 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, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the schedules referred to above present fairly, in all material respects, the information set forth therein. As discussed in Note 18, in 2002 the Company changed its method of accounting for discontinued operations. BDO SEIDMAN, LLP Dallas, Texas March 21, 2003 33 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS
December 31, --------------------- 2002 2001 --------- -------- (dollars in thousands, except per share) Assets Real estate held for investment.................................................... $ 818,636 $712,832 Less--accumulated depreciation..................................................... (81,659) (90,661) --------- -------- 736,977 622,171 Real estate held for sale.......................................................... 22,510 516 Notes and interest receivable Performing (including $12,574 in 2002 and $1,970 in 2001 from related parties).. 26,608 17,620 Nonperforming, nonaccruing...................................................... 2,682 5,247 --------- -------- 29,290 22,867 Less--allowance for estimated losses............................................... (1,337) (818) --------- -------- 27,953 22,049 Investment in real estate entities................................................. 13,757 14,230 Cash and cash equivalents.......................................................... 10,558 10,346 Other assets (including $19,187 in 2002 and $14,170 in 2001 from affiliates and related parties)............................................................. 46,734 39,840 --------- -------- $ 858,489 $709,152 ========= ======== Liabilities and Stockholders' Equity Liabilities Notes and interest payable......................................................... $ 586,628 $461,037 Liabilities related to assets held for sale........................................ 15,724 -- Other liabilities (including $5,272 in 2002 and $1,068 in 2001 to affiliates and related parties)................................................................. 31,099 25,966 --------- -------- 633,451 487,003 Commitments and contingencies Minority interest.................................................................. 2,644 5,381 Stockholders' equity............................................................... Preferred Stock Series A; $.01 par value; authorized, 6,000 shares; issued and outstanding 5,829 shares (liquidation preference $583).................................... -- -- Series C; $.01 par value; authorized, issued and outstanding 30,000 shares; (liquidation preference $3,000)............................................... -- -- Common Stock, $.01 par value; authorized, 10,000,000 shares; issued and outstanding 8,072,594 shares in 2002 and 8,042,594 shares in 2001............................ 81 80 Paid-in capital.................................................................... 257,040 256,833 Accumulated deficit................................................................ (35,294) (40,145) Accumulated other comprehensive income............................................. 567 -- --------- -------- 222,394 216,768 --------- -------- $ 858,489 $709,152 ========= ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 34 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, --------------------------------------- 2002 2001 2000 ---------- ---------- ---------- (dollars in thousands, except per share) Property revenue Rents................................................. $ 109,726 $ 115,439 $ 133,173 Property operations................................... 71,018 68,510 74,608 ---------- ---------- ---------- Operating income.................................. 38,708 46,929 58,565 Other income Interest and other income............................. 4,131 2,924 2,370 Equity loss of equity investees....................... (3,818) (628) (556) Gain on sale of real estate........................... -- 48,961 50,550 ---------- ---------- ---------- 313 51,257 52,364 Other expense Interest.............................................. 38,958 36,809 46,534 Depreciation.......................................... 19,042 17,136 18,849 Provision for asset impairment........................ 2,579 -- -- Provision for losses.................................. 169 281 -- Advisory fees......................................... 4,465 5,346 5,258 Net income fee........................................ 374 1,850 2,415 Incentive fees........................................ -- 3,167 -- General and administrative............................ 8,774 11,496 8,506 Realized loss on investments.......................... -- 3,059 -- Loss on foreign currency transactions................. 2,455 -- -- Minority interest..................................... (893) (66) 32 ---------- ---------- ---------- 75,923 79,078 81,594 Net income (loss) from continuing operations............. (36,902) 19,108 29,335 Discontinued Operations Income (loss) from operations............................ (2,205) 703 447 Gain on sale of operations............................... 38,945 -- -- Equity in investees gain on sale of real estate.......... 5,013 -- -- ---------- ---------- ---------- 41,753 703 447 Net income............................................... 4,851 19,811 29,782 Preferred dividend requirement........................... (190) (172) (22) ---------- ---------- ---------- Net income applicable to Common shares................... $ 4,661 $ 19,639 $ 29,760 ========== ========== ========== Basic earnings per share Net income (loss) from continuing operations............. $ (4.60) $ 2.24 $ 3.40 Discontinued operations.................................. 5.18 .08 .05 ---------- ---------- ---------- Net income applicable to Common shares................... $ .58 $ 2.32 $ 3.451 ========== ========== ========== Diluted earnings Net income (loss) from continuing operations............. $ (4.60) $ 2.20 $ 3.40 Discontinued operations.................................. 5.18 .08 .05 ---------- ---------- ---------- Net income applicable to Common shares................... $ .58 $ 2.28 $ 3.45 ========== ========== ========== Weighted average Common shares used in computing earnings per share.............................................. Basic................................................. 8,057,361 8,478,377 8,631,621 Diluted............................................... 8,057,361 8,615,465 8,637,290
The accompanying notes are an integral part of these Consolidated Financial Statements. 35 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Common Stock Other ---------------- Paid-in Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Income Equity --------- ------ -------- ----------- ------------- ------------- (dollars in thousands, except shares) Balance, January 1, 2000............... 8,626,611 $86 $268,046 $(89,738) $ 718 $179,112 Comprehensive income Unrealized (loss) on marketable equity securities of affiliate.............. -- -- -- -- (3,777) (3,777) Net income............................. -- -- -- 29,782 -- 29,782 -------- 26,005 Sale of Common Stock under dividend reinvestment Plan.................... 9,743 -- 126 -- -- 126 Common dividends ($.54 per share)...... -- -- (4,661) -- -- (4,661) Preferred dividends ($3.77 per share).. -- -- (22) -- -- (22) --------- --- -------- -------- ------- -------- Balance, December 31, 2000............. 8,636,354 86 263,489 (59,956) (3,059) 200,560 Issuance of Series C Preferred Stock, 30,000 shares........................ -- -- 3,000 -- -- 3,000 Comprehensive income Realized (loss) on marketable equity securities of affiliate.............. -- -- -- -- 3,059 3,059 Net income............................. -- -- -- 19,811 -- 19,811 -------- 22,870 Fractional shares...................... (560) Repurchase of Common Stock............. (593,200) (6) (9,484) -- -- (9,490) Series A Preferred Stock cash dividend ($5.00 per share).................... -- -- (29) -- -- (29) Series B Preferred Stock cash dividend ($.38 per share)..................... -- -- (115) -- -- (115) Series C Preferred Stock cash dividends ($.95 per share)..................... -- -- (28) -- -- (28) --------- --- -------- -------- ------- -------- Balance, December 31, 2001............. 8,042,594 80 256,833 (40,145) -- 216,768 Comprehensive income Unrealized (loss) on foreign currency translation.......................... -- -- -- -- 567 567 Net income............................. -- -- -- 4,851 -- 4,851 -------- 5,418 Issuance of Common Stock upon exercise of stock options............ 30,000 1 397 -- -- 398 Series A Preferred Stock cash dividend ($5.00 per share).................... -- -- (29) -- -- (29) Series C Preferred Stock cash dividends ($5.00 per share).................... -- -- (161) -- -- (161) --------- --- -------- -------- ------- -------- Balance, December 31, 2002............. 8,072,594 $81 $257,040 $(35,294) $ 567 $222,394 ========= === ======== ======== ======= ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 36 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, ------------------------------ 2002 2001 2000 --------- -------- --------- (dollars in thousands) Cash Flows from Operating Activities Rents collected................................................... $ 124,359 $136,076 $ 136,767 Interest collected................................................ 3,165 1,645 1,008 Interest paid..................................................... (41,379) (39,452) (45,142) Payments for property operations.................................. (80,424) (80,113) (80,148) Advisory and net income fee paid to affiliate..................... (5,876) (7,881) (10,486) Incentive fee paid to affiliate................................... -- (2,903) -- General and administrative expenses paid.......................... (8,943) (10,877) (7,936) Distributions from operating cash flow of equity investees........ -- 646 172 Other............................................................. (14) 1,964 4,676 --------- -------- --------- Net cash used in operating activities......................... (9,112) (895) (1,089) Cash Flows from Investing Activities Collections on notes receivable (including $1,333 in 2002 and $12,000 in 2000 from affiliates)................................ 16,193 6,042 20,532 Funding of notes receivable (including $14,481 in 2002, $1,970 in 2001 and $12,000 in 2000 to affiliates)......................... (18,337) (19,455) (17,500) Acquisitions of real estate....................................... (12,688) (19,669) (32,450) Real estate improvements.......................................... (7,001) (9,139) (14,664) Real estate construction (including $4,679 to affiliates in 2002). (104,235) (24,478) -- Proceeds from sale of real estate................................. 106,085 100,818 79,869 Payments made under interest rate swap agreement.................. (272) -- -- Refunds/(deposits) on pending purchase............................ (716) (724) 1,887 Distributions from investing cash flow of equity investees........ -- -- 1,296 Payments (to) from advisor........................................ (39,739) 3,368 (2,634) Net advance to affiliates......................................... (6,232) (553) -- Contributions to equity investees................................. (15) (151) (3,974) --------- -------- --------- Net cash provided by (used in) investing activities........... (66,957) 36,059 32,362 Cash Flows from Financing Activities Payments on notes payable......................................... (95,731) (66,063) (107,547) Proceeds from notes payable....................................... 176,069 29,094 63,009 Payments to minority interests.................................... (704) -- -- Dividends paid.................................................... (104) (172) (4,683) Repurchase of Common Stock........................................ -- (9,490) -- Deferred financing costs.......................................... (3,647) (510) (1,121) Proceeds from exercise of stock options........................... 398 -- -- Sale of Common Stock under dividend reinvestment plan............. -- -- 126 --------- -------- --------- Net cash provided by (used in) financing activities........... 76,281 (47,141) (50,216) --------- -------- --------- Net increase (decrease) in cash and cash equivalents................. 212 (11,977) (18,943) Cash and cash equivalents, beginning of year......................... 10,346 22,323 41,266 --------- -------- --------- Cash and cash equivalents, end of year............................... $ 10,558 $ 10,346 $ 22,323 ========= ======== =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 37 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued
For the Years Ended December 31, ------------------------------- 2002 2001 2000 -------- -------- -------- (dollars in thousands) Reconciliation of net income to net cash used in operating activities Net income................................................................. $ 4,851 $ 19,811 $ 29,782 Adjustments to reconcile net income to net cash used in operating activities Depreciation and amortization.............................................. 20,666 19,705 19,702 Provision for loss on notes receivable..................................... 169 -- -- Provision for asset impairment............................................. 2,579 -- -- Equity loss of equity investees............................................ 3,818 5,950 556 Realized loss on investments............................................... -- 3,059 -- Loss on foreign currency transactions...................................... 2,455 -- -- Gain on sale of real estate................................................ (43,958) (54,270) (50,550) Distributions from operating cash flow of equity investees................. -- 646 172 Increase in interest receivable............................................ (665) (137) (28) (Increase) decrease in other assets........................................ (1,687) 2,283 (1,463) Increase (decrease) in interest payable.................................... 1,397 (185) 299 Increase in other liabilities.............................................. 1,263 2,243 441 -------- -------- -------- Net cash used in operating activities.................................. $ (9,112) $ (895) $ (1,089) ======== ======== ======== Schedule of noncash investing and financing activities Carrying value of real estate acquired through foreclosure in satisfaction of notes receivable...................................................... $ -- $ -- $ 318 Notes payable assumed on purchase of real estate........................... 63,555 37,776 58,949 Series B Preferred Stock issued in conjunction with purchase of real estate........................................................... -- (1,500) 1,500 Series C Preferred Stock, issued in conjunction with purchase of real estate........................................................... -- 3,000 -- Debt assumed by purchaser in sales of real estate.......................... 12,110 42,784 16,798 Limited partnership interest received on sale of real estate............... -- 1,500 -- Notes receivable provided on sale of real estate........................... 6,700 -- -- Real estate received on exchange with related party........................ 4,145 -- -- Real estate exchanged with related party................................... 4,145 -- -- Real estate received from related party as payment of debt................. 46,200 -- -- Notes receivable payments received by affiliate and added to affiliate receivable balance....................................................... 2,544 -- -- Issuance of note payable for which cash proceeds were received by the advisor.................................................................. 4,000 -- --
The accompanying notes are an integral part of these Consolidated Financial Statements. 38 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 accounting principles generally accepted in the United States of America, the most significant of which are described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES." 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 2001 and 2000 have been reclassified to conform to the 2002 presentation. NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and 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. In October 2001, TCI announced a preliminary agreement for the acquisition of TCI by American Realty Investors, Inc. ("ARI"). See NOTE 18. "COMMITMENTS AND CONTINGENCIES AND LIQUIDITY." 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 accounting principles generally accepted in the United States of America it is 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. Recent Accounting pronouncements. In April 2002, the FASB issued Statement 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Correction" ("SFAS No. 145"). Statement 4, "Reporting Gains and Losses from Extinguishment of Debt" ("SFAS No. 4"), required that gains and losses from the extinguishment of debt that were included in the determination of net income be aggregated and, if material, classified as an extraordinary item. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 will require TCI to reclassify prior period items that do not meet the extraordinary classification. The provisions of SFAS No. 145 that relate to the rescission of SFAS No. 4 become effective in fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 is not expected to have a material impact on the consolidated financial position or results of operations of TCI. 39 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force ("EITF") Issued 94-3. TCI will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of a company's commitment to an exit plan. SFAS No. 146 also established that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amount recognized. In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions--an amendment to FASB No. 72 and 144 and FASB Interpretation No. 9." SFAS No. 147 provides guidance to companies in reporting and disclosing the purchase of certain financial institutions. Management currently believes that the adoption of SFAS No. 147 will not have a material impact on the financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure, an amendment of FASB No. 123." SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this statements amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. Management currently believes that the adoption of SFAS No. 148 will not have a material impact on the financial statements. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which disclosures are effective for financial statements issued after December 15, 2002. While the Company has various guarantees included in contracts in the normal course of business, these guarantees would not represent significant commitments or contingent liabilities of the indebtedness of entities outside of the consolidated company. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which requires the consolidation of variable interest entities, as defined. FIN 46 is applicable to financial statements to be issued by the Company after 2003; however, disclosures are required currently if TCI expects to consolidate any variable interest entities. TCI does not currently believe that any entities will be consolidated as a result of FIN 46. Real estate held for investment and depreciation. Real estate held for investment is carried at cost. Statement of Financial Accounting Standards No. 144 ("SFAS No. 144") 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. 144 also requires that properties held for sale 40 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) be reported at the lower of carrying amount or fair value less costs of sale. If a reduction in a held for sale 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 but for which significant influence can be exerted, and for its investment in the shares of common stock of Income Opportunity Realty Investors, Inc., ("IORI") and ARI. 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 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 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 investments purchased with an original maturity of three months or less are 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 and convertible preferred stock. The weighted average common shares used to calculate diluted earnings per share for the years ended December 31, 2001 and 2000 include 301,548 and 25,000 shares, respectively, to reflect the dilutive effect of options and convertible preferred stock to purchase shares of common stock. For the year ended December 31, 2002, 223,784 weighted average shares were excluded from the calculation of dilutive earnings per share because the effect of their inclusion would be antidilutive. Stock-based employee compensation. TCI accounts for stock-based compensation utilizing the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, no compensation expense is recognized for fixed option plans because the exercise prices of employee stock options equal or exceed the market prices of the underlying stock on the dates of grant. 41 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table represents the effect on net income and earnings per share if TCI had applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," to stock-based employee compensation:
2002 2001 2000 ------ ------- ------- (dollars in thousands, except per share amounts) Net income applicable to common shares, as reported.......................... $4,661 $19,639 $29,760 Deduct: Stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects................... (105) (190) (223) ------ ------- ------- Proforma net income applicable to common shares.............................. $4,556 $19,449 $29,537 ====== ======= ======= Net income per share Basic, as reported........................................................ $ .58 $ 2.32 $ 3.45 Basic, pro forma.......................................................... $ .57 $ 2.30 $ 3.42 Diluted, as reported...................................................... $ .58 $ 2.28 $ 3.45 Diluted, pro forma........................................................ $ .57 $ 2.26 $ 3.42
42 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 2. REAL ESTATE In 2002, TCI purchased the following properties:
Units/ Purchase Net Debt Interest Maturity Property Location Sq.Ft./Acres Price Cash Paid Incurred Rate Date -------- ------------------ -------------- -------- --------- -------- -------- -------- Apartments Blue Lakes Villas(1)...... Waxahachie, TX 186 Units $ 1,012 $1,048 $ -- -- % -- DeSoto Ranch(1)........... DeSoto, TX 248 Units 1,364 1,489 2,246 7.18 12/43 Echo Valley(1)............ Dallas, TX 216 Units 787 788 -- -- -- Spy Glass(1).............. Mansfield, TX 256 Units 1,280 1,042 2,303 7.50 08/43 Vistas at Pinnacle Park(1) Dallas, TX 382 Units 3,202 414 2,788 6.25 07/44 Office Building Centura(2)................ Farmers Branch, TX 410,901 Sq.Ft. 50,000 -- 43,739(3) 13.00(4) 07/03 Shopping Center Oak Tree Village(5)....... Lubbock, TX 45,623 Sq.Ft. 1,467 196 1,389(3) 8.48 11/07 Land 2301 Valley Branch........ Farmers Branch, TX 23.76 Acres 4,165 1,000 3,124 4.00 08/05 Centura(2)................ Farmers Branch, TX 8.75 Acres 13,300 -- 7,150(3) 13.50 03/03 Hollywood Casino(2)....... Dallas, TX 42.64 Acres 16,987 -- 6,222(3) 9.50 03/03 Lakeshore Villas(5)....... Humble, TX 16.89 Acres 947 127 -- -- -- Marine Creek(2)........... Ft. Worth, TX 54 Acres 3,700 -- 1,500(3) 9.00 01/03 Mason Park(2)............. Houston, TX 18 Acres 2,790 -- 2,600(3) 14.00 02/03(5) Nashville(2).............. Nashville, TN 16.57 Acres 1,890 -- 955(3) 15.50 07/03 Palm Desert(2)............ Palm Desert, CA 61 Acres 4,625 -- -- -- -- Rasor(5).................. Plano, TX 24.5 Acres 2,319 310 -- -- --
-------- (1) Land purchased for apartment construction. (2) Property received from ARI, a related party, for payment of debt. (3) Assumed debt. (4) Weighted average. The Centura Tower is encumbered by two loans, one for $28.7 million at 10.5% and the other for $15.0 million at 17.9%. (5) Property exchanged with American Realty Investors, Inc. ("ARI"), a related party, for the Plaza on Bachman Creek Retail Center and the reduction of $600,000 in affiliate receivables. 43 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In 2001, TCI purchased the following properties:
Units/ Purchase Net Debt Interest Maturity Property Location Rooms/Acres Price Cash Paid Incurred Rate Date -------- ------------------ ----------- -------- --------- -------- -------- -------- Apartments Baywalk................. Galveston, TX 192 Units $ 6,590 $ 390 $ 5,856 7.45% 02/11 By the Sea.............. Corpus Christi, TX 153 Units 6,175 862 5,538 7.07 05/09 Courtyard............... Midland, TX 133 Units 1,425 425 1,051 9.25 04/06 Falcon Lakes(1)......... Arlington, TX 284 Units 1,435 1,437 -- -- -- Island Bay.............. Galveston, TX 458 Units 20,360 3,225 16,232 7.40 07/11 Limestone Ranch(1)(2)... Lewisville, TX 252 Units 505 -- -- -- -- Marina Landing.......... Galveston, TX 256 Units 12,050 518 10,912 5.30 12/37(4) River Oaks(1)........... Wiley, TX 180 Units 531 578 -- -- -- Sendero Ridge(1)........ San Antonio, TX 384 Units 1,850 2,635 -- -- -- Tivoli(1)............... Dallas, TX 190 Units 3,000 2,475 10,000 12.00 12/03(5) Verandas at City View(1) Fort Worth, TX 314 Units 2,544 276 2,197 4.75 06/42(4) Waters Edge IV(1)....... Gulfport, MS 80 Units 441 441 -- -- -- Hotel Akademia(3)............. Wroclaw, Poland 165 Rooms 2,184 2,669 -- -- -- Land Mira Lago(2)............ Farmers Branch, TX 8.88 Acres 541 -- -- -- -- Pac Trust............... Farmers Branch, TX 7.11 Acres 1,175 1,231 -- -- -- Seminary West........... Fort Worth, TX 5.36 Acres 222 232 -- -- -- Solco-Valley Ranch...... Dallas, TX 6.07 Acres 1,454 1,525 -- -- --
-------- (1) Land purchased for apartment construction. (2) Land was received from ARI, a related party, in exchange for the Glenwood Apartments. (3) Land purchased for hotel construction. (4) The note was refinanced. See NOTE 6. "NOTES AND INTEREST PAYABLE." (5) The note was paid in full at maturity. 44 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In 2002, TCI sold the following properties:
Units/ Sales Net Cash Debt Gain/(Loss) Property Location Sq.Ft./Acres Price Received Discharged on Sale -------- ------------------ -------------- ------- -------- ---------- ----------- Apartments 4242 Cedar Springs....... Dallas, TX 76 Units $ 2,600 $ 971 $1,288 $1,252 Camelot.................. Largo, FL 120 Units 5,263 1,616 3,298 1,517 Country Crossing......... Tampa, FL 227 Units 5,800 1,836 3,726 3,142 Gladstell Forest......... Conroe, TX 168 Units 4,875 1,713 2,360 2,050 Grove Park............... Plano, TX 188 Units 7,425 2,498 4,504 3,341 Heritage on the River.... Jacksonville, FL 301 Units 12,475 4,317 7,606 5,162 Primrose................. Bakersfield, CA 162 Units 5,000 1,722 2,920 659 Southgreen............... Bakersfield, CA 80 Units 3,600 1,011 2,381 (72) Trails of Windfern....... Houston, TX 240 Units 7,350 2,379 3,654 2,453 Office Building Hartford................. Dallas, TX 174,513 Sq.Ft. 4,000 -- -- -- (1) Jefferson................ Washington, DC 71,877 Sq.Ft. 16,550 5,957 9,679 3,421 NASA..................... Clear Lake, TX 78,159 Sq.Ft. 2,600 2,341 -- 1,341 Plaza Tower.............. St. Petersburg, FL 186,281 Sq.Ft. 17,100 8,313 6,909 8,093 Savings of America....... Houston, TX 68,634 Sq.Ft. 2,800 1,104 1,185 621 Windsor Plaza............ Windcrest, TX 80,522 Sq.Ft. 4,250 3,813 -- 895 Industrial Warehouse Central Storage.......... Dallas, TX 216,035 Sq.Ft. 4,000 2,095 1,063 1,241 Shopping Center Chelsea Square........... Houston, TX 70,275 Sq.Ft. 4,200 1,940 1,986 1,056 Plaza on Bachman Creek(2) Dallas, TX 80,278 Sq.Ft. 4,707 -- -- -- Land Palm Desert.............. Palm Desert, CA 36 Acres 3,600 685 -- 666
-------- (1) Excludes a $920,000 deferred gain from seller financing. See NOTE 3. "NOTES AND INTEREST RECEIVABLE." (2) Property was exchanged with ARI, a related party, for the Oak Tree Village Shopping Center and two parcels of land; the Rasor land parcel and Lakeshore Villas land parcel. TCI also reduced the affiliate receivable from ARI by $600,000. 45 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In 2001, TCI sold the following properties:
Units/Sq.Ft./ Sales Net Cash Debt Gain/(Loss) Property Location Acres Price Received Discharged on Sale -------- ------------------ -------------- ------- -------- ---------- ----------- Apartments Bent Tree Gardens.... Addison, TX 204 Units $ 9,000 $2,669 $ 6,065(1) $ 601 Carseka.............. Los Angeles, CA 54 Units 4,000 2,138 1,466 1,352 Fontenelle Hills..... Bellevue, NE 338 Units 16,500 3,680 12,454(1) 4,565 Forest Ridge......... Denton, TX 56 Units 2,000 682 1,151 1,014 Glenwood............. Addison, TX 168 Units 3,659 -- 2,537(1) -- (2) Heritage............. Tulsa, OK 136 Units 2,286 206 1,948 1,575 Madison at Bear Creek Houston, TX 180 Units 5,400 828 3,442(1) 1,162(4) McCallum Glen........ Dallas, TX 275 Units 8,450 2,633 5,004(1) 1,375(3) McCallum Crossing.... Dallas, TX 322 Units 11,500 1,841 8,101(1) 4,486 Oak Run.............. Pasadena, TX 160 Units 5,800 1,203 4,364 2,227 Park at Colonade..... San Antonio, TX 211 Units 5,800 927 4,066 1,592 Park Lane............ Dallas, TX 97 Units 2,750 1,526 1,103 1,827 South Cochran........ Los Angeles, CA 64 Units 4,650 1,897 1,873 1,660 Summerstone.......... Houston, TX 242 Units 7,225 1,780 5,180(1) 1,884 Sunset Lakes......... Waukegan, IL 414 Units 15,000 6,089 7,243 7,316 Office Buildings Chesapeake Center.... San Diego, CA 57,493 Sq.Ft. 6,575 3,111 2,844 204 Daley................ San Diego, CA 64,425 Sq.Ft. 6,211 2,412 3,346 836 Valley Rim........... San Diego, CA 54,194 Sq.Ft. 5,500 1,367 3,516 (138) Viewridge............ San Diego, CA 25,062 Sq.Ft. 2,010 701 1,272 4 Waterstreet.......... Boulder, CO 106,257 Sq.Ft. 22,250 7,126 12,949 9,154 Industrial Warehouse Technology Trading... Sterling, VA 197,659 Sq.Ft. 10,775 4,120 6,214 4,163 Zodiac............... Dallas, TX 35,435 Sq.Ft. 762 183 564 167 Land Eagle Crest.......... Farmers Branch, TX 4.41 Acres 300 291 -- (215) McKinney 36.......... McKinney, TX 1.822 Acres 476 476 -- 355 Moss Creek........... Greensboro, NC 4.79 Acres 15 13 -- (71) Round Mountain....... Austin, TX 110.0 Acres 2,560 2,455 -- 1,047
-------- (1) Debt assumed by purchaser. (2) The Glenwood Apartments were exchanged with ARI, a related party, for two parcels of land; the 10.5 acre Limestone Ranch and the 8.88 acre Mira Lago. (3) Excludes $1.5 million deferred gain from seller financing. See NOTE 3. "NOTES AND INTEREST RECEIVABLE." (4) Excludes a $608,000 deferred gain from seller financing. See NOTE 3. "NOTES AND INTEREST RECEIVABLE." 46 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 3. NOTES AND INTEREST RECEIVABLE Notes and interest receivable consisted of the following:
2002 2001 ----------------- ----------------- Estimated Estimated Fair Book Fair Book Value Value Value Value --------- ------- --------- ------- Notes receivable Performing................. $26,295 $25,765 $17,680 $17,442 Nonperforming, nonaccruing. 2,682 2,682 5,630 5,247 ------- ------- ------- ------- $28,977 28,447 $23,310 22,689 ======= ======= Interest receivable........... 843 178 ------- ------- $29,290 $22,867 ======= =======
Interest income is not recognized on nonperforming notes receivable. For the year 2001, unrecognized interest income on nonperforming notes totaled $192,500. Notes receivable at December 31, 2002, mature from 2003 through 2008 with interest rates ranging from 5.8% to 16.0% per annum, with a weighted average rate of 10.14%. Notes receivable are generally nonrecourse and are generally collateralized by real estate. Scheduled principal maturities of $8.5 million are due in 2003. In January 2002, a mortgage loan with a principal balance of $608,000 was paid off, including accrued but unpaid interest. With the payoff of the note, TCI recognized a previously deferred gain on the sale of the property of $608,000. In March 2002, TCI sold the 174,513 sq.ft. Hartford Office Building in Dallas, Texas, for $4.0 million and provided the $4.0 million purchase price as seller financing and an additional $1.4 million line of credit for leasehold improvements in the form of a first lien mortgage note. The note bears interest at a variable interest rate, currently 6.0% per annum, requires monthly interest only payments of $14,667 and matures in March 2007. As of March 2003, TCI has funded $264,000 of the additional line of credit. In July 2002, TCI entered into an agreement to fund up to $300,000 under a revolving line of credit secured by 100% interest in a partnership of the borrower. The line of credit bears interest at 12.0% per annum and requires monthly interest only payments, and matures in June 2005. As of March 2003, TCI has funded $175,000 of the line of credit. In September 2002, TCI sold a 36 acre tract of the Palm Desert land parcel for $3.6 million and provided $2.7 million as seller financing in the form of a first lien mortgage note. The note bears interest at 8.0% per annum, requires quarterly interest only payments of $54,000 and matures in September 2004. In March 2003, the note was sold to a financial institution for $2.6 million. In March 2001, TCI funded a $3.5 million mortgage loan secured by a second lien on a retail center in Montgomery County, Texas. In June 2001, an additional $1.5 million was funded. The note receivable bore interest at 16.0% per annum, required monthly interest only payments of $67,000 and matured in September 2001. In October 2001, TCI extended the loan until February 2002, receiving $100,000 as an extension fee. In December 2001, TCI received a $1.5 million principal payment. In February 2002, TCI sold a $2.0 million senior participation interest in the loan to IORI, a related party. TCI and IORI received 43% and 57%, respectively, of the remaining principal and interest payments. Also in February 2002, TCI received $23,000 as an extension fee 47 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) and the loan was extended until April 2002. In April 2002, the loan was extended until July 2002. In July 2002, the loan was extended until September 2002. In August 2002, the loan was paid off, including accrued but unpaid interest. In June 2001, in conjunction with the sale of 275 unit McCallum Glen Apartments in Dallas, Texas, TCI funded a $1.5 million mortgage loan secured by a second lien on the apartments. The note receivable bore interest at 10% per annum, required monthly interest only payments and matured in June 2003. In May 2002, the loan was paid off. TCI agreed to a 5% discount on the note and recognized a loss of $75,000 from the note. TCI also recognized a previously deferred gain of $1.5 million on the sale of the property. In July 2001, TCI agreed to fund a $4.4 million line of credit secured by a second lien on 1,714.16 acres of unimproved land in Tarrant County, Texas. The note receivable bears interest at 16.0% per annum, requires monthly interest only payments beginning in September 2001 and matures in July 2003. In March 2002, TCI received a $1.8 million principal payment. As of March 2003, TCI has funded $2.4 million of the line of credit and the note is classified as nonperforming. Also in July 2001, TCI funded a $1.7 million mortgage loan secured by a second lien on 44.6 acres of unimproved land in Fort Worth, Texas. The note receivable bears interest at 16.0% per annum, requires monthly payments of accrued interest beginning September 2001 and each month thereafter and matured January 2002. In January 2002, the note was extended until November 2002. As of March 2003, management continued efforts to collect the remaining balance. In August 2001, TCI agreed to fund up to $5.6 million secured by a second lien on an office building in Dallas, Texas. The note receivable bears interest at a variable rate, currently 9.0% per annum, requires monthly interest only payments and matured in January 2003. As of March 2003, TCI has funded a total of $4.3 million. On January 22, 2003, TCI agreed to extend the maturity date until May 1, 2003. The agreement requires interest to accrue at the default rate of 18%. In October 2001, TCI funded a $4.0 million loan secured by a second lien on a 375,752 sq. ft. office building in St. Louis, Missouri. The note receivable bore interest at 9.0% per annum, required monthly interest only payments of $30,000 and matured in February 2002. In February 2002, TCI extended the loan maturity to February 2003. In August 2002, the loan was paid off, including accrued but unpaid interest. In December 2001, TCI provided $608,000 of purchase money financing in conjunction with the sale of the Madison at Bear Creek Apartments in Houston, Texas. The note receivable bore interest at 7% per annum, required payment of the entire outstanding principal and all accrued and unpaid interest in January 2002. The loan was secured by a second lien on the property. The note was paid in full according to the terms in January 2002. 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 bore interest at 16.0% per annum, required monthly payments of interest only and matured in June 2001. In June 2001, the note was extended until November 2001 with a $750,000 loan principal paydown. With the paydown, the note was renegotiated to replace the existing collateral with new collateral consisting of a 120,000 sq.ft. office building and industrial warehouse in Carrollton, Texas. The renegotiated note originally was to mature in May 2002. In February 2002, the maturity date on the loan was extended to July 2002. In July 2002, the loan was paid off, including accrued but unpaid interest. 48 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Related Party. In January 2002, TCI purchased 100% of the outstanding common shares of ART Two Hickory Corporation ("Two Hickory"), a wholly-owned subsidiary of ARI, a related party, for $4.4 million cash. Two Hickory owns the 96,217 sq. ft. Two Hickory Centre Office Building in Farmers Branch, Texas. ARI has guaranteed that the asset shall produce at least a 12% annual return of the purchase price for a period of three years from the purchase date. If the asset fails to produce the 12% annual return, ARI shall pay TCI any shortfall. In addition, if the asset fails to produce the 12% return for a calendar year and ARI fails to pay the shortfall, TCI may require ARI to repurchase the shares of Two Hickory for the purchase price. Because ARI has guaranteed the 12% return and TCI has the option of requiring ARI to repurchase the entities, management has classified this related party transaction as a note receivable from ARI. In June 2002, the asset was refinanced. TCI received $1.3 million of the proceeds as a principal reduction on its note receivable from ARI. In April 2002, TCI purchased 100% of the following entities: ART One Hickory Corporation ("One Hickory"), Garden Confederate Point, LP ("Confederate Point"), Garden Foxwood, LP ("Foxwood"), and Garden Woodsong, LP ("Woodsong"), all wholly-owned subsidiaries of ARI, a related party, for $10.0 million. One Hickory owns the 120,615 sq. ft. One Hickory Centre Office Building in Farmers Branch, Texas. Confederate Point owns the 206 unit Confederate Apartments in Jacksonville, Florida. Foxwood owns the 220 unit Foxwood Apartments in Memphis, Tennessee. Woodsong owned the 190 unit Woodsong Apartments in Smyrna, Georgia. ARI has guaranteed that these assets shall produce at least a 12% return annually of the purchase price for a period of three years from the purchase date. If the assets fail to produce the 12% return, ARI shall pay TCI any shortfall. In addition, if the assets fail to produce the 12% return for a calendar year and ARI fails to pay the shortfall, TCI may require ARI to repurchase the entities for the purchase price. Because ARI has guaranteed the 12% return and TCI has the option of requiring ARI to repurchase the entities, management has classified this related party transaction as a note receivable from ARI. In July 2002, the Woodsong Apartments were sold. ARI received $2.8 million from the proceeds as payment of principal and accrued but unpaid interest on the note receivable. The $2.6 million received by ARI is included in other assets on the accompanying balance sheet. In December 2001, TCI purchased 100% of the outstanding common shares of National Melrose, Inc. ("NM"), a wholly-owned subsidiary of ARI, a related party, for $2.0 million cash. NM owns the 41,840 sq. ft. Executive Court Office Building in Memphis, Tennessee. ARI has guaranteed that the asset will produce at least a 12% annual return of the purchase price for a period of three years from the purchase date. If the asset fails to produce the 12% annual return, ARI will pay TCI any shortfall. In addition, if the asset fails to produce 12% return for a calendar year, TCI may require ARI to repurchase the shares of NM for the purchase price. Management has classified this related party transaction as a note receivable from ARI. NOTE 4. ALLOWANCE FOR ESTIMATED LOSSES Activity in the allowance for estimated losses was as follows:
2002 2001 2000 ------ ---- ---- Balance January 1,................. $ 818 $537 $537 Provision for loss.............. 169 281 -- Fully reserved notes receivable. 350 -- -- ------ ---- ---- Balance December 31,............... $1,337 $818 $537 ====== ==== ====
49 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 5. INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES Investment in equity method real estate entities consisted of the following:
2002 2001 ------- ------- American Realty Investors, Inc. ("ARI")........... $ 9,468 $10,182 Income Opportunity Realty Investors, Inc. ("IORI") 3,983 3,501 Tri-City Limited Partnership ("Tri-City")......... -- 531 Nakash Income Associates ("NIA").................. -- (553) Sacramento Nine ("SAC 9")......................... 285 539 Other............................................. 21 30 ------- ------- $13,757 $14,230 ======= =======
TCI owns an approximate 6.5% interest in ARI, a publicly held real estate company, having a market value of $92.0 million at December 31, 2001. At December 31, 2002, ARI had total assets of $709.3 million and owned 35 apartments, 14 commercial properties, nine hotels and 41 parcels of unimproved land. In 2002, ARI sold 18 apartments, five commercial properties and 13 parcels of unimproved land for a total of $287.4 million, receiving net cash of $22.2 million after paying off $155.0 million in mortgage debt and the payment of various closing costs. ARI recognized gains of $50.5 million on the sales of which TCI's equity share was $3.3 million. In 2001, ARI sold 17 apartments, one commercial property and 26 parcels of unimproved land for a total of $187.3 million, receiving net cash of $52.4 million after paying off $110.2 million in mortgage debt and the payment of various closing costs. ARI recognized gains of $83.4 million on the sales of which TCI's equity share was $5.3 million. Based on the ownership percentage of TCI's investment in ARI and ARI's market value, TCI's investment in ARI has a market value of approximately $6.0 million at December 31, 2002. The carrying value of this investment is approximately $9.5 million at December 31, 2002. Management continues to believe that the market value of ARI temporarily undervalues its assets and therefore, no impairment of TCI's investment in ARI has been recorded. TCI owns an approximate 24.0% interest in IORI, a publicly held real estate investment company. At December 31, 2002, IORI had total assets of $90.2 million and owned seven apartments in Texas, five office buildings (two in California, two in Texas and one in Virginia) and two parcels of unimproved land in Texas. In 2002, IORI sold two office buildings for a total of $19.2 million, receiving net cash of $8.6 million after paying off $9.3 million in mortgage debt and the payment of various closing costs. IORI recognized gains of $6.8 million on the sales of which TCI's equity share was $1.6 million. Prior to the first quarter of 2002, TCI accounted for its investments in Tri-City, Nakash and Jor-Trans on the equity method. TCI was a 63.7% limited partner and IORI was a 36.3% general partner in Tri-City, and TCI is a 60% general partner and IORI is a 40% limited partner in Nakash. TCI owns a 55% limited and general partnership interest in Jor-Trans. TCI makes all partnership operating and policy decisions of the partnerships and TCI has the right to approve the sale or refinancing of principal assets, or approve the acquisition of partnership assets. For Tri-City, IORI as general partner only had protective rights in the partnership. TCI and IORI have the same Board of Directors and the same executive officers. Consequently, because TCI has a greater than 50% ownership over the operations of Tri- City, Nakash and Jor-Trans, the operations of the partnership have been consolidated. In the first quarter of 2002, TCI began accounting for its investment in Tri-City, Nakash and Jor-Trans using a consolidated basis. The effect of these consolidations increased TCI's assets, liabilities, and minority interest by $5.4 million, $3.9 million and $1.5 million, respectively. TCI is a non-controlling 30% general partner in SAC 9, which at December 31, 2002 owned an office building in Rancho Cordova, California. 50 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In March 2001, in conjunction with the sale of the 211 unit Park at Colonade Apartments in San Antonio, Texas, TCI received a 23% limited partner interest in the acquiring partnership. TCI is to receive payments of $5,000 monthly from the partnership, a $50,000 distribution in June 2001 which was received and its remaining investment in March 2002. In July 2001, TCI assigned its limited partnership interest to the general partner, receiving a discounted payoff of $490,000. In conjunction with this assignment, TCI recognized a previously deferred gain on the sale of the apartments of $540,000. Set forth below are summarized financial data for the entities accounted for using the equity method:
2002 2001 --------- --------- Real estate, net of accumulated depreciation ($111,029 in 2002 and $137,407 in 2001)....................................... $ 548,446 $ 692,747 Notes receivable.............................................. 82,197 31,892 Other assets.................................................. 170,990 132,665 Notes payable................................................. (414,914) (651,328) Other liabilities............................................. (268,181) (85,858) --------- --------- Shareholders/partners' capital................................ $ 118,538 $ 120,118 ========= =========
2002 2001 2000 --------- --------- -------- Rents and interest income....................... $ 145,759 $ 181,570 $ 16,245 Depreciation.................................... (12,182) (19,930) (2,917) Operating expenses.............................. (154,764) (153,557) (10,835) Interest expense................................ (62,650) (83,154) (5,559) --------- --------- -------- Income (loss) before gain on sale of real estate (83,837) (75,071) (3,066) Gain on sale of real estate..................... 82,077 83,414 20,878 --------- --------- -------- Net income (loss)............................... $ (1,760) $ 8,343 $ 17,812 ========= ========= ======== TCI's equity share of: 2002 2001 2000 --------- --------- -------- Income (loss) before gain on sale of real estate $ (3,818) $ (5,938) $ (611) Gain on sale of real estate..................... 5,013 5,310 4,572 --------- --------- -------- Net income (loss)............................... $ 1,195 $ (628) $ 3,961 ========= ========= ========
NOTE 6. NOTES AND INTEREST PAYABLE Notes and interest payable consisted of the following:
2002 2001 ------------------- ------------------- Estimated Book Estimated Book Fair Value Value Fair Value Value ---------- -------- ---------- -------- Notes payable... $637,071 $582,433 $461,875 $458,032 ======== ======== Interest payable 4,195 3,005 -------- -------- $586,628 $461,037 ======== ========
51 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Scheduled principal payments are due as follows: 2003...... $209,262 2004...... 81,279 2005...... 36,526 2006...... 28,023 2007...... 32,168 Thereafter 195,175 -------- $582,433 ========
Notes payable at December 31, 2002, bore interest at rates ranging from 4.0% to 17.9% per annum, and mature between 2003 and 2044. The mortgages were collateralized by deeds of trust on real estate having a net carrying value of $733.2 million. In 2002, TCI financed/refinanced the following property:
Net Cash Sq.Ft./ Debt Debt Received/ Interest Maturity Property Location Units/Acres Incurred Discharged (Paid) Rate Date -------- ----------------- -------------- -------- ---------- --------- -------- -------- Apartments Echo Valley.......... Dallas, TX 216 Units $ 1,639(1) $ -- $ 448 6.65% 12/43 Marina Landing....... Galveston, TX 256 Units 11,348 11,397 (699) 5.80 12/37 Metra................ See Below (2) 1,977 Units 30,314 18,822 10,362 7.57 05/12 Paramount Terrace.... Amarillo, TX 181 Units 2,700 2,797 (214) 6.63(3) 07/04 Quail Creek.......... Lawrence, KS 95 Units 3,300 2,157 924 6.63(3) 09/05 Verandas at City View Ft. Worth, TX 314 Units 2,779(4) 2,197 (2,224) 7.00 06/42 Office Building Institute Place...... Chicago, IL 144,915 Sq.Ft. 8,025 5,225 2,434 4.75 12/07 Industrial Warehouse Addison Hanger (5)... Addison, TX 23,650 Sq.Ft. 2,687 1,580 942 6.75(3) 02/07 Shopping Center Sheboygan............ Sheboygan, WI 74,532 Sq.Ft. 600 387 63 6.60 10/05 Land Dominion............. Dallas, TX 14.39 Acres 772 -- 758 13.00 04/03 Manhatten............ Farmers Branch, TX 108.9 Acres 5,846 -- 5,733 13.00 04/03 McKinney 36 (6)...... Collin County, TX 34.58 Acres 425 956 (539) 9.50 04/03 Pac Trust............ Farmers Branch, TX 7.11 Acres 382 -- 370 13.00 04/03 Red Cross............ Dallas, TX 2.89 Acres 4,000 -- -- 5.00 04/04 Sandison (6)......... Collin County, TX 97.97 Acres 1,199 1,040 145 9.50 04/03 Solco-Allen (6)...... Collin County, TX 55.80 Acres 686 305 374 9.50 04/03 Stacy Road (6)....... Allen, TX 160.38 Acres 1,979 1,345 613 9.50 04/03 State Highway 121 (6) Collin County, TX 101.94 Acres 1,475 873 582 9.50 04/03 Watters Road (6)..... Collin County, TX 97.00 Acres 1,189 -- 1,180 9.50 04/03 Whisenant (6)........ Collin County, TX 16.16 Acres 199 133 64 9.50 04/03
-------- (1) The Echo Valley Apartments are under construction. The $1.6 million debt incurred was to fund construction to date. The total construction funding for the project is $12.7 million. (2) In April 2002, TCI sold 12 residential properties to partnerships controlled by Metra Capital, LLC ("Metra"). These properties include: the 75 unit Apple Lane Apartments in Lawrence, Kansas; the 195 unit Arbor Point Apartments in Odessa, Texas; the 264 unit Fairway View Estates Apartments in El Paso, Texas; 52 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the 152 unit Fairways Apartments in Longview, Texas; the 166 unit Fountain Lake Apartments in Texas City, Texas; the 172 unit Fountains of Waterford Apartments in Midland, Texas; the 122 unit Harper's Ferry Apartments in Lafayette, Louisiana; the 108 unit Oak Park IV Apartments in Clute, Texas; the 131 unit Quail Oaks Apartments in Balch Springs, Texas; the 300 unit Sunchase Apartments in Odessa, Texas; the 180 unit Timbers Apartments in Tyler, Texas; and the 112 unit Willow Creek Apartments in El Paso, Texas. Innovo Group, Inc. ("Innovo") is a limited partner in the partnerships that purchased the properties. Joseph Mizrachi, a director of ARI, a related party, controls approximately 11.67% of the outstanding common stock of Innovo. Management has determined to account for this sale as a refinancing transaction, in accordance with SFAS No. 66, "Accounting for Sales of Real Estate." TCI will continue to report the assets and the new debt incurred by the Metra partnerships on the TCI financial statements. The sales price for the properties totaled $37.6 million. TCI received net cash of $10.5 million after paying off the existing debt of $18.0 million and various closing costs. The new debt of $30.3 million bears interest at 7.57% per annum, requires monthly interest only payments of $212,000 and matures in May 2012. TCI also received $8.0 million of 8% non-recourse, non-convertible Series A Preferred Stock ("Preferred Shares") of Innovo. (3) Variable interest rate. (4) The Verandas at City View Apartments are under construction. The $2.8 million debt incurred was to fund construction to date. The total construction funding for the project is $19.4 million. (5) The mortgage is cross-collateralized with the 29,000 sq. ft. Addison Hanger II in Addison, Texas. (6) The mortgages are cross-collateralized. In 2001, TCI financed the following property:
Debt Debt Net Cash Interest Maturity Property Location Acres Incurred Discharged Received Rate Date -------- ---------- ---------- -------- ---------- -------- -------- -------- Land Red Cross Dallas, TX 2.89 Acres $4,500 $-- $4,328 12.5%(1) 04/04
-------- (1) Variable rate. NOTE 7. RELATED PARTY TRANSACTIONS Throughout the period in which TCI qualified as a REIT for tax purposes, TCI charged rent to Regis Hotel Corporation, a related party, for TCI's four hotel properties that were managed by Regis Hotel Corporation. As of December 31, 2000, when TCI no longer qualified as a REIT, the receivable from these rents totaled $2.1 million. During 2001 and 2002, this receivable was reduced by management fees earned by Regis Hotel Corporation. As of December 31, 2002 and 2001, the receivable from Regis Hotel Corporation was $1.7 million and $1.9 million, respectively. During 2002, TCI received $4.0 million in cash from IORI, and has repaid $80,000 to IORI prior to year end. In February 2002, IORI funded a $2.0 million mortgage loan as a participation agreement with TCI. This note was paid in full during 2002. Of the principal repayments on this note, $1.5 million was deposited in the account of TCI. This amount is included in the affiliate payable balance at December 31, 2002. This transaction is more fully described in Note 3. In March 2002, TCI sold the Plaza on Bachman Creek shopping center to ARI in exchange for a shopping center and two parcels of land. This transaction was approved by TCI's Board of Directors. See Note 2. 53 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In April 2002, TCI purchased four wholly-owned subsidiaries of ARI, including Garden Woodsong, L.P. ("Woodsong"). This transaction, which is more fully described in Note 3, was treated as a financing, and TCI recorded a $10.0 million note receivable from ARI. $2.5 million of this note was related to Woodsong, which was subsequently sold in July 2002. The affiliate receivable balance from ARI increased by $2.8 million, representing principal and accrued but unpaid interest on the note receivable. During 2002, ARI sold properties with fair value totaling $46.2 million to TCI. Each of these property sales was approved by TCI's Board of Directors. TCI's affiliate receivables from ARI and BCM were reduced by $5.0 million and $41.2 million, respectively, as a result of these transfers. For property transfers treated as financings, TCI has recorded notes receivable for the fair values of the properties transferred as an offset to the reductions in the affiliate receivables. In January 2003, TCI's Board of Directors approved the payment to BCM of a six percent (6%) construction management fee on all construction projects in process at December 31, 2002, to be applied to all construction costs incurred during 2002 on each project. The resulting calculation of $4.6 million was treated as a reduction in the affiliate receivable balance from BCM. During 2002, TCI's Board of Directors authorized the Chief Financial Officer of the Company to advance funds either to or from the Company, through BCM, in an amount up to $15.0 million, on the condition that such advances shall be repaid in cash or transfers of assets within 90 days. Several property transfers from BCM were made during 2002 to reduce the affiliate balance. Each of these transactions were approved by TCI's Board of Directors. Affiliate receivable with BCM, ARI and Regis Hotel Corporation are included within Other Assets, and the affiliate payable to IORI is included within Other Liabilities in the accompanying consolidated balance sheet. The following table reconciles the beginning and ending balances of affiliate receivables (payables) as of December 31, 2002:
BCM ARI IORI -------- ------- ------- Balance, December 31, 2001............... $ 11,622 $ 608 $ -- Cash transfers........................ 71,191 10,632 (4,000) Cash repayments....................... (31,452) (400) 80 Repayments through property transfers. (41,155) (5,048) -- Fees payable to Advisor............... (5,288) -- -- Other additions....................... 9,888 3,283 (1,539) Other reductions...................... (3,408) (3,036) 199 -------- ------- ------- Balance, December 31, 2002............... $ 11,398 $ 6,039 $(5,260) ======== ======= =======
In addition, Other Assets includes $1.7 million due from Regis Property Management, a related party. Returns on Metra Properties. As described in Note 5, TCI sold residential properties during 2002 to partnerships controlled by Metra. The partnership agreement for each of these partnerships states that the Metra Partners, as defined, receive cash flow distributions at least quarterly in an amount sufficient to provide them with a 15 percent cumulative compounded annual rate of return on their invested capital, as well as a cumulative annual amount of 0.50% of the average outstanding balance of the mortgage indebtedness secured by any of these residential properties. These distributions to the Metra Partners have priority over distributions to any of the other partners. 54 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 8. 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, 2002 and 2001, 5,829 shares of Series A Preferred Stock were issued and outstanding. In conjunction with the purchase of the Baywalk, Island Bay and Marina Landing Apartments, TCI issued 30,000 shares of Series C Preferred Stock. TCI's Series C Cumulative Convertible Preferred Stock consists of a maximum of 30,000 shares with a liquidation preference of $100.00 per share. Dividends are payable at the annual rate of $5.00 per share or $1.25 per quarter through September 2002, then $6.00 per share annually or $1.50 per quarter through September 2003, then $7.00 per share annually or $1.75 per quarter thereafter. After September 30, 2006, the Series C Preferred Stock may be converted into Common Stock at 90% of the daily average closing price of the Common Stock for the prior five trading days. The Series C Preferred Stock is redeemable for cash at any time at the option of TCI. At December 31, 2002, 30,000 shares of Series C Preferred Stock were issued and outstanding. NOTE 9. DIVIDENDS TCI paid dividends on its Common Stock of $4.7 million ($.54 per share) in 2000. TCI reported to the Internal Revenue Service that 100% of the dividends paid in 2000 represented ordinary income. In December 2000, the Board of Directors determined not to pay a fourth quarter dividend to holders of TCI's Common Stock. The non-payment decision was based on the Board determining that TCI needed to retain cash for acquisitions that were anticipated in 2001 and 2002. No dividends were paid in 2002 or 2001. NOTE 10. 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 two 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 date of grant thereof. As of December 31, 2002, TCI had 300,000 shares of Common Stock reserved for issuance under the 2000 Plan. No options have been granted under 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, 2002 and 2003, each Independent Director was granted an option to purchase 5,000 Common shares. The exercise price was $16.05 and $8.875 per Common shares for 2002 and 2001, respectively. Each Independent Director will be awarded an option to purchase an additional 5,000 shares on January 1 of each year. 55 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2002 2001 ------------------ ------------------ Number Exercise Number Exercise of Shares Price of Shares Price --------- -------- --------- -------- Outstanding at January 1,.. 50,000 $11.875 25,000 $14.875 Granted.................... 10,000 16.050 25,000 8.875 Exercised.................. (30,000) -- -- -- Canceled................... (30,000) -- -- -- ------- ------ Outstanding at December 31, -- 50,000 ======= ======
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:
2002 2001 ----- ----- Dividend yield........... -- -- Expected volatility...... 54.50% 65.00% Risk-free interest rate.. 3.88 1.25% Expected lives (in years) 9 9
The weighted average fair value per share of options granted in 2002 and 2001 was $10.51 and $7.60, respectively. 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, 2002: 2003...... $ 46,339 2004...... 38,463 2005...... 28,402 2006...... 19,249 2007...... 11,678 Thereafter 35,330 -------- $179,461 ========
NOTE 12. ADVISORY AGREEMENT Basic Capital Management, Inc. ("BCM"), an affiliate, has served as advisor to TCI since March 28, 1989. BCM is indirectly owned by a trust for the children of Gene E. Phillips. Mr. Phillips is not an officer or director of BCM, but serves as a representative of the trust, is involved in daily consultation with the officers of BCM and has significant influence over the conduct of BCM's business, including the rendering of advisory services and the making of investment decisions for itself and for TCI. 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. 56 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 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. 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. In 2002, BCM was required to refund to TCI $1.4 million of BCM's advisory fee. BCM was not required to refund any of its 2000 or 2001 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 12. "PROPERTY MANAGEMENT," Triad Realty Services, Ltd. ("Triad"), an affiliate of BCM, provides property management services and as discussed in NOTE 13. "REAL ESTATE BROKERAGE," Regis Realty, Inc. ("Regis"), a related party, provided, on a non-exclusive basis, brokerage services until December 2002. Since January 1, 2003, Regis Realty I, LLC, a related party, provided brokerage services. NOTE 13. 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 partner of Triad is Highland Realty Services, Inc. ("Highland"), a related party. Triad subcontracted to Regis, a related party, which is a company owned by Highland, the property-level management and leasing of 45 of TCI's commercial properties, and its five hotels until December 2002. Since January 1, 2003, Regis Realty I, LLC, provided property management services. Regis was and Regis Realty I, LLC 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. During 2002, Regis provided construction management services for TCI's properties under construction. Regis charged fees of 6% of certain construction costs. Those fees totaled $4.7 million. 57 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 14. REAL ESTATE BROKERAGE Regis also provided brokerage services on a non-exclusive basis until December 2002. Regis was and Regis Realty I, LLC 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. NOTE 15. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC. Revenue, fees and cost reimbursements to BCM and its affiliates:
2002 2001 2000 ------ ------- ------ Fees Advisory.................................. $4,465 $ 5,346 $5,258 Net income................................ 374 1,850 2,415 Incentive fees............................ -- 3,167 -- Property acquisition...................... 657 774 1,024 Real estate brokerage..................... 3,049 -- 331 Mortgage brokerage and equity refinancing. 806 45 464 ------ ------- ------ $9,351 $11,182 $9,492 ====== ======= ====== Cost reimbursements.......................... $1,974 $ 2,582 $2,146 ====== ======= ====== Hotel lease revenue.......................... $ -- $ -- $2,237 ====== ======= ====== Rent revenue................................. $ 88 $ 120 $ -- ====== ======= ======
Costs incurred by BCM related to TCI, ARI and IORI are allocated based on the relative book values of each company's assets. Fees paid to Regis, a related party:
2002 2001 2000 ------- ------ ------ Fees Property acquisition......................................... $ 45 $1,668 $2,326 Real estate brokerage........................................ 3,007 3,760 3,250 Construction supervision..................................... 4,678 -- -- Property and construction management and leasing commissions. 8,176 2,599 4,321 ------- ------ ------ $15,906 $8,027 $9,897 ======= ====== ======
NOTE 16. INCOME TAXES During the third quarter of 2000, due to a concentration of ownership, TCI no longer met the requirements for tax treatment 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"), 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 2002, 2001 and 2000; 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 58 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, 2002, TCI's tax basis in its net real estate assets exceeded their basis for financial statement purposes by $46.9 million. As a result, aggregate future income for tax purposes will be less than such amount for financial statement purposes. Additionally, TCI had tax net operating loss carryforwards at December 31, 2002, of approximately $42.5 million expiring through the year 2018. The use of such loss carryforwards are subject to certain limitations under the Internal Revenue Code. At December 31, 2002, TCI had a net deferred tax asset of $28.4 million due to tax deductions available to it in future years. However, as management cannot determine that it is more likely than not that TCI will realize the benefit of the deferred tax asset, a 100% valuation has been established. NOTE 17. 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 equity gains on sale of real estate totaling $4.5 million, $2.3 million and $6.4 million for 2002, 2001 and 2000, respectively. Expenses that are not reflected in the segments are provision for losses, advisory, net income and incentive fees, general and administrative, realized loss on investments, minority interests, foreign currency transaction loss and discontinued operations totaling $26.4 million, $24.4 million and $14.6 million for 2002, 2001 and 2000, respectively. Excluded from operating segment assets are assets of $100.3 million at December 31, 2002, and $86.5 million at December 31, 2001, which are not identifiable with an operating segment. There are no intersegment revenues and expenses. See "NOTE 2. "REAL ESTATE" and NOTE 3. "NOTES AND INTEREST RECEIVABLE." 59 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Presented below is the operating income of each operating segment and each segments' assets for the years 2002, 2001 and 2000.
Commercial Land Properties Apartments Hotels Total -------- ---------- ---------- ------- --------- 2002 Rents.................................... $ 541 $ 58,031 $ 44,889 $ 6,265 $ 109,726 Property operating expenses.............. 1,777 33,280 30,316 5,645 71,018 -------- -------- -------- ------- --------- Segment operating income (loss).......... $ (1,236) $ 24,751 $ 14,573 $ 620 $ 38,708 ======== ======== ======== ======= ========= Depreciation............................. $ 30 $ 12,744 $ 4,640 $ 1,628 $ 19,042 Interest................................. 2,239 20,782 13,925 2,012 38,958 Real estate improvements and construction 1,605 4,620 100,974 5,467 112,666 Provision for asset impairment........... 707 -- 1,872 -- 2,579 Assets................................... 109,427 313,505 300,332 34,894 758,158 Property Sales Sales price.............................. $ 3,600 $ 60,207 $ 54,388 $ 118,195 Cost of sales............................ (2,934) (43,539) (32,777) (79,250) -------- -------- -------- --------- Gain on sale............................. $ 666 $ 16,668 $ 21,611 $ 38,945 ======== ======== ======== ========= 2001 Rents.................................... $ 636 $ 50,895 $ 61,165 $ 2,743 $ 115,439 Property operating expenses.............. 770 25,844 41,683 213 68,510 -------- -------- -------- ------- --------- Segment operating income (loss).......... $ (134) $ 25,051 $ 19,482 $ 2,530 $ 46,929 ======== ======== ======== ======= ========= Depreciation............................. $ -- $ 9,327 $ 6,813 $ 996 $ 17,136 Interest................................. 1,652 19,268 14,308 1,581 36,809 Real estate improvements and construction 1,424 7,365 14,973 9,855 33,617 Assets................................... 62,209 304,657 224,986 30,835 622,687 Property Sales Sales price.............................. $ 3,351 $ 54,083 $104,021 $ 161,455 Cost of sales............................ (2,235) (38,875) (71,384) (112,494) -------- -------- -------- --------- Gain on sale............................. $ 1,116 $ 15,208 $ 32,637 $ 48,961 ======== ======== ======== ========= 2000 Rents.................................... $ 723 $ 58,072 $ 71,635 $ 2,743 $ 133,173 Property operating expenses.............. 1,097 30,047 43,251 213 74,608 -------- -------- -------- ------- --------- Segment operating income (loss).......... $ (374) $ 28,025 $ 28,384 $ 2,530 $ 58,565 ======== ======== ======== ======= ========= Depreciation............................. $ -- $ 10,698 $ 7,155 $ 996 $ 18,849 Interest................................. 3,342 21,146 20,465 1,581 46,534 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 Sales price.............................. $ 12,775 $ 5,750 $ 93,949 $ 1,000 $ 113,474 Cost of sales............................ (2,607) (4,089) (55,861) (367) (62,924) -------- -------- -------- ------- --------- Gain on sale............................. $ 10,168 $ 1,661 $ 38,088 $ 633 $ 50,550 ======== ======== ======== ======= =========
60 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 18. DISCONTINUED OPERATIONS Effective January 1, 2002, TCI adopted Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which established a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. This statement requires that the operations related to properties that have been sold or properties that are intended to be sold be presented as discontinued operations in the statement of operations for all periods presented, and properties intended to be sold are to be designated as "held-for-sale" on the balance sheet. For 2002, 2001 and 2000, income (loss) from discontinued operations relates to 18 properties that TCI sold during 2002. The following table summarizes revenue and expense information for these properties sold.
2002 2001 2000 ------- ------- ------ Revenue Rental.................................................... $13,063 $20,719 $6,489 Property operations....................................... 9,156 12,552 3,562 ------- ------- ------ 3,907 8,167 2,927 Expenses Interest.................................................. 4,489 4,639 1,580 Depreciation.............................................. 1,623 2,825 900 ------- ------- ------ 6,112 7,464 2,480 Net income (loss) from discontinued operations............... (2,205) 703 447 Gain on sale of real estate............................... 38,945 -- -- Equity in gain on sale of real estate by equity investees. 5,013 -- -- ------- ------- ------ Net income (loss) from discontinued operations............... $41,753 $ 703 $ 447 ======= ======= ======
61 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 2002, 2001 and 2000 (unaudited):
Three Months Ended -------------------------------------------- March 31, June 30, September 30, December 31, --------- -------- ------------- ------------ 2002 Rents........................................ $30,420 $29,960 $ 28,761 $ 20,585 Property expense............................. 18,695 18,916 19,699 13,708 ------- ------- -------- -------- Operating income.......................... 11,725 11,044 9,062 6,877 Interest income.............................. 1,067 984 756 1,324 Income (loss) in equity partnerships......... (1,276) (291) (1,181) (1,070) ------- ------- -------- -------- (209) 693 (425) 254 Other expense................................ 17,806 20,213 20,345 17,559 ------- ------- -------- -------- Net loss from continuing operations.......... (6,290) (8,476) (11,708) (10,428) Discontinued operations...................... 4,955 6,623 13,547 16,628 ------- ------- -------- -------- Net income (loss)............................ (1,335) (1,853) 1,839 6,200 Preferred dividend requirement............... (45) (45) (45) (55) ------- ------- -------- -------- Net income (loss) applicable to Common shares $(1,380) $(1,898) $ 1,794 $ 6,145 ======= ======= ======== ======== Basic and Diluted Earnings (Loss) Per Share Net income (loss) applicable to Common shares $ (.17) $ (.24) $ .22 $ .75 ======= ======= ======== ========
In the first quarter of 2002, gains on sale of real estate totaling $5.4 million were recognized on the sale of the Primrose Apartments, Central Storage Industrial Warehouse, a deferred gain on the sale of Madison at Bear Creek Apartments, and TCI's share of gains recognized by ARI and IORI, equity investees. In the second quarter of 2002, gains on sale of real estate totaling $7.3 million were recognized on the sale of Southgreen Apartments, Jefferson Office Building, NASA Office Building, Windsor Plaza Office Building, a deferred gain on the sale of McCallum Glen Apartments, and TCI's share of gains recognized by ARI. In the third quarter of 2002, gains on sale of real estate totaling $13.7 million were recognized on the sale of 4242 Cedar Springs, Camelot, Country Crossing, Gladstell Forest, and Heritage on the River Apartments, Savings of America Office Building, and TCI's share of gains recognized by ARI. In the fourth quarter of 2002, gains on sale of real estate totaling $14.9 million were recognized on Grove Park and Trails of Windfern Apartments, Plaza Tower Office Building, Chelsea Square Shopping Center, and TCI's share of gains recognized by ARI. 62 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended -------------------------------------------- March 31, June 30, September 30, December 31, --------- -------- ------------- ------------ 2001 Rents....................................... $34,405 $33,533 $25,708 $21,793 Property expense............................ 19,854 18,401 15,410 14,845 ------- ------- ------- ------- Operating income......................... 14,551 15,132 10,298 6,948 Interest income............................. 638 670 945 671 Income (loss) in equity partnerships........ (1,373) 624 (1,040) 1,161 Gain on sale of real estate................. 6,484 20,623 17,736 4,118 ------- ------- ------- ------- 5,749 21,917 17,641 5,950 Other expense............................... 19,916 22,588 16,914 19,660 ------- ------- ------- ------- Net income (loss) from continuing operations 384 14,461 11,025 (6,762) Discontinued operations..................... (68) (130) 91 810 ------- ------- ------- ------- Net income (loss)........................... 316 14,331 11,116 (5,952) Preferred dividend requirement.............. (7) (8) (7) (150) ------- ------- ------- ------- Net income applicable to Common shares...... $ 309 $14,323 $11,109 $(6,102) ======= ======= ======= ======= Basic and Diluted Earnings Per Share Net income applicable to Common shares...... $ .04 $ 1.65 $ 1.28 $ (.74) ======= ======= ======= =======
In the first quarter of 2001, gains on sale of real estate totaling $6.5 million were recognized on the sale of Heritage Apartments, Forest Ridge Apartments, Park at Colonade Apartments, the Zodiac Warehouse, a portion of the McKinney 36 land parcel, a portion of the Round Mountain land parcel, and TCI's share of gains recognized by ARI, an equity investee. In the second quarter of 2001, gains on sale of real estate totaling $22.3 million were recognized on the sale of Glenwood Apartments, Fontenelle Hills Apartments, Bent Tree Gardens Apartments, McCallum Glen Apartments, Moss Creek lots land parcel, Waterstreet Office Building, Technology Trading Center, Daley Office Building, and TCI's share of gains recognized by ARI. In the third quarter of 2001, gains on sale of real estate totaling $18.8 million were recognized on the sale of Park Lane Apartments, McCallum Crossing Apartments, Carseka Apartments, Sunset Lakes Apartments, Oak Run Apartments, a portion of the Eagle Crest land parcel, Chesapeake Office Building, and TCI's share of gains recognized by ARI. In the fourth quarter of 2001, gains on sale of real estate totaling $6.7 million were recognized on the sale of South Cochran Apartments, Madison at Bear Creek Apartments, Summerstone Apartments, Valley Rim Office Building, a previously deferred gain on the sale of Town and Country Shopping Center, and TCI's share of gains recognized by ARI. See NOTE 2. "REAL ESTATE" and NOTE 5. "INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES." 63 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended -------------------------------------------- March 31, June 30, September 30, December 31, --------- -------- ------------- ------------ 2000 Rents....................................... $29,257 $32,854 $35,122 $35,940 Property expense............................ 15,819 17,336 19,872 21,581 ------- ------- ------- ------- Operating income......................... 13,438 15,518 15,250 14,359 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............................... 18,823 18,955 20,865 22,951 ------- ------- ------- ------- Net income (loss) from continuing operations 3,977 5,708 6,891 12,759 Discontinued operations..................... 379 67 -- 1 ------- ------- ------- ------- 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 2. "REAL ESTATE" and NOTE 5. "INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES." NOTE 20. DERIVATIVE FINANCIAL INSTRUMENTS During the first quarter of 2002, TCI entered into an interest rate swap agreement with a bank. This agreement contains a notional amount of $12.8 million and requires TCI to pay the bank a fixed rate of 4.3%, and requires the bank to pay to TCI based on the 30 day LIBOR rate. This agreement was entered into in order to effectively fix the rate on TCI's debt associated with the Limestone Canyon property. The swap agreement expires on December 9, 2004. TCI has not designated the interest rate swap agreement as a hedge, as defined within Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," and as such, changes in the fair value of the swap agreement are recognized in earnings during the period of change and reflected in the statement of operations as interest expense. 64 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The fair value of the swap agreement at December 31, 2002 represents a liability to the Company of $624,000 and is included within other liabilities in the accompanying balance sheet. Amounts paid or received under the swap agreement are settled monthly and are reflected as a reduction in the liability when paid. Interest expense at December 31, 2002, was increased by $895,000 representing both amounts paid to the bank under the agreement and increases in the fair value of the related liability. NOTE 21. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY 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. (the "Olive Litigation"), 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 "First Amendment"). The First Amendment provided for the settlement of additional matters raised by plaintiffs' counsel in 1996. The Court issued an order approving the First Amendment on July 3, 1997. The First 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 First 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 First 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 First Amendment. In June 2000, plaintiffs' counsel asserted that loans made by TCI to BCM and American Realty Trust, Inc. breached the provision of the Modification. The Board believes that the provisions of the Settlement, Modification and the First Amendment terminated on April 28, 1999. However, the Court has ruled that certain provisions continue to be effective after the termination date. This ruling was appealed by TCI and IORI. On October 23, 2001, TCI, Income Opportunity Realty Investors, Inc. ("IORI") and American Realty Investors, Inc. ("ARI") jointly announced a preliminary agreement with the plaintiff's legal counsel for complete settlement of all disputes in the lawsuit. In February 2002, the court granted final approval of the proposed settlement (the "Second Amendment"). Under the Second Amendment, the appeal has been dismissed with prejudice and ARI agreed to either (i) acquire all of the outstanding shares of IORI and TCI not currently owned by ARI for a cash payment or shares of ARI preferred stock or (ii) make a tender offer for all of the outstanding common shares of IORI and TCI not currently owned by ARI. Under the merger, ARI would pay $17.50 cash per TCI share and $19.00 cash per IORI share for the stock held by non-affiliated stockholders. ARI would issue one share of Series G Preferred Stock with a liquidation value of $20.00 per share for each share of TCI Common 65 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock for stockholders who affirmatively elect to receive ARI preferred stock in lieu of cash. ARI would issue one share of Series H Preferred Stock with a liquidation value of $21.50 per share for each share of IORI Common Stock for stockholders who affirmatively elect to receive ARI preferred stock in lieu of cash. Each share of Series G Preferred Stock would be convertible into 2.5 shares of ARI Common Stock during a 75-day period that commences fifteen days after the date of the first ARI Form 10-Q filing that occurs after the closing of the merger transaction. Upon the acquisition of IORI and TCI shares, TCI and IORI would become wholly-owned subsidiaries of ARI. The transaction was subject to the negotiation of a definitive merger agreement and a vote of the shareholders of all three entities. TCI has the same board as IORI and the same advisor as IORI and ARI. Two of the directors of TCI and IORI also serve as directors for ARI. On November 15, 2002, ARI commenced, through subsidiaries, a tender offer for shares of common stock of TCI and IORI. The price per share was $17.50 for TCI shares and $19.00 for IORI shares. The tender offers were made to cure a default under the settlement resulting from ARI's failure to timely complete the SEC review process of the registration statement for the proposed mergers with TCI and IORI. The tender offers were completed on March 19, 2003. ARI acquired 265,036 IORI shares and 1,213,226 TCI shares. The completion of the tender offer fulfills the obligations under the Second Amendment and the Olive Litigation has been dismissed with prejudice. ARI has deferred further action on the mergers. Partnership Buyouts. TCI is the limited partner in ten partnerships formed to construct residential properties. As permitted in the respective partnership agreements, TCI intends to purchase the interests of the general and any other limited partners in these partnerships subsequent to the completion of these projects. The amounts paid to buyout the nonaffiliated partners are limited to development fees earned by the nonaffiliated partners, and are set forth in the respective partnership agreements. The total amount of the expected buyouts as of December 31, 2002 is approximately $5.9 million. Liquidity. Although management anticipates that TCI will generate excess cash from operations in 2003, due to increased rental rates 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. TCI is currently in default on its loans secured by the three hotels in Chicago. The loans, in the total principal amount of $9.6 million, matured at the end of February 2003 and have been in default since August 2002 due to the hotels not achieving the necessary debt service coverage ratios. Because of the default, the lender began charging default interest at the rate of 12% per annum. TCI has not paid the default interest since September 2002 and is attempting to obtain an extension on the debt. TCI is currently in default on a $1.0 million loan secured by interests in the partnership which owns the Tivoli Apartments in Dallas, Texas. TCI attempted to negotiate an extension for this loan maturing in December 2002. In January 2003, the lender commenced a lawsuit against TCI to collect the amount. TCI is currently in default on a $5.3 million loan secured by the Majestic Hotel in San Francisco, California. TCI ceased making monthly payments of principal and interest in May 2002 and attempted to restructure the debt. 66 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In January 2001, TCI exercised its option under the loan documents to extend the maturity date of three loans with a principal balance of $30.0 million secured by three office buildings in New Orleans, Louisiana. The lender has disputed TCI's right to extend the loans. This dispute is the subject of litigation pending in the United States District Court for the Eastern District of Louisiana. NOTE 22. SUBSEQUENT EVENTS In 2003, TCI purchased the following property:
Units/ Purchase Net Cash Debt Interest Maturity Property Location Rooms/Acres Price Paid Incurred Rate Date -------- ------------ -------------- -------- -------- -------- -------- -------- Land Maumelle........... Maumelle, AR 10.8 Acres $1,100 $412 $ 640 5.75% 07/04 Shopping Center Bridgeview Plaza(1) LaCrosse, WI 116,008 Sq.Ft. 8,700 -- -- -- -- Cullman(1)......... Cullman, AL 92,433 Sq.Ft. 2,000 -- 2,650 16.75% 03/03
-------- (1) Property received from a related party for forgiveness of debt. In 2003, TCI refinanced or financed the following properties:
Net Cash Sq.Ft./ Debt Debt Received/ Interest Maturity Property Location Units/Acres Incurred Discharged (Paid) Rate Date -------- --------------- ------------- -------- ---------- --------- -------- -------- Apartments Mountain Plaza. El Paso, TX 188 Units $4,350 $4,034 $2,500 6.63%(1) 03/06 Stone Oak...... San Antonio, TX 252 Units 2,500 -- 5.00 04/03 Office Building Bonita Plaza... Bonita, CA 47,777 Sq.Ft. 6,000 4,824 1,134 5.25(1) 01/10
-------- (1) Variable rate. 67 SCHEDULE III TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2002
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) Held for Investment: Apartments 4400, Midland, TX.................. $ 1,048 $ 349 $ 1,396 $ -- $ -- $ 349 $ 1,396 $ 1,745 Apple Lane, Lawrence, KS........... 1,413 168 1,259 -- -- 168 1,259 1,427 Arbor Point, Odessa, TX............ 2,030 321 1,285 526 -- 321 1,811 2,132 Ashton Way, Midland, TX............ 1,048 384 1,536 52 -- 384 1,588 1,972 Autumn Chase, Midland, TX.......... 891 141 1,265 -- -- 141 1,265 1,406 Baywalk, Galveston, TX............. 5,412 679 6,106 -- -- 679 6,106 6,785 Blue Lake Villas, Waxahachie, TX... 8,388 1,049 -- 9,383 -- 1,049 9,383 10,432 By the Sea, Corpus Christi, TX..... 5,459 644 5,797 -- -- 644 5,797 6,441 Cliffs of Eldorado, McKinney, TX... 10,449 2,647 10,589 -- -- 2,647 10,589 13,236 Courtyard, Midland, TX............. 1,019 151 1,359 -- -- 151 1,359 1,510 Coventry, Midland, TX.............. 1,213 236 369 173 -- 236 542 778 DeSoto Ranch, DeSoto, TX........... 8,102 1,472 -- 9,087 -- 1,472 9,087 10,559 Echo Valley, Dallas, TX............ 3,290 788 -- 3,650 788 3,650 4,438 El Chapparal, San Antonio, TX...... 4,166 279 2,821 -- (402)/(2)/ 279 2,419 2,698 Fairway View Estates, El Paso, TX.. 5,006 548 4,530 261 -- 548 4,790 5,338 Fairways, Longview, TX............. 3,471 657 1,532 119 (266)/(2)/ 657 1,385 2,042 Falcon Lakes, Arlington, TX........ 9,770 1,437 -- 11,197 1,437 11,197 12,634 Fountain Lake, Texas City, TX...... 3,256 861 2,585 19 (254)/(2)/ 861 2,350 3,211 Fountains of Waterford, Midland, TX 1,698 311 852 1,538 -- 311 2,390 2,701 Harper's Ferry, Lafayette, LA...... 3,332 349 1,398 223 -- 349 1,621 1,970 Hunters Glen, Midland, TX.......... 1,860 519 2,075 321 -- 519 2,396 2,915 In the Pines, Gainesville, FL...... 5,399 1,288 5,154 91 (573)/(2)/ 1,288 4,672 5,960 Island Bay, Galveston, TX.......... 15,203 2,095 18,852 -- -- 2,095 18,852 20,947 Limestone Canyon, Austin, TX....... 12,755 1,998 -- 12,247 1,895/(4)/ 1,998 14,142 16,140 Limestone Ranch, Lewisville, TX.... 13,000 1,620 -- 13,058 -- 1,620 13,058 14,678 Lincoln Court, Dallas, TX.......... 1,226 500 2,095 -- -- 500 2,095 2,595 Marina Landing, Galveston, TX...... 13,041 1,240 11,161 -- -- 1,240 11,161 12,401 Mountain Plaza, El Paso, TX........ 4,036 837 3,347 139 -- 837 3,486 4,323 Oak Park IV, Clute, TX............. 979 224 674 27 (95)/(2)/ 224 606 830 Paramount Terrace, Amarillo, TX.... 2,689 340 3,061 -- -- 340 3,061 3,401
Life on Which Depreciation In Latest Statement Accumulated Date of Date of Operation Property/Location Depreciation Construction Acquired is Computed ----------------- ------------ ------------ -------- ------------ Held for Investment: Apartments 4400, Midland, TX.................. $ 163 1981 04/98 40 years Apple Lane, Lawrence, KS........... 108 1989 01/00 40 years Arbor Point, Odessa, TX............ 698 1975 08/96 5-40 years Ashton Way, Midland, TX............ 230 1978 04/98 5-40 years Autumn Chase, Midland, TX.......... 87 1985 04/00 40 years Baywalk, Galveston, TX............. 204 1979 09/01 40 years Blue Lake Villas, Waxahachie, TX... -- 2002 01/02 40 years By the Sea, Corpus Christi, TX..... 194 1973 08/01 40 years Cliffs of Eldorado, McKinney, TX... 1,144 1997 10/98 40 years Courtyard, Midland, TX............. 57 1976 05/01 40 years Coventry, Midland, TX.............. 231 1977 08/96 5-40 years DeSoto Ranch, DeSoto, TX........... -- 2002 05/02 40 years Echo Valley, Dallas, TX............ -- 2002 01/02 40 years El Chapparal, San Antonio, TX...... 952 1963 01/88 5-40 years Fairway View Estates, El Paso, TX.. 602 1977 03/99 40 years Fairways, Longview, TX............. 462 1980 03/93 5-40 years Falcon Lakes, Arlington, TX........ -- 2001 10/01 40 years Fountain Lake, Texas City, TX...... 562 1975 12/94 5-40 years Fountains of Waterford, Midland, TX 1,188 1977 05/98 5-40 years Harper's Ferry, Lafayette, LA...... 555 1972 02/92 5-40 years Hunters Glen, Midland, TX.......... 529 1982 01/98 5-40 years In the Pines, Gainesville, FL...... 1,067 1972 12/94 5-40 years Island Bay, Galveston, TX.......... 628 1973 09/01 40 years Limestone Canyon, Austin, TX....... 986 1997 07/98 40 years Limestone Ranch, Lewisville, TX.... 194 2001 05/01 40 years Lincoln Court, Dallas, TX.......... 649 1985 08/90 40 Years Marina Landing, Galveston, TX...... 349 1985 09/01 40 years Mountain Plaza, El Paso, TX........ 533 1972 01/98 5-40 years Oak Park IV, Clute, TX............. 161 1981 06/94 5-40 years Paramount Terrace, Amarillo, TX.... 238 1983 05/00 40 years
68 SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2002
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) Plantation, Tulsa, OK.............. $ 1,937 $ 344 $ 2,396 $ -- $ -- $ 344 $ 2,396 $ 2,740 Quail Creek, Lawrence, KS.......... 3,287 343 3,090 -- -- 343 3,090 3,434 Quail Oaks, Balch Springs, TX...... 2,808 90 2,160 152 (187)/(2)/ 90 2,125 2,215 River Oaks, Wiley, TX.............. 10,023 590 -- 11,549 -- 590 11,549 12,139 Sandstone, Mesa, AZ................ 5,590 1,656 6,625 95 -- 1,656 6,720 8,376 Sendero Ridge, San Antonio, TX..... 18,703 2,635 -- 20,478 -- 2,635 20,478 23,113 Somerset, Texas City, TX........... 2,939 936 2,811 179 (452)/(2)/ 936 2,538 3,474 Southgate, Odessa, TX.............. 1,766 335 1,338 318 -- 335 1,656 1,991 Spy Glass, Mansfield, TX........... 13,195 1,376 -- 13,066 -- 1,376 13,066 14,442 Stone Oak, San Antonio, TX......... 2,756 649 2,598 301 (409)/(2)/ 649 2,490 3,139 Summerfield, Orlando, FL........... 4,484 1,175 4,698 324 -- 1,175 5,022 6,197 Sunchase, Odessa, TX............... 3,493 742 2,842 458 -- 742 3,300 4,042 Terrace Hills, El Paso, TX......... 6,149 1,286 5,145 167 -- 1,286 5,312 6,598 Timbers, Tyler, TX................. 2,453 497 1,988 -- -- 497 1,988 2,485 Tivoli, Dallas, TX................. 10,000 1,355 -- 12,588 -- 1,355 12,588 13,943 Treehouse, Irving, TX.............. 2,554 716 2,865 260 -- 716 3,125 3,841 Verandas at City View, Fort Worth, TX.................... 6,814 2,545 -- 7,919 -- 2,545 7,919 10,464 Vistas at Pinnacle park, Dallas, TX 2,788 1,750 2,236 1,750 2,236 3,986 Waters Edge IV, Gulfport, MS....... -- 443 -- 4,258 -- 443 4,258 4,701 Westwood, Odessa, TX............... -- 85 341 91 -- 85 432 517 Willow Creek, El Paso, TX.......... 2,389 608 1,832 76 (156)/(2)/ 608 1,752 2,360 Will-O-Wick, Pensacola, FL......... 3,050 747 2,990 174 (281)/(2)/ 747 2,883 3,630 Willow Wick, North Augusta, SC..... 1,957 324 1,305 25 (170)/(2)/ 324 1,160 1,484 Woodview, Odessa, TX............... 2,037 716 2,864 102 -- 716 2,966 3,682 Office Buildings 1010 Commons, New Orleans, LA...... 8,216 2,113 15,011 18,584 (1,218)/(2)/ 2,113 32,377 34,490 225 Baronne, New Orleans, LA....... 7,211 1,162 10,457 5,993 (1,293)/(2)/ 1,162 15,157 16,319 4135 Beltline, Addison, TX......... 2,858 476 4,280 -- -- 476 4,280 4,756 9033 Wilshire Blvd., Los Angeles, CA................... 6,689 956 8,609 330 -- 956 8,939 9,895 Ambulatory Surgery Center, Sterling, VA...................... 6,554 908 8,170 -- -- 908 8,170 9,078
Life on Which Depreciation In Latest Statement Accumulated Date of Date of Operation Property/Location Depreciation Construction Acquired is Computed ----------------- ------------ ------------ -------- ------------ Plantation, Tulsa, OK.............. 253 1968 12/99 40 years Quail Creek, Lawrence, KS.......... 245 1969 01/00 40 years Quail Oaks, Balch Springs, TX...... 1,050 1982 02/87 5-40 years River Oaks, Wiley, TX.............. -- 2001 10/01 40 years Sandstone, Mesa, AZ................ 955 1986 10/97 5-40 years Sendero Ridge, San Antonio, TX..... -- 2001 11/01 40 years Somerset, Texas City, TX........... 738 1985 12/93 5-40 years Southgate, Odessa, TX.............. 524 1976 08/96 5-40 years Spy Glass, Mansfield, TX........... -- 2002 03/02 40 years Stone Oak, San Antonio, TX......... 885 1978 03/90 5-40 years Summerfield, Orlando, FL........... 1,044 1971 11/94 5-40 years Sunchase, Odessa, TX............... 752 1981 10/97 5-40 years Terrace Hills, El Paso, TX......... 811 1985 03/97 5-40 years Timbers, Tyler, TX................. 249 1973 12/97 40 years Tivoli, Dallas, TX................. 25 2001 12/01 40 years Treehouse, Irving, TX.............. 661 1974 05/97 5-40 years Verandas at City View, Fort Worth, TX.................... -- 2001 09/01 40 years Vistas at Pinnacle park, Dallas, TX -- 2002 10/02 40 Years Waters Edge IV, Gulfport, MS....... 35 2001 11/01 40 years Westwood, Odessa, TX............... 147 1977 08/96 5-40 years Willow Creek, El Paso, TX.......... 433 1972 05/94 5-40 years Will-O-Wick, Pensacola, FL......... 709 1974 05/95 5-40 years Willow Wick, North Augusta, SC..... 240 1968 09/94 5-40 years Woodview, Odessa, TX............... 414 1974 05/98 5-40 years Office Buildings 1010 Commons, New Orleans, LA...... 5,220 1971 03/98 5-40 years 225 Baronne, New Orleans, LA....... 3,629 1960 03/98 5-40 years 4135 Beltline, Addison, TX......... 440 1981/1982 06/99 40 years 9033 Wilshire Blvd., Los Angeles, CA................... 672 1957 04/00 5-40 years Ambulatory Surgery Center, Sterling, VA...................... 460 1991 07/00 40 years
69 SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2002
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) AMOCO, New Orleans, LA.............. $14,617 $ 895 $ 3,582 $6,836 $(1,149)/(2)/ $ 895 $ 9,269 $10,164 Atrium, Palm Beach, FL.............. 3,839 1,147 4,590 177 -- 1,147 4,767 5,914 Bay Plaza, Tampa, FL................ 2,329 895 3,582 508 (384)/(2)/ 895 3,706 4,601 Bay Plaza II, Tampa, FL............. 3,513 506 4,550 90 -- 506 4,640 5,146 Bonita Plaza, Bonita, CA............ 4,833 1,168 4,670 1,153 -- 1,168 5,823 6,991 Brandeis, Omaha, NE................. 8,750 1,451 13,061 114 -- 1,451 13,175 14,626 Centura, Farmers Branch, TX......... 43,739 5,000 45,000 54 -- 5,000 45,054 50,054 Corporate Point, Chantilly, VA...... 3,730 830 3,321 547 -- 830 3,868 4,698 Countryside Retail Center, Sterling, VA................................. 21,307 2,088 18,791 39 -- 2,088 18,830 20,918 Durham Center, Durham, NC........... 14,047 4,233 16,932 1,457 (1,362)/(2)/ 4,233 17,027 21,260 Eton Square, Tulsa, OK.............. 10,058 1,469 13,219 581 -- 1,469 13,800 15,269 Forum, Richmond, VA................. 5,097 1,360 5,439 562 -- 1,360 6,001 7,361 Harmon, Sterling, VA................ 7,884 1,054 9,487 183 -- 1,054 9,670 10,724 Institute Place, Chicago, IL........ 8,025 665 7,057 115 -- 665 7,172 7,837 Lexington Center, Colorado Springs, CO................................. 4,058 1,103 4,413 558 -- 1,103 4,971 6,074 Mimado, Sterling, VA................ -- 582 5,236 50 -- 582 5,286 5,868 One Steeplechase, Sterling, VA...... 7,808 1,380 5,520 2,633 72/(4)/ 1,380 8,225 9,605 Parkway North, Dallas, TX........... 3,757 1,173 4,692 942 -- 1,173 5,634 6,807 Remington Tower, Tulsa, OK.......... 3,419 480 4,351 229 -- 480 4,580 5,060 Signature Athletic Club, Dallas, TX. 2,510 1,075 2,921 1,143 (439)/(2)/ 1,075 3,625 4,700 Venture Center, Atlanta, GA......... 2,607 411 2,746 220 -- 411 2,966 3,377 Westgrove Air Plaza, Addison, TX.... 3,487 501 2,004 549 (945)/(2)/ 501 1,608 2,109 Industrial Warehouses 5360 Tulane, Atlanta, GA............ 370 95 514 50 (44)/(2)/ 95 520 615 5700 Tulane, Atlanta, GA............ -- -- -- 720 (100)/(2)/ -- 620 620 Addison Hangar, Addison, TX......... 1,187 928 1,481 32 -- 928 1,513 2,441 Addison Hanger II, Addison, TX...... 1,465 -- 1,150 248 -- -- 1,398 1,398 Encon, Fort Worth, TX............... 3,440 984 3,934 67 -- 984 4,001 4,985 Kelly, Dallas, TX................... 4,319 1,136 4,856 224 (1,196)/(2)(9)/ 1,136 3,884 5,020 McLeod, Orlando, FL................. 1,929 673 2,693 471 (511)/(2)/ 673 2,653 3,326
Life on Which Depreciation In Latest Statement Accumulated Date of Date of Operation Property/Location Depreciation Construction Acquired is Computed ----------------- ------------ ------------ -------- ------------ AMOCO, New Orleans, LA.............. 4,404 1974 06/97 5-40 years Atrium, Palm Beach, FL.............. 623 1985 06/98 40 years Bay Plaza, Tampa, FL................ 784 1988 07/97 5-40 years Bay Plaza II, Tampa, FL............. 316 1985 06/00 40 years Bonita Plaza, Bonita, CA............ 1,188 1991 09/97 5-40 years Brandeis, Omaha, NE................. 684 1921 11/00 40 years Centura, Farmers Branch, TX......... 477 1999 06/02 40 years Corporate Point, Chantilly, VA...... 979 1992 10/94 5-40 years Countryside Retail Center, Sterling, VA................................. 1,044 1986 09/00 40 years Durham Center, Durham, NC........... 2,894 1988 07/97 5-40 years Eton Square, Tulsa, OK.............. 1,230 1985 09/99 5-40 years Forum, Richmond, VA................. 1,723 1987 10/92 2-40 years Harmon, Sterling, VA................ 558 1987 09/00 5-40 years Institute Place, Chicago, IL........ 4,184 1910 01/93 2-40 years Lexington Center, Colorado Springs, CO................................. 969 1986 12/97 3-40 years Mimado, Sterling, VA................ 306 1986 09/00 40 years One Steeplechase, Sterling, VA...... 3,589 1987 12/92 5-40 years Parkway North, Dallas, TX........... 1,080 1980 02/98 2-40 years Remington Tower, Tulsa, OK.......... 504 1982 09/99 40 years Signature Athletic Club, Dallas, TX. 850 1985 02/99 5-40 years Venture Center, Atlanta, GA......... 1,128 1981 07/89 1-40 years Westgrove Air Plaza, Addison, TX.... 130 1982 10/97 5-40 years Industrial Warehouses 5360 Tulane, Atlanta, GA............ 319 1970 11/97 5-40 years 5700 Tulane, Atlanta, GA............ 122 1998 11/97 40 years Addison Hangar, Addison, TX......... 135 1992 12/99 5-40 years Addison Hanger II, Addison, TX...... 331 2000 12/99 5-40 years Encon, Fort Worth, TX............... 511 1958 10/97 5-40 years Kelly, Dallas, TX................... 961 1966/1973 03/95 5-40 years McLeod, Orlando, FL................. 822 1985 09/94 5-40 years
70 SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2002
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) Ogden, Ogden, UT................... $ -- $ 52 $1,568 $ 112 $ (70)/(2)/ $ 52 $ 1,610 $ 1,662 Space Center, San Antonio, TX...... 1,081 247 1,332 112 (131)/(2)/ 247 1,313 1,560 Texstar, Arlington, TX............. 1,192 333 1,331 216 -- 333 1,547 1,880 Tricon, Atlanta, GA................ 9,490 2,761 6,442 1,280 -- 2,761 7,722 10,483 Shopping Centers Dunes Plaza, Michigan City, IN..... 2,973 1,230 5,430 1,915 (482)/(5)/ 1,230 6,863 8,093 K-Mart, Cary, NC................... 1,749 1,358 1,157 162 -- 1,358 1,319 2,677 Oaktree, Lubbock, TX............... 1,353 231 2,076 123 231 2,199 2,430 Parkway Center, Dallas, TX......... 1,666 273 1,876 51 -- 273 1,927 2,200 Promenade, Highlands Ranch, CO..... 7,126 1,749 6,995 102 (679)/(2)/ 1,749 6,418 8,167 Sadler Square, Amelia Island, FL... 2,769 679 2,715 120 -- 679 2,835 3,514 Sheboygan, Sheboygan, WI........... 591 242 1,371 177 -- 242 1,548 1,790 Hotels Akademia, Wroclaw, Poland.......... 13,872 1,563 -- 14,994 -- 2,184 14,989 18,727 The Majestic, Chicago, IL.......... 2,215 572 2,365 1,441 -- 572 3,806 4,378 City Suites, Chicago, IL........... 3,695 950 3,847 1,061 -- 950 4,908 5,858 Majestic Inn, San Francisco, CA.... 5,255 1,139 4,555 985 -- 1,139 5,540 6,679 Willows, Chicago, IL............... 3,670 945 3,851 1,389 -- 945 5,240 6,185 Land 1013 Commons, New Orleans, LA...... -- 615 -- 124 (36)/(2)/ 703 -- 703 2301 Valley Branch, Farmers Branch, TX................................ 3,124 4,169 -- 84 -- 4,253 -- 4,253 Alamo Springs, Dallas, TX.......... -- 1,385 -- -- -- 1,385 -- 1,385 Centura, Farmers Branch, TX........ 7,150 13,300 -- -- -- 13,300 -- 13,300 Dominion, Dallas, TX............... 662 3,931 -- -- -- 3,931 -- 3,931 Eagle Crest, Farmers Branch, TX.... -- 2,500 -- 134 (505)/(9)/ 2,129 -- 2,129 Folsom............................. -- 1,781 -- 450 -- 2,231 -- 2,231 Hollywood Casino, Farmers Branch, TX................................ 6,222 16,987 -- 2 -- 16,989 -- 16,989 Lakeshore Villas, Harris County, TX -- 950 -- 62 -- 1,012 -- 1,012 Lamar Parmer, Austin, TX........... -- 1,571 -- 94 -- 1,665 -- 1,665 Las Colinas, Las Colinas, TX....... -- 995 -- 5 -- 1,000 -- 1,000
Life on Which Depreciation In Latest Statement Accumulated Date of Date of Operation Property/Location Depreciation Construction Acquired is Computed ----------------- ------------ ------------ -------- ------------ Ogden, Ogden, UT................... 595 1979 01/86 5-40 years Space Center, San Antonio, TX...... 802 1970 11/97 5-40 years Texstar, Arlington, TX............. 497 1967 12/93 5-40 years Tricon, Atlanta, GA................ 2,499 1971 02/93 2-40 years Shopping Centers Dunes Plaza, Michigan City, IN..... 2,076 1978 03/92 5-40 years K-Mart, Cary, NC................... 91 1981 08/98 40 years Oaktree, Lubbock, TX............... 51 1981 03/02 40 years Parkway Center, Dallas, TX......... 635 1979 11/91 5-40 years Promenade, Highlands Ranch, CO..... 1,382 1985 07/96 5-40 years Sadler Square, Amelia Island, FL... 778 1987 11/93 3-40 years Sheboygan, Sheboygan, WI........... 384 1977 05/92 40 years Hotels Akademia, Wroclaw, Poland.......... 407 2001 02/01 40 years The Majestic, Chicago, IL.......... 749 1995 12/98 5-40 years City Suites, Chicago, IL........... 1,024 1995 12/98 5-40 years Majestic Inn, San Francisco, CA.... 2,208 1902 12/90 5-40 years Willows, Chicago, IL............... 1,217 1995 12/98 5-40 years Land 1013 Commons, New Orleans, LA...... 28 -- 08/98 -- 2301 Valley Branch, Farmers Branch, TX................................ -- -- 09/02 -- Alamo Springs, Dallas, TX.......... -- -- 09/99 -- Centura, Farmers Branch, TX........ -- -- 12/02 -- Dominion, Dallas, TX............... -- -- 03/99 -- Eagle Crest, Farmers Branch, TX.... -- -- 05/98 -- Folsom............................. -- -- 10/00 -- Hollywood Casino, Farmers Branch, TX................................ -- -- 06/02 -- Lakeshore Villas, Harris County, TX -- -- 03/02 -- Lamar Parmer, Austin, TX........... -- -- 01/00 -- Las Colinas, Las Colinas, TX....... -- -- 01/96 --
71 SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2002
Cost Capitalized Gross Amounts of Which Initial Cost Subsequent to Acquisition Carried at End of Year --------------------- --------------------- ------------------------------ Building & Building & (1) Property/Location Encumbrances Land Improvements Improvements Other Land Improvements Total ----------------- ------------ -------- ------------ ------------ -------- -------- ------------ -------- (dollars in thousands) Lemon Carlisle, Dallas, TX. $ 1,745 $ 3,576 $ -- $ 30 $ -- $ 3,606 $ -- $ 3,606 Limestone Canyon II........ -- 1,999 -- 635 -- 2,634 -- 2,634 Manhattan, Farmers Branch, TX........................ 5,006 11,186 -- 876 40 12,106 -- 12,106 Marine Creek, Ft. Worth, TX........................ 1,500 3,713 -- 20 -- 3,733 -- 3,733 Mason Park, Houston, TX.... 1,345 2,790 -- 301 -- 3,091 -- 3,091 Mira Lago, Farmers Branch, TX........................ -- 541 -- 56 -- 597 -- 597 Nashville, Nashville, TN... 955 1,890 -- 7 -- 1,897 -- 1,897 Pac-Trust, Dallas, TX...... 332 1,232 -- -- -- 1,232 -- 1,232 Palm Desert, Palm Desert, CA........................ -- 1,190 -- 705 -- 1,895 -- 1,895 Rasor, Plano, TX........... -- 2,319 -- 227 -- 2,546 -- 2,546 Seminary West, Fort Worth, TX........................ -- 234 -- -- -- 234 -- 234 Solco-Valley, Dallas, TX... -- 1,525 -- -- -- 1,525 -- 1,525 West End, Dallas, TX....... 5,844 11,405 -- 77 (4,013)/(8)/ 7,469 -- 7,469 -------- -------- -------- -------- -------- -------- -------- -------- Investment Properties...... 578,055 191,701 432,216 210,515 (15,796) 191,080 627,556 818,636 -------- -------- -------- -------- -------- -------- -------- -------- Properties Held for Sale Land Fiesta, San Angelo, TX..... -- 44 -- -- -- 44 -- 44 Fruitland, Fruitland Park, FL........................ -- 253 -- -- (100)/(6)/ 153 -- 153 McKinney 36, Collin County, TX........................ 425/(7)/ 2,203 -- -- (230)/(2)/ 1,973 -- 1,973 Red Cross, Dallas, TX...... 8,500 7,676 -- 3 -- 7,678 -- 7,678 Round Mt, Austin, TX....... -- 5,740 -- -- (5,421)/(2)(3)/ 319 -- 319 Sandison, Collin County, TX........................ 1,199/(7)/ 5,021 -- -- (392)/(2)/ 4,629 -- 4,629
Life on Which Depreciation In Latest Statement Accumulated Date of Date of Operation Property/Location Depreciation Construction Acquired is Computed ----------------- ------------ ------------ -------- ------------ Lemon Carlisle, Dallas, TX. -- -- 02/98 -- Limestone Canyon II........ -- -- 06/00 -- Manhattan, Farmers Branch, TX........................ 29 -- 02/00 -- Marine Creek, Ft. Worth, TX........................ -- -- 06/02 -- Mason Park, Houston, TX.... -- -- 06/02 -- Mira Lago, Farmers Branch, TX........................ -- -- 05/01 -- Nashville, Nashville, TN... -- -- 06/02 -- Pac-Trust, Dallas, TX...... -- -- 10/01 -- Palm Desert, Palm Desert, CA........................ -- -- 06/02 -- Rasor, Plano, TX........... -- -- 03/02 -- Seminary West, Fort Worth, TX........................ -- -- 07/01 -- Solco-Valley, Dallas, TX... -- -- 04/01 -- West End, Dallas, TX....... -- -- 08/97 -- ------ Investment Properties...... 81,659 ------ Properties Held for Sale Land Fiesta, San Angelo, TX..... -- -- 12/91 -- Fruitland, Fruitland Park, FL........................ -- -- 05/92 -- McKinney 36, Collin County, TX........................ -- -- 01/98 -- Red Cross, Dallas, TX...... -- -- 05/99 -- Round Mt, Austin, TX....... -- -- 12/86 -- Sandison, Collin County, TX........................ -- -- 05/98 --
72 SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2002
Cost Capitalized Gross Amounts of Which Initial Cost Subsequent to Acquisition Carried at End of Year --------------------- --------------------- ------------------------------ Building & Building & (1) Property/Location Encumbrances Land Improvements Improvements Other Land Improvements Total ----------------- ------------ -------- ------------ ------------ -------- -------- ------------ -------- (dollars in thousands) Solco Allen, Collin County, TX........................ 686/(7)/ 1,388 -- -- (80)/(2)/ 1,308 -- 1,308 Stacy Road, Allen, TX...... 1,979/(7)/ 2,665 -- -- (193)/(2)/ 2,472 -- 2,472 State Highway 121, Collin County, TX......... 1,475/(7)/ 4,354 -- -- (2,581)/(2)/ 1,773 -- 1,773 Watters Road, Collin County, TX................ 1,189/(7)/ 1,787 -- -- (200)/(2)/ 1,587 -- 1,587 Whisenant, Collin County, TX........................ 199/(7)/ 631 -- -- (57)/(2)/ 574 -- 574 -------- -------- -------- -------- -------- -------- -------- -------- Properties Held for Sale... 15,652 31,762 -- 3 (9,254) 22,510 -- 22,510 -------- -------- -------- -------- -------- -------- -------- -------- $593,707 $223,463 $432,216 $210,518 $(25,050) $213,590 $627,556 $841,146 ======== ======== ======== ======== ======== ======== ======== ========
Life on Which Depreciation In Latest Statement Accumulated Date of Date of Operation Property/Location Depreciation Construction Acquired is Computed ----------------- ------------ ------------ -------- ------------ 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 -- Whisenant, Collin County, TX........................ -- -- 05/98 -- ------- Properties Held for Sale... -- ------- $81,659 =======
-------- (1) The aggregate cost for federal income tax purposes is $863.6 million. (2) Purchase accounting basis adjustment. (3) Writedown of property to estimated net realizable value. (4) Construction period interest and taxes. (5) Forgiveness of debt and cash received deducted from the basis of the property, offset by land acquired in 1992. (6) Cash received for easement deducted from the basis of the property. (7) 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. (8) Cash received for condemnation of part of property. (9) Sale of portion of property. (10) The Countryside Retail Center is collateralized with the Mimado Building. 73 SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION
2002 2001 2000 -------- --------- -------- (dollars in thousands) Reconciliation of Real Estate Balance at January 1,........................................... $713,348 $ 729,051 $686,522 Additions Purchases, improvements and construction................. 220,164 97,703 122,683 Foreclosures............................................. -- -- 352 Real estate added from consolidation of partnerships..... 4,257 -- -- Deductions Sale of real estate...................................... (88,680) (111,986) (80,188) Asset impairments........................................ (2,579) -- -- Asset retirements........................................ (5,364) -- -- Sale of foreclosed properties............................ -- (1,420) (318) -------- --------- -------- Balance at December 31,......................................... $841,146 $ 713,348 $729,051 ======== ========= ======== Reconciliation of Accumulated Depreciation Balance at January 1,........................................... $ 90,661 $ 88,187 $ 84,986 Additions Depreciation............................................. 20,445 19,705 19,702 Real estate added from consolidation of partnerships..... 817 -- -- Deductions Sale of real estate...................................... (24,900) (17,231) (16,501) Asset retirements........................................ (5,364) -- -- -------- --------- -------- Balance at December 31,......................................... $ 81,659 $ 90,661 $ 88,187 ======== ========= ========
74 SCHEDULE IV TRANSCONTINENTAL REALTY INVESTORS, INC. MORTGAGE LOANS ON REAL ESTATE December 31, 2002
Final Interest Maturity Prior Description Rate Date Periodic Payment Terms Liens ----------- -------- -------- ----------------------------------- ------ FIRST MORTGAGE LOANS 400 St. Paul.................................. 6.0% 03/07 Monthly interest only payments. $ -- Secured by an office building in Dallas, TX. Executive Court............................... 12.0% 12/04 Excess property cash flow payments. -- Secured by a 41,840 sq. ft. office building in Memphis, TN. Palm Desert................................... 8.0% 09/04 Quarter interest only payments of -- Secured by 36 acres in Palm Desert, CA. $54,000. WRAPAROUND MORTGAGE LOANS Pinemont...................................... 10.40% 07/08 Monthly principal and interest 274 Secured by an office building in payments of $6,281. Houston, TX. Nakash........................................ Monthly interest only payments of 305 Secured by a shopping Center $13,000. in Malden, MO. JUNIOR MORTGAGE LOANS Dallas Fund XVII.............................. Varies 05/03 One note bearing interest at the 835 Secured by an office building in Dallas, TX. default rate of 18%. Keller Hicks.................................. 16.0% 11/02 Interest only payments of $22,667 -- Secured by 21.6 acres of unimproved land due monthly. in Fort Worth, TX. Confederate Point............................. 12.0% Excess property cash flow payments. 7,299 Secured by an apartment building in Jacksonville, FL. Foxwood....................................... 12.0% Excess property cash flow payments. 5,801 Secured by an apartment building in Memphis, TN. One Hickory................................... 12.0% Excess property cash flow payments. 7,428 Secured by an office building in Farmers Branch, TX. Two Hickory................................... 12.0% Excess property cash flow payments. 7,500 Secured by an office building in Farmers Branch, TX. Sendera Ranch................................. 15.0% 07/03 Interest only payments of $44,338. 7,000 Secured by 1,714.16 acres of unimproved land in Tarrant County, TX.
Principal Amount of Loans Subject to Face Carrying Delinquent Amount of Amounts of Principal Description Mortgage Mortgage (1) or Interest ----------- --------- ------------ ----------- (dollars in thousands) FIRST MORTGAGE LOANS 400 St. Paul.................................. $4,180 $4,180 $ -- Secured by an office building in Dallas, TX. Executive Court............................... 1,970 1,970 -- Secured by a 41,840 sq. ft. office building in Memphis, TN. Palm Desert................................... 2,700 2,700 -- Secured by 36 acres in Palm Desert, CA. WRAPAROUND MORTGAGE LOANS Pinemont...................................... 467 311 -- Secured by an office building in Houston, TX. Nakash........................................ 902 902 -- Secured by a shopping Center in Malden, MO. JUNIOR MORTGAGE LOANS Dallas Fund XVII.............................. 4,258 4,258 -- Secured by an office building in Dallas, TX. Keller Hicks.................................. 1,700 690 -- Secured by 21.6 acres of unimproved land in Fort Worth, TX. Confederate Point............................. 1,929 1,929 -- Secured by an apartment building in Jacksonville, FL. Foxwood....................................... 1,092 1,092 -- Secured by an apartment building in Memphis, TN. One Hickory................................... 4,468 4,468 -- Secured by an office building in Farmers Branch, TX. Two Hickory................................... 4,448 3,115 -- Secured by an office building in Farmers Branch, TX. Sendera Ranch................................. 2,682 2,682 -- Secured by 1,714.16 acres of unimproved land in Tarrant County, TX.
75 SCHEDULE IV (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. MORTGAGE LOANS ON REAL ESTATE December 31, 2002
Final Face Carrying Interest Maturity Prior Amount of Amounts of Description Rate Date Periodic Payment Terms Liens Mortgage Mortgage (1) ----------- -------- -------- --------------------------------- ------- --------- ------------ (dollars in thousands) OTHER Apartment Development Services............ 12.0% 06/05 Interest only payments of $1,250. -- 150 150 Secured by 100% interest in partnership. ------- ------- ------- $36,442 $30,946 28,447 ======= ======= Interest.................................. 843 Allowance for estimated losses............ (1,337) ------- $27,953 =======
Principal Amount of Loans Subject to Delinquent Principal Description or Interest ----------- ----------- OTHER Apartment Development Services............ -- Secured by 100% interest in partnership. ------ $ -- ====== Interest.................................. Allowance for estimated losses............
-------- (1) The aggregate cost for federal income tax purposes is $16.1 million. TRANSCONTINENTAL REALTY INVESTORS, INC. MORTGAGE LOANS ON REAL ESTATE
2002 2001 2000 -------- ------- -------- (dollars in thousands) Balance at January 1,...................................... $ 22,689 $ 8,668 $ 12,061 Additions New mortgage loans...................................... 25,037 20,063 17,500 Mortgages added from consolidation of partnerships...... 902 -- -- Deductions Collections of principal................................ (18,737) (6,042) (20,531) Foreclosed properties and deeds-in-lieu of foreclosure.. -- -- (356) Mortgages eliminated from consolidation of partnerships. (1,369) -- -- Write off of principal due to discount for early payoff. (75) -- (6) -------- ------- -------- Balance at December 31,.................................... $ 28,447 $22,689 $ 8,668 ======== ======= ========
76 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 69, 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; General Manager (since April 2002) of Unified Housing Foundation, Inc., a nonprofit corporation; Director and Chairman of the Board of ARI (since November 2002); and Director (since April 1990) and Chairman of the Board (since January 1995) of Income Opportunity Realty Investors, Inc. ("IORI"). HENRY BUTLER: Age 52, Director (Affiliated) (since December 2001). Broker--Land Sales (since 1992) of Basic Capital Management, Inc. ("BCM"); Owner/Operator (1989 to 1991) of Butler Interests, Inc.; and Director (since December 2001) of IORI. EARL D. CECIL: Age 73, Director (Independent) (since March 2002). Financial and business consultant (since January 1994); Division Vice President (February 1987 to December 1993) of James Mitchell & Company, a financial services marketing organization; Director (since November 2001) of ARI; and Director (since March 2002) of IORI. MARTIN L. WHITE: Age 63, 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.; and Director (since January 1995) of IORI. Board Committees The Board of Directors held 18 meetings during 2002. 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 77 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. Cecil, Stokely and White. The Audit Committee met four times during 2002. The Board of Directors does not have Nominating or Compensation Committees. Executive Officers The following persons currently serve as executive officers of TCI: Mark Branigan, Executive Vice President--Residential; Louis J. Corna Executive Vice President--Tax; and Ronald E. Kimbrough, Executive Vice President and Chief Financial Officer. 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. MARK W. BRANIGAN: Age 48, Executive Vice President--Residential (since June 2001), Executive Vice President and Chief Financial Officer (August 2000 to June 2001), 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--Residential (since June 2001), Executive Vice President and Chief Financial Officer (August 2000 to June 2001), Vice President--Director of Construction (August 1999 to August 2000) and Executive Vice President--Residential Management (January 1992 to October 1997) of BCM, American Realty Trust, Inc. ("ART") and IORI; Executive Vice President and Chief Financial Officer (August 2000 to June 2001) and Director (September 2000 to June 2001) of ARI; and real estate consultant (November 1997 to July 1999). LOUIS J. CORNA: Age 55, Executive Vice President--Tax (since October 2001), Executive Vice President and Chief Financial Officer (June 2001 to October 2001), and Senior Vice President--Tax (December 2001 to June 2001). Executive Vice President--Tax (since October 2001), Executive Vice President and Chief Financial Officer (June 2001 to October 2001), and Senior Vice President--Tax (December 2000 to June 2001) of BCM, ARI and IORI; Private Attorney (January 2000 to December 2000); Vice President--Taxes and Assistant Treasurer (March 1998 to January 2000) of IMC Global, Inc.; and Vice President--Taxes (July 1991 to February 1998) of Whitman Corporation. RONALD E. KIMBROUGH: Age 50, Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer (since January 2002). Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer (since January 2002) of BCM, ARI and IORI; Controller (from September 2000 to January 2002) of BCM; Vice President and Treasurer (from January 1998 to September 2000) of Syntek West, Inc. and One Realco Corporation; and Consultant (1997). 78 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 50, 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 2002. 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. Branigan, Corna, and Kimbrough serve as executive officers. BCM is indirectly owned by a trust for the children of Gene E. Phillips. Mr. Phillips is not an officer or director of BCM, but serves as a representative of the trust, is involved in daily consultation with the officers of BCM and has significant influence over the conduct of BCM's business, including the rendering of advisory services and the making of investment decisions for itself and for TCI. 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 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. 79 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. 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 80 Advisory Agreement based on the book value, net asset value and net income of TCI during the fiscal year. BCM was required to refund $1.4 million of the 2002 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 had engaged, on a non-exclusive basis, Regis Realty, Inc. ("Regis"), a related party, to perform brokerage services for TCI until December 2002. Beginning January 1, 2003, Regis Realty I LLC performs 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 Mark W. Branigan: Executive Vice President-- Residential Louis J. Corna: Executive Vice President--Tax Ronald E. Kimbrough: Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer Dan S. Allred: Senior Vice President--Land Development Michael E. Bogel: Senior Vice President--Project Manager Robert A. Waldman: Senior Vice President, Secretary and General 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 indirectly owns BCM and, in such capacity, has 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 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 partner of Triad is Highland Realty Services, Inc. ("Highland"), a related party. Triad subcontracted the property-level management and leasing of 45 of TCI's commercial properties to Regis Realty, Inc. ("Regis"), a related party, which was a company owned by Highland, until December 2002. Regis was entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad, until December 2002. Regis also was entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. Since January 1, 2003, Regis Realty I, LLC ("Regis I"), provided these services. Regis I is owned by Highland. Regis Hotel Corporation, a related party, managed TCI's five hotels, until December 2002. Since January 1, 2003, Regis Hotel I, LLC, managed TCI's five hotels. The sole member of Regis I and Regis Hotel I, LLC is Highland. Real Estate Brokerage Regis also provided real estate brokerage services to TCI (on a non-exclusive basis), until December 2002. Regis was 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 81 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 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. Beginning January 1, 2003, Regis I provides these services. The sole member of Regis I is Highland. 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 2002, $91,113 was paid to the Independent Directors in total Directors' fees for all services, including the annual fee for service during the period January 1, 2002 through December 31, 2002, and 2002 special service fees as follows: Earl D. Cecil, $25,113; Ted P. Stokely, $34,000; and Martin L. White, $32,000. 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, 2003, TCI had 110,000 shares of Common Stock reserved for issuance under the Director's Stock Option Plan of which 15,000 options were outstanding. 82 Performance Graph The following performance graph compares the cumulative total stockholder return on TCI's shares of Common Stock with the Dow Jones US Total Market Index ("DJ Total Market Index") and the Dow Jones Real Estate Investment Index ("DJ Real Estate Index"). The comparison assumes that $100 was invested on December 31, 1997, 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. COMPARISON OF FIVE YEARS CUMULATIVE TOTAL RETURN [CHART] TCI DJ Total Market Index DJ Real Estate Index 1997 $100.00 $100.00 $100.00 1998 83.00 124.90 78.88 1999 85.88 153.28 74.69 2000 63.28 139.07 95.24 2001 114.44 122.50 106.49 2002 125.77 95.45 110.35
1997 1998 1999 2000 2001 2002 ------ ------ ------ ------ ------ ------ TCI.................. 100.00 83.00 85.88 63.28 114.44 125.77 DJ Total Market Index 100.00 124.90 153.28 139.07 122.50 95.45 DJ Real Estate Index. 100.00 78.88 74.69 95.24 106.49 110.35
83 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 19, 2003, after completion of the tender offer.
Amount and Nature Percent of Beneficial of Name and Address of Beneficial Owner Ownership Class/(1)/ ------------------------------------ ------------- --------- EQK Holdings, Inc.(2).............................. 5,206,067 64.5% 1800 Valley View Lane Suite 300 Dallas, Texas 75234 Transcontinental Realty Acquisition Corporation (3) 1,213,226 15.0% 1800 Valley View Lane Suite 100 Dallas, Texas 75234 Basic Capital Management, Inc...................... 1,166,947 14.5% 1800 Valley View Lane Suite 300 Dallas, Texas 75234
-------- (1) Percentage is based upon 8,072,594 shares of Common Stock outstanding at March 19, 2003. (2) EQK Holdings, Inc. ("EQK") is a wholly-owned subsidiary of ART, which is a wholly-owned subsidiary of ARI. (3) Transcontinental Realty Acquisition Corporation ("TRAC") is a wholly-owned subsidiary of ARI. 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 19, 2003.
Amount and Nature of Percent Beneficial of Name of Beneficial Owner Ownership Class/(1)/ ------------------------ ---------- --------- Mark W. Branigan............................................... 6,400,949/(2)(3)/ 79.3% Henry A. Butler................................................ -- -- Earl D. Cecil.................................................. 5,212,527/(4)(5)/ 64.5% Louis J. Corna................................................. 6,400,929/(2)(3)/ 79.3% Ronald E. Kimbrough............................................ 6,400,929/(2)(3)/ 79.3% Ted P. Stokely................................................. 5,212,527/(4)(6)/ 64.5% Martin L. White................................................ 5,000/(7)/ * All Directors and Executive Officers as a group (7 individuals) 6,415,250/(2)(3)(4)/ /(5)(6)(7)/ 79.4%
-------- * Less than 1% (1) Percentage is based upon 8,072,594 shares of Common Stock outstanding at March 19, 2003 and 15,000 shares which may be issued under existing Director Stock Options. (2) Includes 26,475 shares owned by Syntek Asset Management, L.P., 1,166,947 shares owned by BCM. Each of the executive officers of TCI may be deemed to be beneficial owners of such shares by virtue of their positions as executive officers of TCI disclaim such beneficial ownership. 84 (3) Includes 5,206,067 shares owned by EQK and 1,213,226 shares owned by TRAC. Each of the executive officers of ARI may be deemed to be beneficial owners of such shares by virtue of their positions as executive officers of BCM. The executive officers of TCI disclaim such beneficial ownership. (4) Includes 5,206,067 shares owned by EQK and 1,213,226 shares owned by TRAC. Messrs. Cecil and Stokely may be deemed to be beneficial owners of such shares by virtue of their positions as directors of ARI. Messrs. Cecil and Stokely disclaim such beneficial ownership. (5) Includes 5,000 shares which may be acquired by Mr. Cecil pursuant to the Director Stock Option Plan. (6) Includes 5,000 shares which may be acquired by Mr. Stokely pursuant to the Director Stock Option Plan. (7) Includes 5,000 shares which may be acquired by Mr. White pursuant to the Director Stock Option Plan. 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 indirectly owned by a trust for the children of Gene E. Phillips. Mr. Phillips is not an officer or director of BCM, but serves as a representative of the trust, is involved in daily consultation with the officers of BCM and has significant influence over the conduct of BCM's business, including the rendering of advisory services and the making of investment decisions for itself and for 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 partner of Triad is Highland, a related party. Triad subcontracted the property-level management and leasing of 45 of TCI's commercial properties, and its five hotels to Regis, a related party, which is a company owned by Highland, until December 2002. Since January 1, 2003, Regis I provided this service. Regis also provided real estate brokerage services for TCI, on a non-exclusive basis, and receives brokerage commissions in accordance with the brokerage agreement, until December 2002. Since January 1, 2003, Regis I provided this service. 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, 2002, TCI owned approximately 24.0% of the outstanding common shares of IORI. BCM also serves as advisor to ARI. Messrs. Cecil and Stokely serve also as Directors of ARI. Messrs. Branigan, Corna, and Kimbrough serve as executive officers of ARI. 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. Operating Relationships In the year ended December 31, 2002, TCI received $68,000 in rent from BCM for BCM's lease at Addison Hanger. BCM owns a corporate jet that is housed at the hanger and TCI has available space at the hanger. Property Transactions In January 2002, TCI purchased 100% of the outstanding common shares of ART Two Hickory Corporation from ARI, for $4.4 million. See NOTE 3. "NOTES AND INTEREST RECEIVABLE." The purchase price was 85 determined based upon the market value of the property exchanged, using a market rate multiple of net operating income ("cap rate") of 7.0%. The business purpose of the transaction was for TCI to make an equity investment in Two Hickory anticipating a profitable return. In February 2002, TCI sold a $2.0 million senior participation interest in a loan to IORI. See NOTE 3. "NOTES AND INTEREST RECEIVABLE." Management determined that TCI could benefit from the increase in cash and decrease its notes receivable outstanding portfolio. In March 2002, TCI paid cash of $600,000 and received from ARI two parcels of land, a 24.5 acre tract of Rasor land, a 16.89 acre tract of Lakeshore Villas land, and the 45,623 sq. ft. Oaktree Village Shopping Center in exchange for the 80,278 sq. ft. Plaza on Bachman Creek Shopping Center. The exchange value prices for the shopping centers were determined based on a cap rate of 10.5% and the value for the Rasor and Lakeshore Villas land was determined on appraised rates of $3.36 and $1.29, respectively, per square foot. The business purpose of the transaction was for TCI to construct apartments on the Rasor and Lakeshore Villas land and to give ample value for the property TCI exchanged, the Oaktree Shopping Center was added to the transaction. See NOTE 2. "REAL ESTATE." In April 2002, TCI purchased 100% of the following entities from ARI: Garden Confederate Point, L.P., Garden Foxwood, L.P., Garden Woodsong, L.P. and ART One Hickory Corporation for $10.0 million. See NOTE 3. "NOTES AND INTEREST RECEIVABLE." The purchase price for these entities was determined based on a cap rate of 8.41% for the partnerships and 7.0% for ART One Hickory Corporation. The business purpose of the transaction was for TCI to make an equity investment in the entities anticipating a profitable return. In June 2002, TCI purchased Centura Tower, Ltd. partnership, which owns the Centura Tower Office Building from ARI for $50.0 million. See NOTE 2. "REAL ESTATE." The purchase price for the Centura Tower was determined based on appraised value and replacement cost. The business purpose of the transaction was for TCI to acquire a Class A office building with significant upside potential anticipating a profitable return. Also in June 2002, TCI purchased five parcels of unimproved land from ARI: the Hollywood Casino, Marine Creek, Mason Park, Nashville and Palm Desert land parcels. See NOTE 2. "REAL ESTATE." The purchase price of the Hollywood Casino land was determined based on an appraised rate of $9.10 per square foot. The business purpose of the transaction was for TCI to consolidate its holdings within the Mercer Crossing development. The purchase price for the Marine Creek, Mason Park, Nashville and Palm Desert land parcels was determined based on appraised rates of $2.00, $3.56, $4.00 and $1.48 per square foot, respectively. The business purpose of the transaction was for TCI to develop apartments on these four tracts of land. In October 2002, a short term working capital loan to BCM for a total of $4.0 million was assumed by TCI. The loan is secured on the Red Cross land, requires quarterly payments and was due in October 2002. See NOTE 6. "NOTES AND INTEREST PAYABLE." In December 2002, TCI purchased the NLP/CH, Ltd. partnership, which owns the Centura land parcel, from ARI. See NOTE 2. "REAL ESTATE." The purchase price was determined based on an appraised rate of $34.89 per share foot. The business purpose of the transaction was for TCI to construct apartments on the land. As more fully described in ITEM 2. "PROPERTIES-Real Estate," TCI is a partner with IORI in Nakash Income Associates. TCI owns 345,728 shares of IORI's Common Stock, an approximate 24.0% interest. At December 31, 2002, the market value of the IORI common shares was $6.5 million. At December 31, 2002, 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 19, 2003, ARI owned approximately 64.5% of 86 TCI's outstanding Common Stock. At December 31, 2002, the market value of the ARI common shares owned by TCI was $6.0 million. In February 2002, a short term working capital loan to BCM for a total of $2.5 million was assumed by TCI. The loan is secured by the Stone Oak Apartments in San Antonio, Texas, requires all principal and interest due and payable on April 28, 2003. See NOTE 22. "SUBSEQUENT EVENTS." In 2002, TCI paid BCM, its affiliates and related parties $5.9 million in advisory, incentive and net income fees, $753,000 in mortgage brokerage and equity refinancing fees, $58,000 in property acquisition fees, $3.0 million in real estate brokerage commissions and $8.2 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 $2.0 million. In addition, from time-to-time, TCI and its affiliates have made advances to each other, which generally have not had specific repayment terms and have been reflected in TCI's financial statements as other assets or other liabilities. At December 31, 2002, TCI had receivables of $6.6 million, $1.8 million and $6.0 million from BCM, GS Realty, and ARI, respectively. Also at December 31, 2002, TCI owed $649,000, $374,000 and $5.3 million to GS Realty, BCM and IORI, respectively. In January 2003, TCI paid the $649,000 due to GS Realty and in March 2003, TCI paid the $374,000 to BCM. 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. CONTROLS AND PROCEDURES (a) Within the 90 days prior to the date of this report, TCI carried out an evaluation, under the supervision and with the participation of TCI's management, including TCI's Acting Principal Executive Officer and Principal Accounting Officer, of the effectiveness of the design and operation of TCI's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon the evaluation, TCI's Acting Principal Executive Officer and Principal Accounting Officer concluded that TCI's disclosure controls and procedures are effective in timely alerting him to material information relating to TCI (including its consolidated subsidiaries) required to be included in TCI's periodic SEC filings. (b) There have been no significant changes in TCI's internal controls or in other factors that could significantly affect TCI's internal controls subsequent to the date TCI carried out this evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 87 PART IV ITEM 15. 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, 2002 and 2001 Consolidated Statements of Operations--Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Stockholders' Equity--Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows--Years Ended December 31, 2002, 2001 and 2000 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, 2002). Consolidated Financial Statements of American Realty Investors, Inc. (incorporated by reference to Item 8 of American Realty Investors, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002). 88 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). 3.6 Certificate of Designation of Transcontinental Realty Investors, Inc., Setting for the Voting Powers, Designating, Preferences, Limitations, Restrictions and Relative Rights of Series C Cumulative Convertible Preferred Stock, dated September 28, 2001 (incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). 3.7 Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc. Decreasing the Number of Authorized Shares of and Eliminating Series B Preferred Stock dated December 14, 2001 (incorporated by reference to Exhibit 3.7 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001). 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). 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
(b) Reports on Form 8-K: None. 89 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 31, 2003 By: /s/ RONALD E. KIMBROUGH ---------------------------------- Ronald E. Kimbrough Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Acting Principal Executive Officer)
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 31, 2003 ----------------------------- Director Ted P. Stokely /s/ HENRY A. BUTLER Director March 31, 2003 ----------------------------- Henry A. Butler /s/ EARL D. CECIL Director March 31, 2003 ----------------------------- Earl D. Cecil /s/ MARTIN L. WHITE Director March 31, 2003 ----------------------------- Martin L. White /s/ RONALD E. KIMBROUGH Executive Vice President and March 31, 2003 ----------------------------- Chief Financial Officer Ronald E. Kimbrough (Principal Financial and Accounting Officer and Acting Principal Executive Officer) 90 CERTIFICATION I, Ronald E. Kimbrough, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Acting Principal Executive Officer) of Transcontinental Realty Investors, Inc. ("TCI"), certify that: 1. I have reviewed this quarterly report on Form 10-K of TCI; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining internal controls and procedures and have: a. designed such internal controls to insure that material information relating to TCI and its consolidated subsidiaries is made known to me by others within those entities, particularly for the periods presented in this quarterly report; b. evaluated the effectiveness of TCI's internal controls as of a date within 90 days prior to the filing date of this quarterly report; and c. presented in this quarterly report my conclusions about the effectiveness of the disclosure controls and procedures based on a date within 90 days prior to the filing date of this quarterly report; 5. I have disclosed to TCI's auditors and Audit Committee of the Board of Directors (or persons fulfilling the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect TCI's ability to record, process, summarize, and report financial data and have identified for TCI's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in TCI's internal controls; and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including corrective actions with regard to significant deficiencies and material weaknesses. Dated: March 31, 2003 By: /s/ RONALD E. KIMBROUGH ---------------------------------- Ronald E. Kimbrough Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Acting Principal Executive Officer)
91 ANNUAL REPORT ON FORM 10-K EXHIBIT INDEX For the Year Ended December 31, 2002
Exhibit Page Number Description No. ------ ----------- --- 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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