-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FzQYpKU2QCIZAbMbrRu75CoUZ/0zpsfP5vefLtJXw5vjgtdTk9nhbA3eO0CoO+kJ fBWv6IMZXHN2UdP2jx2+Uw== 0000930661-03-002067.txt : 20030520 0000930661-03-002067.hdr.sgml : 20030520 20030520164151 ACCESSION NUMBER: 0000930661-03-002067 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030520 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSCONTINENTAL REALTY INVESTORS INC CENTRAL INDEX KEY: 0000733590 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 946565852 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09240 FILM NUMBER: 03712871 BUSINESS ADDRESS: STREET 1: 1800 VALLEY VIEW LANE STREET 2: SUITE 300 CITY: DALLAS STATE: TX ZIP: 75234 BUSINESS PHONE: 4695224200 MAIL ADDRESS: STREET 1: 1800 VALLEY VIEW LANE STREET 2: SUITE 300 CITY: DALLAS STATE: TX ZIP: 75234 FORMER COMPANY: FORMER CONFORMED NAME: JOHNSTOWN CONSOLIDATED REALTY TRUST /CA/ DATE OF NAME CHANGE: 19890815 FORMER COMPANY: FORMER CONFORMED NAME: JOHNSTOWN CONSOLIDATED REALTY TRUST DATE OF NAME CHANGE: 19861005 10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2003 -------------- Commission File Number 1-9240 ------ TRANSCONTINENTAL REALTY INVESTORS, INC. ---------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Nevada 94-6565852 - --------------------------------- --------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1800 Valley View Lane, Suite 300, Dallas, Texas 75234 - ------------------------------------------------------------------------------- (Address of Principal Executive Office) (Zip Code) (469) 522-4200 ------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ___. No X . --- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No ___. --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, $.01 par value 8,072,594 - ---------------------------- ------------------------------ (Class) (Outstanding at April 30, 2003) 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The accompanying Consolidated Financial Statements have not been audited by independent certified public accountants, but in the opinion of the management of Transcontinental Realty Investors, Inc. ("TCI"), all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of TCI's consolidated financial position, consolidated results of operations and consolidated cash flows at the dates and for the periods indicated, have been included. TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2003 2002 --------- --------- (dollars in thousands, except per share) Assets Real estate held for investment ...................... $ 840,563 $ 818,636 Less - accumulated depreciation ...................... (84,194) (81,659) --------- --------- 756,369 736,977 Real estate held for sale ............................ 22,510 22,510 Notes and interest receivable Performing (including $12,574 in 2003 and 2002 from related parties) ................................ 25,734 26,608 Nonperforming, nonaccruing ........................ 2,859 2,682 --------- --------- 28,593 29,290 Less--allowance for estimated losses ................. (1,456) (1,337) --------- --------- 27,137 27,953 Investment in real estate entities ................... 13,988 13,757 Marketable equity securities, at market value......... 5,000 -- Cash and cash equivalents ............................ 3,490 10,558 Other assets (including $14,317 in 2003 and $19,187 in 2002 from affiliates and related parties) ...... 47,059 46,734 --------- --------- $ 875,553 $ 858,489 ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 2 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS - Continued
March 31, December 31, 2003 2002 --------- -------- (dollars in thousands, except per share) Liabilities and Stockholders' Equity Liabilities Notes and interest payable ............................................ $ 610,537 $ 586,628 Liabilities related to assets held for sale ........................... 15,008 15,724 Other liabilities (including $5,260 in 2003 and $5,272 in 2002 to affiliates and related parties) ............................ 33,764 31,099 --------- --------- 659,309 633,451 Commitments and contingencies Minority interest ..................................................... 2,583 2,644 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 2003 and 8,042,594 in 2002 .............................................. 81 81 Paid-in capital ....................................................... 257,040 257,040 Accumulated deficit ................................................... (42,743) (35,294) Accumulated other comprehensive income (loss) ......................... (717) 567 --------- --------- 213,661 222,394 --------- --------- $ 875,553 $ 858,489 ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 3 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended March 31, -------------------- 2003 2002 -------- -------- (dollars in thousands, except per share) Property revenue Rents (including $30 from affiliates in 2003 and 2002) .................................. $ 29,308 $ 25,406 Property expense Property operations (including $807 in 2003 and $643 in 2002 to affiliates and related parties) ................................... 18,515 15,498 -------- -------- Operating income ........................... 10,793 9,908 Other income (loss) Interest and other (including $152 in 2003 and $74 in 2002 from related parties) .......... 848 1,067 Equity loss of equity investees ............... (1,296) (1,276) -------- -------- (448) (209) Other expense Interest ...................................... 10,347 7,857 Depreciation .................................. 5,053 4,462 Discount on sale of note receivable ........... 104 -- Advisory fee to affiliate ..................... 1,656 1,415 General and administrative (including $559 in 2003 and $786 in 2002 to affiliates) ....... 1,700 2,202 Minority interest ............................. (61) (59) -------- -------- 18,799 15,877 -------- -------- Net loss from continuing operations .............. (8,454) (6,178) Discontinued operations: Loss from operations .......................... (459) (586) Gain on sale of operations .................... -- 2,508 Equity in investees gain on sale of real estate ........................................ 1,509 2,921 -------- -------- Net income from discontinued operations .......... 1,050 4,843 Net loss ......................................... (7,404) (1,335) Preferred dividend requirement ................... (45) (45) -------- -------- Net loss applicable to Common shares ............. $ (7,449) $ (1,380) ======== ======== The accompanying notes are an integral part of these Consolidated Financial Statements. 4 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS - Continued
For the Three Months Ended March 31, ------------------------------ 2003 2002 ------------- ------------- (dollars in thousands, except per share) Basic loss per share Net loss from continuing operations $ (1.05) $ (.77) Discontinued operations ................ .13 .60 ------------- ------------- Net loss applicable to Common shares ...... $ (.92) $ (.17) ============= ============= Diluted loss per share Net loss from continuing operations .... $ (1.05) $ (.77) Discontinued operations ................ .13 .60 ------------- ------------- Net loss applicable to Common shares ...... $ (.92) $ (.17) ============= ============= Weighted average Common shares used in computing earnings per share Basic .................................. 8,072,594 8,042,594 Diluted ................................ 8,072,594 8,042,594
The accompanying notes are an integral part of these Consolidated Financial Statements. 5 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated Common Stock Other --------------------- Paid-in Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Income/(Loss) Equity --------- --------- --------- ----------- ------------- ------------- (dollars in thousands, except per share) Balance, January 1, 2003 .......... 8,072,594 $ 81 $ 257,040 $ (35,294) $ 567 $ 222,394 Unrealized loss on foreign currency translation .................... -- -- -- -- (1,284) (1,284) Net loss ....................... -- -- -- (7,404) -- (7,404) ----------- (8,688) Series A Preferred Stock cash dividend ($1.25 per share) ..... -- -- -- (7) -- (7) Series C Preferred Stock cash dividends ($1.25 per share) .... -- -- -- (38) -- (38) --------- --------- --------- --------- --------- ----------- Balance, March 31, 2003 ........... 8,072,594 $ 81 $ 257,040 $ (42,743) $ (717) $ 213,661 ========= ========= ========= ========= ========= ===========
The accompanying notes are an integral part of these Consolidated Financial Statements. 6 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, -------------------- 2003 2002 -------- -------- (dollars in thousands) Cash Flows from Operating Activities Net (loss) ............................................................................. $ (7,404) $ (1,335) Reconciliation of net loss to net cash (used in) provided by operating activities Adjustments to reconcile net loss to net cash (used in) provided by operating activities Depreciation and amortization .................................................... 5,102 5,242 Loss on foreign currency transaction ............................................. 3 -- Gain on sale of real estate ...................................................... (1,509) (5,429) Equity loss of equity investees .................................................. 1,296 1,276 (Increase) decrease in interest receivable ....................................... (99) 30 Decrease in other assets ......................................................... 73 657 (Decrease) in interest payable ................................................... (120) (134) (Decrease) increase in other liabilities ......................................... 1,557 (292) -------- -------- Net cash (used in) provided by operating activities ........................... (1,101) 15 Cash Flows from Investing Activities Collections on notes receivable (including $2,045 in 2002 from related parties) ..... 157 4,472 Funding of notes receivable (including $4,448 in 2002 to related parties) ........... (461) (5,351) Acquisition of real estate .......................................................... (1,476) (2,412) Real estate improvements ............................................................ (17,612) (15,476) Proceeds from sale of real estate ................................................... -- 6,779 Deposits on pending purchases and financings ........................................ (1,105) 35 Payments made under interest rate swap agreement..................................... (56) -- Payments made for marketable securities.............................................. (5,000) -- Payments (to)/from advisor .......................................................... (1,250) 2,573 Advance to affiliates ............................................................... -- (2,670) Distributions from equity investees ................................................. 600 323 -------- -------- Net cash used in investing activities ......................................... (26,203) (11,630) Cash Flows from Financing Activities Payments on notes payable ........................................................... (24,731) (7,838) Proceeds from notes payable ......................................................... 45,367 14,328 Deferred financing costs (including $27 in 2002 to affiliates and related parties) .. (400) (133) Dividends to stockholders ........................................................... -- (45) -------- -------- Net cash provided by financing activities ..................................... 20,236 6,215 Net decrease in cash and cash equivalents .............................................. (7,068) (5,400) Cash and cash equivalents, beginning of period ......................................... 10,558 10,346 -------- -------- Cash and cash equivalents, end of period ............................................... $ 3,490 $ 4,946 ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 7 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued For the Three Months Ended March 31, -------------------- 2003 2002 -------------------- (dollars in thousands) Supplemental Disclosures of Cash Flow Information Cash paid for interest ............................ $10,358 $ 8,169 Schedule of noncash investing and financing activities Notes payable assumed on purchase of real estate ..... $ 2,650 $ 1,389 Notes receivable provided on sale of real estate ..... 1,600 4,000 Real estate received on exchange with related party .. -- 4,145 Real estate exchanged with related party ............. 10,700 (4,145) Funds collected by affiliates on sale of note receivable ........................................ 2,700 -- Debt assumed by purchasers on sale of real estate .... 8,100 -- The accompanying notes are an integral part of these Consolidated Financial Statements. 8 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION TCI is a Nevada corporation and successor to a California business trust which was organized on September 6, 1983. TCI invests in real estate through direct ownership, leases and partnerships. TCI also invests in mortgage loans on real estate. The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Dollar amounts in tables are in thousands, except per share amounts. Certain balances for 2002 have been reclassified to conform to the 2003 presentation. Operating results for the three month period ended March 31, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the Consolidated Financial Statements and notes included in TCI's Annual Report on Form 10-K for the year ended December 31, 2002 (the "2002 Form 10-K"). 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. 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") Issue No. 94-3. TCI has adopted the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for 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 establishes 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. 9 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 1. BASIS OF PRESENTATION (Continued) TCI provides stock options and other stock-based awards to certain directors. TCI accounts for these awards using the intrinsic method pursuant to Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure" ("SFAS 148"), which amended SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The new standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, the statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in the annual and interim financial statements for fiscal years ending after December 15, 2002. In compliance with SFAS 148, TCI has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangement as defined by APB 25. If TCI had elected to recognize compensation cost for the issuance of options to employees of TCI based on the fair value at the grant dates for awards consistent with the fair value method prescribed by SFAS No. 123, net loss and loss per share would have been impacted as follows: Three months ended March 31, 2003 2002 -------- -------- Net loss As reported (7,404) (1,335) Proforma compensation expense, net of tax 268 172 Proforma (7,672) (1,507) Basic loss per share: As reported (.92) (.17) Proforma (.95) (.19) Diluted loss per share: As reported (.92) (.17) Proforma (.95) (.19) 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 TCI 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. NOTE 2. REAL ESTATE In 2003, TCI purchased the following properties:
Units/ Purchase Net Cash Debt Interest Maturity Property Location Sq.Ft./Acres Price Paid Incurred Rate Date - ----------------------------------------- -------------- -------- -------- -------- -------- -------- First Quarter Apartments Heather Creek/(1)/ Mesquite, TX 200 Units $2,523 $ 449 $ 2,074 -- -- Capital Hill/(1)/ Little Rock, AR 156 Units 1,904 615 1,289 -- -- Kingsland Ranch/(1)/ Houston, TX 398 Units 3,300 -- 3,300 -- -- Shopping Center Bridgeview Plaza/(2)/ LaCrosse, WI 116,008 Sq.Ft. 8,700 -- -- -- -- Cullman/(2)/ Cullman, AL 92,433 Sq.Ft. 2,000 -- 2,650/(4)/ 16.75 03/03/(3)/ Land Maumelle Maumelle, AR 10.8 Acres 1,100 412 640 5.75 07/04
- ------------------ (1) Land purchased for apartment construction. (2) Property received from a related party for forgiveness of affiliate receivable. (3) Debt was paid off in April refinance. See NOTE 6. "NOTES AND INTEREST PAYABLE." (4) Assumed debt. 10 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 2. REAL ESTATE (Continued) In 2002, TCI purchased the following properties:
Units/ Purchase Net Cash Debt Interest Maturity Property Location Sq.Ft./Acres Price Paid Incurred Rate Date - ---------------------- ---------------- -------------- -------- -------- -------- -------- -------- First Quarter Apartments Blue Lakes Villas/(1)/ Waxahachie, TX 186 Units $1,012 $1,048 $ -- -- -- Echo Valley/(1)/ Dallas, TX 216 Units 787 788 -- -- -- Spy Glass/(1)/ Mansfield, TX 256 Units 1,280 1,042 208 7.5% 08/43 Rasor/(1)(2)/ Plano, TX 200 Units 2,319 310 -- -- -- Shopping Center Oak Tree Village/(2)/ Lubbock, TX 45,623 Sq.Ft. 1,467 196 1,389 8.48 11/07 Land Lakeshore Villas/(2)/ Humble, TX 16.89 Acres 947 127 -- -- --
- ----------------- (1) Land purchased for apartment construction. (2) Property exchanged with American Realty Investors, Inc. ("ARI"), a related party, for the Plaza at Bachman Retail Center. In 2003, TCI sold the following properties:
Sales Net Cash Debt Gain/(Loss) Property Location Rooms/Sq.Ft. Price Received Discharged on Sale - ------------------- ------------------------------------------------------ ---------- ----------- First Quarter Office Building 4135 Beltline Addison, TX 90,000 Sq.Ft. $ 4,358 $ -- $2,858/(3)/ --/(1)/ Hotel Majestic Inn San Francisco, CA 57 Rooms 5,348 -- 5,255/(3)/ --/(2)/
- ------------------ (1) Excludes $178,000 deferred gain from sale to related party. See NOTE 3. "NOTES AND INTEREST RECEIVABLE." (2) Excludes $427,000 deferred gain from sale to related party. See NOTE 3. "NOTES AND INTEREST RECEIVABLE." (3) Debt assumed by purchaser. In 2002, TCI sold the following properties:
Sales Net Cash Debt Gain/(Loss) Property Location Units/Sq.Ft. Price Received Discharged on Sale - ------------------- ------------------------------------------------------ ---------- ----------- First Quarter Apartments Primrose Bakersfield, CA 162 Units $ 5,000 $ 1,722 $ 2,920 $ 659 Office Building Hartford Dallas, TX 174,513 Sq.Ft. 4,000 -- -- --/(1)/ Industrial Warehouse Central Storage Dallas, TX 216,035 Sq.Ft. 4,000 2,095 1,063 1,241 Shopping Center Plaza at Bachman/(2)/ Dallas, TX 80,278 Sq.Ft. 4,707 -- -- --
- ----------------- 11 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 2. REAL ESTATE (Continued) - -------------- (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. At March 31, 2003, TCI had the following properties under construction:
Additional Construction Amount Amount Loan Property Location Units/Rooms Expended to Expend Funding - -------------------------- ------------------------------ ---------- ------------ -------------- Apartments Blue Lake Villas Waxahachie, TX 186 Units $10,704 $ 1,886 $ 10,736 Capital Hill Little Rock, AR 156 Units 2,472 8,107 9,500 DeSoto Ranch DeSoto, TX 248 Units 14,281 2,867 16,273 Echo Valley Dallas, TX 216 Units 7,612 6,607 12,719 Falcon Lakes Arlington, TX 284 Units 14,030 1,715 13,469 Heather Creek Mesquite, TX 200 Units 2,775 10,528 12,079 Kingsland Ranch Houston, TX 398 Units 3,370 22,281 23,000 Sendero Ridge San Antonio, TX 384 Units 24,864 3,797 24,420 Spyglass Mansfield, TX 256 Units 15,231 2,772 16,017 Verandas at City View Fort Worth, TX 314 Units 11,784 11,166 19,393 Vistas at Pinnacle Park Dallas, TX 322 Units 2,788 18,025 19,149
NOTE 3. NOTES AND INTEREST RECEIVABLE In March 2003, TCI sold the 57 room Majestic Inn in San Francisco, California, for $5.3 million and provided $100,000 of the purchase price as seller financing. The note bears interest at a fixed interest rate of 12%, requires quarterly interest only payments and matures in March 2004. Also in March 2003, TCI sold the 90,000 sq. ft., 4135 Beltline Office Building in Addison, Texas, for $4.4 million and provided $1.5 million of the purchase price as seller financing. The note bears interest at a fixed rate of 12%, requires quarterly interest only payments and matures in March 2004. 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 Center 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 12 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued) 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. 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 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 April 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%. At May 2003, negotiations are underway to modify and extend the terms of the loan. 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 April 2003, TCI has funded $2.9 million of the line of credit and it is classified as nonperforming. During May 2003, TCI received a $433,000 principal payment. 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 April 2003, TCI has funded $264,000 of the additional line of credit. 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 Center Office Building in Farmers Branch, Texas, Confederate Point owns the 206 unit Confederate Apartments in Jacksonville, FL, Foxwood owns the 220 unit Foxwood Apartments in Memphis, Tennessee, and 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, ARL 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 13 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued) 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, 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 April 2003, TCI has funded $200,000 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. NOTE 4. INVESTMENT IN REAL ESTATE ENTITIES Real estate entities. TCI's investment in real estate entities at March 31, 2003, included equity securities of two publicly traded real estate entities, Income Opportunity Realty Investors, Inc. ("IORI") and ARI, related parties, and interests in real estate joint venture partnerships. Basic Capital Management, Inc. ("BCM"), TCI's advisor, serves as advisor to IORI and ARI. TCI accounts for its investment in IORI and ARI and the joint venture partnerships using the equity method. TCI's investment in real estate entities, accounted for using the equity method, at March 31, 2003 was as follows: Percentage Carrying Equivalent of TCI's Value of Investee Market Value Ownership at Investment at Book Value at of Investment at Investee March 31, 2003 March 31, 2003 March 31, 2003 March 31, 2003 - ------------ -------------- -------------- -------------- -------------- IORI ....... 24.0% $ 3,760 $ 8,714 $ 6,431 ARI ........ 6.5% 9,924 5,228 6,207 ---------- ---------- ---------- 13,684 $ 13,942 $ 12,638 ========== ========== Other ...... 304 ---------- $ 13,988 ========== Management continues to believe that the market value of ARI undervalues its assets and, therefore, no impairment of this investment has been recorded. 14 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. INVESTMENT IN REAL ESTATE ENTITIES (Continued) Set forth below is summarized results of operations of equity investees for the first quarter of 2003 and 2002. 2003 2002 ----------- ----------- Revenues ................................... $ 35,904 $ 41,527 Equity in loss of equity investees ......... (4,354) (429) Property operating expenses ................ (24,066) (35,631) Depreciation ............................... (2,952) (4,096) Interest expense ........................... (12,737) (19,854) ----------- ----------- Loss before gains on sale of real estate (8,205) (18,483) Gain on sale of real estate ................ 22,984 25,586 ----------- ----------- Net income ................................. $ 14,779 $ 7,103 =========== =========== TCI's share of equity investees' loss before gains on the sale of real estate was $1.3 million for the first quarter of 2003, and its share of equity investees' loss before gains on sale of real estate was $1.3 million for the first quarter of 2002. NOTE 5. MARKETABLE EQUITY SECURITIES In March 2003, TCI obtained a loan in the amount of $5.0 million to acquire equity securities of Realty Korea CR-REIT Co., Ltd. No. 1 representing approximately a 9.2% ownership interest. As of May 2003, the loan was paid in full. NOTE 6. RELATED PARTIES On September 19, 2002, TCI's Board of Directors authorized the Chief Financial Officer of TCI to advance funds either to or from TCI, 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. These advances are unsecured and bear no interest and generally have not had specific repayment terms and have been reflected in TCI's financial statements as other assets and other liabilities. In March 2003, TCI purchased two properties from an affiliate with a net purchase price of $10.7 million, reducing the affiliate receivable balance by $8.1 million after the assumption of debt of $2.65 million. The following table reconciles the beginning and ending balances of Accounts Receivable from Affiliates as of March 31, 2003. BCM ARI IORI ----------- ----------- ----------- Balance, December 31, 2002 ........... $ 11,398 $ 6,039 $ (5,260) Cash transfers ..................... 13,244 -- -- Cash repayments .................... (11,994) -- -- Repayments through property transfers ...................... (8,050) -- -- Repayment through sale of note receivable ..................... 2,633 -- -- Other additions .................... 10,023 371 -- Other repayments ................... (10,309) -- -- --------- --------- --------- Balance, March 31, 2003 .............. $ 6,945 $ 6,410 $ (5,260) ========= ========= ========= In addition, Other Assets includes $962,000 due from Regis Property Management, a related party. 15 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 7. NOTES AND INTEREST PAYABLE In 2003, TCI refinanced or financed the following properties:
Net Cash Debt Debt Received/ Interest Maturity Property Location Sq.Ft./Units Incurred Discharged (Paid) Rate Date - -------------------------- ---------------------------------- -------- ---------- --------- ----------- -------- Apartments Mountain Plaza El Paso, TX 188 Units $ 4,350 $ 4,034 $ 15 6.63%/(1)/ 03/06 Stone Oak San Antonio, TX 252 Units 2,500 -- 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 Second Quarter Shopping Centers Bridgeview La Crosse, WI 116,008 Sq.Ft. 6,500 -- 6,152 6.25 /(1)/ 04/05 Cullman Cullman, AL 92,433 Sq.Ft. 1,700 2,650 1,048 6.25 /(1)/ 04/05 Industrial Warehouse Ogden Industrial Ogden, UT 107,112 Sq.Ft. 1,800 -- 1,722 6.25 /(1)/ 04/05
- ----------------- (1) Variable interest rate. In 2002, TCI refinanced the following property:
Debt Debt Net Cash Interest Maturity Property Location Sq.Ft. Incurred Discharged Received Rate Date - -------------------------- ---------------------------------- -------- ---------- -------- ------------ -------- First Quarter Industrial Warehouse Addison Hanger/(1)/ Addison, TX 23,650 Sq.Ft. $ 2,687 $ 1,580 $ 942 6.75%/(2)/ 02/07
- ----------------- (1) The mortgage is cross-collateralized with the 29,000 sq. ft. Addison Hanger II in Addison, Texas. (2) Variable interest rate. In March 2003, TCI obtained a loan in the amount of $5.0 million to purchase an approximate 9.2% interest in Realty Korea CR-REIT Co., Ltd. No. 1. As of May 2003, the loan was paid in full. NOTE 8. OPERATING SEGMENTS Significant differences among the accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation and allocation of administrative expenses. Management evaluates the performance of each of the operating segments and allocates resources to each based on its operating income and cash flow. Items of income not reflected in the segments are interest, equity in partnerships and gains on sales of real estate from equity investees which totaled $1.1 million and $2.7 million for the first quarter of 2003 and 2002, respectively. Expenses not reflected in the segments are general and administrative expenses, discount on sale of note receivable, minority interest, advisory fees, and net income 16 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 8. OPERATING SEGMENTS (Continued) fees which totaled $3.4 million and $3.6 million for the first quarter of 2003 and 2002, respectively. Also excluded from segment assets are assets of $96.7 million at March 31, 2003, and $86.6 million at March 31, 2002, which are not identifiable with an operating segment. There are no intersegment revenues and expenses. Presented below is the operating income of each operating segment for the first quarter of 2003 and 2002, and each segment's assets at March 31.
Commercial Quarter Ended March 31, 2003 Land Properties Apartments Hotels Total - -------------------------------------------- --------- ----------- ---------- --------- --------- Rents ...................................... $ 134 $ 16,098 $ 12,170 $ 906 $ 29,308 Property operating expenses ................ 466 8,748 8,458 843 18,515 --------- ----------- ---------- --------- --------- Operating income (loss) .................... (332) 7,350 3,712 63 10,793 Depreciation ............................... -- 3,468 1,216 369 5,053 Interest ................................... 832 5,809 3,237 469 10,347 Real estate improvements ................... 17 1,566 8,795 49 10,427 Assets ..................................... 106,161 317,571 325,400 29,747 778,879
Commercial Quarter Ended March 31, 2002 Land Properties Apartments Hotels Total - -------------------------------------------- --------- ----------- ---------- --------- --------- Rents ...................................... $ 161 $ 13,819 $ 10,802 $ 624 $ 25,406 Property operating expenses ................ 470 7,739 6,849 440 15,498 --------- ----------- ---------- --------- --------- Operating income (loss) .................... (309) 6,080 3,953 184 9,908 Depreciation ............................... -- 3,078 1,154 230 4,462 Interest ................................... 493 4,058 3,113 193 7,857 Real estate improvements ................... 40 1,537 10,309 3,590 15,476 Assets ..................................... 63,308 298,813 237,371 34,123 633,615 Commercial Property Sales Properties Apartments Total ----------- ---------- --------- Sales price ................................ $ 12,707 $ 5,000 $ 17,707 Cost of sales .............................. (11,466) (4,341) (15,807) ----------- ---------- --------- Gain on sale ............................... $ 1,241 $ 659 $ 1,900/(1)/ =========== ========== =========
- ------------------------- (1) Excludes TCI's share of gains on sale of real estate recognized by an equity investee of $2.9 million and a previously deferred gain on the sale of the Madison at Bear Creek Apartments of $608,000. NOTE 9. DISCONTINUED OPERATIONS Effective January 1, 2002, TCI adopted Financial Accounting Standards Board Statement 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 the properties intended to be sold are to be designated as "held-for-sale" on the balance sheet. 17 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 9. DISCONTINUED OPERATIONS (Continued) For the three months ended March 31, 2003, income from discontinued operations relates to two properties that TCI sold during 2003. The following table summarizes revenue and expense information for these properties sold and held-for-sale.
For the Three Months Ended March 31, -------------------- 2003 2002 -------- -------- Revenue Rental ................................................................................... $ 167 $ 5,462 Property operations ...................................................................... 440 3,968 -------- -------- ............................................................................................ (273) 1,494 Expenses Interest ................................................................................. 137 1,300 Depreciation ............................................................................. 49 780 -------- -------- ............................................................................................ 186 2,080 Net loss from discontinued operations before gains on sale of real estate ................... (459) (586) Gain on sale of operations ............................................................... -- 2,508 Equity in investees gain on sale of real estate .......................................... 1,509 2,921 -------- -------- Net income from discontinued operations ..................................................... $ 1,050 $ 4,843 ======== ========
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. NOTE 10. COMMITMENTS AND CONTINGENCIES Liquidity. Although management anticipates that TCI will generate excess cash from operations in 2003, due to increased rental rates and occupancy at its properties, such excess, however, will not be sufficient to discharge all of TCI's debt obligations as they mature. Management intends to selectively sell income producing real estate, refinance real estate and incur additional borrowings against real estate to meet its cash requirements. Commitments. In January 2001, TCI exercised its option under the loan documents to extend the maturity date of three loans with a principal balance of $30.6 million secured by three office buildings in New Orleans, Louisiana. The lender has disputed TCI's right to extend the loans. This dispute is subject to litigation pending in the United States District Court for the Eastern District of Louisiana. Litigation. TCI is involved in various 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. NOTE 11. INCOME TAXES Financial statement income varies from taxable income principally due to the accounting for income and losses of investees, gains and losses from asset sales, depreciation on owned properties, amortization of discounts 18 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 11. INCOME TAXES (Continued) on notes receivable and payable and the difference in the allowance for estimated losses. TCI had a loss for federal income tax purposes in the first quarter of 2003 and 2002; therefore, it recorded no provision for income taxes. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction TCI invests in real estate through acquisitions, leases and partnerships. TCI also invests in mortgage loans. TCI is the successor to a business trust organized on September 6, 1983, and commenced operations on January 31, 1984. Liquidity and Capital Resources TCI reported a net loss of $7.4 million for the three months ended March 31, 2003, which included the following non-cash charges: depreciation and amortization from real estate held for investment of $5.1 million, equity loss of equity investees of $1.3 million, equity investees gain on sale of real estate of $1.5 million and loss on foreign currency transactions of $3,000. Net cash used in operating activities amounted to $1.1 million for the three months ended March 31, 2003, interest receivable increased by $99,000 due to additional notes receivable from seller financings, other assets decreased by $73,000 primarily due to decreases in accounts receivable from affiliates, interest payable increased by $120,000 due to an increased balance of notes payable and other liabilities increased by $1.6 million primarily due to an increase in security deposits and property taxes. Net cash used in investing activities of $26.2 million was primarily due to real estate improvements of $17.6 million, payments for real estate acquisitions of $1.5 million, deposits on pending purchases of $1.1 million and additional fundings on notes receivable of $461,000, payments to purchase marketable securities of $5.0 million and payments to advisor of $1.3 million. These outflows for investing activities were offset by the collection of $157,000 on notes receivable and $600,000 received from distributions from equity investees. Net cash provided by financing activities of $20.2 million was comprised from proceeds received from the funding or refinancing of notes payable of $45.4 million; offset by cash payments of $24.7 million to paydown existing notes payable and $400,000 for financing costs. In the first quarter 2003, TCI sold one hotel and one office building for a total of $9.7 million, receiving no cash but discharging debt of $8.1 million after the payment of various closing costs. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) Also in the first quarter of 2003, TCI financed or refinanced one office building and two apartments for a total of $12.9 million, receiving $3.6 million in cash after the payment of various closing costs. Further in the first quarter of 2003, TCI purchased three parcels of unimproved land, including the Maumelle land, for apartment construction and two shopping centers for $19.5 million. TCI paid $1.5 million in cash, including various closing costs, assumed existing mortgage debt of $2.7 million and acquired new debt of $640,000 for the purchases. TCI also incurred $24.0 million on property construction, of which $19.6 million was funded by debt. For the remainder of 2003 and the first half of 2004, TCI expects to spend an additional $89.8 million on property construction projects, of which $85.6 million will be funded by debt. 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 mortgage note receivable review includes an evaluation of the collateral property securing each 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 a net loss of $7.4 million in the first quarter of 2003, compared to a net loss of $1.3 million in the corresponding period in 2002, including gains on sale of real estate totaling $5.4 million. Fluctuations in this and other components of revenues and expense between the 2003 and 2002 periods are discussed below. Rents in the first quarter of 2003, increased to $29.3 million compared to $25.4 million in 2002. Of this increase, $1.4 million was due to the purchase of eight apartments in 2003 and 2002, and $1.6 million was due to the purchase of one commercial property in 2002. Rental rates and occupancies increased rents by $14,000 for TCI's apartments and by $759,000 for TCI's commercial properties. Rents in the remaining quarters of 2003 may decrease as TCI sells income producing properties. Property operations expense increased in the first quarter of 2003, to $18.5 million from $15.5 million compared to the corresponding period in 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) 2002. Of this increase, $1.3 million was due to the purchase of eight apartments in 2003 and 2002 and $1.6 million was due to the purchase of two commercial properties in 2003. Interest and other income decreased to $848,000 in the first quarter of 2003, compared to $1.1 million in 2002. The decrease was primarily due to the initial interest received from funding loans in 2002. Interest income for the remaining quarters of 2003 is expected to approximate the interest income for 2002. Equity losses of investees of $1.3 million for the first quarter ended March 31, 2003 approximated the $1.3 million for the same period ending March 31, 2002. In the first quarter of 2002, gains on sale of real estate totaling $5.4 million were recognized, attributable to $659,000 on the sale of the Primrose Apartments, $1.2 million on the sale of the Central Storage Warehouse, a $608,000 deferred gain on the sale of the Madison at Bear Creek Apartments and $2.9 million on gains on sale of real estate from equity investees. Interest expense increased to $10.3 million in the first quarter of 2003, from $7.9 million in 2002. Of this increase, $550,000 was due to the purchase of eight apartments in 2003 and 2002 and $1.7 million was due to the purchase of one commercial property in 2002. Interest expense for the remaining quarters of 2003 may decrease as TCI selectively sells properties. Depreciation expense increased to $5.1 million in the first quarter of 2003, from $4.5 million in 2002. An increase of $273,000 was due to the purchase of five apartments in 2002 and $548,000 was due to building and tenant improvements at TCI's commercial properties. Depreciation expense for the remaining quarters of 2003 may decrease as TCI selectively sells properties. Advisory fee increased to $1.7 million in the first quarter of 2003, from $1.4 million in 2002. The increase was due to an increase in TCI's gross assets from 2002, the basis for such fee. Advisory fees for the remaining quarters of 2003 are expected to decrease with decreases in TCI's gross assets. General and administrative expenses decreased to $1.7 million in the first quarter of 2003, from $2.2 million in 2002. These decreases were mainly due to a decrease in consulting fees and insurance expenses. Tax Matters Financial statement income varies from taxable income principally due to the accounting for income and losses of investees, gains and losses from asset sales, depreciation on owned properties, amortization of discounts on notes receivable and payable and the difference in the allowance for estimated losses. TCI had a loss for federal income tax purposes in the first quarter of 2003 and 2002; therefore, it recorded no provision for income taxes. 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Tax Matters (Continued) At March 31, 2003, TCI had a net deferred tax asset of $32.4 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 allowance has been established. Inflation The effects of inflation on TCI's operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect sales values of properties and the ultimate gain to be realized from property sales. To the extent that inflation affects interest rates, TCI's earnings from short-term investments and the cost of new financings as well as the cost of variable interest rate debt, will be affected. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS At March 31, 2003, TCI's exposure to a change in interest rates on its debt is as follows: Weighted Effect of 1% Average Increase In Balance Interest Rate Base Rates --------- ------------- ----------- Notes payable: Variable rate ............. $ 214,963 6.40% $ 2,150 ========= =========== Total decrease in TCI's annual net income ......... $ 2,150 =========== Per share ................... $ .27 =========== ITEM 4. 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. 22 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On November 15, 2002, ARI commenced tender offers for shares of common stock of IORI and TCI. The price per share to be paid was $19.00 for IORI shares and $17.50 for TCI shares. The tender offers were made as an alternative under a settlement resulting from a failure of timely completion of the SEC review process of a registration statement for proposed mergers among ARI subsidiaries and IORI and TCI. ARI deferred further action on the mergers, pending completion of the tender offers. The tender offers were completed on March 19, 2003. Pursuant to the tender offers, ARI acquired 265,036 IORI shares and 1,213,226 TCI shares. The completion of the tender offers fulfilled the remaining obligations under the Olive Settlement and the Olive Litigation has been dismissed with prejudice. Effective March 2003, TCI financial results will be consolidated in the ARI Form 10-Q and related consolidated financial statements. For further information refer to NOTE 21. "COMMITMENTS AND CONTINGENCIES AND LIQUIDITY," included in TCI's Form 10-K for the year ended December 31, 2002. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None. (b) Reports on Form 8-K as follows: None. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRANSCONTINENTAL REALTY INVESTORS, INC. Date: May 20, 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) 24 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-Q 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 25 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. Date: May 20, 2003 /s/ Ronald E. Kimbrough ---------------------- ----------------------------------- Ronald E. Kimbrough Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Acting Principal Executive Officer) 26 TRANSCONTINENTAL REALTY INVESTORS, INC. EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the Quarter ended March 31, 2003 Exhibit Page Number Description Number - ------- ---------------------------------------------------------------- ------ 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted 28 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 27 EX-99.1 3 dex991.txt CERTIFICATION EXHIBIT 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Transcontinental Realty Investors, Inc. (the "Company"), on Form 10-Q for the period ended March 31, 2003, as filed with Securities Exchange Commission on the date hereof (the "Report"), I, Ronald E. Kimbrough, Executive Vice President and Chief Financial Officer, Principal Financial and Accounting Officer and Acting Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: May 20, 2003 /s/ Ronald E. Kimbrough ----------------------- ----------------------------------- Ronald E. Kimbrough Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Acting Principal Executive Officer) 28 -----END PRIVACY-ENHANCED MESSAGE-----