-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, UrbhKoXExBmVjJv1nGdiHqj2d8KBh1/lBqfQbPG+Cze9yqd6XS4SdL+89oHUhb97 8y6uEKIl+guvyR2UXfsYzA== 0000950134-94-001316.txt : 19941117 0000950134-94-001316.hdr.sgml : 19941117 ACCESSION NUMBER: 0000950134-94-001316 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSCONTINENTAL REALTY INVESTORS INC CENTRAL INDEX KEY: 0000733590 STANDARD INDUSTRIAL CLASSIFICATION: 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: 94559041 BUSINESS ADDRESS: STREET 1: 10670 N CENTRAL EXPRWY STE 300 CITY: DALLAS STATE: TX ZIP: 75231 BUSINESS PHONE: 2146924700 MAIL ADDRESS: STREET 1: 10670 N CENTRAL EXPRWY STREET 2: SUITE 300 CITY: DALLAS STATE: TX ZIP: 75231 FORMER COMPANY: FORMER CONFORMED NAME: JOHNSTOWN CONSOLIDATED REALTY TRUST /CA/ DATE OF NAME CHANGE: 19890815 FORMER COMPANY: FORMER CONFORMED NAME: JOHNSTOWN CONSOLIDATED REALTY TRUST DATE OF NAME CHANGE: 19861005 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1994 Commission File Number 0-13291 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.) 10670 North Central Expressway, Suite 300, Dallas, Texas 75231 -------------------------------------------------------------------- (Address of Principal Executive Office) (Zip Code) (214) 692-4700 ------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No ___. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, $.01 par value 2,674,850 - - - ---------------------------- -------------------------------- (Class) (Outstanding at October 28, 1994) 1 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The accompanying Consolidated Financial Statements have not been examined by independent certified public accountants, but in the opinion of the management of Transcontinental Realty Investors, Inc. (the "Company"), all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the Company'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
September 30, December 31, 1994 1993 ------------- ------------ Assets (dollars in thousands) ------ Notes and interest receivable Performing........................................ $ 16,641 $ 12,270 Nonperforming, nonaccruing........................ 593 1,172 -------------- -------------- 17,234 13,442 Real estate held for sale, net of accumulated depreciation ($478 in 1994 and $641 in 1993)...... 8,137 15,577 Less - allowance for estimated losses.............. (960) (5,504) -------------- -------------- 24,411 23,515 Real estate held for investment, net of accumulated depreciation ($29,447 in 1994 and $27,509 in 1993).................................. 183,217 179,662 Investment in partnerships......................... 11,094 7,127 Cash and cash equivalents.......................... 4,816 5,902 Other assets (including $392 in 1994 and $117 in 1993 due from affiliates)...................... 6,194 4,889 -------------- -------------- $ 229,732 $ 221,095 ============== ============== Liabilities and Stockholders' Equity ------------------------------------ Liabilities Notes and interest payable......................... $ 124,082 $ 116,024 Other liabilities (including $110 in 1994 and $182 in 1993 to affiliates)............................ 10,813 8,489 -------------- -------------- 134,895 124,513 Stockholders' equity Common stock, $.01 par value, authorized, 10,000,000 shares; issued and outstanding, 2,674,850 shares.. 27 27 Paid-in capital.................................... 219,049 219,049 Accumulated distributions in excess of accumulated earnings.............................. (124,239) (122,494) -------------- -------------- 94,837 96,582 -------------- -------------- $ 229,732 $ 221,095 ============== ==============
The accompanying notes are an integral part of these Consolidated Financial Statements. 2 3 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------------ ---------------------------- 1994 1993 1994 1993 ---------- ---------- ---------- ---------- (dollars in thousands, except per share) Income Rentals..................... $ 9,104 $ 7,858 $ 26,376 $ 22,763 Interest.................... 353 337 1,160 1,322 Equity in (losses) of investees................... (66) (15) (77) (528) -------------- -------------- --------------- ------------- 9,391 8,180 27,459 23,557 Expenses Property operations......... 6,622 6,368 20,317 17,653 Interest.................... 2,783 2,128 7,711 6,444 Depreciation................ 1,544 1,420 4,472 4,013 Provision for losses........ - 142 - 873 Advisory fee to affiliate... 438 386 1,280 1,160 General and administrative.. 402 454 1,280 1,618 -------------- -------------- --------------- ------------- 11,789 10,898 35,060 31,761 -------------- -------------- --------------- ------------- (Loss) before gain on partnership interests, gain on sale of real estate and extraordinary gain.......... (2,398) (2,718) (7,601) (8,204) Gain on sale of partnership interests................... - - 2,514 - Gain on sale of real estate.. 2,153 - 2,153 - Extraordinary gain........... 1,189 500 1,189 1,545 -------------- -------------- --------------- ------------- Net income (loss)............ $ 944 $ (2,218) $ (1,745) $ (6,659) ============== ============== =============== ============= Earnings Per Share (Loss) before gain on sale of partnership interests, gain on sale of real estate and extraordinary gain........... $ (.89) $ (1.02) $ (2.84) $ (3.04) Gain on sale of partnership interests.................. - - .94 - Gain on sale of real estate... .80 - .80 - Extraordinary gain............ .44 .19 .44 .57 ------------- ------------ ------------- ------------ Net income (loss)............. $ .35 $ (.83) $ (.66) $ (2.47) ============= ============ ============= ============ Weighted average Common shares used in computing earnings per share........... 2,674,850 2,678,580 2,674,850 2,693,618 ============== ============== =============== =============
The accompanying notes are an integral part of these Consolidated Financial Statements. 3 4 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Nine Months Ended September 30, 1994
Accumulated Distributions Common Stock in Excess of --------------------- Paid-in Accumulated Stockholders' Shares Amount Capital Earnings Equity ---------- --------- ---------- ------------ ------------- (dollars in thousands) Balance, January 1, 1994..................... 2,674,850 $ 27 $ 219,049 $ (122,494) $ 96,582 Net (loss).................... - - - (1,745) (1,745) ------------ ------- ----------- ---------- --------- Balance, September 30, 1994..................... 2,674,850 $ 27 $ 219,049 $ (124,239) $ 94,837 ============ ======= =========== ========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. 4 5 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, ------------------------- 1994 1993 ---------- ----------- (dollars in thousands) Cash Flows from Operating Activities Rentals collected................................ $ 26,319 $ 23,077 Interest collected............................... 969 803 Interest paid.................................... (6,593) (5,306) Payments for property operations................. (21,648) (16,100) Advisory fee paid to affiliate................... (1,299) (1,157) General and administrative expenses paid......... (1,852) (2,360) Distributions from operating cash flow of investees..................................... 240 2,013 Cash from replacement reserves................... 125 487 Other............................................ (733) 1,799 -------------- -------------- Net cash provided by (used in) operating activities................................. (4,472) 3,256 Cash Flows from Investing Activities Funding of notes receivable...................... - (2,704) Collections on notes receivable.................. 1,748 9,921 Real estate improvements......................... (2,432) (4,324) Acquisition of real estate....................... (1,775) (5,085) Contributions to investees....................... (2,878) (460) Proceeds from sale of partnership interests...... 2,076 - Proceeds from sale of real estate................ 3,285 275 -------------- -------------- Net cash provided by (used in) investing activities................................. 24 (2,377) Cash Flows from Financing Activities Payments on notes payable........................ (1,519) (7,806) Proceeds from notes payable...................... 4,881 2,746 Shares repurchased............................... - (473) -------------- -------------- Net cash provided by (used in) financing activities................................. 3,362 (5,533) Net (decrease) in cash and cash equivalents....... (1,086) (4,654) Cash and cash equivalents, beginning of period.... 5,902 11,780 -------------- -------------- Cash and cash equivalents, end of period.......... $ 4,816 $ 7,126 ============== ==============
The accompanying notes are an integral part of these Consolidated Financial Statements. 5 6 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Nine Months Ended September 30, -------------------------------- 1994 1993 ---------- ----------- (dollars in thousands) Reconciliation of net (loss) to net cash provided by (used in) operating activities Net (loss)......................................... $ (1,745) $ (6,659) Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities Depreciation and amortization.................... 4,651 4,200 Provision for losses............................. - 873 Gain on sale of partnership interests............ (2,514) - Gain on sale of real estate...................... (2,153) - Extraordinary gain............................... (1,189) (1,545) Equity in losses of investees.................... 77 528 Distributions from investees in excess of current period earnings............................... 240 2,013 Decrease in interest receivable.................. (1) (310) (Increase) decrease in other assets.............. (789) 2,596 Increase in interest payable..................... 748 742 Increase (decrease) in other liabilities......... (1,797) 818 -------------- -------------- Net cash provided by (used in) operating activities................................. $ (4,472) $ 3,256 ============== ============== Noncash investing and financing activities Carrying value of real estate acquired through foreclosure (in satisfaction of notes receivable with carrying values of $2,663 in 1993)......................................... $ - $ 2,213 Notes receivable from sales of real estate with carrying value of $2,679 in 1994 and $1,686 in 1993....................................... 5,637 1,130 Notes payable from acquisition of real estate.... 10,584 12,375 Carrying value of property acquired through assumption of debt of $6,559.................. - 6,559
The accompanying notes are an integral part of these Consolidated Financial Statements. 6 7 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The Company, a Nevada corporation, is successor to a California business trust which was organized on September 6, 1983. The Company invests in real estate through direct equity ownership, leases and partnerships and it also invests in mortgage loans on real estate, including first, wraparound and junior mortgage loans. The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the nine month period ended September 30, 1994 are not necessarily indicative of the results that may be expected for the year ending December 31, 1994. For further information, refer to the Consolidated Financial Statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (the "1993 Form 10-K"). NOTE 2. REAL ESTATE In February 1994, the Company sold all of its Maumelle, Arkansas, residential and commercial subdivisions, retaining 114 residential lots, for $8.4 million. The Company received $1.7 million in cash and provided purchase money financing of $6.7 million. The note receivable bears interest at 8.0% per annum, requires annual payments of principal of $850,000 plus accrued interest through maturity in February 1998 and provides discounts of up to $1.2 million for early payments. The note is guaranteed by companies affiliated with the purchaser. The Company has recorded this transaction as a cost recovery method sale and accordingly has deferred recognizing a gain on the sale pending collection of the note receivable. The Company paid a real estate brokerage commission of $215,000 to Carmel Realty, Inc. ("Carmel Realty"), an affiliate of the Company's advisor, based on $7.2 million, the sales price of $8.4 million less the discounts allowable of $1.2 million. Through September 1994, the Company has sold or otherwise disposed of an additional 44 lots for a total of $101,000 in cash recognizing no gain or loss on the sales. In April 1994, the Company purchased the Corporate Center at Beaumeade I and II, a two building, 100,411 square foot industrial facility in Ashburn, Virginia, for $3.3 million, consisting of $600,000 in cash and new mortgage financing of $2.7 million. The mortgage bears interest at 9.28% per annum, requires monthly payments of principal and interest of $22,132 and matures on April 30, 1999. The Company paid a real estate brokerage commission of $119,000 to Carmel Realty and an acquisition fee of $33,000 to Basic Capital Management, Inc. ("BCM"), the Company's advisor, based on the $3.3 million purchase price. In October 1994, the 7 8 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 2. REAL ESTATE (Continued) Company purchased the third building in the center, a 79,409 square foot industrial facility for $2.7 million, consisting of $600,000 in cash and new mortgage financing of $2.1 million. The mortgage bears interest at 10.09% per annum, requires monthly payments of principal and interest of $19,693 and matures on September 30, 1999. The Company paid a real estate brokerage commission of $100,000 to Carmel Realty and an acquisition fee of $27,000 to BCM based on the $2.7 million purchase price. In June 1994, the Company purchased the Parke Long Industrial Buildings, a four building, 222,197 square foot office/industrial facility in Chantilly, Virginia, for $8.8 million, consisting of $900,000 in cash and $7.9 million in seller mortgage financing. The mortgage bears interest at 6.0% per annum in the first two years, increasing to 7.0% per annum in the third year, 8.0% per annum in the fifth year and 9.0% in the ninth year. The mortgage requires monthly payments of interest only in the first two years and monthly payments of principal and interest thereafter, and matures in June 2006. The Company paid a real estate brokerage commission of $246,000 to Carmel Realty and an acquisition fee of $88,000 to BCM, based on the $8.8 million purchase price. In June 1994, the Company sold the RCA Building, a vacant 100,800 square foot office building in Mt. Laurel, New Jersey, which was held for sale, for $100,000 providing purchase money financing for the entire sales price. The Company also received an equity participation interest in the subsequent appreciation of the building, if any. The Company incurred no loss on the sale beyond the amounts which had been previously provided. The Company owns Institute Place Lofts, a 142,215 square foot office building in Chicago, Illinois. The Company did not payoff the $6.5 million mortgage secured by the property on its June 1, 1993 maturity, as the Company determined further investment in the property could not be justified without a substantial modification of the mortgage. For the six months ended June 30, 1994, the property's cash flow of $358,176 was remitted to the lender all of which was applied to unpaid real estate taxes. In July 1994, the property was placed in bankruptcy and all cash flow for the three months ended September 30, 1994 of $212,803 has been remitted to the court appointed Receiver. The Company is negotiating with the lender to obtain a long-term modification of this mortgage. The Company has filed a settlement plan with the court which provides for a reduction in the mortgage's principal balance to $4.1 million, reduces the pay rate to 6% per annum in the first year, increasing to 10.25% per annum in the fourth year, with a constant accrue rate of 10.25% per annum, and the Company to fund $500,000 to satisfy outstanding taxes and to cover the negative cash flow of the property. If such negotiations are not successful, and the lender forecloses on the property securing the mortgage, the Company would 8 9 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 2. REAL ESTATE (Continued) recognize a gain of $1.1 million, the amount by which the mortgage balance exceeds the property's carrying value, which approximates the fair value of the property. In September 1994, the Company sold the Cedar Creek Apartments, a 260 unit apartment complex in Charlotte, North Carolina, for $10.1 million, receiving net cash of $2.2 million after payoff of the first mortgage of $7.7 million and funding a $250,000 escrow for correction of a zoning violation, which is expected to be received before the end of the year. The Company recognized a gain on the sale of $2.2 million. The Company paid a real estate sales commission of $272,000 to Carmel Realty based on the $10.1 million sales price. NOTE 3. NOTES AND INTEREST RECEIVABLE In January 1994, the Company instituted foreclosure proceedings on a mortgage note receivable secured by an office building in Madison, Wisconsin. In June 1994, the Company wrote off the debt as uncollectible, the building having been foreclosed upon by the local taxing authority. The Company recognized no loss beyond that which had previously been provided. In June 1994, a note receivable with a principal balance of $2.7 million and secured by an apartment complex in Dallas, Texas, was paid down and modified. The Company received $1.3 million in cash and subordinated the remaining note balance of $1.4 million to a new first mortgage secured by the property. The $1.4 million note was also split into two new notes. One new note, in the amount of $600,000, is secured by a second lien mortgage on the property, bears interest at the prime rate plus 1%, requires monthly payments of interest only and matures in June 2004. The second new note in the amount of $769,000, is unsecured, bears interest at the prime rate plus 1% and requires payments of net cash flow from property operations. In July and August 1994, the Company received $120,000 and $105,000, respectively, from the payoff of two notes receivable at their maturities. NOTE 4. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES The Company owned a 55% limited partnership interest in One Penn Square Associates Limited Partnership ("One Penn Square"), and accordingly accounted for it under the equity method as control of the partnership was maintained by the general partner. In January 1992, the partnership stopped making payments on the first mortgage secured by One East Penn Square Office Building in Philadelphia, Pennsylvania. An affiliate of the lender owned the remaining 45% limited partnership interest. In May 1993, the lender filed a foreclosure action against One Penn Square. The court appointed a receiver for the property on October 6, 1993. The lender had also filed an action against the partnership and the Company 9 10 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES (Continued) to set aside, as a fraudulent conveyance, payments from the partnership in 1992 and in 1993 to the Company of $1.8 million made to repay the Company's mortgage note secured by a second lien on the One East Penn Square Office Building. In April 1994, the Company and the lender reached an agreement which provided that the Company would pay $575,000 to the lender and convey the Company's interest in the partnership to the lender. In August 1994, the Company made the required $575,000 payment, conveyed its partnership interest to the lender and the parties executed mutual releases and all litigation between the parties was dismissed. The Company recognized an extraordinary gain of $1.2 million as the carrying value of its investment was less than the debt secured by the building due to previously recognized equity losses. In March 1994, the Company sold its 50% general partnership interests in Pilgrim Village Associates and Pilgrim Village Associates II general partnerships which owned the Pilgrim Village Apartments I and II, respectively, in Canton Township, Michigan, to the co- general partner for $2.6 million in cash. The Company recognized a gain of $2.5 million on the sale. The following information summarizes the results of operations of the Company's equity method investees for the nine months ended September 30, 1994 (dollars in thousands):
1994 -------- Rentals and interest income........................... $ 11,421 Depreciation.......................................... (1,592) Property operations................................... (6,529) Interest expense...................................... (3,417) -------- Net (loss)............................................ $ (117) ========
NOTE 5. NOTES PAYABLE In January 1994, the mortgage secured by the Northtown Mall, a shopping center in Dallas, Texas, matured. In February 1994, the Company reached an agreement with the lender to modify and extend the mortgage, with the Company making a principal paydown of $200,000. The modified mortgage required an additional principal payment of $200,000 in July 1994. The Company did not make the July 1994 principal payment when due. In October 1994, the Company repaid the loan in full. In March 1994, the Company entered into a loan commitment with a Northtown Mall tenant, providing for a loan to the Company of $1.4 million secured by a second lien on the shopping center. The loan proceeds were used primarily for specified renovations and repairs to the shopping center. The second lien mortgage bore interest at 8.5% per annum, required monthly payments of interest only and matured in March 1999. In October 1994, the Company reached agreement with the tenant to finance an additional $1.9 million, the proceeds of which were used 10 11 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 5. NOTES PAYABLE (Continued) in part to repay the first mortgage secured by the property described above. At funding of the second loan, the two loans were combined and the first loan restructured. The combined mortgage bears interest at 12% per annum, requires monthly payments of interest only of $32,500 and matures September 30, 1995. In April 1994, the Company refinanced the mortgage debt secured by the Heritage Apartments in Tulsa, Oklahoma in the amount of $2.1 million. The Company received net cash of $1.2 million after the payoff of $650,000 in existing mortgage debt and funding required repair and tax escrows and the payment of various closing costs associated with the financing. The new mortgage bears interest at 9.25% per annum, requires monthly payments of principal and interest of $16,978 and matures May 1, 2001. The Company paid a mortgage brokerage and equity refinancing fee of $21,000 to BCM based on the $2.1 million refinancing. In July 1994, the Company refinanced the mortgage debt secured by the Waterstreet Office Building in Boulder, Colorado in the amount of $8.6 million. The Company received net cash of $1.4 million after the payoff of $6.8 million in existing mortgage debt and funding required tenant improvement escrows and the payment of various closing costs associated with the financing. The new mortgage bears interest at 9.99% per annum, requires monthly payments of principal and interest of $82,935 and matures February 28, 1999. The Company paid a mortgage brokerage and equity refinancing fee of $86,000 to BCM based on the $8.6 million refinancing. In September 1994, the Company obtained first mortgage financing of $1.0 million secured by the previously unencumbered South Cochran Apartments in Los Angeles, California. The mortgage bears interest at a variable rate of 4 1/2% above the Eleventh District monthly weighted average cost of funds of rate, currently 10% per annum, requires monthly payments of principal and interest and matures October 1, 2004. The mortgage is guaranteed by the Company. NOTE 6. EXTRAORDINARY GAIN In August 1994, the Company recognized an extraordinary gain of $1.2 million on the conveyance of it's limited partner interest in One Penn Square to the lender on a mortgage secured by the property, in satisfaction of all claims against the Company. See "NOTE 4. INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES". NOTE 7. COMMITMENTS AND CONTINGENCIES The Company is involved in various lawsuits arising in the ordinary course of business. The Company's management is of the opinion that the outcome of these lawsuits will have no material impact on the Company's financial condition. 11 12 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 8. SUBSEQUENT EVENTS In October 1994, the Company purchased Corporate Pointe at Westfields, a 70,000 square foot office building located in Chantilly, Virginia for $4.0 million, consisting of $1.0 million in cash and new mortgage financing of $3.0 million. The mortgage bears interest at 10.09% per annum, requires monthly payments of principal and interest of $29,052 and matures September 30, 1999. The Company paid a real estate brokerage commission of $139,000 to Carmel Realty and $40,000 to BCM based on the $4.0 million purchase price. Concurrently, the Company also purchased from an affiliate of the seller the third of the Corporate Center at Beaumeade industrial facilities. See NOTE 2. "REAL ESTATE". In November 1994, the Company purchased the Summerfield Apartments, a 224 unit apartment complex in Orlando, Florida, for $5.6 million, consisting of $800,000 in cash and assumption of existing mortgage debt of $4.8 million. The mortgage bears interest at a variable rate based on the LIBOR six month rate plus 4.10%, currently 10.25% per annum, requires monthly payments of principal and interest of $43,240 and matures March 1, 2024. The Company paid a real estate brokerage commission of $182,000 to Carmel Realty and $56,000 to BCM based on the $5.6 million purchase price. Also in November 1994, the Company purchased the Hartford Building, a 174,227 square foot office building in Dallas, Texas, for $3.0 million, consisting of $700,000 in cash and seller provided financing of $2.3 million. The mortgage bears interest at 7% per annum in the first year, increasing to 8% per annum in the second year and thereafter. The mortgage requires monthly payments of principal and interest and matures October 31, 1999. The Company guaranteed the first $450,000 of the principal balance. The Company paid a real estate brokerage commission of $110,000 to Carmel Realty and an acquisition commission of $30,000 to BCM, based on the $3.0 million purchase price. ________________________________ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction Transcontinental Realty Investors, Inc. (the "Company") invests in real estate through direct ownership, leases and partnerships and in mortgage loans, including first, wraparound and junior mortgage loans. The Company was organized on September 6, 1983 and commenced operations on January 31, 1984. 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources Cash and cash equivalents aggregated $4.8 million at September 30, 1994 compared with $5.9 million at December 31, 1993. The Company's principal sources of cash have been and will continue to be from property operations, proceeds from property and mortgage note sales, the collection of mortgage notes receivable and borrowings. The Company anticipates that its cash on hand, as well as cash generated from the collection of mortgage notes receivable, sales of properties, borrowings against certain of the Company's unencumbered properties and refinancing or extending certain of its mortgage debt will be sufficient to meet all of the Company's cash requirements, including debt service obligations and property maintenance and improvements. In February 1994, the Company sold all of its Maumelle, Arkansas, residential and commercial subdivisions, retaining 114 residential lots, for $8.4 million. The Company received $1.7 million in cash and provided purchase money financing of $6.7 million. Through September 1994, the Company has sold or otherwise disposed of 44 of its remaining residential lots for $101,000 in cash. In March 1994, the Company sold its 50% general partnership interests in Pilgrim Village Associates and Pilgrim Village Associates II general partnerships which own the Pilgrim Village Apartments I and II, respectively, in Canton Township, Michigan, to the co- general partner for $2.6 million in cash. In February 1994, the Company modified and extended the first lien mortgage debt secured by the Northtown Mall in Dallas, Texas, which required a principal paydown of $200,000. In March 1994, the Company entered into a loan commitment with a tenant, providing for a loan to the Company of $1.4 million secured by a second lien on the shopping center. In October 1994, the Company reached an agreement with the second lienholder to refinance the first lien debt in the amount of $1.9 million. The Company paid an additional $400,000 to the first lienholder to retire such debt. In April 1994, the Company refinanced the mortgage debt secured by the Heritage Apartments in Tulsa, Oklahoma. The Company received net cash of $1.2 million after the payoff of the existing mortgage debt of $650,000 and funding of required repair and tax escrows and payment of various closing costs associated with the financing. Also in April 1994, the Company purchased the Corporate Center at Beaumeade I and II in Ashburn, Virginia for $3.3 million, consisting of $600,000 in cash and new mortgage financing of $2.7 million. In June 1994, the Company purchased the Parke Long Industrial Buildings in Chantilly, Virginia for $8.8 million, consisting of $900,000 in cash and $7.9 million in seller financing. Also in June 1994, the Company received a $1.3 million paydown on a mortgage note receivable. 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) In July and August 1994, the Company received $120,000 and $105,000, respectively, from the payoff of two notes receivable at their maturities. In July 1994, the Company refinanced the mortgage debt secured by the Waterstreet Office Building in Boulder, Colorado in the amount of $8.6 million. The Company received net cash of $1.4 million after the payoff of $6.8 million in existing mortgage debt and funding required tenant improvement escrows. In August 1994, the Company paid $575,000 and transferred its limited partner interest in One Penn Square Associates Limited Partnership to the lender on the mortgage secured by the One East Penn Square Office Building in Philadelphia, Pennsylvania, which was owned by the partnership in settlement of all of the lender's claims against the Company. In September 1994, the Company sold the Cedar Creek Apartments in Charlotte, North Carolina, for $10.1 million receiving cash of $2.2 million after payoff of the first lien mortgage of $7.7 million and funding a $250,000 escrow for correction of a zoning violation. Also in September 1994, the Company obtained first mortgage financing of $1.0 million secured by the previously unencumbered South Cochran Apartments in Los Angeles, California. In October 1994, the Company purchased Corporate Center at Beaumeade III in Ashburn, Virginia for $2.7 million, consisting of $600,000 in cash and new mortgage financing of $2.1 million. Also in October 1994, the Company purchased Corporate Point at Westfield in Chantilly, Virginia for $4.0 million, consisting of $1.0 million in cash and new mortgage financing of $3.0 million. In November 1994, the Company purchased the Summerfield Apartments in Orlando, Florida for $5.6 million, consisting of $800,000 in cash and assumption of existing mortgage debt of $4.8 million. Also in November 1994, the Company purchased the Hartford Building in Dallas, Texas for $3.0 million, consisting of $700,000 in cash and seller provided financing of $2.3 million. The Company's Board of Directors has approved the Company's repurchase of a total of 458,000 shares of its Common Stock. Through October 28, 1994, the Company had purchased a total of 233,725 shares, for an aggregate purchase price of $1.7 million. The Company has repurchased none of its shares during 1994. 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations The Company's net loss for the nine months ended September 30, 1994 was $1.7 million as compared to a net loss of $6.7 million in the corresponding period in 1993. The Company's net income for the three months ended September 30, 1994 was $944,000 as compared to a net loss of $2.2 million in the corresponding period in 1993. The Company's net income for the three months ended September 30, 1994 is due to the gain on the sale of real estate of $2.2 million and the extraordinary gain of $1.2 million, both of which are more fully described below. Fluctuations in the other major components of the Company's revenues and expenses between the 1993 and 1994 periods are also described below. Net rental income (rental income less property operating expenses) was $2.5 million and $6.1 million for the three and nine months ended September 30, 1994 compared to $1.5 million and $5.1 million for the corresponding periods in 1993. The increase for the three and nine months of 1994 is attributable to net rental income of $501,000 and $1.3 million, respectively, from properties acquired subsequent to the third quarter of 1993 and increase of $377,000 and $388,000, respectively, due to increased rental revenue and decreased property operating expenses at several of the Company's residential and commercial properties. The nine months increase being partially offset by a decrease of $882,000 due to a lease buyout at the Northtown Mall in the second quarter of 1994. Although performing receivables have increased by one-third, the note responsible for this increase is accounted for under the cost recovery method and as such, no income is recognized pending a portion of principal collections. See NOTE 2. "REAL ESTATE". Accordingly, interest income for the three months ended September 30, 1994 was $353,000 compared to $337,000 in the same period in 1993. The increase is attributable to the loans acquired in 1993. Interest income decreased to $1.2 million in the nine months ended September 30, 1994 compared to $1.3 million in the same period in 1993. Equity in (losses) of investees was a loss of $66,000 and $77,000 for the three and nine months ended September 30, 1994 compared to a loss of $15,000 and $528,000 for the corresponding periods in 1993. The decrease in equity losses for the nine months ended September 30, 1994 is due primarily to the Company ceasing to record equity losses on the One East Penn partnership. See NOTE 4. "INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES." Interest expense for the three months ended September 30, 1994 was $2.8 million as compared to $2.1 million for the corresponding period in 1993. This increase is attributable to properties acquired and property refinancings subsequent to September 30, 1993. This increase is partially offset by a decrease of $260,000 attributable to loans paid off or modified during 1993. Interest expense increased to $7.7 million in the nine months ended September 30, 1994 compared to $6.4 million in 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) the same period in 1993. The increase for the nine months is generally attributable to the same factors as the increase for the three months ended September 30, 1994. Depreciation expense increased to $1.5 million and $4.5 million in the three and nine months ended September 30, 1994 as compared to $1.4 million and $4.0 million in the corresponding periods in 1993. These increases are attributable to properties acquired by the Company subsequent to September 30, 1993. The Company recorded a provision for losses of $142,000 and $873,000 in the three and nine months ended September 30, 1993. The 1993 provision for losses includes $731,000 to reduce the carrying value of a property held for sale to its estimated fair value. No such provision was required in 1994. The advisory fee increased to $438,000 and $1.3 million in the three and nine months ended September 30, 1994 as compared to $386,000 and $1.2 million in the corresponding periods in 1993. The increase is due to the increase in the Company's gross assets, the basis for such fee. The advisory fee is expected to continue to increase as the Company makes additional property acquisitions. General and administrative expenses decreased to $402,000 and $1.3 million for the three and nine months ended September 30, 1994 compared to $454,000 and $1.6 million in the corresponding periods in 1993. The decrease is primarily attributable to decreased legal fees. For the three and nine months ended September 30, 1994, the Company recognized a gain of $2.1 million on the sale of Cedar Creek Apartments, and an extraordinary gain of $1.2 million on the disposition of a limited partnership interest. See NOTE 2. "REAL ESTATE" and NOTE 4. "INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES". In the first quarter of 1994, the Company recognized a gain of $2.5 million on the sale of its interest in two partnerships. See NOTE 4. "INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES." In the three and nine months ended September 30, 1993, the Company recognized an extraordinary gain of $1.0 million as a result of the forgiveness of debt related to the Fountain Village mortgage modification. On a quarterly basis, the Company's management reviews the carrying value of the Company's mortgage loans, properties held for investment and properties held for sale. Generally accepted accounting principles require that the carrying value of an investment held for sale cannot exceed the lower of its cost or its estimated net realizable value. In those instances in which estimates of net realizable value of the Company's properties are less than the carrying value thereof at the time of evaluation, a provision for loss is recorded by a charge against operations. The estimate of net realizable value of the mortgage loans is based on management's review and evaluation of the collateral 16 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) properties securing the mortgage loans. The review generally includes selective property inspections, a review of the property's current rents compared to market rents, a review of the property's expenses, a review of the maintenance requirements, discussions with the manager of the property and a review of the surrounding area. Future quarterly reviews could cause the Company's management to adjust its estimates of net realizable value. Income Tax Aspects As more fully discussed in the Company's 1993 Form 10-K, the Company has elected and, in the opinion of the Company's management, qualified, to be taxed as a Real Estate Investment Trust ("REIT"), as defined under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and as such, will not be taxed for federal income tax purposes on that portion of its taxable income which is distributed to stockholders provided that at least 95% of its REIT taxable income is distributed. Environmental Matters Under various federal, state and local environmental laws, ordinances and regulations, the Company may be potentially liable for removal or remediation costs, as well as certain other potential costs relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos- containing materials into the air, and third parties may seek recovery from the Company for personal injury associated with such materials. The Company's management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on the Company's business, assets or results of operations. Recent Accounting Pronouncement In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 114 - "Accounting by Creditors for Impairment of a Loan" which amends SFAS No. 5 - "Accounting for Contingencies" and SFAS No. 15 - "Accounting by Debtors and Creditors for Troubled Debt Restructurings." The statement requires that notes receivable be considered impaired when "based on current information and events, it is probable that a creditor will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement". Impairment is to be measured either on the present value of expected future cash flows discounted at the note's effective interest rate or if the note is collateral dependent, on the fair value of the collateral. In October 17 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Recent Accounting Pronouncement (Continued) 1994, the FASB issued SFAS No. 118 - "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure" which amends SFAS No. 114. SFAS No. 118 eliminates the income recognition provision of SFAS No. 114, substituting disclosure of the creditor's policy of income recognition on impaired notes. SFAS No. 114 and SFAS No. 118 are both effective for fiscal years beginning after December 15, 1994. The Company's management has not fully evaluated the effects of implementing these statements, but expects that they will not affect the Company's interest income recognition policy but may require the classification of otherwise performing loans as impaired. __________________________________ PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Olive Litigation. In February 1990, Transcontinental Realty Investors, Inc. (the "Company") together with Continental Mortgage and Equity Trust ("CMET"), Income Opportunity Realty Trust ("IORT") and National Income Realty Trust ("NIRT"), three real estate entities with, at the time, the same officers, directors or trustees and advisor as the Company, entered into a settlement of a class and derivative action entitled Olive et al. v. National Income Realty Trust et al. relating to the operation and management of each of the entities. On April 23, 1990, the court granted final approval of the terms of the settlement. On May 4, 1994, the parties entered into a Modification of Stipulation of Settlement dated April 27, 1994 (the "Modification") which settles subsequent claims of breaches of the settlement agreement which were asserted by the plaintiffs and modifies certain provisions of the April 1990 settlement. The Modification was preliminarily approved by the court on July 1, 1994. At a hearing held on November 1, 1994, the court indicated that it would enter a judgment approving the Modification. The Modification shall become effective at such time as the court's judgment becomes final. The Modification, among other things, provides for the addition of three new unaffiliated members of the Company's Board of Directors and sets forth new requirements for the approval of any transactions with affiliates over the next five years. In addition, Basic Capital Management, Inc., the Company's advisor, Gene E. Phillips and William S. Friedman have agreed to pay a total of $1.2 million to CMET, IORT, NIRT and the Company. Under the Modification, the Company, CMET, IORT and NIRT and their shareholders will release the defendants from any claims relating to the plaintiffs' allegations. The Company, CMET, IORT and NIRT have also agreed to waive any demand requirement for the plaintiffs to pursue 18 19 ITEM 1. LEGAL PROCEEDINGS (Continued) claims on behalf of each of them against certain persons or entities. The Modification also requires that any shares of the Company held by Messrs. Phillips, Friedman or their affiliates shall be (1) voted in favor of the reelection of all current Board members that stand for reelection during the two calendar years following the effective date of the Modification and (ii) voted in favor of all new Board members appointed pursuant to the terms of the Modification that stand for reelection during the three calendar years following the effective date of the Modification. The Modification also terminates a number of the provisions under the Stipulation of Settlement, including the requirement that the Company, CMET, IORT and NIRT maintain a Related Party Transaction Committee and a Litigation Committee of their respective Boards. The court will retain jurisdiction to enforce the Modification. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
Exhibit Number Description - - - ------- --------------------------------------------------------- 27.0 Financial Data Schedule
(b) Reports on Form 8-K as follows: None. 19 20 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: November 14, 1994 By: /s/ Oscar W. Cashwell Oscar W. Cashwell President Date: November 14, 1994 By: /s/ Hamilton P. Schrauff Hamilton P. Schrauff Executive Vice President and Chief Financial Officer 20 21 TRANSCONTINENTAL REALTY INVESTORS, INC. EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the quarter ended September 30, 1994
Exhibit Page Number Description Number - - - ------- --------------------------------------------------- ------ 27.0 Financial Data Schedule 22
21 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1994 JAN-01-1994 SEP-30-1994 4,816 0 17,234 960 0 0 221,279 29,925 229,732 0 124,082 27 0 0 94,810 229,732 0 26,376 0 20,317 4,472 0 7,711 (7,601) 0 (7,601) 0 1,189 0 (1,745) (0.66) (0.66)
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