-----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, Kt4h1/LNh9bt9TE6o7D81VmX98qMRLiWCqE54fCUJnWi9G8ba7u+Z2zcKH0prf2F WKA+iYM5k0uXuJsw6cGhvw== 0000950134-97-003649.txt : 19970513 0000950134-97-003649.hdr.sgml : 19970513 ACCESSION NUMBER: 0000950134-97-003649 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970512 SROS: NYSE 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: 97600499 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 FOR QUARTER ENDED MARCH 31, 1997 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 MARCH 31, 1997 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.) 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 3,926,427 - ---------------------------- --------------------------------- (Class) (Outstanding at April 30, 1997) 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
March 31, December 31, 1997 1996 --------- --------- Assets (dollars in thousands) Notes and interest receivable Performing ......................................... $ 9,152 $ 9,075 Nonperforming, nonaccruing ......................... 417 457 --------- --------- 9,569 9,532 Less - allowance for estimated losses ............... (926) (926) --------- --------- 8,643 8,606 Foreclosed real estate held for sale ................ 910 910 Real estate held for sale, net of accumulated depreciation ($76 in 1996) ......................... 281 2,089 --------- --------- 1,191 2,999 Real estate held for investment, net of accumulated depreciation ($52,526 in 1997 and $50,310 in 1996) ................................... 226,952 217,410 Investment in real estate entities .................. 4,859 4,578 Cash and cash equivalents ........................... 8,542 960 Other assets (including $349 in 1997 and $960 in 1996 from affiliates) .............................. 9,253 10,818 --------- --------- $ 259,440 $ 245,371 ========= ========= Liabilities and Stockholders' Equity Liabilities Notes and interest payable .......................... $ 167,601 $ 158,692 Other liabilities (including $135 in 1997 and $535 in 1996 to affiliates) ............................. 12,921 7,320 --------- --------- 180,522 166,012 Stockholders' equity Common stock, $.01 par value, authorized, 10,000,000 shares; issued and outstanding, 3,926,427 in 1997 and 3,926,445 in 1996 shares ....................... 39 39 Paid-in capital ..................................... 218,133 218,133 Accumulated distributions in excess of accumulated earnings ............................... (139,254) (138,813) --------- --------- 78,918 79,359 --------- --------- $ 259,440 $ 245,371 ========= =========
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 Ended March 31, -------------------------- 1997 1996 ----------- ----------- (dollars in thousands, except per share) Income Rents ......................................... $ 12,114 $ 11,158 Interest ...................................... 409 412 ----------- ----------- 12,523 11,570 Expenses Property operations ........................... 7,276 7,417 Interest ...................................... 3,824 3,754 Depreciation .................................. 2,255 2,067 Advisory fee to affiliate ..................... 465 478 General and administrative .................... 617 580 ----------- ----------- 14,437 14,296 ----------- ----------- (Loss) from operations ......................... (1,914) (2,726) Equity in income (losses) of investees ......... 348 (45) Gain on sale of real estate .................... 1,400 1,650 ----------- ----------- (Loss) before extraordinary gain ............... (166) (1,121) Extraordinary gain ............................. -- 48 ----------- ----------- Net (loss) ..................................... $ (166) $ (1,073) =========== =========== Earnings Per Share (Loss) before extraordinary gain ............... $ (.04) $ (.28) Extraordinary gain ............................. -- .01 ----------- ----------- Net (loss) ..................................... $ (.04) $ (.27) =========== =========== Weighted average Common shares used in computing earnings per share ............................ 3,926,439 4,012,275 =========== ===========
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 Three Months Ended March 31, 1997
Accumulated Distributions Common Stock in Excess of ------------------------ Paid-in Accumulated Stockholders' Shares Amount Capital Earnings Equity ---------- ---------- ---------- ---------- ---------- (dollars in thousands) Balance, January 1, 1997 .. 3,926,445 $ 39 $ 218,133 $ (138,813) $ 79,359 Fractional shares ......... (18) -- -- -- -- Dividends ($.07 per share) -- -- -- (275) (275) Net (loss) ................ -- -- -- (166) (166) ---------- ---------- ---------- ---------- ---------- Balance, March 31, 1997 ... 3,926,427 $ 39 $ 218,133 $ (139,254) $ 78,918 ========== ========== ========== ========== ==========
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 Three Months Ended March 31, -------------------- 1997 1996 -------- -------- (dollars in thousands) Cash Flows from Operating Activities Rents collected .............................. $ 14,343 $ 11,286 Interest collected ........................... 352 334 Interest paid ................................ (3,689) (3,598) Payments for property operations ............. (10,749) (8,151) Advisory fee paid to affiliate ............... (414) (491) General and administrative expenses paid ..... (575) (546) Distributions from equity investees' operating cash flow ................................. 72 41 Insurance settlement ......................... 9,529 -- Other ........................................ 50 (1,770) -------- -------- Net cash provided by (used in) operating activities ............................. 8,919 (2,895) Cash Flows from Investing Activities Acquisition of real estate ................... (3,954) (891) Proceeds from sale of real estate ............ 2,932 1,754 Collections on notes receivable .............. 20 844 Real estate improvements ..................... (943) (548) Contributions to equity investees ............ (5) (132) -------- -------- Net cash provided by (used in) investing activities ............................. (1,950) 1,027 Cash Flows from Financing Activities Payments on notes payable .................... (24,071) (1,631) Proceeds from notes payable .................. 26,584 -- Deferred borrowing costs ..................... (1,126) -- Reimbursements to advisor .................... (499) (751) Dividends to stockholders .................... (275) (281) -------- -------- Net cash provided by (used in) financing activities ............................. 613 (2,663) Net increase (decrease) in cash and cash equivalents .................................. 7,582 (4,531) Cash and cash equivalents, beginning of period 960 9,620 -------- -------- Cash and cash equivalents, end of period ...... $ 8,542 $ 5,089 ======== ========
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 Three Months Ended March 31, ------------------ 1997 1996 -------- ------- (dollars in thousands) Reconciliation of net (loss) to net cash provided by (used in) operating activities Net (loss) ........................................ $ (166) $(1,073) Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities Depreciation and amortization .................... 2,353 2,156 Gain on sale of real estate ...................... (1,400) (1,650) Extraordinary gain ............................... -- (48) Equity in (income) losses of investees ........... (348) 45 Distributions from operating cash flow of equity investees ..................................... 72 41 (Increase) decrease in interest receivable ....... 2 (1) Decrease in other assets ......................... 2,246 804 Increase (decrease) in interest payable .......... (22) 9 Increase (decrease) in other liabilities ......... 6,182 (3,178) ------- ------- Net cash provided by (used in) operating activities ................................. $ 8,919 $(2,895) ======= =======
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 also has invested in mortgage loans on real estate, including first, wraparound and junior mortgage loans. The Company is no longer seeking to fund or acquire new mortgage loans other than those which it may originate in conjunction with providing purchase money financing of a property sale. 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 three month period ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. 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, 1996 (the "1996 Form 10-K"). NOTE 2. REAL ESTATE AND DEPRECIATION In February 1997, the Company completed the sale of the Fiesta Mart, a 29,000 square foot shopping center in San Angelo, Texas, which was under contract for sale at December 31, 1996, for $544,000 in cash. The Company received net cash of $403,000 after the payoff of $90,000 in existing mortgage debt and the payment of various closing costs associated with the sale. The Company paid a real estate brokerage commission of $22,000 to Carmel Realty, Inc. ("Carmel Realty"), an affiliate of Basic Capital Management, Inc. ("BCM"), the Company's advisor, based on the $544,000 sales price of the property. The Company recognized no gain or loss on the sale. Also in February 1997, the Company completed the sale of a .9976 acre parcel of land in Dallas, Texas, which was under contract for sale at December 31, 1996, for $2.7 million in cash. The Company received net cash of $2.6 million after paying various closing costs associated with the sale. The Company paid a real estate sales commission of $103,000 to Carmel Realty based on the $2.7 million sales price of the property. The Company recognized a gain of $1.4 million on the sale. In March 1997, the Company purchased the Terrace Hills Apartments, a 310 unit apartment complex in El Paso, Texas, for $6.2 million. The Company paid $1.4 million in cash and obtained new mortgage financing of $4.8 million. The mortgage bears interest at 8.07% per annum, requires monthly payments of principal and interest of $35,086 and matures in April 2007. The Company paid a real estate brokerage commission of $193,000 to Carmel Realty and a real estate acquisition fee of $62,000 to BCM based on the $6.2 million purchase price of the property. 7 8 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 2. REAL ESTATE AND DEPRECIATION (Continued) In March 1997, the Company purchased the Crescent Place Apartments, a 120 unit apartment complex in Houston, Texas, for $2.3 million. The Company paid $500,000 in cash and obtained new mortgage financing of $1.8 million. The mortgage bears interest at 8.5% per annum, requires monthly payments of principal and interest of $13,552 and matures in April 2004. The Company paid a real estate brokerage commission of $91,000 to Carmel Realty and a real estate acquisition fee of $24,000 to BCM based on the $2.3 million purchase price of the property. Also in March 1997, the Company purchased the Savings of America Building, a 68,634 square foot office building in Houston, Texas, for $1.6 million in cash. The Company paid a real estate acquisition commission of $64,000 to Carmel Realty and a real estate brokerage fee of $16,000 to BCM based on the $1.6 million purchase price of the property. NOTE 3. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES Set forth below is summarized results of operations for the real estate entities the Company accounts for using the equity method for the three months ended March 31, 1997 (dollars in thousands): Rents and interest income ................... $5,404 Depreciation ................................ 492 Property operations ......................... 2,357 Interest expense ............................ 988 ------ Net income .................................. $1,567
NOTE 4. NOTES AND INTEREST PAYABLE In January 1997, the Company refinanced the matured mortgage debt secured by 74 New Montgomery, an office building in San Francisco, California, in the amount of $6.3 million. The Company received net cash of $1.0 million after the payoff of $5.2 million in existing mortgage debt. The remainder of the refinancing proceeds were used to fund a tax escrow and to pay various closing costs associated with the refinancing. The new mortgage bears interest at a variable rate, currently 9.25% per annum, requires monthly payments of principal and interest of $53,996 and matures in January 2004. The Company paid a mortgage brokerage and equity refinancing fee of $63,000 to BCM based on the $6.3 million refinancing. Also in January 1997, the Company refinanced the matured mortgage debt secured by the Woods Edge Apartments in Rockville, Maryland in the amount of $6.2 million. The Company received no net cash. The refinancing proceeds were used to payoff $5.9 million in existing mortgage debt, fund a tax escrow and pay various closing costs associated with the refinancing. The new mortgage bears interest at 8.125% per annum, requires monthly payments of principal and interest of 8 9 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. NOTES AND INTEREST PAYABLE (Continued) $46,035 and matures in February 2007. The Company paid a mortgage brokerage and equity refinancing fee of $62,000 to BCM based on the $6.2 million refinancing. In February 1997, the Company refinanced the matured mortgage debt secured by the Spa Cove Apartments in Annapolis, Maryland in the amount of $12.2 million. The Company received net cash of $245,000 after the payoff of $11.6 million in existing mortgage debt. The remainder of the refinancing proceeds were used to fund a tax escrow and pay various closing costs associated with the refinancing. The new mortgage bears interest at 8.015% per annum, requires monthly payments of principal and interest of $89,529 and matures in March 2007. The Company paid a mortgage brokerage and equity refinancing fee of $122,000 to BCM based on the $12.2 million refinancing. In March 1997, the Company refinanced the mortgage debt scheduled to mature in December 1997, secured by President's Square, a shopping center in San Antonio, Texas, in the amount of $1.9 million. The Company received net cash of $600,000 after the payoff of $1.2 million in existing debt and the payment of various closing costs associated with the refinancing. The new mortgage bears interest at 9.44% per annum, requires monthly payments of principal and interest of $16,521 and matures in March 2009. The Company paid a mortgage brokerage and equity refinancing fee of $19,000 to BCM based on the $1.9 million refinancing. In August 1996, the Company modified and extended the matured mortgage debt secured by the Northtown Mall Shopping Center in Dallas, Texas. The Company paid $450,000 in principal paydowns to extend the loan's maturity date to March 31, 1997. The Company did not payoff the mortgage at maturity. The Company is in negotiations with the lender to extend the loan and expects to be successful in such negotiations, but if it is not, the Company intends to payoff the loan. NOTE 5. 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. NOTE 6. SUBSEQUENT EVENTS In April 1997, the Company sold a foreclosed single family residence in Scottsdale, Arizona, for net cash of $778,000. The Company will recognize a gain of approximately $50,000 on the sale. The Company paid a real estate sales commission of $31,000 to Carmel Realty based on the $778,000 sales price of the property. In May 1997, the Company purchased the Treehouse Apartments, a 160 unit apartment complex in Irving, Texas, for $3.4 million in cash. The 9 10 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 6. SUBSEQUENT EVENTS (Continued) Company paid a real estate brokerage commission of $122,000 to Carmel Realty and a real estate acquisition fee of $34,000 to BCM based on the $3.4 million purchase price of the property. In May 1997, the Company accepted a discounted payoff of $2,075,000 in settlement of a mortgage note receivable with a principal balance of $2,110,000. The Company expects no loss on the settlement in excess of the amount previously reserved. ------------------------- 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 has invested in mortgage loans, including first, wraparound and junior mortgage loans. The Company is no longer seeking to fund or acquire new mortgage loans other than those which it may originate in conjunction with providing purchase money financing of a property sale. The Company is the successor to a business trust which was organized on September 6, 1983 and commenced operations on January 31, 1984. Liquidity and Capital Resources Cash and cash equivalents aggregated $8.5 million at March 31, 1997 compared with $960,000 at December 31, 1996. The Company's principal sources of cash have been and will continue to be from property operations, proceeds from property sales, the collection of mortgage notes receivable 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 extensions of certain of its mortgage debt will be sufficient to meet all of the Company's cash requirements including debt service obligations and expenditures for property maintenance and improvements. In the first three months of 1997, the Company paid dividends of $.07 per share, or a total of $275,000. The Company's Board of Directors has approved the Company's repurchase of a total of 458,000 shares of its Common Stock. Through March 31, 1997, the Company had purchased a total of 350,588 shares, for an aggregate purchase price of $1.7 million. The Company has repurchased none of its shares during 1997. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) In January 1997, the Company received a $10.0 million final payment on an insurance settlement from the 1995 hail storm and flood damage to the Republic Towers Office Building in Dallas, Texas. The Company is not currently able to estimate the amount of such proceeds that will be expended to complete repairs to the building. In January 1997, the Company refinanced the mortgage debt secured by 74 New Montgomery, an office building in San Francisco, California in the amount of $6.3 million. The Company received net cash of $1.0 million after the payoff of $5.2 million in existing debt and the payment of various closing costs associated with the refinancing. Also in January 1997, the Company refinanced the mortgage debt secured by the Woods Edge Apartments in Rockville, Maryland in the amount of $6.2 million. The Company received no net cash. The refinancing proceeds were used to payoff $5.9 million in existing mortgage debt, fund a tax escrow and pay various closing costs associated with the refinancing. In February 1997, the Company refinanced the mortgage debt secured by the Spa Cove Apartments in Annapolis, Maryland in the amount of $12.2 million. The Company received net cash of $245,000 after the payoff of $11.6 million in existing mortgage debt, funding a tax escrow and pay various closing costs associated with the refinancing. In February 1997, the Company completed the sale of two properties under contract for sale at December 31, 1996, (i) the Fiesta Mart, a shopping center in San Angelo, Texas and, (ii) a .9976 acre parcel of land in Dallas, Texas. The Company received net cash of $3.0 million after the payoff of $90,000 in existing mortgage debt secured by the Fiesta Mart and the payment of various closing costs associated with the sales. In March 1997, the Company purchased (i) the Crescent Place Apartments in Houston, Texas for $2.3 million, consisting of $500,000 in cash and new mortgage financing of $1.8 million, (ii) the Savings of America Building, an office building in Houston, Texas, for $1.6 million in cash and (iii) Terrace Hills, an apartment complex in El Paso, Texas, for $6.2 million consisting of $1.4 million in cash and new mortgage financing of $4.8 million. Also in March 1997, the Company refinanced the mortgage debt secured by President's Square, a shopping center in San Antonio, Texas. The Company received net cash of $600,000 after the payoff of $1.2 million in existing mortgage debt and the payment of various closing costs associated with the refinancing. In April 1997, the Company sold a foreclosed single family residence in Scottsdale, Arizona, for net cash of $778,000 and purchased the Treehouse Apartments in Irving, Texas, for $3.4 million in cash. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) In May 1997, the Company purchased the Treehouse Apartments, a 160 unit apartment complex in Irving, Texas, for $3.4 million in cash. Also in May 1997, the Company accepted a discounted payoff of $2,075,000 in settlement of a mortgage note receivable with a principal balance of $2,110,000. The Company's management reviews the carrying values of the Company's properties and mortgage note 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. In those instances where impairment is found to exist, a provision for loss is recorded by a charge against earnings. The Company's mortgage note receivable review includes an evaluation of the collateral property securing such note. The property review generally includes selective property inspections, a review of the property's current rents compared to market rents, a review of the property's expenses, a review of maintenance requirements, a review of the property's cash flow, discussions with the manager of the property and a review of properties in the surrounding area. Results of Operations The Company's net loss for the three months ended March 31, 1997 was $166,000 as compared to a net loss of $1.0 million in the corresponding period in 1996. The Company's 1997 net loss includes gains on the sale of real estate of $1.4 million. The 1996 net loss includes an extraordinary gain of $48,000 and gains on sales of real estate of $1.7 million. Fluctuations in these and other components of the Company's revenues and expenses between the 1996 and 1997 periods are discussed below. Rents in the three months ended March 31, 1997 were $12.1 million compared to $11.2 million in the corresponding period in 1996. Of this increase, $293,000 relates to an increase in rental rates at the Company's commercial properties, $182,000 relates to a decrease in discounts and concessions given primarily at the Company's office buildings, and $650,000 is due to the acquisition of eight properties subsequent to March 31, 1996. These increases are partially offset by $443,000 in rents lost due to the sale of three properties subsequent to March 31, 1996. Property operations expense in the three months ended March 31, 1997 was $7.3 million as compared to $7.4 million in the corresponding period in 1996. Of this decrease, $300,000 is due to the sale of three properties subsequent to March 31, 1996 and $400,000 is due to a decrease in 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) operating expenses at Republic Towers. These decreases are partially offset by an increase of $570,000 due to the acquisition of eight properties subsequent to March 31, 1996. Interest income for the three months ended March 31, 1997 of $409,000 was comparable to the $412,000 for the corresponding period in 1996. Equity in earnings of investees was income of $348,000 for the three months ended March 31, 1997 compared to a loss of $45,000 for the corresponding period in 1996. Included in equity earnings of investees for the three months ended March 31, 1997 is a $399,000 gain on sale of real estate, the Company's equity share of the gain recognized by Income Opportunity Realty Investors, Inc. on the sale of one of its apartment complexes. Interest expense for the three months ended March 31, 1997 and 1996 remained constant at $3.8 million. Depreciation expense increased to $2.3 million for the three months ended March 31, 1997 compared to $2.1 million in the corresponding period in 1996. The increase is due to the acquisition of eight properties subsequent to March 31, 1996 with three of the properties being acquired in the first quarter of 1997. Advisory fees decreased to $465,000 for the three months ended March 31, 1997 compared to $478,000 in the corresponding period in 1996. Advisory fees are expected to increase with increases in the Company's gross assets, as a result of property acquisitions in 1997, the basis for such fee. General and administrative expenses increased to $617,000 for the three months ended March 31, 1997 compared to $580,000 in the corresponding period in 1996. The increase is mainly due to legal fees related to the Olive litigation. In the three months ended March 31, 1997, the Company recognized net gains totaling $1.4 million on the sale of (i) the Fiesta Mart, a shopping center and (ii) a parcel of land in downtown Dallas, both of which were under contract for sale at December 31, 1996. In the three months ended March 31, 1996, the Company recognized net gains of $1.7 million on the sales of Cheyenne Mountain land and the Park Forest Apartments. In the three months ended March 31, 1996, the Company recognized an extraordinary gain of $148,000 on the paydown of the mortgage debt secured by the Dunes Plaza, a shopping center. No such gain was recognized in 1997. Tax Matters As more fully discussed in the Company's 1996 Form 10-K, the Company has elected and, in the opinion of the Company's management, qualified to be 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Tax Matters (Continued) taxed as a Real Estate Investment Trust ("REIT"), as defined under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, (the "Code"). To continue to qualify for federal taxation as a REIT under the Code, the Company is required to hold at least 75% of the value of its total assets in real estate assets, government securities, cash and cash equivalents at the close of each quarter of each taxable year. The Code also requires a REIT to distribute at least 95% of its REIT taxable income, plus 95% of its net income from foreclosure property, all as defined in Section 857 of the Code, on an annual basis to stockholders. Inflation The effects of inflation on the Company's operations are not quantifiable. Revenues from property operations generally fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect the sales values of properties, and correspondingly, the ultimate gains to be realized by the Company from property sales. To the effect that inflation affects interest rates, the Company's earnings from short- term investments and the cost of new financings as well as the cost of its variable note financing will be affected. 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. ---------------------- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Olive Litigation. In February 1990, the Company, together with Continental Mortgage and Equity Trust ("CMET"), Income Opportunity Realty Investors, Inc. ("IORI") and National Income Realty Trust, three real 14 15 ITEM 1. LEGAL PROCEEDINGS (Continued) 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. pending before the United States District Court for the Northern District of California and relating to the operation and management of each of the entities (the "Olive Litigation"). On April 23, 1990, the court granted final approval of the terms of a Stipulation of Settlement. On May 4, 1994, the parties entered into a Modification of Stipulation of Settlement dated April 27, 1994 (the "Olive Modification") that settled subsequent claims of breaches of the settlement that were asserted by the plaintiffs and that modified certain provisions of the April 1990 settlement. The Olive Modification was preliminarily approved by the Court on July 1, 1994, and final court approval was entered on December 12, 1994. The effective date of the Olive Modification was January 11, 1995. The Court retained jurisdiction to enforce the Modification, and during August and September 1996, the Court held evidentiary hearings to assess compliance with the terms of the Modification by various parties. The Court issued no ruling or order with respect to the matters addressed at the hearings. Separately in 1996, legal counsel for the plaintiffs notified the Company's Board of Directors that he intends to assert that certain actions taken by the Board of Directors breached the terms of the Modification. On January 27, 1997, the parties entered into an Amendment to the Modification effective January 9, 1997 (the "Amendment"), which was submitted to the Court for approval on January 29, 1997. The Amendment provides for the settlement of all matters raised at the evidentiary hearings and by plaintiffs' counsel in his notices to the Company's Board of Directors. On May 2, 1997, a hearing was held for the Court to consider approval of the amendment. As of May 9, 1997, the Court had not issued an order either approving or disapproving the amendment. The Amendment provides for the addition of three new unaffiliated members to the Company's Board of Directors and sets forth new requirements for the approval of any transactions with certain affiliates until April 28, 1999. In addition, the Company, CMET, IORI and their shareholders released the defendants from any claims relating to the plaintiffs' allegations and matters which were the subject of the evidentiary hearings. The plaintiffs' allegations of any breaches of the Modification shall be settled by mutual agreement of the parties or, lacking such agreement, by an arbitration proceeding. Under the Amendment, all shares of the Company owned by Gene E. Phillips or any of his affiliates shall be voted at all stockholders' meetings held until April 28, 1999 in favor of all new Board members added under the Amendment. The Amendment also requires that, until April 28, 1999, all shares of the Company owned by Gene E. Phillips or his affiliates in 15 16 ITEM 1. LEGAL PROCEEDINGS (Continued) excess of forty percent (40%) of the Company's outstanding shares shall be voted in proportion to the votes cast by all non-affiliated shareholders of the Company. 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. 16 17 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 12, 1997 By: /s/ Randall M. Paulson ---------------------------- -------------------------------- Randall M. Paulson President Date: May 12, 1997 By: /s/ Thomas A. Holland ---------------------------- -------------------------------- Thomas A. Holland Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 17 18 TRANSCONTINENTAL REALTY INVESTORS, INC. EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the Three Months ended March 31, 1997 Exhibit Page Number Description Number - ------- ----------- ------ 27.0 Financial Data Schedule 19 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 8,542 0 9,569 926 0 0 280,745 52,602 259,440 0 167,601 39 0 0 78,879 259,440 0 12,114 0 7,276 2,255 0 3,824 (166) 0 (166) 0 0 0 (166) (.04) (.04)
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