-----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, GmB7TAIk/WHCTrpwE8h8KUoIzXJeKeqmSfaAuv2IxXmlQuwtl28qa1E7fth8Pq9O yeWYHHr9fg4Hyebw1aJ7xw== 0000950134-96-004063.txt : 19960813 0000950134-96-004063.hdr.sgml : 19960813 ACCESSION NUMBER: 0000950134-96-004063 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960812 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: 96608087 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 JUNE 30, 1996 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 JUNE 30, 1996 ------------- 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 4,012,275 - ---------------------------- -------------------------------- (Class) (Outstanding at August 2, 1996) 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
June 30, December 31, 1996 1995 -------------- -------------- Assets (dollars in thousands) ------ Notes and interest receivable Performing........................................ $ 9,109 $ 9,916 Nonperforming, nonaccruing........................ 1,082 1,150 -------------- -------------- 10,191 11,066 Less - allowance for estimated losses............... (926) (1,049) -------------- -------------- 9,265 10,017 Foreclosed real estate held for sale, net of accumulated depreciation ($33 in 1996 and 1995)... 2,460 2,460 Real estate held for sale, net of accumulated depreciation ($529 in 1996 and $1,684 in 1995).... 3,313 3,415 -------------- -------------- 15,038 15,892 Real estate held for investment, net of accumulated depreciation ($46,090 in 1996 and $42,455 in 1995).................................. 213,915 220,249 Investment in real estate entities.................. 5,135 5,086 Cash and cash equivalents........................... 3,571 9,620 Other assets (including $408 in 1996 and $733 in 1995 from affiliates)............................. 9,834 9,333 -------------- ------------- $ 247,493 $ 260,180 ============== ============== Liabilities and Stockholders' Equity ------------------------------------ Liabilities Notes and interest payable.......................... $ 155,844 $ 159,889 Other liabilities (including $529 in 1996 and $677 in 1995 to affiliates)............................ 8,055 11,107 -------------- -------------- 163,899 170,996 Stockholders' equity Common stock, $.01 par value, authorized, 10,000,000 shares; issued and outstanding, 4,012,275 shares.. 40 40 Paid-in capital..................................... 219,036 219,036 Accumulated distributions in excess of accumulated earnings.............................. (135,482) (129,892) -------------- -------------- 83,594 89,184 -------------- ------------- $ 247,493 $ 260,180 ============== ==============
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 Six Months Ended June 30, Ended June 30, ---------------------------------- -------------------------------- 1996 1995 1996 1995 -------------- -------------- --------------- ------------- (dollars in thousands, except per share) Income Rents....................... $ 10,988 $ 11,853 $ 22,146 $ 22,993 Interest.................... 353 350 765 724 -------------- -------------- --------------- ------------- 11,341 12,203 22,911 23,717 Expenses Property operations......... 6,915 7,586 14,332 14,923 Equity in losses of investees................. 1 1,070 46 999 Interest.................... 3,669 4,048 7,423 7,602 Depreciation................ 2,098 2,120 4,165 4,109 Advisory fee to affiliate... 468 506 946 994 General and administrative.. 567 602 1,147 1,063 Litigation settlement....... - (500) - (500) Provision for loss.......... 1,579 - 1,579 - -------------- -------------- --------------- ------------- 15,297 15,432 29,638 29,190 -------------- -------------- --------------- ------------- (Loss) before gain on sale of real estate and extra- ordinary gain............... (3,956) (3,229) (6,727) (5,473) Gain on sale of real estate... - - 1,650 - Extraordinary gain............ - 48 48 1,341 -------------- -------------- --------------- ------------- Net (loss).................... $ (3,956) $ (3,181) $ (5,029) $ (4,132) ============== ============== =============== ============= Earnings Per Share (Loss) before extraordinary gain........ $ (.99) $ (.80) $ (1.27) $ (1.36) Extraordinary gain.......... - .01 .01 .33 -------------- -------------- --------------- ------------- Net (loss).................. $ (.99) $ (.79) $ (1.26) $ (1.03) ============== ============== =============== ============= Common shares used in computing earnings per share 4,012,275 4,012,275 4,012,275 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 Six Months Ended June 30, 1996
Accumulated Distributions Common Stock in Excess of -------------------------- Paid-in Accumulated Stockholders' Shares Amount Capital Earnings Equity ------------- ----------- -------------- -------------- -------------- (dollars in thousands) Balance, January 1, 1996..................... 4,012,275 $ 40 $ 219,036 $ (129,892) $ 89,184 Dividends ($.14 per share). - - - (561) (561) Net (loss)................. - - - (5,029) (5,029) ------------- ----------- -------------- -------------- -------------- Balance, June 30, 1996..... 4,012,275 $ 40 $ 219,036 $ (135,482) $ 83,594 ============= =========== ============== ============== ==============
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 Six Months Ended June 30, ----------------------------------- 1996 1995 -------------- -------------- (dollars in thousands) Cash Flows from Operating Activities Rents collected.................................. $ 22,321 $ 22,910 Interest collected............................... 645 629 Interest paid.................................... (7,046) (6,914) Payments for property operations................. (14,598) (14,343) Advisory fee paid to affiliate................... (959) (1,015) General and administrative expenses paid......... (1,194) (1,169) Distributions from equity investees' operating cash flow..................................... 43 178 Cash from replacement reserves................... - 277 Litigation settlement............................ - 500 Other............................................ (3,406) 192 -------------- -------------- Net cash provided by (used in) operating activities................................. (4,194) 1,245 Cash Flows from Investing Activities Collections on notes receivable.................. 864 208 Real estate improvements......................... (1,542) (5,603) Acquisition of real estate....................... (891) (166) Contributions to equity investees................ (140) (408) Proceeds from sale of real estate................ 1,754 - -------------- -------------- Net cash provided by (used in) investing activities................................. 45 (5,969) Cash Flows from Financing Activities Payments on notes payable........................ (2,934) (12,208) Proceeds from notes payable...................... 1,825 15,492 Debt issue costs................................. (74) Advances from (repayments to) advisor............ (156) 2,418 Distributions to shareholders.................... (561) - -------------- -------------- Net cash provided by (used in) financing activities................................. (1,900) 5,702 Net increase (decrease) in cash and cash equivalents...................................... (6,049) 978 Cash and cash equivalents, beginning of period.... 9,620 563 --------------- -------------- Cash and cash equivalents, end of period.......... $ 3,571 $ 1,541 =============== ==============
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 Six Months Ended June 30, ---------------------------------- 1996 1995 -------------- -------------- (dollars in thousands) Reconciliation of net (loss) to net cash provided by (used in) operating activities Net (loss)......................................... $ (5,029) $ (4,132) Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities Depreciation and amortization.................... 4,381 4,312 Provision for losses............................. 1,579 - Gain on sale of real estate...................... (1,650) - Extraordinary gain............................... (48) (1,341) Equity in losses of investees.................... 46 999 Distributions from equity investees in excess of current period earnings..................... 43 178 (Increase) decrease in interest receivable....... (2) 26 (Increase) decrease in other assets.............. (746) 238 Increase in interest payable..................... 43 363 Increase (decrease) in other liabilities......... (2,811) 602 -------------- -------------- Net cash provided by (used in) operating activities................................... $ (4,194) $ 1,245 ============== ============== Noncash investing and financing activities Real estate obtained in satisfaction of a note receivable with no carrying value Carrying value of real estate received........... $ - $ 2,519 Carrying value of debt assumed................... - 2,675 Notes payable from acquisition of real estate...... - - Acquisition of remaining general partner interests in three partnerships Carrying value of assets received................ - 22,807 Carrying value of liabilities assumed............ - 21,481
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 six month period ended June 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. 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, 1995 (the "1995 Form 10-K"). Certain balances for 1995 have been reclassified to conform to the 1996 presentation. Shares and per share data have been restated for the three for two forward stock split effected February 15, 1996. NOTE 2. NOTES AND INTEREST RECEIVABLE In March 1996, the Company accepted a discounted payoff of $825,000 in full settlement of a mortgage note receivable with a principal balance of $875,000. The Company recorded no loss on the settlement in excess of the reserve previously established. In 1993 in conjunction with the sale of a foreclosed residence in Phoenix, Arizona, the Company provided purchase money financing of $725,000. The note matures in August 1996 and at June 30, 1996 had a principal balance of $682,772. On June 19, 1996, the borrower filed for bankruptcy protection. The Company anticipates incurring no loss if it forecloses on the collateral property, as the value of the collateral property exceeds the carrying value of the note. NOTE 3. REAL ESTATE AND DEPRECIATION In January 1996, the Company sold the Cheyenne Mountain land, a 7 acre held for sale parcel of land in Colorado Springs, Colorado for $330,000 in cash. The Company recognized a gain of $218,000 on the sale. Also in January 1996, the Company purchased a 4.7 acre parcel of partially developed land in Las Colinas, Texas for $941,000 in cash. The Company paid a real estate acquisition commission of $38,000 to 7 8 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. REAL ESTATE AND DEPRECIATION (Continued) Carmel Realty, Inc. ("Carmel Realty"), an affiliate of Basic Capital Management, Inc. ("BCM"), the Company's advisor, and a real estate acquisition fee of $9,000 to BCM based upon the $941,000 purchase price. In March 1996, the Company sold the Park Forest Apartments, a 44 unit held for sale apartment complex in Dearborn Heights, Michigan, for $4.8 million in cash. The Company received net cash of $1.6 million after paying off the existing first mortgage of $2.9 million and various closing costs associated with the sale. The Company paid a real estate sales commission of $165,000 to Carmel Realty based upon the $4.8 million sales price. The Company recognized a gain on the sale of $1.4 million. In June 1996, the Company entered into a contract to sell the Latham Square Office Building in Oakland, California for $2.2 million in cash, which was $1.4 million less than the property's carrying value. Accordingly at June 30, 1996, the Company recognized a provision for loss of $1.6 million to reduce the property's carrying value to its agreeded sales price less estimated costs of sale. The property has been reclassified from real estate held for investment to real estate held for sale in the accompanying June 30, 1996 Consolidated Balance Sheet. See NOTE 7. "SUBSEQUENT EVENTS." NOTE 4. 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 six months ended June 30, 1996 (dollars in thousands):
1996 ------- Rents and interest income............................. 5,811 Depreciation.......................................... (821) Property operations................................... (3,937) Interest expense...................................... (1,362) Provision for loss.................................... - ------ Net loss.............................................. (309) ======
NOTE 5. NOTES AND INTEREST PAYABLE In May 1996, the Company refinanced the mortgage debt secured by Parkway Centre Shopping Center in Dallas, Texas in the amount of $1.8 million. The Company received net cash of $771,000 after the payoff of $735,000 in existing mortgage debt and the payment of various closing costs associated with the refinancing. The new mortgage bears interest at 9.5625% per annum, requires monthly payments of principal and interest of $16,024 and matures June 1, 2006. The Company paid a mortgage brokerage and equity refinancing fee of $18,000 to BCM based on the $1.8 million refinancing. 8 9 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 5. NOTES AND INTEREST PAYABLE (Continued) In July 1996, the Company refinanced the matured mortgage debt secured by the Westgate of Laurel Apartments in Laurel, Maryland in the amount of $7.7 million. The Company received net cash of $126,000 after the payoff of $7.2 million in existing mortgage debt and the payment of various closing costs associated with the refinancing. The new mortgage bears interest at 9.1875% per annum, requires monthly payments of principal and interest of $63,202 and matures August 1, 2006. The Company paid a mortgage brokerage and equity refinancing fee of $77,000 to BCM based upon the $7.7 million refinancing. NOTE 6. 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 7. SUBSEQUENT EVENTS In July 1996, the Company completed the sale of the Latham Square Office Building, for $2.2 million, receiving net cash of $2.0 million after the payment of various closing costs associated with the sale. No gain or loss was recognized on the sale. The Company paid a real estate sales commission of $85,000 to Carmel Realty based on the $2.2 million sales 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 has invested in mortgage loans, including first, wraparound and junior mortgage loans. 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 $3.6 million at June 30, 1996 compared with $9.6 million at December 31, 1995. 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 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) 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 for the remainder of 1996, including debt service obligations and expenditures for property maintenance and improvements. In January 1996, the Company received $330,000 in cash from the sale of the Cheyenne Mountain land in Colorado Springs, Colorado, net cash of $1.6 million from the sale of the Park Forest Apartments in Dearborn Heights, Michigan after paying off the existing first mortgage, both of which properties were held for sale, and $825,000 in full settlement of a mortgage note receivable. Also in January 1996, the Company purchased 4.7 acres of partially developed land in Las Colinas, Texas for $941,000 in cash and paid off at maturity the underlying lien on the property securing one of its wraparound mortgage notes receivable in the amount of $893,000. In May 1996, the Company refinanced the mortgage debt secured by the Parkway Centre Shopping Center in Dallas, Texas, in the amount $1.8 million. The Company received net cash of $771,000 after the payoff of $735,000 in existing mortgage debt and the payment of various closing costs associated with the refinancing. In July 1996, the Company refinanced the matured mortgage debt secured by the Westgate of Laurel Apartments in Laurel, Maryland in the amount of $7.7 million. The Company received net cash of $126,000 after the payoff of $7.2 million in existing mortgage debt and the payment of various closing costs associated with the refinancing. In July 1996, the Company completed the sale of the Latham Square Office Building in Oakland, California. The Company received net cash of $2.0 million after paying various closing costs associated with the sale. In the first six months of 1996, the Company paid dividends of $.14 per share, or a total of $561,000. The Company's Board of Directors has approved the Company's repurchase of a total of 458,000 shares of its Common Stock. Through June 30, 1996, 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 1996. On a quarterly basis, the Company's management reviews the carrying value of the Company's mortgage notes receivable and properties held for sale and periodically, but no less than annually, its properties held for investment. Generally accepted accounting principles require that the carrying value of such assets cannot exceed the lower of their 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) respective carrying amounts or estimated net realizable value. In the initial instance when estimated net realizable value of a mortgage note receivable or a property held for sale is less than the carrying amount at the time of evaluation, a reserve is established and a corresponding provision for loss is recorded by a charge against earnings. A subsequent revision to estimated net realizable value either increases or decreases such reserve with a corresponding charge against or credit to earnings. In the case of properties held for investment the carrying value of the property is written down and a provision for loss is recorded. The estimate of net realizable value of the Company's mortgage notes receivable is based on management's review and evaluation of the collateral property securing the mortgage 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, discussions with the manager of the property and a review of the surrounding area. See "Recent Accounting Pronouncement," below. Results of Operations The Company's net loss for the three and six months ended June 30, 1996 was $4.0 million and $5.0 million, respectively, as compared to a net loss of $3.2 million and $4.1 million in the corresponding periods in 1995. The Company's 1996 net loss includes an extraordinary gain of $48,000, gains on sales of real estate of $1.7 million and a provision for loss of $1.6 million. Its 1995 net loss includes an extraordinary gain of $1.3 million. Fluctuations in these and other components of the Company's revenues and expenses between the 1995 and 1996 periods are described below. Rents in the three and six months ended June 30, 1996 were $11.0 million and $22.0 million as compared to $11.9 million and $23.0 million in the corresponding periods in 1995. Of this decrease, $2.5 million and $1.4 million in the three and six months is due to four properties being sold subsequent to June 30, 1995. This decrease is partially offset by an increase of $408,000 and $202,000 in the three and six months due to the obtaining through foreclosure of the Gladstell Forest Apartments in June 1995 and $375,000 and $312,000 in the three and six months due to a decrease in discounts and concessions at various of the Company's apartment complexes. Additionally, for the six months ended June 30, 1996, an increase of $470,000 is due to the acquisition of 100% ownership of Shadow Run Associates partnership, $256,000 is due to increases in rental rates and occupancy at various of the Company's apartment complexes and $85,000 is due to increased in common area maintenance at various of the Company's commercial properties. Property operations expense in the three and six months ended June 30, 1996 was $6.9 million and $14.3 million as compared to $7.6 million and $14.9 million in the corresponding periods in 1995. Of this decrease, $1.4 million and $755,000 in the three and six months is due to four 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) properties being sold subsequent to June 30, 1995. This decrease is partially offset by an increase of $247,000 and $119,000 in the three and six months due to the obtaining through foreclosure of the Gladstell Forest Apartments. Additionally, for the six months ended June 30, 1996 an increase of $244,000 due to the acquisition of 100% ownership of Shadow Run Associates. Interest income for the three and six months ended June 30, 1996 of $353,000 and $765,000 was comparable to the $350,000 and $724,000 for the corresponding periods in 1995. Equity in loss of investees was a loss of $1,000 and $46,000 for the three and six months ended June 30, 1996 compared to a loss of $1.1 million and $999,000 for the corresponding periods in 1995. The 1995 equity loss is due to the write- down of a wraparound mortgage note receivable to the balance of the underlying first lien mortgage by the Nakash Income Associates, a partnership in which the Company has a 60% general partner interest. The Company's equity share of the loss was $901,000. Interest expense decreased to $3.7 million and $7.4 million in the three and six months ended June 30, 1996 as compared to $4.0 million and $7.6 million for the corresponding periods in 1995. These decreases are attributable to four properties being sold subsequent to June 30, 1995. Depreciation expense for the three and six months ended June 30, 1996 of $2.1 million and $4.2 million was comparable to the $2.1 million and $4.1 million in the corresponding periods in 1995. The advisory fee for the three and six months ended June 30, 1996 of $468,000 and $946,000 was comparable to the $506,000 and $994,000 in the corresponding periods in 1995. General and administrative expenses for the three and six months ended June 30, 1996 of $567,000 and $1.1 million was comparable to the $602,000 and $1.1 million in the corresponding periods in 1995. In the three and six months ended June 30, 1996, the Company recognized a provision for loss of $1.6 million to reduce the carrying value of an office building to its agreed sales price less costs of sale. No such provision was recorded in 1995. In the six months ended June 30, 1996, the Company recognized gains totaling $1.7 million on the sales of the Cheyenne Mountain land and the Park Forest Apartments, both of which were held for sale. No such gains were recognized in 1995. In the six months ended June 30, 1996, the Company recognized an extraordinary gain of $48,000 on the paydown of the mortgage debt secured by the Dunes Plaza Shopping Center. In the six months ended June 30, 1995, the Company recognized extraordinary 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) gains of $1.3 million on the payoff of the mortgage debt secured by the Fountain Village Apartments and a principal paydown and modification of the mortgage debt secured by the Dunes Plaza Shopping Center. Tax Matters As more fully discussed in the Company's 1995 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, (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. 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Recent Accounting Pronouncement In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of". The statement requires that long-lived assets be considered impaired "...if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset." If impairment exists, an impairment loss shall be recognized, by a charge against earnings, equal to "...the amount by which the carrying amount of the asset exceeds the fair value of the asset." If impairment of a long-lived asset is recognized, the carrying amount of the asset shall be reduced by the amount of the impairment, shall be accounted for as the asset's "new cost" and such new cost shall be depreciated over the asset's remaining useful life. SFAS No. 121 further requires that long-lived assets held for sale "...be reported at the lower of carrying amount or fair value less cost to sell." If a reduction in a held for sale asset's carrying amount to fair value less cost to sell is required, a provision for loss shall be recognized by a charge against earnings. Subsequent revisions, either upward or downward, to a held for sale asset's fair value less cost to sell shall be recorded as an adjustment to the asset's carrying amount, but not in excess of the assets carrying amount when originally classified or held for sale. A corresponding charge or credit to earnings is to be recognized. Long-lived assets held for sale are not to be depreciated. The Company adopted SFAS No. 121 effective January 1, 1996. The effect of adopting SFAS No. 121 was the discontinuance of depreciation on the Company's one apartment complex held for sale of $24,000 and a corresponding reduction in the Company's reported gain on the March 1996 sale of the property. _____________________ PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of stockholders on May 31, 1996, at which meeting the Company's stockholders were asked to consider and vote upon (i) the election of Class III Directors of the Company, (ii) the renewal of the Company's advisory agreement with Basic Capital Management, Inc. ("BCM") and (iii) approval of an amendment to Article Six of the Company's Articles of Incorporation removing the provision for the division of the Company's Board of Directors into three classes. 14 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (Continued) At such meeting the Company's stockholders elected the following individual as a Class III Director of the Company:
Shares Voting ------------------------- Withheld Director For Authority -------- --------- ----------- Bennett B. Sims 2,933,120 70,610
Also at such meeting the Company's stockholders approved the renewal of the Company's advisory agreement with BCM until the next annual meeting of the Company's stockholders with 2,843,966 votes for the proposal, 100,821 votes against the proposal and 58,943 votes abstaining and the amendment of Article Six of the Company's Articles of Incorporation with 2,340,473 votes for the proposal, 98,686 votes against the proposal and 73,648 votes abstaining. ITEM 5. OTHER EVENTS On August 1, 1996, the Company announced an offer to buy back shares of Common Stock from stockholders owning 99 or fewer shares as of the record date August 1, 1996. The Company will pay a premium of $.50 per share over the average of the closing market prices as reported from August 8, 1996 through September 30, 1996. The purpose of the buy back offer is to reduce expenses of servicing the stockholders, including the printing and mailing of investor materials. 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: A Current Report on Form 8-K, dated June 3, 1996, was filed with respect to Item 5., which reports that on June 30, 1996, Transcontinental Realty Investors, Inc. effected an amendment, approved by its stockholders May 31, 1996, to the Company's Articles of Incorporation which deleted the provision which provided for the division of the Company's Board of Directors into three separate classes. 15 16 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: August 12, 1996 By: /s/ Randall M. Paulson ---------------------------- -------------------------------- Randall M. Paulson President Date: August 12, 1996 By: /s/ Thomas A. Holland ---------------------------- -------------------------------- Thomas A. Holland Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 16 17 TRANSCONTINENTAL REALTY INVESTORS, INC. EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the Three Months ended June 30, 1996
Exhibit Page Number Description Number - ------- --------------------------------------------------- ------ 27.0 Financial Data Schedule 18
17 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 3,571 0 10,191 926 0 0 266,340 46,652 247,493 0 155,844 40 0 0 83,554 247,493 0 22,146 0 14,332 4,165 1,579 7,423 (6,727) 0 (6,727) 0 48 0 (5,029) (1.26) (1.26)
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