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, 2001 ------------- Commission File Number 1-15663 ------- AMERICAN REALTY INVESTORS, INC. --------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Nevada 75-2847135 -------------------------------- --------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1800 Valley View Lane, Suite 300, Dallas, Texas 75234 ---------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (469) 522-4200 ------------------------------ (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 11,830,127 - ---------------------------- -------------------------------- (Class) (Outstanding at July 31, 2001) 1
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ----------------------------- The accompanying Consolidated Financial Statements have not been audited by independent certified public accountants but in the opinion of the management of American Realty Investors, Inc. ("ARI"), all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of consolidated results of operations, consolidated financial position and consolidated cash flows at the dates and for the periods indicated, have been included. AMERICAN REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS <TABLE> <S> <C> <C> June 30, December 31, 2001 2000 --------- --------- (dollars in thousands, except per share) Assets Real estate held for investment....................................... $ 523,010 $ 559,461 Less - accumulated depreciation....................................... (133,024) (148,690) --------- --------- 389,986 410,771 Real estate held for sale............................................. 231,493 242,973 Notes and interest receivable Performing ($19,164 in 2001 and $9,684 in 2000 from affiliates)......................................................... 23,776 13,346 Nonperforming ($6,433 in 2001 and $1,540 in 2000 from affiliates).................................................... 7,551 3,062 --------- --------- 31,327 16,408 Less--allowance for estimated losses.................................. (2,577) (2,577) --------- --------- 28,750 13,831 Pizza parlor equipment................................................ 10,871 10,191 Less - accumulated depreciation....................................... (3,598) (3,164) --------- --------- 7,273 7,027 Leasehold interest - oil and gas properties........................... 4,719 -- Less - accumulated depletion.......................................... -- -- --------- --------- 4,719 -- Oilfield equipment.................................................... 213 -- Less - accumulated depreciation....................................... -- -- --------- --------- 213 -- Marketable equity securities, at market value......................... 140 153 Cash and cash equivalents............................................. 5,966 4,177 Investments in equity investees....................................... 74,595 44,777 Intangibles, net of accumulated amortization ($2,326 in 2001 and $2,233 in 2000).......................................... 15,951 16,075 Other assets.......................................................... 40,722 47,231 --------- --------- $ 799,808 $ 787,015 ========= ========= </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 2
AMERICAN REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS - Continued <TABLE> June 30, December 31, 2001 2000 -------- -------- <S> <C> <C> (dollars in thousands, except per share) Liabilities and Stockholders' Equity Liabilities Notes and interest payable................................................ $599,365 $616,331 Margin borrowings......................................................... 12,307 13,485 Accounts payable and other liabilities ($29,413 in 2001 and $3,030 in 2000 to affiliate)......................................... 63,713 41,221 -------- -------- 675,385 671,037 Minority interest......................................................... 37,510 42,576 Series F, 3,968.75 shares in 2001 (liquidation preference $3,969)....................................................... 3,969 -- Stockholders' equity Preferred Stock, $2.00 par value, authorized 50,000,000 shares, issued and outstanding Series A, 2,721,332 shares in 2001 and 2000 (liquidation preference $27,213)........................................ 4,843 4,843 Series E, 50,000 shares in 2001 and 2000 (liquidation preference $5,000)...................................................... 100 100 Common Stock, $.01 par value, authorized 100,000,000 shares; issued 11,830,127 shares in 2001 and 11,829,217 shares in 2000................................................ 118 118 Paid-in capital........................................................... 112,167 112,301 Accumulated (deficit)..................................................... (34,268) (43,943) Treasury stock at cost, 1,637,000 shares in 2001 and 1,718,749 shares in 2000................................................. (16) (17) -------- -------- 82,944 73,402 -------- -------- $799,808 $787,015 ======== ======== </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 3
AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> For the Three Months For the Six Months Ended June 30, Ended June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- (dollars in thousands, except per share) <S> <C> <C> <C> <C> Property revenue Rents......................................... $ 32,823 $ 35,424 $ 66,036 $ 70,503 Property operations expenses.................. 25,643 22,710 49,094 46,675 ----------- ----------- ----------- ----------- Operating income............................. 7,180 12,714 16,942 23,828 Land operations Sales......................................... 13,087 5,760 33,577 18,953 Cost of sales................................. 12,163 4,698 28,864 15,442 ----------- ----------- ----------- ----------- Gain on land sales........................... 924 1,062 4,713 3,511 Pizza parlor operations Sales......................................... 8,733 8,392 16,559 16,264 Cost of sales................................. 7,129 6,852 13,551 13,340 ----------- ----------- ----------- ----------- Gross margin................................. 1,604 1,540 3,008 2,924 Income from operations......................... 9,708 15,316 24,663 30,263 Other income Interest income............................... 776 772 1,160 3,012 Equity in income of investees................. 5,710 94 5,705 296 Gain on sale of real estate................... 25,840 32,078 42,266 48,232 Other......................................... 44 (288) 77 (187) ----------- ----------- ----------- ----------- 32,370 32,656 49,208 51,353 Other expenses Interest...................................... 19,111 20,391 37,181 40,573 Depreciation and amortization................. 4,600 4,544 8,679 8,908 General and administrative.................... 1,557 4,723 4,473 8,832 Advisory fee to affiliate..................... 2,292 1,283 3,534 2,624 Net income fee to affiliate................... 1,766 -- 1,766 -- Incentive fee to affiliate.................... 4,314 -- 5,835 -- Minority interest............................. (95) 17,895 1,480 27,266 ----------- ----------- ----------- ----------- 33,545 48,836 62,948 88,203 ----------- ----------- ----------- ----------- Net income (loss).............................. 8,533 (864) 10,923 (6,587) Preferred dividend requirement................. (606) (563) (1,248) (1,071) ----------- ----------- ----------- ----------- Net income (loss) applicable to................ $ 7,927 $ (1,427) $ 9,675 $ (7,658) Common shares................................. =========== =========== =========== =========== Earnings per share Net income.................................... $.78 $(.13) $.96 $(.71) =========== =========== =========== =========== Weighted average Common shares used in computing earnings per share............... 10,128,124 10,716,533 10,116,196 10,738,003 =========== =========== =========== =========== </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 4
AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Six Months Ended June 30, 2001 <TABLE> <CAPTION> Series A Series E Preferred Preferred Common Treasury Paid-in Accumulated Stockholders' Stock Stock Stock Stock Capital (Deficit) Equity -------------- --------- ------ -------- --------- ---------- ---------- (dollars in thousands, except per share) <S> <C> <C> <C> <C> <C> <C> <C> Balance, January 1, 2001.................. $4,843 $100 $118 (17) $112,301 (43,943) $73,402 Preferred dividends Series A Preferred Stock ($.50 per share)........................ -- -- -- -- -- Series E Preferred Stock ($.30 per share)........................ -- -- -- -- -- Retirement of Treasury Stock.............. -- -- -- 1 (1) -- -- Repurchase of Common Stock................ -- -- -- -- (133) -- (133) Net income................................ -- -- -- -- -- 10,923 10,923 -------------- --------- ------ -------- --------- ---------- -------- Balance, June 30, 2001.................... $4,843 $100 $118 (16) $112,167 (34,268) $82,944 ============== ========= ====== ======== ========= ========== ======== </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 5
AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> For the Six Months Ended June 30, ------------------------- 2001 2000 -------- -------- (dollars in thousands) <S> <C> <C> Cash Flows From Operating Activities Rents collected......................................................... $ 65,738 $ 69,984 Pizza parlor sales collected............................................ 16,579 16,299 Interest collected...................................................... 300 3,948 Distributions received from equity investees' operating cash flow.............................................................. 53 1,806 Payments for property operations........................................ (56,666) (60,701) Payments for pizza parlor operations.................................... (13,689) (13,295) Interest paid........................................................... (31,221) (32,965) Advisory fee paid to affiliate.......................................... (3,534) (2,624) Distributions to minority interest holders.............................. (1,583) (5,153) General and administrative expenses paid................................ (4,473) (8,832) Other................................................................... (2,497) 764 -------- -------- Net cash (used in) operating activities................................ (30,993) (30,769) Cash Flows From Investing Activities Collections on notes receivable......................................... 4,471 14,757 Pizza parlor equipment purchased........................................ (713) (161) Proceeds from sale of real estate....................................... 77,693 42,759 Purchase of marketable equity securities................................ -- (5,531) Proceeds from sale of marketable equity securities...................... -- 4,203 Notes receivable funded................................................. (13,783) (9,956) Earnest money/escrow deposits........................................... (960) (5,944) Investment in real estate entities...................................... (36,976) 3,997 Acquisition of real estate.............................................. -- (1,040) Construction and development............................................ -- (8,030) Real estate improvements................................................ (6,465) (5,064) Acquisition of leasehold interests...................................... (150) -- Purchase of oilfield equipment.......................................... (213) -- -------- -------- Net cash provided by investing activities.............................. 22,904 29,990 Cash Flows from Financing Activities Proceeds from notes payable............................................. 77,924 124,201 Payments on notes payable............................................... (79,875) (90,809) Deferred borrowing costs................................................ (4,941) (3,737) Net (payments to)/advances from affiliates.............................. 18,832 (27,681) Issuance of Series E Preferred Stock.................................... -- 500 Margin borrowings, net.................................................. (1,286) 375 Repurchase of Common Stock.............................................. (133) (746) Preferred dividends paid................................................ (643) (1,071) -------- -------- Net cash provided by financing activities.............................. 9,878 1,032 Net increase in cash and cash equivalents.............................. 1,789 253 Cash and cash equivalents, beginning of period........................... 4,177 2,479 -------- -------- Cash and cash equivalents, end of period................................. $ 5,966 $ 2,732 ======== ======== </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 6
AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued <TABLE> <CAPTION> For the Six Months Ended June 30, ------------------------- 2001 2000 -------- -------- (dollars in thousands) <S> <C> <C> Reconciliation of net income (loss) to net cash (used in) operating activities Net income (loss)...................................................... $ 10,923 $(6,587) Adjustments to reconcile net income (loss) to net cash (used in) operating activities Depreciation and amortization......................................... 8,679 8,908 Gain on sale of real estate........................................... (46,979) (51,743) Distributions from equity investees' operating cash flow............................................................ 53 1,806 Distributions to minority interest holders............................ (103) 22,113 Equity in (income) of investees....................................... (5,705) (296) (Increase) decrease in accrued interest receivable.................... (860) 936 Decrease in other assets.............................................. 3,243 5,314 Increase (decrease) in accrued interest payable....................... (243) 2,741 (Decrease) in accounts payable and other liabilities.................. (1) (13,961) -------- -------- Net cash (used in) operating activities.............................. (30,993) (30,769) ======== ======== Schedule of noncash investing and financing Notes payable from acquisition of real estate.......................... $ -- $ 2,927 Notes payable assumed by buyer on sale of real estate.................. 18,406 27,914 Retirement of Common Stock............................................. -- 20 Exchange of real estate at carrying value.............................. 3,726 2,989 Notes receivable from sale of real estate.............................. 4,329 -- Issuance of Series F Preferred Stock................................... 3,969 -- </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 7
AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION - ------- --------------------- The accompanying Consolidated Financial Statements have been prepared in conformity 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. Dollar amounts in tables are in thousands, except per share amounts. Certain balances for 2000 have been reclassified to conform to the 2001 presentation. Operating results for the six month period ended June 30, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. For further information, refer to the Consolidated Financial Statements and Notes thereto included in ARI's Annual Report on Form 10-K for the year ended December 31, 2000 (the "2000 Form 10-K"). NOTE 2. NOTES RECEIVABLE - ------- ---------------- In April 2000, a loan with a then principal balance of $1.2 million, secured by a pledge of a partnership interest in a partnership which owns real estate in Addison, Texas, matured. In February 2001, the principal balance was increased to $1.6 million, the interest rate was increased to 18.0% per annum, and the maturity date was extended to June 2001. At August 2001, extension terms are being negotiated. At December 31, 2000, a loan with a principal balance of $404,000 to La Quinta Partners, LLC, was in default. In March 2001, a settlement was reached, whereby ARI collected $410,000 in full satisfaction of the note including accrued but unpaid interest. In July 2000, ARI sold a 749.1 acre tract of its Keller land parcel for $10.0 million, receiving $8.7 million in cash and providing purchase money financing of the remaining $1.3 million of the sales price. The loan bears interest at 12.0% per annum. In September 2000, $500,000 in principal and interest was collected. All remaining principal and interest was due July 31, 2001. The loan was secured by 100% of the shares of DM Development, Inc. and an assignment of land sales proceeds. The loan had a principal balance of $817,000 at December 31, 2000. In March 2001, the loan was collected in full, including accrued but unpaid interest. In August 2000, ARI sold a 20.5 acre tract of its Mason Goodrich land parcel for $3.6 million, receiving $2.1 million in cash and providing purchase money financing of the remaining $1.5 million of the sales price. The loan matured in December 2000. In February 2001, the loan was collected in full, including accrued but unpaid interest. In March 2001, ARI sold a 20.0 acre tract of its Katrina land parcel for $2.8 million, receiving $700,000 in cash and providing purchase money 8
AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 2. NOTES RECEIVABLE (Continued) - ------- ---------------- financing of the remaining $2.1 million of the sales price. The loan bears interest at 12.0% per annum and matured in July 2001. All principal and interest are due at maturity. At August 2001, extension terms are being negotiated. In April 2001, ARI sold a 20.0 acre tract of its Katrina land parcel for $2.9 million receiving $700,000 in cash and providing purchase money financing of the remaining $2.2 million of the sales price. The loan bore interest at 10.0% per annum and matured in June 2001. In May 2001, ARI sold an 80% senior interest in the note to a financial institution. In June 2001, the interest rate was increased to 12.0% and the maturity date was extended to August 2001. All principal and accrued but unpaid interest are due at maturity. In July 2001, the note was collected in full, including accrued but unpaid interest. Related Party. In March 2001, ARI funded $13.6 million of a $15.0 million unsecured line of credit to One Realco Corporation ("One Realco") which owns approximately 11.9% of the outstanding shares of ARI's Common Stock. The line of credit bears interest at 12.0% per annum. All principal and interest are due at maturity in February 2002. The line of credit is guaranteed by Basic Capital Management, Inc, ("BCM"), ARI's advisor. In December 2000, an unsecured loan with a principal balance of $1.6 million to Warwick of Summit, Inc. ("Warwick") matured. All principal and interest were due at maturity. At June 2001, the loan, and $331,000 of accrued interest, remained unpaid. Richard D. Morgan, a Warwick shareholder, serves as a director of ARI. In December 2000, a loan with a principal balance of $1.6 million to Bordeaux Investments Two, L.L.C. ("Bordeaux"), matured. The loan is secured by (1) a 100% interest in Bordeaux, which owns a shopping center in Oklahoma City, Oklahoma; (2) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and (3) the personal guarantees of the Bordeaux members. At June 2001, the loan, and $379,000 of accrued interest, remained unpaid. Richard D. Morgan, a Bordeaux member, serves as a director of ARI. In March 2000, a loan with a principal balance of $2.3 million to Lordstown, L.P., matured. The loan is secured by a second lien on land in Ohio and Florida, by 100% of the general and limited partner interest in Partners Capital, Ltd., the limited partner of Lordstown, L.P., and a profits interest in subsequent land sales. At June 2001, the loan, and $611,000 of accrued interest, remained unpaid. A corporation controlled by Richard D. Morgan is the general partner of Lordstown, L.P. Mr. Morgan serves as a director of ARI. 9
AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. REAL ESTATE - --------- ----------- In 2001, ARI sold the following properties: <TABLE> <CAPTION> Units/ Sales Net Cash Debt Gain (Loss) Property Location Sq.Ft./Acres Price Received Discharged on Sale - --------------------- ------------------ ------------- ------- -------- ----------- ------------ <S> <C> <C> <C> <C> <C> <C> First Quarter Apartments Carriage Park Tampa, FL 46 Units $ 2,005 $ 757 $ 1,069 $ 663 Rockborough Denver, CO 345 Units 16,675 3,654 12,215 (1) 13,471 Shopping Center Regency Pointe Jacksonville, FL 67,063 Sq.Ft. 7,350 5,126 1,500 2,292 Land Frisco Bridges Collin County, TX 27.8 Acres 4,500 4,130 -- 25 Katrina Palm Desert, CA 20.0 Acres 2,831 (124) 596 -- (2) Las Colinas Las Colinas, TX 1.7 Acres 825 233 400 539 Plano Parkway Plano, TX 11.3 Acres 1,446 312 950 -- Scoggins Tarrant County, TX 232.8 Acres 2,913 892 1,800 181 Scout Tarrant County, TX 408.0 Acres 5,087 1,586 3,200 2,969 Tree Farm Dallas County, TX 10.4 Acres 2,888 (87) 2,644 75 Second Quarter Apartments Kimberly Woods Tucson, AZ 279 Units 8,450 1,667 6,191 (1) 6,052 Place One Tulsa, OK 407 Units 12,935 3,310 7,539 8,623 Shadowood Addison, TX 184 Units 7,125 1,980 4,320 4,644 Glenwood Addison, TX 168 Units 6,650 3,166 2,549 (560) Bent Tree Addison, TX 292 Units 12,050 2,480 8,867 7,081 Land Katrina Palm Desert, CA 20.0 Acres 2,940 78 -- 516 Mason/Goodrich Houston, TX 22.1 Acres 4,168 (34) 3,750 2,896 Plano Parkway Plano, TX 12.0 Acres 740 672 -- (991) Yorktown Harris County, TX 120.4 Acres 5,239 (160) 4,991 (1,497) Third Quarter Apartments Club Mar Sarasota, FL 248 Units 8,500 1,805 6,199 5,719 Land Elm Fork Denton County, TX 10.0 Acres 1,002 (30) 958 284 Katrina Palm Desert, CA 6.1 Acres 1,196 1,108 -- 570 Chase Oaks Plano, TX 22.3 Acres 2,875 663 2,027 796 </TABLE> - ----------------- (1) Debt assumed by purchaser. (2) Gain deferred until ARI-provided financing is collected. In 2000, ARI sold the following properties: <TABLE> <CAPTION> Units/ Sales Net Cash Debt Gain (Loss) Property Location Sq.Ft./Acres Price Received Discharged On Sale - --------------------- --------------- ------------ ------- -------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> First Quarter Apartments Summerwind Reseda, CA 172 Units $9,000 $3,082 $5,568 (1) $6,684 Windtree Reseda, CA 159 Units 8,350 2,911 5,063 (1) 6,170 Whispering Pines Canoga Park, CA 102 Units 5,300 1,597 3,437 (1) 3,106 </TABLE> 10
AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. REAL ESTATE (Continued) - ------- ----------- <TABLE> <CAPTION> Units/ Sales Net Cash Debt Gain (Loss) Property Location Sq.Ft./Acres Price Received Discharged On Sale - --------------------- ----------------- -------------- ------- -------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Shopping Center Katella Plaza Orange, CA 62,290 Sq.Ft. $ 1,814 $ 283 $ 1,188 $ 194 Land Duchense Duchense, UT 420 Acres 43 42 -- 16 Frisco Bridges Collin County, TX 15.00 Acres 2,675 706 2,000 297 Frisco Bridges Collin County, TX 19.74 Acres 2,971 -- -- (2) -- Mason/Goodrich Houston, TX 1.1 Acres 129 -- 116 70 Mason/Goodrich Houston, TX 12.8 Acres 2,536 -- 1,803 1,783 Nashville Nashville, TN 2.6 Acres 405 -- 345 225 Rasor Plano, TX 43.0 Acres 1,850 -- 1,604 58 Second Quarter Apartments Pines Little Rock, AR 257 Units 4,650 1,281 3,063 2,441 Four Seasons Denver, CO 384 Units 16,600 6,543 9,220 (1) 8,191 Sherwood Glen Urbandale, IA 180 Units 6,250 1,244 4,626 (1) 4,161 Office Building Marina Playa Santa Clara, CA 124,205 Sq.Ft. 25,750 6,082 7,766 17,285 Land Rasor Plano, TX 5.4 Acres 915 -- 915 705 Salmon River Salmon River, ID 3.0 Acres 45 44 -- 38 Valley Ranch Irving, TX 22.4 Acres 1,455 -- 1,375 (585) Parkfield Denver, CO 2.6 Acres 615 (1) 584 512 Frisco Bridges Collin County, TX 24.3 Acres 4,194 (435) 4,000 260 Vista Business Travis County, TX 5.4 Acres 620 14 577 173 McKinney Corners II Collin County, TX 14.6 Acres 500 (599) 1,050 (40) Third Quarter Apartments Fair Oaks Euless, TX 208 Units 6,850 609 5,711 3,364 Land Mason/Goodrich Houston, TX 6.8 Acres 1,198 114 991 807 McKinney Corners I,II,III,IV,V Collin County, TX 82.0 Acres 9,150 613 8,123 1,638 - --------------------- </TABLE> (1) Debt assumed by purchaser. (2) Exchanged for 3.25 acres of Clark land. In 2001, ARI purchased the following properties: <TABLE> <CAPTION> Units/ Purchase Net Cash Debt Interest Maturity Property Location Sq.Ft./Acres Price Paid Incurred Rate Date - ----------------- ----------- ------------ -------- --------- ----------- --------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Second Quarter Apartments Glenwood Addison, TX 168 Units $6,246 -- (1) $ 2,549 (2) 9.25% 10/04 - -------------- </TABLE> (1) 8.88 acres of Hollywood Casino land and 10.5 acres of Vista Ridge land given as consideration. Exchanged with a related party. (2) Assumed debt of seller. Exchanged with a related party. 11
AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. REAL ESTATE (Continued) - ------- ----------- In 2000, ARI purchased the following properties: <TABLE> <CAPTION> Units/ Purchase Net Cash Debt Interest Maturity Property Location Sq.Ft./Acres Price Paid Incurred Rate Date - ----------------- ------------------ ------------ -------- -------- ---------- --------- -------- <S> <C> <C> <C> <C> <C> <C> <C> First Quarter Land Clark Farmers Branch, TX 3.25 Acres $2,989 $ -- $-- (1) -- % -- Kelly lots Collin County, TX .75 Acres 130 20 100 (2) 10.0 03/10 Mastenbrook Collin County, TX 157.86 Acres 3,200 704 2,400 (2) 9.0 09/00 Second Quarter Land Sladek Travis County, TX 63.3 Acres 712 316 427 (2) 10.0 05/04 - -------------- </TABLE> (1) Exchanged for 19.74 acres of Frisco Bridges land. (2) Seller financing. NOTE 4. OIL AND GAS OPERATIONS - ------- ---------------------- In May 2001, ARI purchased the leasehold interests in 37 oil and gas mineral development properties, which include 131 drilled wells. The total proved reserves are 5.9 million barrels of oil and 3.0 billion cubic feet of natural gas. The total purchase price was $4.7 million, plus a 40% profit participation. The Operator's Interest was purchased for $375,000, with $25,000 cash paid at closing. ARI gave a note payable for the remaining $350,000. The note bears no interest, and matures in May 2002. Monthly principal payments are required. The Working Interests were purchased for $4.3 million, with $125,000 cash paid at closing. ARI gave a note payable for $250,000. The note bears no interest, and matures in November 2001. One-half of the principal is due in August 2001. The remaining $4.0 million was paid by issuing 3,968.75 shares of ARI Series F Preferred Stock, which is redeemable quarterly in an amount equal to 20% of net cash flow from these oil and gas operations. The stock has a liquidation value of $1,000 per share, and pays no dividends. Production from these wells began in July 2001. NOTE 5. INVESTMENTS IN EQUITY INVESTEES - ------- ------------------------------- Real estate entities. ARI's investment in real estate entities at June 30, 2001, included equity securities of two affiliated publicly traded real estate companies, Income Opportunity Realty Investors, Inc. ("IORI") and Transcontinental Realty Investors, Inc. ("TCI"), and interests in real estate joint venture partnerships. BCM, ARI's advisor, serves as advisor to IORI and TCI. ARI accounts for its investment in IORI and TCI and the joint venture partnerships using the equity method. The equity securities of IORI and TCI are pledged as collateral for borrowings. See NOTE 8. "MARGIN BORROWINGS." 12
AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 5. INVESTMENTS IN EQUITY INVESTEES (Continued) - ------- ------------------------------- ARI's investment in real estate entities, accounted for using the equity method, at June 30, 2001 was as follows: <TABLE> <CAPTION> Percentage Carrying Equivalent of ARI's Value of Investee Market Value Ownership at Investment at Book Value at of Investment at Investee June 30, 2001 June 30, 2001 June 30, 2001 June 30, 2001 - -------------- --------------------- -------------------- --------------------- ----------------------- <S> <C> <C> <C> <C> IORI 27.0% $ 7,347 $10,408 $ 3,361 TCI 46.6% 64,966 99,940 52,270 ------- ------- 72,313 $55,631 ======= Other 2,282 ------- $74,595 ======= </TABLE> Management continues to believe that the market value of both IORI and TCI undervalues their assets, and, therefore, ARI may continue to increase its ownership in these entities in 2001, as its liquidity permits. On October 3, 2000, ARI and IORI entered into a stock option agreement which provided IORI and ARI with an option to purchase 1,858,900 shares of Common Stock of TCI from a third party. On October 19, 2000, IORI assigned all of its rights to purchase such shares to ARI. The total cost to purchase the TCI shares was $30.8 million. In October 2000, ARI paid $5.6 million of the option price. In April 2001, the remainder of the option price was paid and ARI acquired the TCI shares. Set forth below is summarized results of operations of equity investees for the six months ended June 30, 2001: <TABLE> <S> <C> Revenues......................................................................... $ 78,973 Equity in income (loss) of equity investees...................................... (1,452) Property operating expenses...................................................... 55,914 Depreciation..................................................................... 11,227 Interest expense................................................................. 25,017 -------- (Loss) before gains on sale of real estate....................................... (14,637) Gain on sale of real estate...................................................... 27,106 -------- Net income....................................................................... $ 12,469 ======== </TABLE> ARI's share of equity investees' loss before gains on the sale of real estate was $6.5 million for the six months ended June 30, 2001, and its share of equity investees' gains on sale of real estate was $12.6 million for the six months ended June 30, 2001. Also included is a loss of $387,000 from the sale of stock. ARI's cash flow from IORI and TCI is dependent on the ability of each of them to make distributions. In the fourth quarter of 2000, IORI and TCI suspended distributions. In June 2000, ARI sold 1.6 million shares of TCI stock resulting in a $7.7 million loss and 54,000 shares of IORI stock resulting in a 13
AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 5. INVESTMENTS IN EQUITY INVESTEES (Continued) - ------- ------------------------------- $246,000 loss. These losses are included in equity in income (loss) of investees on the Statement of Operations. ART Florida Portfolio II, Ltd. In June 2000, Vestavia Lakes Apartments partnership, in Orlando, Florida, in which ART Portfolio II, Ltd. owned an interest, was sold. A loss was incurred on the sale, of which ARI's share was $967,000, which is included in equity income (loss) of investees in the accompanying Consolidated Financial Statements. Elm Fork Ranch, L.P. In June 2000, ARI sold its partnership interests for $2.0 million in cash, retaining an option to repurchase its interests. In January 2001, ARI purchased 100% of the partnership interests for $9.2 million, including financing of $9.0 million. NOTE 6. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO - ------- ------------------------------------------------ Since 1994, ARI has been purchasing equity securities of entities other than those of IORI and TCI to diversify and increase the liquidity of its margin accounts. These equity securities are considered a trading portfolio and are carried at market value. In the first six months of 2001, ARI did not purchase or sell any such securities. At June 30, 2001, ARI recognized an unrealized decrease in the market value of its trading portfolio securities of $15,000. Unrealized and realized gains and losses on trading portfolio securities are included in other income in the accompanying Consolidated Statements of Operations. NOTE 7. NOTES PAYABLE - --------- ------------- In 2001, ARI financed/refinanced or obtained second mortgage financing on the following: <TABLE> <CAPTION> Acres/Rooms/ Debt Debt Net Cash Interest Maturity Property Location Sq.Ft. Incurred Discharged Received Rate Date - ----------------------- ------------------- ------------- --------- ---------- -------- --------- -------- <S> <C> <C> <C> <C> <C> <C> <C> First Quarter Land Mason/Goodrich Houston, TX 235.0 Acres $ 6,750 $ -- $6,302 14.00% 01/02 Pioneer Crossing Austin, TX 350.1 Acres 7,000 -- 6,855 16.90 03/05 Pioneer Crossing Austin, TX 14.5 Acres 2,500 -- 2,350 14.50 01/02 Second Quarter Land Hollywood Casino Farmers Branch, TX 51.7 Acres 2,500 (1) -- 1,916 9.00 04/03 Valwood Dallas County, TX 19.4 Acres -- (1) -- -- -- -- Katrina Palm Desert, CA 300.5 Acres 22,000 15,584 4,417 12.50 (2) 10/01 Jeffries Ranch Oceanside, CA 82.4 Acres 5,250 (3) 750 3,944 14.50 06/02 Willow Springs Riverside, CA 1,485.7 Acres -- (3) -- -- -- -- Hotel Williamsburg Hospitality House Williamsburg, VA(4) 296 Rooms 10,309 -- 9,851 36.00 01/02 </TABLE> 14
AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 7. NOTES PAYABLE (Continued) - ------- ------------- <TABLE> <CAPTION> Acres/Rooms/ Debt Debt Net Cash Interest Maturity Property Location Sq. Ft. Incurred Discharged Received Rate Date - ---------------------- ------------------ -------------- -------- ---------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Shopping Center Cullman Cullman, AL 92,486 Sq.Ft. $ --(3) $129 $ -- -- -- Third Quarter Land Marine Creek Fort Worth, TX 54.2 Acres 1,500 750 701 9.00% 01/03 - ------------------ </TABLE> (1) Single note, with all properties as collateral. (2) Variable interest rate. (3) Single note, with all properties as collateral. (4) Also secured by 1,846,000 shares of TCI common stock. In 2000, ARI financed/refinanced or obtained second mortgage financing on the following: <TABLE> <CAPTION> Acres/ Debt Debt Net Cash Interest Maturity Property Location Units/Sq.Ft. Incurred Discharged Received Rate Date - ---------------------- ------------------ -------------- -------- ---------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> First Quarter Land Centura, Clark and Woolley Farmers Branch, TX 10.08 Acres $ 7,150 $ -- $ 6,960 14.00% 03/03 Frisco Bridges Collin County, TX 127.41 Acres 18,000 11,900 6,190 13.00 03/01 Frisco Bridges Collin County, TX 62.84 Acres 7,800 4,985 2,432 14.00 03/02 Nashville Nashville, TN 144.82 Acres 10,000 2,034 7,039 15.50 07/00 Second Quarter Apartments Rockborough Denver, CO 345 Units 2,222 -- 1,942 8.37 11/10 Confederate Point Jacksonville, FL 206 Units 7,440 5,879 1,039 8.12 05/07 Whispering Pines Topeka, KS 320 Units 7,530 6,829 302 8.12 05/07 Chateau Bayou Ocean Springs, MS 122 Units 1,007 -- 988 8.36 05/10 Waters Edge Gulfport, MS 238 Units 7,532 3,993 3,447 8.08 05/07 Land Katy Harris County, TX 130.6 Acres 4,250 4,042 (9) 13.00 05/01 Third Quarter Office Buildings Centura Tower Farmers Branch, TX 410,910 Sq.Ft. 15,000 -- 14,612 16.90 07/02 </TABLE> NOTE 8. MARGIN BORROWINGS - --------- ----------------- ARI has margin arrangements with various financial institutions and brokerage firms which provide for borrowing of up to 50% of the market value of marketable equity securities. The borrowings under such margin arrangements are secured by equity securities of IORI and TCI and ARI's trading portfolio securities and bear interest rates ranging from 7.0% to 11.0%. Margin borrowing totaled $12.3 million at June 30, 2001. In April 2000, ARI obtained a security loan in the amount of $5.0 million with a financial institution. ARI received net cash of $4.6 15
AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 8. MARGIN BORROWINGS (Continued) - ------- ----------------- million after paying various closing costs. The loan bears interest at prime plus 1% per annum (currently 7.75% per annum), requires monthly payments of interest only and matures in September 2001. The loan is secured by 1,050,000 shares of ARI Common Stock held by BCM, ARI's advisor. In March 2001, ARI obtained a security loan in the amount of $3.5 million from a financial institution. ARI received net cash of $3.5 million after paying various closing costs. The loan bears interest at 16.0% per annum. In April and May 2001, a total of $2.0 million in principal paydowns were made. In July 2001, the loan was repaid in full, including accrued but unpaid interest. The loan was secured by 472,000 shares of TCI owned by ARI and 128,000 shares of ARI owned by One Realco. NOTE 9. INCOME TAXES - ------- ------------ Financial statement income varies from taxable income principally due to the accounting for income and losses of investees, gains and losses from asset sales, depreciation on owned properties, amortization of discounts on notes receivable and payable and the difference in the allowance for estimated losses. ARI had no taxable income or provision for income taxes in the six months ended June 30, 2001 or 2000. A deferred tax liability equal to the deferred tax asset has been provided due to the uncertainty of the future utilization of the deferred tax asset. NOTE 10. OPERATING SEGMENTS - -------- ------------------ Significant differences among the accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation and allocation of administrative expenses. Management evaluates the performance of each of the operating segments and allocates resources to them based on their net operating income and cash flow. Expenses that are not reflected in the segments are $1.6 million and $4.5 million of general and administrative expenses for the three and six months ended June 30, 2001 and $4.7 million and $8.8 million for 2000. Excluded from operating segment assets are assets of $122.4 million in 2001 and $95.7 million in 2000, which are not identifiable with an operating segment. There are no intersegment revenues and expenses and ARI conducted all of its business within the United States, with the exception of Hotel Sofia (Bulgaria). 16
AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 10. OPERATING SEGMENTS (Continued) - -------- ------------------ Presented below are ARI's reportable segments operating income for the six months ended June 30, and segment assets at June 30. <TABLE> <CAPTION> Inter- Three Months Ended Commercial U.S. national Pizza Oil & Receivables/ June 30, 2001 Properties Apartments Hotels Hotels Land Parlors Gas Other Total - ------------------- ---------- ---------- -------- -------------- -------- -------- ------ ------------ -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Operating revenue $ 7,600 $ 15,116 $ 8,937 $ 1,032 $ 42 $ 8,733 $ -- $ 96 $ 41,556 Interest income -- -- -- -- -- -- -- 776 776 Operating expenses 4,884 8,693 8,448 891 2,625 7,129 -- 102 32,772 -------- -------- ------- ------- -------- ------- ------ ------- -------- $ 2,716 $ 6,423 $ 489 $ 141 $ (2,583) $ 1,604 $ -- $ 770 $ 9,560 ======== ======== ======= ======= ======== ======= ====== ======= ======== Depreciation $ 1,805 $ 1,204 $ 680 $ 650 $ -- $ 257 $ -- $ 4 $ 4,600 Interest 4,091 5,435 1,006 97 8,078 (463) -- 867 19,111 Capital expenditures 2,588 23 168 -- 251 375 363 -- 3,768 Assets 162,933 130,110 68,549 28,394 231,493 21,620 4,932 28,750 676,781 </TABLE> <TABLE> <CAPTION> Property Sales: Apartments Land Total ---------- -------- -------- <S> <C> <C> <C> Sales price $ 47,210 $ 13,087 $ 60,297 Cost of sale 21,370 12,163 33,533 -------- -------- -------- Gain on sale $ 25,840 $ 924 $ 26,764 ======== ======== ======== </TABLE> <TABLE> <CAPTION> Inter- Six Months Ended Commercial U.S. national Pizza Oil & Receivables/ June 30, 2001 Properties Apartments Hotels Hotels Land Parlors Gas Other Total - ------------------- ---------- ---------- -------- -------------- -------- -------- ------ ------------ -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Operating revenue. $ 16,733 $ 31,242 $15,938 $ 1,726 $ 105 $16,559 $ -- $ 292 $ 82,595 Interest income.... -- -- -- -- -- -- -- 1,160 1,160 Operating expenses 10,030 18,519 14,498 1,425 4,544 13,551 -- 78 62,645 -------- -------- ------- ------- -------- ------- ------ ------- -------- $ 6,703 $ 12,723 $ 1,440 $ 301 $(4,439) $ 3,008 $ -- $ 1,374 $ 21,110 ======== ======== ======= ======= ======== ======= ====== ======= ======== Depreciation....... $ 3,586 $ 2,543 $ 1,309 $ 650 $ -- $ 586 $ -- $ 5 $ 8,679 Interest........... 8,578 10,620 2,273 194 13,368 (191) -- 2,339 37,181 Capital expenditures..... 4,806 23 320 1,000 316 713 363 -- 7,541 Assets............. 162,933 130,110 68,549 28,394 231,493 21,620 4,932 28,750 676,781 Commercial Property Sales: Properties Apartments Land Total ---------- ---------- -------- -------- Sales price........ $ 7,350 $ 65,890 $ 33,577 $106,817 Cost of sale....... 5,058 25,916 28,864 59,838 -------- -------- -------- -------- Gain on sale....... $ 2,292 $ 39,974 $ 4,713 $ 46,979 ======== ======== ======== ======== </TABLE> <TABLE> <CAPTION> Three Months Ended Commercial Pizza June 30, 2000 Properties Apartments Hotels Land Parlors Receivables Total - --------------------------- ---------- ---------- ------- -------- ------- ----------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Operating revenue.......... $ 7,048 $ 17,968 $ 9,614 $ 794 $ 8,392 $ -- $ 43,816 Interest income............ -- -- -- -- -- 772 772 Operating expenses......... 4,934 10,297 5,978 1,501 6,852 -- 29,562 -------- -------- ------- -------- ------- ------- -------- $ 2,114 $ 7,671 $ 3,636 $ (707) $ 1,540 $ 772 $ 15,026 ======== ======== ======= ======== ======= ======= ======== Depreciation............... $ 1,887 $ 1,618 $ 640 $ -- $ 396 $ -- $ 4,541 Interest................... 4,697 5,469 1,222 7,082 291 -- 18,761 Capital expenditures....... (1,520) 5,435 122 905 116 -- 5,058 Assets..................... 191,177 177,085 70,436 312,495 21,882 31,953 805,028 Commercial Property Sales: Properties Apartments Land Total ------------ ------------- ------------ ------------- Sales price................ $25,750 $27,500 $8,344 $61,594 Cost of sale............... 8,465 12,707 7,282 28,454 ------- ------- ------ ------- Gain on sale............... $17,285 $14,793 $1,062 $33,140 ======= ======= ====== ======= </TABLE> 17
AMERICAN REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 10. OPERATING SEGMENTS (Continued) - -------- ------------------ <TABLE> <CAPTION> Six Months Ended Commercial Pizza June 30, 2000 Properties Apartments Hotels Land Parlors Receivables Total - --------------------------- ---------- ---------- -------- --------- -------- ----------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Operating revenue.......... $ 16,478 $ 36,309 $16,468 $ 1,248 $16,264 $ -- $ 86,767 Interest income............ -- -- -- -- -- 3,012 3,012 Operating expenses......... 9,939 20,389 11,460 4,887 13,340 -- 60,015 -------- -------- ------- -------- ------- ------- -------- $ 6,539 $ 15,920 $ 5,008 $ (3,639) $ 2,924 $ 3,012 $ 29,764 ======== ======== ======= ======== ======= ======= ======== Depreciation............... $ 3,498 $ 3,449 $ 1,238 $ -- $ 720 $ -- $ 8,905 Interest................... 8,264 10,817 2,452 14,177 569 -- 36,279 Capital expenditures....... 1,529 9,488 317 1,760 161 -- 13,255 Assets..................... 191,177 177,085 70,436 312,495 21,882 31,953 805,028 Commercial Property Sales: Properties Apartments Land Total ---------- ---------- --------- -------- Sales price................ $ 27,564 $ 50,150 $ 18,953 $ 96,667 Cost of sale............... 10,085 19,397 15,442 44,924 -------- -------- -------- -------- Gain on sale............... $ 17,479 $ 30,753 $ 3,511 $ 51,743 -------- -------- -------- -------- </TABLE> NOTE 11. COMMITMENTS AND CONTINGENCIES - ---------- ----------------------------- Liquidity. Management expects that ARI will generate excess cash from operations, due to increased rental rates and occupancy at its properties; however, such excess will not be sufficient to discharge all of ARI's debt obligations as they mature. ARI will rely on aggressive land sales, selected income producing property sales and, to the extent necessary, additional borrowings to meet its cash requirements. Commitments. In March 1999, ARI reached an agreement with the Class A unitholders of Valley Ranch, L.P. to acquire their eight million Class A units for $1.00 per unit. In 1999, three million units were purchased. Additionally, one million units were purchased in January 2000 and two million units were purchased in May 2001. ARI has committed to purchase the remaining two million units in May 2002. Litigation. ARI is involved in various lawsuits arising in the ordinary course of business. In the opinion of ARI's management, the outcome of these lawsuits will not have a material impact on ARI's financial condition, results of operations or liquidity. ------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- Introduction - ------------ ARI's predecessor was organized in 1961 to provide investors with a professionally managed, diversified portfolio of equity real estate and mortgage loan investments selected to provide opportunities for capital appreciation as well as current income. 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Liquidity and Capital Resources - ------------------------------- General. Cash and cash equivalents at June 30, 2001, totaled $6.0 million, compared with $4.2 million at December 31, 2000. Although ARI anticipates that during the remainder of 2001 it will generate excess cash flow from property operations, as discussed below, such excess cash is not sufficient to discharge all of ARI's debt obligations as they mature. ARI will therefore continue to rely on externally generated funds, including borrowings against its investments in various real estate entities, mortgage notes receivable, refinancing of properties and, to the extent necessary, borrowings to meet its debt service obligations, pay taxes, interest and other non-property related expenses. At December 31, 2000, notes payable totaling $193.4 million had either scheduled maturities or required principal reduction payments during 2001. During the first six months of 2001, ARI either extended, refinanced, paid down, paid off or received commitments from lenders to extend or refinance $93.4 million of the debt scheduled to mature in 2001. Net cash used in operating activities increased to a use of $31.0 million in the six months ended June 30, 2001, from a use of $30.8 million in the six months ended June 30, 2000. Fluctuations in the components of cash flow from operations are discussed in the following paragraphs. Net cash from property operations (rents collected less payments for expenses applicable to rental income) decreased to $9.0 million in the six months ended June 30, 2001 from $9.3 million in 2000. The decrease is primarily attributable to the sale of nine apartments in 2000. ARI expects a decrease in cash flow from property operations during the remainder of 2001. Such decrease is expected to result from the continued selective sale of income producing properties. Net cash from pizza operations (sales less cost of sales) in the six months ended June 30, 2001, was $2.9 million approximating the $3.0 million in the six months ended June 30, 2000. Interest collected decreased to $300,000 in the six months ended June 30, 2001, from $3.9 million in 2000. The decrease was attributable to the collection of $36.0 million of mortgage notes receivable in 2000. Interest paid decreased to $31.2 million in the six months ended June 30, 2001, from $33.0 million in 2000. The decrease was attributable to the 13 land parcels and nine apartments sold in 2000 resulting in the payoff, paydown or assumption by the purchaser of mortgage debt. Advisory fees paid increased to $3.5 million in the six months ended June 30, 2001, from $2.6 million in 2000. The increase is attributable to the inclusion of National Realty, L.P. assets in the basis for the advisory fees, after August 2000. 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Liquidity and Capital Resources (Continued) - ------------------------------- General and administrative expenses paid decreased to $4.5 million in the six months ended June 30, 2001, from $8.8 million in 2000. The decrease is primarily attributable to reduced consulting and partnership fees, and reduced cost reimbursements paid to the advisor. ARI's cash flow from its investments in IORI and TCI is dependent on the ability of each of the entities to make distributions. In the fourth quarter of 2000, IORI and TCI suspended distributions. Accordingly, ARI received no current distributions in the six months ended June 30, 2001, compared to $1.8 million in the first six months of 2000. However, in May 2001, ARI received $53,000 in accumulated dividends on shares of Continental Mortgage and Equity Trust that should have been exchanged for TCI Common Stock in 1999. Other cash used in operating activities was $2.5 million in the six months ended June 30, 2001 compared to $764,000 in other cash from operating activities in 2000. The change was primarily attributable to an increase in prepaid expenses. In the first six months of 2001, ARI received a total of $2.7 million on the collection of three mortgage notes receivable and $1.8 million in partial paydown of another mortgage note receivable. In 2001, ARI sold the following properties: <TABLE> <CAPTION> Units/ Sales Net Cash Debt Gain/(Loss) Property Location Sq.Ft./Acres Price Received Discharged on Sale - ----------------------- ------------------ ------------- ------- -------- ----------- ------------ <S> <C> <C> <C> <C> <C> <C> First Quarter Apartments Carriage Park Tampa, FL 46 Units $ 2,005 $ 757 $ 1,069 $ 663 Rockborough Denver, CO 345 Units 16,675 3,654 12,215 (1) 13,471 Shopping Center Regency Pointe Jacksonville, FL 67,063 Sq.Ft. 7,350 5,126 1,500 2,292 Land Frisco Bridges Collin County, TX 27.8 Acres 4,500 4,130 -- 25 Katrina Palm Desert, CA 20.0 Acres 2,831 (124) 596 -- (2) Las Colinas Las Colinas, TX 1.7 Acres 825 233 400 539 Plano Parkway Plano, TX 11.3 Acres 1,446 312 950 -- Scoggins Tarrant County, TX 232.8 Acres 2,913 892 1,800 181 Scout Tarrant County, TX 408.0 Acres 5,087 1,586 3,200 2,969 Tree Farm Dallas County, TX 10.4 Acres 2,888 (87) 2,644 75 Second Quarter Apartments Kimberly Woods Tucson, AZ 279 Units 8,450 1,667 6,191 (1) 6,052 Place One Tulsa, OK 407 Units 12,935 3,310 7,539 8,623 Shadowood Addison, TX 184 Units 7,125 1,980 4,320 4,644 Glenwood Addison, TX 168 Units 6,650 3,166 2,549 (560) Bent Tree Addison, TX 292 Units 12,050 2,480 8,867 7,081 Land Katrina Palm Desert, CA 20.0 Acres 2,940 78 -- 516 </TABLE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Liquidity and Capital Resources (Continued) - ------------------------------- <TABLE> <CAPTION> Units/ Sales Net Cash Debt Gain/(Loss) Property Location Sq.Ft./Acres Price Received Discharged on Sale - ----------------------- ----------------- ------------ ------- -------- ---------- ----------- <S> <C> <C> <C> <C> <C> <C> Land - Continued Mason/Goodrich Houston, TX 22.1 Acres $4,168 $ (34) $3,750 $ 2,896 Plano Parkway Plano, TX 12.0 Acres 740 672 -- (991) Yorktown Harris County, TX 120.4 Acres 5,239 (160) 4,991 (1,497) Third Quarter Apartments Club Mar Sarasota, FL 248 Units 8,500 1,805 6,199 5,719 Land Elm Fork Denton County, TX 10.0 Acres 1,002 (30) 958 284 Katrina Palm Desert, CA 6.1 Acres 1,196 1,108 -- 570 Chase Oaks Plano, TX 22.3 Acres 2,875 663 2,027 796 - ------------- </TABLE> (1) Debt assumed by purchaser. (2) Gain deferred until ARI-provided financing is collected. In 2001, ARI purchased the following properties: <TABLE> <CAPTION> Units/ Purchase Net Cash Debt Interest Maturity Property Location Sq.Ft./Acres Price Paid Incurred Rate Date - ----------------- ----------- ------------ -------- --------- ----------- --------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Second Quarter Apartments Glenwood Addison, TX 168 Units $6,246 - (1) $2,549 (2) 9.25% 10/04 - -------------- </TABLE> (1) 8.88 acres of Hollywood Casino land and 10.5 acres of Vista Ridge land given as consideration. Exchanged with a related party. (2) Assumed debt of seller. Exchanged with a related party. In 2001, ARI financed/refinanced or obtained second mortgage financing on the following: <TABLE> <CAPTION> Debt Debt Net Cash Interest Maturity Property Location Acres Incurred Discharged Received Rate Date - ----------------------- ------------------- ------------- --------- ---------- -------- --------- -------- <S> <C> <C> <C> <C> <C> <C> <C> First Quarter Land Mason/Goodrich Houston, TX 235.0 Acres $ 6,750 $ -- $6,302 14.00% 01/02 Pioneer Crossing Austin, TX 350.1 Acres 7,000 -- 6,855 16.90 03/05 Pioneer Crossing Austin, TX 14.5 Acres 2,500 -- 2,350 14.50 01/02 Second Quarter Land Hollywood Casino Farmers Branch, TX 51.7 Acres 2,500 (1) -- 1,916 9.00 04/03 Valwood Dallas County, TX 19.4 Acres -- (1) -- -- -- -- Katrina Palm Desert, CA 300.5 Acres 22,000 15,584 4,417 12.50 (2) 10/01 Jeffries Ranch Oceanside, CA 82.4 Acres 5,250 (3) 750 3,944 14.50 06/02 Willow Springs Riverside, CA 1,485.7 Acres -- (3) -- -- -- -- Hotel Williamsburg Hospitality House Williamsburg, VA(4) 296 Rooms 10,309 -- 9,851 36.00 01/02 Shopping Center Cullman Cullman, AL 92,486 Sq.Ft. -- (3) 129 -- -- -- - ----------------------- ------------------- ------------- -------- ---------- ------ ------- ----- </TABLE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Liquidity and Capital Resources (Continued) - ------------------------------- <TABLE> <CAPTION> Debt Debt Net Cash Interest Maturity Property Location Acres Incurred Discharged Received Rate Date - ----------------------- ------------- ---------- -------- ---------- -------- --------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Third Quarter Land Marine Creek Ft. Worth, TX 54.2 Acres $1,500 $750 $701 9.00% 01/03 - -------------------- </TABLE> (1) Single note, with all properties as collateral. (2) Variable interest rate. (3) Single note, with all properties as collateral. (4) Also secured by 1,846,000 shares of TCI common stock. ARI has margin arrangements with various financial institutions and brokerage firms which provide for borrowing up to 50% of the market value of ARI's marketable equity securities. The borrowings under such margin arrangements are secured by equity securities of IORI and TCI and ARI's trading portfolio and bear interest rates ranging from 7.0% to 11.0%. Margin borrowing totaled $12.3 million at June 30, 2001. Management expects that it will be necessary for ARI to sell $102.0 million, $34.1 million and $1.2 million of its land holdings during each of the next three years to satisfy the debt on such land as it matures. If ARI is unable to sell at least the minimum amount of land to satisfy the debt obligations on such land as it matures, or, if it was not able to extend such debt, ARI would either sell other of its assets to pay such debt or return the property to the lender. Management reviews the carrying values of ARI's properties and mortgage notes receivables 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. ARI'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. Commitments and Contingencies - ----------------------------- In March 1999, ARI reached an agreement with the Class A unitholders of Valley Ranch, L.P. to acquire their eight million Class A units for $1.00 per unit. In 1999, three million units were purchased. Additionally, one million units were purchased in January 2000 and two million units were purchased in May 2001. ARI has committed to purchase the remaining two million units in May 2002. 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Results of Operations - --------------------- For the six months ended June 30, 2001, ARI reported net income of $9.7 million, compared to the net loss of $7.7 million for the six months ended June 30, 2000. The primary factors contributing to ARI's net income are discussed in the following paragraphs. Pizza parlor sales and cost of sales were $8.7 million and $7.1 million, respectively, in the three months ended June 30, 2001 and $16.6 million and $13.6 million for the six months ended June 30, 2001 approximating the $8.4 million and $6.9 million, respectively, for the three months ended June 30, 2000 and $16.3 million and $13.3 million for the six months ended June 30, 2000. Rents decreased to $32.8 million and $66.0 million in the three and six months ended June 30, 2001, from $35.4 million and $70.5 million in 2000. Rents from commercial properties increased to $16.7 million for the six months ended June 30, 2001, from $16.5 million in 2000, rent from hotels increased to $17.7 million in the six months ended June 30, 2001, from $16.5 million in 2000 and rent from apartments decreased to $31.2 million in the six months ended June 30, 2001, from $36.3 million in 2000. The increase in hotel property rents was primarily attributable to the opening of the Hotel Sofia in 2001 and the decrease in apartment rent was due to the sale of nine apartments in 2000. Rental income is expected to decrease significantly in the remainder of 2001 as a result of the income producing properties sold in 2000 and 2001. Property operations expense increased to $25.6 million and $49.1 million in the three and six months ended June 30, 2001, from $22.7 million and $46.7 million in 2000. Property operations expense for commercial properties of $10.0 million in the six months ended June 30, 2001, approximated the $9.9 million in 2000. For hotels, property operations expense increased to $15.9 million in the six months ended June 30, 2001, from $11.5 million in 2000. For land, property operations expense decreased to $4.5 million in the six months ended June 30, 2001 from $4.9 million in 2000. For apartments, property operations expense decreased to $18.5 million in the six months ended June 30, 2001, from $20.4 million in 2000. The increase in hotel property operations expense was primarily due to the opening of the Hotel Sofia in 2001. The decrease for land was primarily due to the 13 land parcels sold in 2000. The decrease in property operations expense for apartments was due to the sale of nine apartments in 2000. Property operations expense is expected to decrease significantly in the remainder of 2001 as a result of the properties sold in 2000 and 2001. Interest income from notes receivable increased to $776,000 and decreased to $1.2 million in the three and six months ended June 30, 2001 from $772,000 and $3.0 million in 2000. The six month decrease is due to the collection of mortgage receivables and their related interest at maturity in 2000 and 2001. Other income increased to $44,000 and $77,000 in the three and six months ended June 30, 2001 from losses of $288,000 and $187,000 in the 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Results of Operations (Continued) - --------------------- three and six months ended June 30, 2000. ARI recognized an unrealized decrease in market value of its trading portfolio securities of $13,000 in the six months ended June 30, 2001 compared to $127,000 in 2000. See NOTE 6. "MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO." Interest expense decreased to $19.1 million and $37.2 million in the three and six months ended June 30, 2001 from $20.4 million and $40.6 million in 2000. The decrease was attributable to the sale of nine apartments and 13 parcels of land in 2000. In the remainder of 2001, interest expense is expected to continue to decrease due to the properties sold in 2000 and 2001. Depreciation expense of $4.6 million and $8.7 million in the three and six months ended June 30, 2001, approximated the $4.5 million and $8.9 million in 2000. General and administrative expenses decreased to $1.6 million and $4.5 million in the three and six months ended June 30, 2001, from $4.7 million and $8.8 million in 2000. The decrease is primarily attributable to reduced consulting and partnership fees, and reduced cost reimbursements paid to the advisor. Advisory fees increased to $2.3 million and $3.5 million in the three and six months ended June 30, 2001 from $1.3 million and $2.6 million in 2000. The increase is due to the addition of the National Realty, L.P. assets to the advisory fee basis. Net income fee to affiliate was $1.8 million in the three and six months ended June 30, 2001. The income fee payable to ARI's advisor is 10% of the net income for the year, in excess of a 10% return on shareholders' equity. Incentive fee to affiliate was $4.3 million and $5.8 million in the three and six months ended June 30, 2001. The incentive fee payable to ARI's advisor is 10% of the excess of net capital gains over net capital losses realized from sales of assets. Incentive fees are expected to increase as ARI selectively sells properties. Minority interest decreased to $(95,000) and $1.5 million in the three and six months ended June 30, 2001, from $17.9 million and $27.3 million in 2000. The decrease is attributable to the acquisition of National Realty, L.P. by ARI in August 2000. Equity in income of investees increased to $5.7 million and $5.7 million in the three and six months ended June 30, 2001, from $94,000 and $296,000 in 2000. The increase in equity income was attributable to the loss associated with the sale of TCI and IORI stock in 2000 and gains from property sales by TCI in 2001. 24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) ------------------------- Tax Matters - ----------- Financial statement income varies from taxable income principally due to the accounting for income and losses of investees, gains and losses from asset sales, depreciation on owned properties, amortization of discounts on notes receivable and payable and the difference in the allowance for estimated losses. ARI had no taxable income or provision for income taxes in the six months ended June 30, 2001 or 2000. A deferred tax liability equal to the deferred tax asset has been provided due to the uncertainty of the future utilization of the deferred tax asset. Environmental Matters - --------------------- Under various federal, state and local environmental laws, ordinances and regulations, ARI may be potentially liable for removal or remediation costs, as well as certain other potential costs relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery for personal injury associated with such materials. Management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on ARI's business, assets or results of operations. Inflation - --------- The effects of inflation on ARI's operations are not quantifiable. Revenues from apartment operations fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect the sales values of properties and the ultimate gains to be realized from property sales. To the extent that inflation affects interest rates, earnings from short-term investments and the cost of new borrowings as well as the cost of variable interest rate debt will be affected. 25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS - ------- ----------------------------------------------------------- At June 30, 2001, ARI's exposure to a change in interest rates on its debt is as follows: <TABLE> <CAPTION> Weighted Effect of 1% Average Increase In Balance Interest Rate Base Rates --------------- --------------------- ------------------- (Amounts in thousands, except per share) <S> <C> <C> <C> Notes payable: Variable rate................................. $136,902 11.54% $1,369 Total decrease in ARI's annual net income.................................... $1,369 ====== Per share..................................... $ .14 ====== </TABLE> -------------------------------- PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- The annual meeting was held on July 9, 2001, at which meeting stockholders were asked to consider and vote upon the election of Directors. At the meeting, stockholders elected the following individuals as Directors: <TABLE> <CAPTION> Shares Voting ----------------------------------------- Withheld Director For Authority - ----------------------------------------------------- -------------------- ------------------- <S> <C> <C> Karl L. Blaha 10,537,155 51,617 Collene C. Currie 10,538,563 50,209 Richard D. Morgan 10,538,129 50,643 Joseph Mizrachi 10,538,607 50,165 </TABLE> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) Exhibits: None. (b) Reports on Form 8-K as follows: None. 26
SIGNATURE PAGE 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. AMERICAN REALTY INVESTORS, INC. Date: August 13, 2001 By: /s/ Karl L. Blaha ------------------------- ----------------------------------- Karl L. Blaha President Date: August 13, 2001 By: /s/ Louis J. Corna -------------------------- ----------------------------------- Louis J. Corna Executive Vice President and Chief Financial Officer (Principal Financial Officer) 27