================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Year Ended December 31, 2001 Commission File Number 1-9240 ----------------- Transcontinental Realty Investors, Inc. (Exact Name of Registrant as Specified in Its Charter) Nevada 94-6565852 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1800 Valley View Lane Suite 300, Dallas, Texas 75234 (Address of Principal Executive Office) (Zip Code) (469) 522-4200 (Registrant's Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.01 par value New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: NONE 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 at least the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 4, 2002, the Registrant had 8,042,594 shares of Common Stock outstanding. Of the total shares outstanding 2,858,143 were held by other than those who may be deemed to be affiliates, for an aggregate value of $47,445,174 based on the last trade as reported on the New York Stock Exchange on March 4, 2002. The basis of this calculation does not constitute a determination by the Registrant that all of such persons or entities are affiliates of the Registrant as defined in Rule 405 of the Securities Act of 1933, as amended. Documents Incorporated by Reference: Consolidated Financial Statements of Income Opportunity Realty Investors, Inc. Commission File No. 1-14784 Consolidated Financial Statements of American Realty Investors, Inc. Commission File No. 001-15663 ================================================================================
INDEX TO ANNUAL REPORT ON FORM 10-K <TABLE> <CAPTION> Page ---- <S> <C> PART I Item 1. Business............................................................................. 3 Item 2. Properties........................................................................... 6 Item 3. Legal Proceedings.................................................................... 16 Item 4. Submission of Matters to a Vote of Security Holders.................................. 17 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............ 18 Item 6. Selected Financial Data.............................................................. 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 7A. Quantitative and Qualitative Disclosures Regarding Market Risk...................... 27 Item 8. Financial Statements and Supplementary Data.......................................... 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 68 PART III Item 10. Directors, Executive Officers and Advisor of the Registrant......................... 68 Item 11. Executive Compensation.............................................................. 73 Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 75 Item 13. Certain Relationships and Related Transactions...................................... 75 PART IV Item 14. Exhibits, Consolidated Financial Statements, Schedules and Reports on Form 8-K...... 77 Signature Page............................................................................... 79 </TABLE> 2
PART I ITEM 1. BUSINESS Transcontinental Realty Investors, Inc. ("TCI"), a Nevada corporation, is the successor to a California business trust that was organized on September 6, 1983 and commenced operations on January 31, 1984. On November 30, 1999, TCI acquired all of the outstanding shares of beneficial interest of Continental Mortgage and Equity Trust ("CMET"), a real estate company, in a tax-free exchange of shares, issuing 1.181 shares of its Common Stock for each outstanding CMET share. Prior to January 1, 2000, TCI elected to be treated as a Real Estate Investment Trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). During the third quarter of 2000, due to a concentration of ownership TCI no longer met the requirement for tax treatment as a REIT. Under the Code, TCI cannot re-qualify for REIT tax status for at least five years. TCI's real estate at December 31, 2001, consisted of 136 properties held for investment, three partnership properties and three properties held for sale that were primarily obtained through foreclosure. In 2001, TCI purchased 17 properties held for investment. TCI's mortgage notes receivable portfolio at December 31, 2001, consisted of ten mortgage loans. In addition, TCI has an interest in a partnership that holds a wraparound mortgage note receivable. TCI's real estate and mortgage notes receivable portfolios are more fully discussed in ITEM 2. "PROPERTIES." On October 23, 2001, TCI, Income Opportunity Realty Investors, Inc. ("IORI") and American Realty Investors, Inc. ("ARI") jointly announced a preliminary agreement with the plaintiff's legal counsel of the derivative action entitled Olive et al. V. National Income Realty Trust, et al. for complete settlement of all disputes in the lawsuit. In February 2002, the court granted final approval of the proposed settlement. Under the proposal, ARI would acquire all of the outstanding shares of IORI and TCI not currently owned by ARI for a cash payment or shares of ARI Preferred Stock. ARI will pay $17.50 cash per TCI share and $19.00 cash per IORI share for the stock held by non-affiliated stockholders. ARI would issue one share of Series G Preferred Stock with a liquidation value of $20.00 per share for each share of TCI Common Stock for stockholders who elect to receive ARI preferred stock in lieu of cash. ARI would issue one share of Series H Preferred Stock with a liquidation value of $21.50 per share for each share of IORI Common Stock for stockholders who elect to receive ARI preferred stock in lieu of cash. Each share of Series G Preferred Stock will be convertible into 2.5 shares of ARI Common Stock during a 75-day period that commences fifteen days after the date of the first ARI Form 10-Q filing that occurs after the closing of the merger transaction. Upon the acquisition of IORI and TCI shares, TCI and IORI would become wholly-owned subsidiaries of ARI. The transaction is subject to the negotiation of a definitive merger agreement and a vote of the shareholders of all three entities. TCI has the same board as IORI and the same advisor as IORI and ARI. Business Plan and Investment Policy TCI's business is investing in real estate through direct equity ownership and partnerships and financing real estate and real estate related activities through investments in mortgage loans, including first, wraparound and junior mortgage loans. TCI's real estate is located throughout the continental United States and one property is located in Poland. Information regarding TCI's real estate and mortgage notes receivable portfolios is set forth in ITEM 2. "PROPERTIES", and in Schedules III and IV to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." TCI's business is not seasonal. Management has determined to continue to pursue a balanced investment policy, seeking both current income and capital appreciation. With respect to new real estate investments, management's plan of operation is to consider all types of real estate with an emphasis on properties generating current cash flow. Management expects to invest in and improve these properties to maximize both their immediate and long-term value. Management will also consider the development of apartment properties in selected markets primarily in Texas. 3
Management also expects to consider property sales opportunities for properties in stabilized real estate markets where TCI's properties have reached their potential. Management also expects to be an opportunistic seller of properties in markets that have become overheated, i.e. an abundance of buyers. Management's operating strategy with regard to TCI's properties is to maximize each property's operating income by aggressive property management through closely monitoring expenses while at the same time making property renovations and/or improvements where appropriate. While such expenditures increase the amount of revenue required to cover operating expenses, management believes that such expenditures are necessary to maintain or enhance the value of the properties. Management does not expect that TCI will seek to fund or acquire new mortgage loans in 2002. However, TCI may originate mortgage loans in conjunction with providing purchase money financing of a property sale. Management intends to service and hold for investment the mortgage notes in TCI's portfolio. However, TCI may borrow against its mortgage notes, using the proceeds from such borrowings for property acquisitions or for general working capital needs. Management also intends to pursue TCI's rights vigorously with respect to mortgage notes that are in default. TCI's Articles of Incorporation impose no limitations on its investment policy with respect to mortgage loans and does not prohibit it from investing more than a specified percentage of its assets in any one mortgage loan. Management of the Company Although the Board of Directors is directly responsible for managing the affairs of TCI and for setting the policies which guide it, its day-to-day operations are performed by Basic Capital Management, Inc. ("BCM"), a contractual advisor under the supervision of the Board. The duties of BCM include, among other things, locating, investigating, evaluating and recommending real estate and mortgage note investment and sales opportunities, as well as financing and refinancing sources. BCM also serves as a consultant in connection with TCI's business plan and investment decisions made by the Board. BCM is a company owned by a trust for the benefit of the children of Gene E. Phillips. Mr. Phillips serves as a representative of his children's trust, which owns BCM and in such capacity, has substantial contact with the management of BCM and input with respect to its performance of advisory services to TCI. BCM is more fully described in ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT--The Advisor." BCM has been providing advisory services to TCI since March 28, 1989. BCM also serves as advisor to IORI and ARI. The Directors of TCI are also directors of IORI. The officers of TCI also serve as officers of ARI, IORI, and BCM. As of March 4, 2002, TCI owned approximately 24.0% of IORI's outstanding shares of common stock and ARI owned approximately 50.0% and BCM owned approximately 14.5% of the outstanding shares of TCI's Common Stock. Since February 1, 1990, affiliates of BCM have provided property management services to TCI. Currently, Triad Realty Services, Ltd. ("Triad") provides such property management services. Triad subcontracts with other entities for the provision of property-level management services to TCI. The general partner of Triad is BCM. The limited partner of Triad is GS Realty Services, Inc. ("GS Realty"), a related party. Triad subcontracts the property-level management and leasing of 51 of TCI's commercial properties and the two commercial properties owned by real estate partnerships in which TCI and IORI are partners to Regis Realty, Inc. ("Regis"), a related party, which is a company owned by GS Realty. Regis is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad. Regis also is entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. Regis Hotel Corporation, a related party, manages TCI's five hotels. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT--The Advisor." TCI has no employees. Employees of BCM render services to TCI. 4
Competition The real estate business is highly competitive and TCI competes with numerous entities engaged in real estate activities (including certain entities described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Related Party Transactions"), some of which have greater financial resources than those of TCI. Management believes that success against such competition is dependent upon the geographic location of the property, the performance of property-level managers in areas such as marketing, collections and control of operating expenses, the amount of new construction in the area and the maintenance and appearance of the property. Additional competitive factors with respect to commercial properties are the ease of access to the property, the adequacy of related facilities, such as parking, and sensitivity to market conditions in setting rent levels. With respect to apartments, competition is also based upon the design and mix of units and the ability to provide a community atmosphere for the tenants. Management believes that beyond general economic circumstances and trends, the rate at which properties are renovated or the rate new properties are developed in the vicinity of each of TCI's properties also are competitive factors. To the extent that TCI seeks to sell any of its properties, the sales prices for such properties may be affected by competition from other real estate entities and financial institutions also attempting to sell their properties located in areas in which TCI's properties are located, as well as by aggressive buyers attempting to penetrate or dominate a particular market. As described above and in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Related Party Transactions," the officers and Directors of TCI also serve as officers or directors of certain other entities, also advised by BCM, and which have business objectives similar to those of TCI. TCI's Directors, officers and advisor owe fiduciary duties to such other entities as well as to TCI under applicable law. In determining to which entity a particular investment opportunity will be allocated, the officers, Directors and advisor consider the respective investment objectives of each such entity and the appropriateness of a particular investment in light of each such entity's existing real estate portfolio. To the extent that any particular investment opportunity is appropriate to more than one of the entities, the investment opportunity will be allocated to the entity which has had funds available for investment for the longest period of time or, if appropriate, the investment may be shared among all or some of the entities. In addition, as also described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Certain Business Relationships," TCI also competes with other entities which are affiliates of BCM and which have investment objectives similar to TCI's and that may compete with it in purchasing, selling, leasing and financing of real estate and real estate related investments. In resolving any potential conflicts of interest which may arise, BCM has informed management that it intends to continue to exercise its best judgment as to what is fair and reasonable under the circumstances in accordance with applicable law. Certain Factors Associated with Real Estate and Related Investments TCI is subject to all the risks incident to ownership and financing of real estate and interests therein, many of which relate to the general illiquidity of real estate investments. These risks include, but are not limited to, changes in general or local economic conditions, changes in interest rates and the availability of permanent mortgage financing which may render the purchase, sale or refinancing of a property difficult or unattractive and which may make debt service burdensome, changes in real estate and zoning laws, increases in real estate taxes, federal or local economic or rent controls, floods, earthquakes, hurricanes and other acts of God and other factors beyond the control of management or BCM. The illiquidity of real estate investments may also impair the ability of management to respond promptly to changing circumstances. Management believes that such risks are partially mitigated by the diversification by geographic region and property type of TCI's real estate and mortgage notes receivable portfolios. However, to the extent new property investments or mortgage lending is concentrated in any particular region or property type, the advantages of diversification may be mitigated. 5
ITEM 2. PROPERTIES TCI's principal offices are located at 1800 Valley View Lane, Suite 300, Dallas, Texas 75234 and are, in the opinion of management, suitable and adequate for TCI's present operations. Details of TCI's real estate and mortgage notes receivable portfolios at December 31, 2001, are set forth in Schedules III and IV to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." The discussions set forth below under the headings "Real Estate" and "Mortgage Loans" provide certain summary information concerning TCI's real estate and mortgage notes receivable portfolios. TCI's real estate portfolio consists of properties held for investment, properties held for sale, which were primarily obtained through foreclosure of the collateral securing mortgage notes receivable, and investments in partnerships. The discussion set forth below under the heading "Real Estate" provides certain summary information concerning TCI's real estate and further summary information with respect to its properties held for investment, properties held for sale and its investment in partnerships. At December 31, 2001, none of TCI's properties, mortgage notes receivable or investment in partnerships exceeded 10% of total assets. At December 31, 2001, 88% of TCI's assets consisted of properties held for investment, less than 1% consisted of properties held for sale, 3% consisted of mortgage notes and interest receivable and 2% consisted of investments in partnerships. The remaining 7% of TCI's assets were invested in cash, cash equivalents and other assets. The percentage of TCI's assets invested in any one category is subject to change and no assurance can be given that the composition of TCI's assets in the future will approximate the percentages listed above. TCI's real estate is geographically diverse. At December 31, 2001, TCI held investments in apartments and commercial properties in each of the geographic regions of the continental United States, although its apartments and commercial properties were concentrated in the Southeast and Southwest regions, as shown more specifically in the table under "Real Estate" below. At December 31, 2001, TCI held mortgage notes receivable secured by apartments and commercial properties in the Southwest and Midwest regions of the continental United States, as shown more specifically in the table under "Mortgage Loans" below. 6
Geographic Regions TCI has divided the continental United States into the following geographic regions. [GEOGRAPHIC REGION MAP] Northeast region comprised of the states of Connecticut, Delaware, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont, and the District of Columbia. TCI owns a commercial property in this region. Southeast region comprised of the states of Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee and Virginia. TCI owns 8 apartments and 19 commercial properties in this region. Southwest region comprised of the states of Arizona, Arkansas, Louisiana, New Mexico, Oklahoma and Texas. TCI owns 45 apartments and 22 commercial properties in this region. Midwest region comprised of the states of Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, West Virginia and Wisconsin. TCI owns 2 apartments, 4 commercial properties and 3 hotels in this region. Mountain region comprised of the states of Colorado, Idaho, Montana, Nevada, Utah and Wyoming. TCI owns 3 commercial properties in this region. Pacific region comprised of the states of California, Oregon and Washington. TCI owns 2 apartments, a hotel and 2 commercial properties in this region. Excluded from the above are 26 parcels of unimproved land and one hotel in Wroclaw, Poland, as described below. Real Estate At December 31, 2001, approximately 93% of TCI's assets were invested in real estate. TCI invests primarily in real estate located throughout the continental United States, either on a leveraged or nonleveraged basis. TCI's real estate portfolio consists of properties held for investment, investments in partnerships and properties held for sale (which were primarily obtained through foreclosure of the collateral securing mortgage notes receivable). Types of Real Estate Investments. TCI's real estate consists of commercial properties (office buildings, industrial warehouses and shopping centers), hotels and apartments having established income-producing capabilities. In selecting real estate for investment, the location, age and type of property, gross rents, lease terms, financial and business standing of tenants, operating expenses, fixed charges, land values and physical condition are among the factors considered. TCI may acquire properties subject to or assume existing debt and may mortgage, pledge or otherwise obtain financing for its properties. The Board of Directors may alter the types of and criteria for selecting new real estate investments and for obtaining financing without a vote of stockholders. TCI typically invests in developed real estate. However, TCI has recently invested in apartment development and construction. To the extent that TCI continues to invest in development and construction projects, it will be subject to business risks, such as cost overruns and construction delays, associated with such higher risk projects. 7
At December 31, 2001, TCI had the following properties under construction: <TABLE> <CAPTION> Additional Construction Units/ Amount Amount Loan Property Location Rooms Expended to Expend Funding - -------- --------------- --------- -------- ---------- ------------ <S> <C> <C> <C> <C> <C> Apartments Falcon Lakes......... Arlington, TX 284 Units $ 1,688 $14,057 $13,469 Limestone Ranch...... Lewisville, TX 252 Units 8,225 6,396 13,000 River Oaks........... Wiley, TX 180 Units 2,228 9,763 10,023 Sendero Ridge........ San Antonio, TX 384 Units 6,561 22,100 24,420 Tivoli............... Dallas, TX 190 Units 4,299 9,135 11,000 Verandas at City View Fort Worth, TX 314 Units 2,570 20,380 19,000 Waters Edge IV....... Gulfport, MS 80 Units 1,979 2,104 -- Hotel Akademia............. Wroclaw, Poland 165 Rooms 11,761 6,974 14,240 </TABLE> In the opinion of management, the properties owned by TCI are adequately covered by insurance. The following table sets forth the percentages, by property type and geographic region, of TCI's real estate (other than four hotels in the Pacific and Midwest regions, one hotel in Poland and 26 parcels of unimproved land, as described below) at December 31, 2001. <TABLE> <CAPTION> Commercial Region Apartments Properties ------ ---------- ---------- <S> <C> <C> Pacific.. 2% 1% Midwest.. 2 11 Northeast -- 1 Southwest 83 51 Southeast 13 31 Mountain. -- 5 --- --- 100% 100% === === </TABLE> The foregoing table is based solely on the number of apartment units and amount of commercial square footage and does not reflect the value of TCI's investment in each region. TCI owns 26 parcels of unimproved land, 1 parcel of 4.66 acres in the Southeast region and 25 parcels of .67 acres, .68 acres, 14.39 acres, 2.89 acres, 2.14 acres, 4.7 acres, 6.8 acres, 18.99 acres, 34.58 acres, 36.38 acres, 97.97 acres, 55.8 acres, 160.38 acres, 97.0 acres, 101.94 acres, 16.16 acres, 18 acres, 17.07 acres, 9.96 acres, 108.9 acres, 6.07 acres, 10.5 acres, 5.36 acres, 7.11 acres, and 18,000 sq. ft. in the Southwest region. See Schedule III to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" for a detailed description of TCI's real estate portfolio. A summary of activity in TCI's owned real estate portfolio during 2001 is as follows: <TABLE> <S> <C> Owned properties at January 1, 2001.. 144 Properties purchased................. 17 Properties sold...................... (22) --- Owned properties at December 31, 2001 139 === </TABLE> 8
Properties Held for Investment. Set forth below are TCI's properties held for investment and the monthly rental rate for apartments, the average annual rental rate for commercial properties and the average daily room rate and room revenue divided by total available rooms for hotels and occupancy at December 31, 2001, 2000 and 1999, for apartments and commercial properties and average occupancy during 2001, 2000 and 1999 for hotels: <TABLE> <CAPTION> Rent Per Square Foot Occupancy % Units/ ---------------- -------------- Property Location Square Footage 2001 2000 1999 2001 2000 1999 - -------- ------------------ ------------------------- ----- ----- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> Apartments 4242 Cedar Springs.... Dallas, TX 76 Units/60,600 Sq. Ft. $ .89 $ .87 $.84 90 92 99 4400.................. Midland, TX 92 Units/94,472 Sq. Ft. .49 .49 .49 95 91 85 Apple Lane............ Lawrence, KS 75 Units/30,000 Sq. Ft. 1.04 1.00 * 99 97 * Arbor Point........... Odessa, TX 195 Units/178,920 Sq. Ft. .41 .39 .37 91 95 95 Ashton Way............ Midland, TX 178 Units/138,964 Sq. Ft. .43 .41 .41 89 95 78 Autumn Chase.......... Midland, TX 64 Units/58,652 Sq. Ft. .53 .52 * 94 97 * Bay Walk.............. Galveston, TX 192 Units/153,120 Sq. Ft. .74 * * 92 * * By the Sea............ Corpus Christi, TX 153 Units/123,945 Sq. Ft. .83 * * 93 * * Camelot............... Largo, FL 120 Units/141,024 Sq. Ft. .56 .54 .53 92 99 92 Cliffs of Eldorado.... McKinney, TX 208 Units/182,288 Sq. Ft. .84 .84 .84 94 95 91 Country Crossing...... Tampa, FL 227 Units/199,952 Sq. Ft. .61 .58 .56 93 94 95 Courtyard............. Midland, TX 133 Units/111,576 Sq. Ft. .43 * * 89 * * Coventry.............. Midland, TX 120 Units/105,608 Sq. Ft. .43 .42 .42 77 98 78 El Chapparal.......... San Antonio, TX 190 Units/174,220 Sq. Ft. .72 .69 .67 92 93 99 Fairway View Estates.. El Paso, TX 264 Units/204,000 Sq. Ft. .62 .61 .57 86 83 76 Fairways.............. Longview, TX 152 Units/134,176 Sq. Ft. .54 .53 .53 93 95 78 Falcon Lakes.......... Arlington, TX 284 Units/207,960 Sq. Ft. ** * * ** * * Fountain Lake......... Texas City, TX 166 Units/161,220 Sq. Ft. .59 .56 .55 96 86 85 Fountains of Waterford Midland, TX 172 Units/129,200 Sq. Ft. .53 .53 .53 94 88 52 Gladstell Forest...... Conroe, TX 168 Units/121,536 Sq. Ft. .72 .72 .72 95 90 90 Grove Park............ Plano, TX 188 Units/143,556 Sq. Ft. .86 .81 .77 94 95 95 Harper's Ferry........ Lafayette, LA 122 Units/112,500 Sq. Ft. .58 .58 .57 91 94 75 Heritage on the River. Jacksonville, FL 301 Units/289,490 Sq. Ft. .65 .63 .63 97 98 92 Hunters Glen.......... Midland, TX 212 Units/174,180 Sq. Ft. .38 .37 .37 91 91 86 In the Pines.......... Gainesville, FL 242 Units/294,860 Sq. Ft. .54 .54 .52 96 97 98 Island Bay............ Galveston, TX 458 Units/374,784 Sq. Ft. .81 * * 87 * * Limestone Canyon...... Austin, TX 260 Units/216,000 Sq. Ft. 1.06 1.00 .97 91 96 83 Limestone Ranch....... Lewisville, TX 252 Units/219,600 Sq. Ft. ** * * ** * * Marina Landing........ Galveston, TX 256 Units/205,504 Sq. Ft. .87 * * 90 * * Mountain Plaza........ El Paso, TX 188 Units/220,710 Sq. Ft. .49 .49 .48 95 94 94 Oak Park IV........... Clute, TX 108 Units/78,708 Sq. Ft. .54 .52 .51 94 88 84 Paramount Terrace..... Amarillo, TX 181 Units/123,840 Sq. Ft. .57 .55 * 94 94 * Plantation............ Tulsa, OK 138 Units/103,500 Sq. Ft. .59 .56 .54 93 95 91 Primrose.............. Bakersfield, CA 162 Units/144,836 Sq. Ft. .59 .56 * 97 93 * Quail Creek........... Lawrence, KS 95 Units/113,416 Sq. Ft. .57 .55 * 98 97 * Quail Oaks............ Balch Springs, TX 131 Units/72,848 Sq. Ft. .81 .77 .73 93 97 96 River Oaks............ Wiley, TX 180 Units/164,604 Sq. Ft. ** * * ** * * Sandstone............. Mesa, AZ 238 Units/146,320 Sq. Ft. .90 .90 .88 88 91 93 Sendero Ridge......... San Antonio, TX 384 Units/340,880 Sq. Ft. ** * * ** * * Somerset.............. Texas City, TX 200 Units/163,368 Sq. Ft. .66 .64 .63 91 91 85 Southgate............. Odessa, TX 180 Units/151,656 Sq. Ft. .42 .41 .41 95 96 86 Southgreen............ Bakersfield, CA 80 Units/66,000 Sq. Ft. .80 .77 .70 96 95 92 Stone Oak............. San Antonio, TX 252 Units/187,686 Sq. Ft. .68 .65 .63 91 94 85 Summerfield........... Orlando, FL 224 Units/204,116 Sq. Ft. .75 .70 .67 93 95 86 Sunchase.............. Odessa, TX 300 Units/223,048 Sq. Ft. .44 .43 .43 96 95 87 Terrace Hills......... El Paso, TX 310 Units/233,192 Sq. Ft. .67 .66 .63 91 93 94 Tivoli................ Dallas, TX 190 Units/168,862 Sq. Ft. ** * * ** * * Timbers............... Tyler, TX 180 Units/101,666 Sq. Ft. .57 .55 .54 92 98 93 Trails at Windfern.... Houston, TX 240 Units/173,376 Sq. Ft. .73 .71 .68 96 97 96 Treehouse............. Irving, TX 160 Units/153,072 Sq. Ft. .78 .75 .71 94 94 93 Verandas at City View. Fort Worth, TX 314 Units/295,170 Sq. Ft. ** * * ** * * </TABLE> 9
<TABLE> <CAPTION> Rent Per Square Foot Occupancy % Units/ -------------------- -------------- Property Location Square Footage 2001 2000 1999 2001 2000 1999 - -------- -------------------- ------------------------- ------ ------ ------ ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> Apartments (continued) Waters Edge IV........... Gulfport, MS 80 Units/76,400 Sq. Ft. $ ** $ * $ * ** * * Westwood................. Odessa, TX 79 Units/49,001 Sq. Ft. .48 .43 .41 92 100 91 Willow Creek............. El Paso, TX 112 Units/103,140 Sq. Ft. .54 .50 .49 94 97 77 Willo-Wick Gardens....... Pensacola, FL 152 Units/153,360 Sq. Ft. .54 .56 .53 91 89 80 Willow Wick.............. North Augusta, SC 104 Units/94,128 Sq. Ft. .56 .56 .55 97 91 96 Woodview................. Odessa, TX 232 Units/165,840 Sq. Ft. .48 .46 .45 95 96 91 Office Buildings 1010 Common.............. New Orleans, LA 494,579 Sq. Ft. 11.28 10.83 10.45 36 32 21 225 Baronne.............. New Orleans, LA 416,834 Sq. Ft. 9.77 9.61 9.32 75 76 77 4135 Beltline Road....... Addison, TX 90,000 Sq. Ft. 10.33 10.17 10.00 -- 33 * 9033 Wilshire............ Los Angeles, CA 44,253 Sq. Ft. 27.67 26.08 * 88 90 * Ambulatory Surgery Center Sterling, VA 33,832 Sq. Ft. 20.37 34.26 * 100 100 * Amoco.................... New Orleans, LA 378,244 Sq. Ft. 12.07 11.54 11.23 79 80 78 Atrium................... Palm Beach, FL 74,603 Sq. Ft. 12.69 11.55 11.31 82 84 96 Bay Plaza................ Tampa, FL 75,780 Sq. Ft. 15.96 15.60 15.14 99 95 85 Bay Plaza II............. Tampa, FL 78,882 Sq. Ft. 13.03 12.80 * 91 93 * Bonita Plaza............. Bonita, CA 47,777 Sq. Ft. 19.50 18.66 18.78 93 92 88 Brandeis................. Omaha, NE 319,234 Sq. Ft. 10.88 15.87 * 89 100 * Corporate Pointe......... Chantilly, VA 65,918 Sq. Ft. 19.72 18.31 16.85 100 100 100 Countryside Retail Center Sterling, VA 133,422 Sq. Ft. 16.02 18.02 * 89 89 * Durham Center............ Durham, NC 207,171 Sq. Ft. 17.65 17.79 17.93 94 95 78 Eton Square.............. Tulsa, OK 222,654 Sq. Ft. 11.27 10.52 9.78 63 60 86 Forum.................... Richmond, VA 79,791 Sq. Ft. 15.99 15.65 15.34 70 84 88 Harmon................... Sterling, VA 72,062 Sq. Ft. 19.72 19.50 * 70 85 * Hartford................. Dallas, TX 174,513 Sq. Ft. 11.08 10.78 10.68 47 50 57 Institute Place.......... Chicago, IL 144,915 Sq. Ft. 16.23 14.99 14.47 95 100 95 Jefferson................ Washington, DC 71,877 Sq. Ft. 31.65 31.94 30.94 91 89 100 Lexington Center......... Colorado Springs, CO 74,603 Sq. Ft. 12.88 12.26 11.71 83 54 97 Mimado................... Sterling, VA 35,127 Sq. Ft. 19.97 19.55 * 73 89 * NASA..................... Clear Lake, TX 78,159 Sq. Ft. 11.86 11.74 11.44 68 66 66 One Steeplechase......... Sterling, VA 103,376 Sq. Ft. 17.19 16.64 16.26 100 100 100 Parkway North............ Dallas, TX 71,041 Sq. Ft. 17.00 14.77 7.82 73 76 85 Plaza Towers............. St. Petersburg, FL 186,281 Sq. Ft. 15.54 14.54 14.03 97 95 95 Remington Tower.......... Tulsa, OK 90,009 Sq. Ft. 11.61 11.34 10.89 88 86 76 Savings of America....... Houston, TX 68,634 Sq. Ft. 12.63 11.68 11.28 85 79 71 Venture Center........... Atlanta, GA 38,272 Sq. Ft. 17.85 17.16 16.62 100 100 100 Westgrove Air Plaza...... Addison, TX 78,326 Sq. Ft. 13.54 12.91 12.69 81 90 89 Windsor Plaza............ Windcrest, TX 80,522 Sq. Ft. 13.72 13.70 13.43 66 63 62 Industrial Warehouses 5360 Tulane.............. Atlanta, GA 30,000 Sq. Ft. 2.75 2.60 2.55 100 100 100 5700 Tulane.............. Atlanta, GA 67,850 Sq. Ft. 2.93 2.83 2.63 7 77 9 Addison Hanger........... Addison, TX 23,650 Sq. Ft. 10.07 11.08 11.29 86 51 50 Addison Hanger II........ Addison, TX 29,000 Sq. Ft. 7.21 * * 12 * * Central Storage.......... Dallas, TX 216,035 Sq. Ft. 2.40 1.48 1.48 100 100 100 Encon.................... Fort Worth, TX 256,410 Sq. Ft. 3.08 2.00 2.00 100 100 100 Kelly.................... Dallas, TX 294,899 Sq. Ft. 3.61 3.85 3.74 94 100 98 McLeod................... Orlando, FL 110,914 Sq. Ft. 8.01 7.86 7.62 92 88 91 Ogden Industrial......... Ogden, UT 107,112 Sq. Ft. 2.94 3.32 3.79 100 86 100 Space Center............. San Antonio, TX 101,500 Sq. Ft. 3.18 3.09 2.97 89 100 83 Texstar.................. Arlington, TX 97,846 Sq. Ft. 2.11 2.11 2.11 100 100 100 Tricon................... Atlanta, GA 570,877 Sq. Ft. 3.87 3.75 3.21 93 91 96 Shopping Centers Dunes Plaza.............. Michigan City, IN 223,869 Sq. Ft. 5.81 5.61 5.54 62 63 64 K-Mart................... Cary, NC 92,033 Sq. Ft. 3.28 3.28 3.28 100 100 100 Parkway Center........... Dallas, TX 28,374 Sq. Ft. 15.08 14.67 13.60 86 100 100 Plaza on Bachman Creek... Dallas, TX 80,278 Sq. Ft. 12.11 11.13 11.70 88 79 65 Promenade................ Highland Ranch, CO 133,558 Sq. Ft. 13.06 10.57 10.34 75 73 93 </TABLE> 10
<TABLE> <CAPTION> Rent Per Square Foot Occupancy % Units/ ----------------- -------------- Property Location Square Footage 2001 2000 1999 2001 2000 1999 - -------- ----------------- -------------- ----- ----- ----- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> Shopping Centers (continued) Sadler Square............... Amelia Island, FL 70,295 Sq. Ft. $7.21 $7.15 $6.99 93 95 96 Sheboygan................... Sheboygan, WI 74,532 Sq. Ft. 2.36 1.99 1.99 100 100 100 Other Signature Athletic Club..... Dallas, TX 56,532 Sq. Ft. </TABLE> <TABLE> <CAPTION> Total Room Revenues Divided By Average Room Rate Occupied % Total Available Rooms ----------------------- -------------- --------------------- Property Location Rooms 2001 2000 1999 2001 2000 1999 2001 2000 1999 - -------- ----------------- --------- ------- ------- ------- ---- ---- ---- ----- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Hotels Willows..... Chicago, IL 52 Rooms $130.37 $131.78 $115.12 53 52 60 69.65 $ 69.10 $ 79.24 City Suites. Chicago, IL 45 Rooms 131.16 125.32 111.45 61 74 71 81.13 92.40 69.23 Majestic Inn San Francisco, CA 57 Rooms 174.85 170.08 162.58 41 79 79 79.10 133.65 128.76 The Majestic Chicago, IL 55 Rooms 129.63 120.67 105.27 55 65 63 71.52 77.89 66.62 Akademia.... Wroclaw, Poland 165 Rooms ** * * ** * * ** * * </TABLE> <TABLE> <CAPTION> Square Property Location Footage/Acres -------- ------------------ -------------- <S> <C> <C> Land 1013 Common........ New Orleans, LA 18,000 Sq. Ft. Alamo Springs...... Dallas, TX .678 Acres Dominion........... Dallas, TX 14.39 Acres Eagle Crest........ Farmers Branch, TX 18.99 Acres Folsom............. Dallas, TX 36.38 Acres Lamar/Parmer....... Austin, TX 17.07 Acres Las Colinas........ Las Colinas, TX 4.7 Acres Lemmon Carlisle.... Dallas, TX 2.14 Acres Limestone Canyon II Austin, TX 9.96 Acres Manhattan.......... Farmers Branch, TX 108.9 Acres McKinney 36........ Collin County, TX 34.58 Acres Mira Lago.......... Farmers Branch, TX 8.88 Acres Pac Trust.......... Farmers Branch, TX 7.11 Acres Red Cross.......... Dallas, TX 2.89 Acres Sandison........... Collin County, TX 97.97 Acres Seminary West...... Fort Worth, TX 5.36 Acres Solco--Allen....... Collin County, TX 55.8 Acres Solco--Valley Ranch Dallas, TX 6.07 Acres Stacy Road......... Allen, TX 160.38 Acres State Highway 121.. Collin County, TX 101.94 Acres Watters Road....... Collin County, TX 97.00 Acres West End........... Dallas, TX 6.8 Acres Whisenant.......... Collin County, TX 16.16 Acres </TABLE> - -------- * Property was either purchased or under construction in 2000 or 2001. ** Property was under construction in 2001. Occupancy presented here and throughout this ITEM 2. is without reference to whether leases in effect are at, below or above market rates. 11
In 2001, TCI purchased the following properties: <TABLE> <CAPTION> Net Units/ Purchase Cash Debt Interest Maturity Property Location Rooms/Acres Price Paid Incurred Rate Date - -------- ------------------ ----------- -------- ------ -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Apartments Baywalk................. Galveston, TX 192 Units $ 6,590 $ 390 $ 5,856 7.45% 02/11 By the Sea.............. Corpus Christi, TX 153 Units 6,175 862 5,538 7.07 05/09 Courtyard............... Midland, TX 133 Units 1,425 425 1,051 9.25 04/06 Falcon Lakes(1)......... Arlington, TX 284 Units 1,435 1,437 -- -- -- Island Bay.............. Galveston, TX 458 Units 20,360 3,225 16,232 7.40 07/11 Limestone Ranch(1)...... Lewisville, TX 252 Units 505 -- -- -- -- (2) Marina Landing.......... Galveston, TX 256 Units 12,050 518 10,912 5.30 01/02 River Oaks(1)........... Wiley, TX 180 Units 531 578 -- -- -- Sendero Ridge(1)........ San Antonio, TX 384 Units 1,850 2,635 -- -- -- Tivoli(1)............... Dallas, TX 190 Units 3,000 2,475 1,000 12.00 12/02 Verandas at City View(1) Fort Worth, TX 314 Units 2,544 276 2,197 4.75 03/02 Waters Edge IV(1)....... Gulfport, MS 80 Units 441 441 -- -- -- Hotel Akademia(3)............. Wroclaw, Poland 165 Rooms 2,184 2,669 -- -- -- Land Mira Lago............... Farmers Branch, TX 8.88 Acres 541 -- -- -- -- (2) Pac Trust............... Farmers Branch, TX 7.11 Acres 1,175 1,231 -- -- -- Seminary West........... Fort Worth, TX 5.36 Acres 222 232 -- -- -- Solco-Valley Ranch...... Dallas, TX 6.07 Acres 1,454 1,525 -- -- -- </TABLE> - -------- (1) Land purchased for apartment construction. (2) Land was received from ARI, a related party, in exchange for the Glenwood Apartments. (3) Land purchased for hotel construction. In 2001, TCI sold the following properties: <TABLE> <CAPTION> Net Units/Sq.Ft./ Sales Cash Debt Gain/(Loss) Property Location Acres Price Received Discharged on Sale - -------- --------------- -------------- ------- -------- ---------- ----------- <S> <C> <C> <C> <C> <C> <C> Apartments Bent Tree Gardens.... Addison, TX 204 Units $ 9,000 $2,669 $ 6,065(1) $ 601 Carseka.............. Los Angeles, CA 54 Units 4,000 2,138 1,466 1,352 Fontenelle Hills..... Bellevue, NE 338 Units 16,500 3,680 12,454(1) 4,565 Forest Ridge......... Denton, TX 56 Units 2,000 682 1,151 1,014 Glenwood............. Addison, TX 168 Units 3,659 -- 2,537(1) -- (2) Heritage............. Tulsa, OK 136 Units 2,286 206 1,948 1,575 Madison at Bear Creek Houston, TX 180 Units 5,400 828 3,442(1) 1,162(4) McCallum Glen........ Dallas, TX 275 Units 8,450 2,633 5,004(1) 1,375(3) McCallum Crossing.... Dallas, TX 322 Units 11,500 1,841 8,101(1) 4,486 Oak Run.............. Pasadena, TX 160 Units 5,800 1,203 4,364 2,227 Park Lane............ Dallas, TX 97 Units 2,750 1,526 1,103 1,827 Park at Colonade..... San Antonio, TX 211 Units 5,800 927 4,066 1,592 South Cochran........ Los Angeles, CA 64 Units 4,650 1,897 1,873 1,660 Summerstone.......... Houston, TX 242 Units 7,225 1,780 5,180(1) 1,884 Sunset Lakes......... Waukegan, IL 414 Units 15,000 6,089 7,243 7,316 Office Buildings Chesapeake Center.... San Diego, CA 57,493 Sq.Ft. 6,575 3,111 2,844 204 Daley................ San Diego, CA 64,425 Sq.Ft. 6,211 2,412 3,346 836 Valley Rim........... San Diego, CA 54,194 Sq.Ft. 5,500 1,367 3,516 (138) Viewridge............ San Diego, CA 25,062 Sq.Ft. 2,010 701 1,272 4 Waterstreet.......... Boulder, CO 106,257 Sq.Ft. 22,250 7,126 12,949 9,154 Industrial Warehouse Technology Trading... Sterling, VA 197,659 Sq.Ft. 10,775 4,120 6,214 4,163 Zodiac............... Dallas, TX 35,435 Sq.Ft. 762 183 564 167 </TABLE> 12
<TABLE> <CAPTION> Net Units/Sq.Ft./ Sales Cash Debt Gain/(Loss) Property Location Acres Price Received Discharged on Sale - -------- ------------------ ------------- ------ -------- ---------- ----------- <S> <C> <C> <C> <C> <C> <C> Land Eagle Crest... Farmers Branch, TX 4.41 Acres $ 300 $ 291 $ -- (215) McKinney 36... McKinney, TX 1.822 Acres 476 476 -- 355 Moss Creek.... Greensboro, NC 4.79 Acres 15 13 -- (71) Round Mountain Austin, TX 110.0 Acres 2,560 2,455 -- 1,047 </TABLE> - -------- (1) Debt assumed by purchaser. (2) The Glenwood Apartments were exchanged with ARI, a related party, for two parcels of land; the 10.5 acre Limestone Ranch and the 8.88 acre Mira Lago. (3) Excludes $1.5 million deferred gain from seller financing. See Note 4. "Notes and Interest Receivable.") (4) Excludes $608,000 deferred gain from seller financing. (See Note 4. "Notes and Interest Receivable.") In 2001, TCI financed/refinanced the following property: <TABLE> <CAPTION> Debt Debt Net Cash Interest Maturity Property Location Acres Incurred Discharged Received Rate Date -------- ---------- ---------- -------- ---------- -------- -------- -------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> Land Red Cross Dallas, TX 2.89 Acres $4,500 $ -- $4,328 12.5% 10/02 </TABLE> Properties Held for Sale. Set forth below are TCI's properties held for sale, primarily obtained through foreclosure. <TABLE> <CAPTION> Property Location Acres -------- ------------------ ----------- <S> <C> <C> Land Fiesta........ San Angelo, TX .6657 Acres Fruitland..... Fruitland Park, FL 4.66 Acres Round Mountain Austin, TX 18 Acres </TABLE> Partnership Properties. TCI accounts for partnership properties using the equity method. Set forth below are the properties owned by partnerships, the monthly rental rate for apartments, the average annual rental rate for commercial properties, and occupancy rates at December 31, 2001, 2000 and 1999: <TABLE> <CAPTION> Rent Per Square Foot Occupancy % -------------------- -------------- Property Location Units/Square Footage 2001 2000 1999 2001 2000 1999 - -------- ------------------ ----------------------- ------ ------ ------ ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> Apartment Lincoln Court.... Dallas, TX 55 Units/40,063 Sq. Ft. $ 1.20 $ 1.16 $ 1.14 98 94 92 Office Building Prospect Park #29 Rancho Cordova, CA 40,807 Sq. Ft. 19.52 20.42 16.56 72 100 100 Shopping Center Chelsea Square... Houston, TX 70,275 Sq. Ft. 9.63 9.31 8.95 79 77 85 </TABLE> TCI owns a noncontrolling combined 55% limited and general partnership interest in Jor-Trans Investors Limited Partnership ("Jor-Trans") which owns the Lincoln Court Apartments. TCI is a 30% general partner in Sacramento Nine ("SAC 9"), which owns the Prospect Park #29 Office Building. In 2001, TCI received no operating distributions from SAC 9. TCI is a 63.7% limited partner and IORI is a 36.3% general partner in the Tri-City Limited Partnership ("Tri-City") which owns the Chelsea Square Shopping Center. In 2001, TCI received $32,000 in operating distributions from Tri-City. In February 2000, the Chelsea Square Shopping Center was financed in the amount of $2.1 million. Tri-City received net cash of $2.0 million after the payment of various closing costs. The 13
mortgage bore interest at a fixed rate of 10.24% per annum until February 2001, and a variable rate thereafter, currently 10% per annum, requires monthly payments of principal and interest of $20,601 and matures in February 2005. TCI received a distribution of $1.3 million of the net financing proceeds. See ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Related Party Transactions." Mortgage Loans In addition to investments in real estate, a portion of TCI's assets are invested in mortgage notes receivable, principally secured by real estate. TCI may originate mortgage loans in conjunction with providing purchase money financing of property sales. Management intends to service and hold for investment the mortgage notes in TCI's portfolio. TCI's mortgage notes receivable consist of first, wraparound and junior mortgage loans. Types of Mortgage Activity. TCI has originated its own mortgage loans, as well as acquired existing mortgage notes either directly from builders, developers or property owners, or through mortgage banking firms, commercial banks or other qualified brokers. BCM, in its capacity as a mortgage servicer, services TCI's mortgage notes. TCI's investment policy is described in ITEM 1. "BUSINESS--Business Plan and Investment Policy." Types of Properties Securing Mortgage Notes. The properties securing TCI's mortgage notes receivable portfolio at December 31, 2001, consisted of three apartments, five office buildings, a shopping center, and a mobile home park and unimproved land. The Board of Directors may alter the types of properties securing or collateralizing mortgage loans in which TCI invests without a vote of stockholders. TCI's Articles of Incorporation impose certain restrictions on transactions with related parties, as discussed in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." At December 31, 2001, TCI's mortgage notes receivable portfolio included nine mortgage loans with an aggregate principal balance of $17.4 million secured by income-producing real estate located in the Midwest, Southeast and Southwest regions of the continental United States, and two non-performing loans with an aggregate principal balance of $5.2 million secured by unimproved land. At December 31, 2001, 3% of TCI's assets were invested in notes and interest receivable. The following table sets forth the percentages (based on the mortgage note principal balance) by property type and geographic region, of the income producing properties that serve as collateral for TCI's mortgage notes receivable at December 31, 2001. See Schedule IV to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" for further details of TCI's mortgage notes receivable portfolio. <TABLE> <CAPTION> Commercial Region Apartments Properties Total ------ ---------- ---------- ----- <S> <C> <C> <C> Southwest 19.9% 45.0% 64.9% Southeast -- 11.3 11.3 Midwest.. -- 23.8 23.8 ---- ---- ----- 19.9% 80.1% 100.0% ==== ==== ===== </TABLE> A summary of the activity in TCI's mortgage notes receivable portfolio during 2001 is as follows: <TABLE> <S> <C> Mortgage notes receivable at January 1, 2001.. 6 Loans paid off................................ (2) Loans funded.................................. 8 -- Mortgage notes receivable at December 31, 2001 12 == </TABLE> 14
During 2001, $3.7 million was collected in full payment of two mortgage notes and $2.3 million in principal payments were received on other mortgage notes. At December 31, 2001, less than 1% of TCI's assets were invested in mortgage notes secured by non-income producing real estate, comprised of a first lien mortgage note secured by 44.6 acres of unimproved land in Fort Worth, Texas, and a second lien mortgage note secured by 1,714.6 acres of unimproved land in Tarrant County, Texas. First Mortgage Loans. TCI invests in first mortgage notes with short, medium or long-term maturities. First mortgage loans generally provide for level periodic payments of principal and interest sufficient to substantially repay the loan prior to maturity, but may involve interest-only payments or moderate amortization of principal and a "balloon" principal payment at maturity. With respect to first mortgage loans, the borrower is required to provide a mortgagee's title policy or an acceptable legal title opinion as to the validity and the priority of the mortgage lien over all other obligations, except liens arising from unpaid property taxes and other exceptions normally allowed by first mortgage lenders in the relevant area. TCI may grant participations in first mortgage loans that it originates to other lenders. In July 2001, TCI funded a $1.7 million mortgage loan secured by a first lien on 44.6 acres of unimproved land in Fort Worth, Texas, and a 100% interest in a partnership. The note receivable bears interest at 16.0% per annum, requires monthly interest only payments and matures in June 2002. The following discussion briefly describes events that affected previously funded first mortgage loans during 2001. In December 1999, TCI provided $1.2 million of purchase money financing in conjunction with the sale of the Town and Country Office Building in Houston, Texas. The note receivable bore interest at 8.5% per annum, required monthly payments of interest only, matured in 2001 and was secured by a first lien on the property sold. In December 2001, the note was paid in full and a previously deferred gain on the sale of $819,000 was recognized. Junior Mortgage Loans. TCI may invest in junior mortgage loans, which are secured by mortgages that are subordinate to one or more prior liens either on the fee or a leasehold interest in real estate. Recourse on such loans ordinarily includes the real estate on which the loan is made, other collateral and personal guarantees by the borrower. The Board of Directors restricts investment in junior mortgage loans, excluding wraparound mortgage loans, to not more than 10% of TCI's assets. At December 31, 2001, 3% of TCI's assets were invested in junior and wraparound mortgage loans. The following discussion briefly describes the junior mortgage loans that TCI originated as well as events that affected previously funded junior mortgage loans during 2001. In March 2001, TCI funded a $3.5 million mortgage loan secured by a second lien on a retail center in Montgomery County, Texas. In June 2001, an additional $1.5 million was funded. The note receivable bears interest at 16.0% per annum, requires monthly interest only payments of $67,000 and matured in September 2001. In October 2001, TCI extended the loan until February 2002, receiving $100,000 as an extension fee. In December 2001, TCI received a $1.5 million principal payment. In February 2002, TCI sold a $2.0 million senior participation interest in the loan to IORI, a related party. TCI and IORI will receive 43% and 57%, respectively, of the remaining principal and interest payments. Also in February 2002, TCI extended the loan until April 2002, receiving $23,000 as an extension fee. In June 2001, in conjunction with the sale of 275 unit McCallum Glen Apartments in Dallas, Texas, TCI funded a $1.5 million mortgage loan secured by a second lien on the apartments. The note receivable bears interest at 10% per annum, requires monthly interest only payments and matures in June 2003. 15
In July 2001, TCI agreed to fund a $4.4 million line of credit secured by a second lien on 1,714.16 acres of unimproved land in Tarrant County, Texas. The note receivable bears interest at 15% per annum, requires monthly interest only payments beginning in September 2001 and matures in July 2003. As of March 2002, TCI has funded $3.8 million of the line of credit. In August 2001, TCI agreed to fund up to $5.6 million secured by an office building in Dallas, Texas. The note receivable bears interest at a variable rate, currently 9.0% per annum, requires monthly interest only payments and matures in January 2003. As of March 2002, TCI has funded a total of $2.3 million. In December 2001, TCI purchased 100% of the outstanding common shares of National Melrose, Inc. ("NM"), a wholly-owned subsidiary of ARI, a related party, for $2.0 million cash. NM owns the 41,840 sq. ft. Executive Court Office Building in Memphis, Tennessee. ARI has guaranteed that the asset shall produce at least a 12% return annually of the purchase price for a period of three years from the purchase date. If the asset fails to produce the 12% return, ARI shall pay TCI any shortfall. In addition, if the asset fails to produce 12% return for a calendar year, TCI may require ARI to repurchase the shares of NM for the purchase price. Management has classified this related party transaction as a note receivable from ARI. In December 2000, TCI funded a $2.5 million mortgage loan secured by a second lien on unimproved land: 442 acres in Tarrant County, Texas, 1,130 acres in Denton County, Texas, and 26 acres in Collin County, Texas. The note receivable bore interest at 18.0% per annum, required monthly interest only payments of $37,500 and matured in June 2001. In June 2001, the loan and all accrued but unpaid interest was paid off. Also in December 2000, TCI funded a $3.0 million mortgage loan secured by a second lien on four office buildings in San Antonio, Texas. The note receivable bore interest at 16.0% per annum, required monthly interest only payments of $40,000 and matured in June 2001. The note was extended until November 2001 with a $750,000 loan principal paydown. With this paydown, the note was renegotiated to replace the existing collateral with new collateral consisting of a 120,000 sq. ft. office building and industrial warehouse in Carrollton, Texas. The note bears interest at 16.0% per annum, requires monthly payments of interest only and matures in May 2002. In October 2001, TCI funded a $4.0 million loan secured by a 375,152 sq.ft. office building in St. Louis, Missouri. The note receivable bears interest at 9.0% per annum, requires monthly interest only payments of $30,000 and matured in February 2002. In February 2002, TCI extended the loan maturity to February 2003. Partnership mortgage loans. TCI owns a 60% general partner interest and IORI owns a 40% general partner interest in Nakash Income Associates ("NIA"), which owns a wraparound mortgage note receivable secured by a building occupied by a Wal-Mart in Maulden, Missouri. TCI advanced $33,000 to the partnership. ITEM 3. LEGAL PROCEEDINGS Olive Litigation In February 1990, TCI, together with National Income Realty Trust, CMET and IORI three real estate entities which, at the time, had the same officers, directors or trustees and advisor as TCI, entered into a settlement (the "Settlement") of a class and derivative action entitled Olive et al. v. National Income Realty Trust et al., relating to the operation and management of each of the entities. On April 23, 1990, the Court granted final approval of the terms of the Settlement. The Settlement was modified in 1994 (the "Modification"). On January 27, 1997, the parties entered into an Amendment to the Modification effective January 9, 1997 (the "Olive Amendment"). The Olive Amendment provided for the settlement of additional matters raised by plaintiffs' counsel in 1996. The Court issued an order approving the Olive Amendment on July 3, 1997. 16
The Olive Amendment provided that TCI's Board retain a management/compensation consultant or consultants to evaluate the fairness of the BCM advisory contract and any contract of its affiliates with TCI, CMET and IORI, including, but not limited to, the fairness to TCI, CMET and IORI of such contracts relative to other means of administration. In 1998, the Board engaged a management/compensation consultant to perform the evaluation which was completed in September 1998. In 1999, plaintiffs' counsel asserted that the Board did not comply with the provision requiring such engagement and requested that the Court exercise its retained jurisdiction to determine whether there was a breach of this provision of the Olive Amendment. In January 2000, the Board engaged another management compensation consultant to perform the required evaluation again. The evaluation was completed in April 2000 and was provided to plaintiffs' counsel. The Board believes that any alleged breach of the Olive Amendment has been fully remedied by the Board's engagement of this second consultant. Although several status conferences on this matter were held, there has been no court order resolving whether there was any breach of the Olive Amendment. In June 2000, plaintiffs' counsel asserted that loans made by TCI to BCM and American Realty Trust, Inc. breached the provision of the Modification. The Board believes that the provisions of the Settlement, Modification and the Olive Amendment terminated on April 28, 1999. However, the Court has ruled that certain provisions continue to be effective after the termination date. This ruling has been appealed by TCI and IORI. On October 23, 2001, TCI, IORI and ARI jointly announced a preliminary agreement with the plaintiff's legal counsel of the derivative action entitled Olive et al. V. National Income Realty Trust, et al. for complete settlement of all disputes in the lawsuit. In February 2002, the court granted final approval of the proposed settlement. Under the proposal, ARI would acquire all of the outstanding shares of IORI and TCI not currently owned by ARI for a cash payment or shares of ARI Preferred Stock. ARI will pay $17.50 cash per TCI share and $19.00 cash per IORI share for the stock held by non-affiliated stockholders. ARI would issue one share of Series G Preferred Stock with a liquidation value of $20.00 per share for each share of TCI Common Stock for stockholders who elect to receive ARI preferred stock in lieu of cash. ARI would issue one share of Series H Preferred Stock with a liquidation value of $21.50 per share for each share of IORI Common Stock for stockholders who elect to receive ARI preferred stock in lieu of cash. Each share of Series G Preferred Stock will be convertible into 2.5 shares of ARI Common Stock during a 75-day period that commences fifteen days after the date of the first ARI Form 10-Q filing that occurs after the closing of the merger transaction. Upon the acquisition of IORI and TCI shares, TCI and IORI would become wholly-owned subsidiaries of ARI. The transaction is subject to the negotiation of a definitive merger agreement and a vote of the shareholders of all three entities. TCI has the same board as IORI and the same advisor as IORI and ARI. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ----------------- 17
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS TCI's Common Stock is traded on the New York Stock Exchange ("NYSE") using the symbol "TCI". The following table sets forth the high and low sales prices as reported in the consolidated reporting system of the NYSE. <TABLE> <CAPTION> Quarter Ended High Low ------------- ------ ------ <S> <C> <C> March 31, 2002 (through March 4, 2002) $16.82 $15.50 March 31, 2001........................ 12.60 8.19 June 30, 2001......................... 16.00 8.95 September 30, 2001.................... 14.75 11.70 December 31, 2001..................... 16.85 11.80 March 31, 2000........................ 13.00 10.81 June 30, 2000......................... 13.50 2.88 September 30, 2000.................... 16.00 11.50 December 31, 2000..................... 16.00 8.88 </TABLE> As of March 4, 2002, the closing price of TCI's Common Stock as reported in the consolidated reporting system of the NYSE was $16.60 per share. As of March 4, 2002, TCI's Common Stock was held by 6,757 holders of record. TCI paid no dividends in 2001. In December 2000, the Board of Directors determined not to pay a fourth quarter dividend to holders of TCI's Common Stock. The non-payment decision was based on the Board determining that TCI needed to retain cash for acquisitions that were anticipated in 2001 and 2002. TCI paid dividends in 2000 as follows: <TABLE> <CAPTION> Amount Date Declared Record Date Payable Date Per Share ------------- ------------------ ------------------ --------- <S> <C> <C> <C> February 10, 2000 March 15, 2000 March 31, 2000 $.18 June 6, 2000..... June 15, 2000 June 30, 2000 .18 September 8, 2000 September 19, 2000 September 29, 2000 .18 </TABLE> TCI reported to the Internal Revenue Service that 100% of the dividends paid in 2000 represented ordinary income. In December 1989, the Board of Directors approved a share repurchase program, authorizing the repurchase of a total of 687,000 shares of TCI's Common Stock. In October 2000, the Board increased this authorization to 1,409,000 shares. Through December 31, 2001, a total of 409,765 shares had been repurchased at a cost of $3.3 million. No shares were repurchased in 2001. In September 2001, the Board approved a private block purchase of 593,200 shares of Common Stock for a total cost of $9.5 million. 18
ITEM 6. SELECTED FINANCIAL DATA <TABLE> <CAPTION> For the Years Ended December 31, ---------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (dollars in thousands, except per share) <S> <C> <C> <C> <C> <C> EARNINGS DATA Rents............................... $ 134,911 $ 139,662 $ 82,101 $ 69,829 $ 54,462 Property expense.................... 80,562 78,170 44,514 38,282 32,424 ---------- ---------- ---------- ---------- ---------- Operating income.................... 54,349 61,492 37,587 31,547 22,038 Other income........................ (3,002) 1,814 555 739 2,311 Other expense....................... 85,806 84,074 48,440 38,320 33,154 Gain on sale of real estate......... 54,270 50,550 40,517 12,940 21,404 ---------- ---------- ---------- ---------- ---------- Net income (loss)................... 19,811 29,782 30,219 6,906 12,599 Preferred dividend requirement...... (172) (22) (30) (1) -- ---------- ---------- ---------- ---------- ---------- Net income (loss) applicable to Common shares..................... $ 19,639 $ 29,760 $ 30,189 $ 6,905 $ 12,599 ========== ========== ========== ========== ========== Basic and Diluted Earnings Per Share Basic.............................. $ 2.32 $ 3.45 $ 7.05 $ 1.78 $ 3.22 Diluted............................ 2.28 3.45 7.05 1.78 3.22 Dividends per Common share.......... $ -- $ .54 $ .60 $ .60 $ .28* Weighted Average Common Shares Outstanding Basic.............................. 8,478,377 8,631,621 4,283,574 3,876,797 3,907,221 Diluted............................ 8,615,465 8,637,290 4,283,574 3,876,797 3,907,221 </TABLE> - -------- * Does not include a special dividend of $1.00 per share. <TABLE> <CAPTION> For the Years Ended December 31, -------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (dollars in thousands, except per share) <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA Real estate held for investment, net $622,171 $639,040 $599,746 $347,389 $269,845 Real estate held for sale, net...... Foreclosed....................... 516 1,824 1,790 1,356 1,356 Other............................ -- -- -- -- 3,630 Notes and interest receivable, net.. 22,049 8,172 11,530 1,493 3,947 Total assets........................ 709,152 731,885 714,195 382,203 319,135 Notes and interest payable.......... 461,037 501,734 503,406 282,688 222,029 Stockholders' equity................ 216,768 200,560 179,112 91,132 86,133 Book value per share................ $ 26.95 $ 23.22 $ 20.76 $ 23.35 $ 22.15 </TABLE> TCI purchased 17 properties for a total of $62.5 million in 2001, 18 properties for a total of $103.9 million in 2000, 10 properties for a total of $51.2 million and obtained an additional 64 properties through merger with CMET in 1999, purchased 22 properties in 1998 for a total of $91.0 million, and 15 properties in 1997 for a total of $60.0 million. TCI sold 22 properties, one warehouse in the Kelly portfolio and three partial land parcels in 2001 for a total of $161.5 million, 20 properties in 2000 for a total of $113.5 million, 11 properties in 1999 for a total of $117.4 million, five properties in 1998 for a total of $31.8 million, and five properties in 1997 for a total $29.1 million. See ITEM 2. "PROPERTIES--Real Estate" and ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction TCI invests in real estate through acquisitions, leases and partnerships and in mortgage loans on real estate, including first, wraparound and junior mortgage loans. TCI is the successor to a California business trust organized on September 6, 1983, which commenced operations on January 31, 1984. On November 30, 1999, TCI acquired all of the outstanding shares of beneficial interest of CMET, a real estate company, in a tax-free exchange of shares, issuing 1.181 shares of its Common Stock for each outstanding CMET share. TCI accounted for the merger as a purchase. Prior to January 1, 2000, TCI elected to be treated as a Real Estate Investment Trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). During the third quarter of 2000, TCI no longer met the requirement for tax treatment as a REIT due to a concentration of ownership. Liquidity and Capital Resources Cash and cash equivalents at December 31, 2001, totaled $10.3 million compared with $22.3 million at December 31, 2000. The principal reasons for the decrease in cash are discussed in the paragraphs below. TCI'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, borrowings and to a lesser extent, distributions from partnerships. Management anticipates that TCI's cash at December 31, 2001, and cash that will be generated in 2002 from property operations, will not be sufficient to meet all of TCI's cash requirements. Management intends to selectively sell income producing real estate, refinance or extend real estate debt and seek additional borrowings against real estate to meet its cash requirements. Management is uncertain that it can refinance its real estate debt or rely on additional borrowings. However, management has been successful at extending its current maturity obligations. 2001 compared to 2000. Net cash used in operations was $895,000 in 2001 compared to $1.1 million in 2000. The primary factors contributing to TCI's use of cash in its operations are discussed in the following paragraphs. Cash flow from property operations (rents collected less payments for property operating expenses) decreased to $56.0 million in 2001 from $56.6 million in 2000. Decreases in cash flow of $8.6 million were due to the sale of 29 apartments in 2001 and 2000, and $2.7 million was due to the sale of eight commercial properties and one industrial warehouse in the Kelly portfolio in 2001 and 2000. These decreases were offset by increases in cash flow from property operations of which $900,000 and $2.7 million were from the purchase of 10 existing apartments and seven commercial properties in 2001 and 2000, and $2.5 million and $4.5 million were due to increases in rents at TCI's apartments and commercial properties, respectively. Management believes that this trend of decreased cash flow from property operations will continue as a result of TCI's selling of income producing properties to meet its cash requirements. Interest collected increased to $1.6 million in 2001 from $1.0 million in 2000. This increase was due to loans funded in 2001. Interest collected is expected to decrease in 2002 due to six loans maturing in 2002. Interest paid decreased to $39.5 million in 2001 from $45.1 million in 2000. A decrease of $6.8 million was due to the sale of 40 properties subject to debt in 2001 and 2000, $1.3 million was due to lower variable interest rates, and $1.5 million was due to principal paydowns. These decreases were offset by increases of $3.8 million due to the purchase of 18 properties subject to debt in 2001 and 2000 and $200,000 was due to the refinancing of 14 properties in 2001 and 2000. Interest paid will continue to decrease as TCI sells properties subject to debt. 20
Advisory and net income fees paid to affiliate decreased to $7.9 million in 2001 from $10.5 million in 2000. The decrease is due to a decrease in net income. Advisory fees are expected to decrease as additional properties are sold. TCI paid incentive fees of $2.9 million to an affiliate in 2001. No such fee was paid in 2000. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT." Incentive fees are expected to increase in 2002 as TCI selectively sells income producing properties. General and administrative expenses paid increased to $10.9 million in 2001 from $7.9 million in 2000. Increases of $1.8 million, $615,000, $249,000, and $219,000 were due to increases in consulting fees, legal fees, taxes, and insurance, respectively. Distributions were received from equity investees operating cash flow of $646,000 in 2001 and $172,000 in 2000. See NOTE 7. "INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES." Management expects that funds from existing cash resources, selective sales of income producing properties, refinancing of real estate, and additional borrowings against real estate will be sufficient to meet TCI's cash requirements associated with its current and anticipated level of operations, maturing debt obligations and existing commitments. To the extent that TCI's liquidity permits or financing sources are available, management intends to make new real estate investments. In 2001, TCI received cash of $3.7 million from the collection of two mortgage notes receivable, $2.3 million in mortgage receivable principal payments, net cash of $29.1 million from new mortgage borrowings and refinancings and an additional $100.8 million from property sales. In 2001, $19.7 million in cash was expended on property purchases, $24.5 million in cash was expended on construction projects, $9.1 million was expended on capital improvements, and a total of $66.1 million in principal payments were made on mortgage debt. In 2001, TCI repurchased 593,200 shares of Common Stock in a private block purchase for a total cost of $9.5 million. Scheduled principal payments on notes payable of $152.8 million are due in 2002. For those mortgages that mature in 2002, management intends to either seek to extend the due dates one or more years, or refinance the debt on a long-term basis. Management also intends to sell income producing properties to retire mortgage debt as it becomes due. Management believes it will continue to be successful in obtaining loan extensions or refinancings. TCI paid dividends to its Common stockholders totaling $4.7 million or $.54 per share in 2000. 2000 compared to 1999. Cash and cash equivalents at December 31, 2000, totaled $22.3 million compared with $41.3 million at December 31, 1999. The principal reasons for the decrease in cash are discussed in the paragraphs below. Net cash used in operations was $1.1 million in 2000 compared to $4.1 million provided by operations in 1999. The primary factors contributing to TCI's use of cash in its operations are discussed in the following paragraphs. Cash flow from property operations (rents collected less payments for property operating expenses) increased to $56.7 million in 2000 from $37.2 million in 1999. An increase of $4.3 million was due to the purchase of 15 income producing properties in 2000 and seven income producing properties in 1999, an increase of $24.5 million was due to the properties obtained in the acquisition of CMET and an increase of $1.9 million was due to increased apartment and commercial property occupancy and rental rates, and control of operating expenses. These increases were partially offset by a decrease of $6.8 million due to the sale of 18 income producing properties in 2000 and 1999 and a decrease of $4.3 million from the hotel operations. 21
Interest collected increased to $1.0 million in 2000 from $449,000 in 1999. This increase was due to loans funded in 2000. Interest paid increased to $45.1 million in 2000 from $25.5 million in 1999. An increase of $5.4 million was due to 37 properties being purchased on a leveraged basis in 2000 and 1999 and refinancings and financings of unencumbered properties during 2000 and 1999. An additional increase of $17.5 million was due to the acquisition of CMET. These increases were partially offset by a decrease of $3.3 million due to properties sold in 2000 and 1999. Advisory and net income fees paid to affiliate increased to $10.5 million in 2000 from $4.0 million in 1999. The increase is due to the increase in assets from the merger with CMET and accrued net income fees in 1999 and paid in 2000. General and administrative expenses paid increased to $7.9 million in 2000 from $3.5 million in 1999. This increase was due to increased legal fees, insurance and taxes. Distributions were received from equity investees operating cash flow of $172,000 in 2000 and $331,000 in 1999. See NOTE 7. "INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES." In 2000, TCI received cash of $20.4 million from the collection of four mortgage notes receivable, $131,000 in mortgage receivable principal payments, net cash of $63.0 million from new mortgage borrowings and refinancings and an additional $80.0 million from property sales. In 2000, $32.5 million in cash was expended on property purchases and a total of $107.5 million in principal payments on mortgage debt. TCI paid dividends to its Common stockholders totaling $4.7 million or $.54 per share in 2000 and $3.0 million or $.60 per share in 1999. Management reviews the carrying values of TCI's properties and mortgage notes receivable at least annually and whenever events or a change in circumstances indicate that impairment may exist. Impairment is considered to exist if, in the case of a property, the future cash flow from the property (undiscounted and without interest) is less than the carrying amount of the property. For notes receivable impairment is considered to exist if it is probable that all amounts due under the terms of the note will not be collected. If impairment is found to exist, a provision for loss is recorded by a charge against earnings. The note receivable review includes an evaluation of the collateral property securing such note. The property review generally includes: (1) selective property inspections; (2) a review of the property's current rents compared to market rents; (3) a review of the property's expenses; (4) a review of maintenance requirements; (5) a review of the property's cash flow; (6) discussions with the manager of the property; and (7) a review of properties in the surrounding area. Results of Operations 2001 compared to 2000. TCI had net income of $19.8 million in 2001, including gains on sale of real estate totaling $54.3 million, as compared to $29.8 million in 2000, including gains on sale of real estate totaling $50.6 million. Fluctuations in the components of revenues and expense between 2001 and 2000 are discussed below. Rents decreased to $134.9 million in 2001 from $139.7 million in 2000. Of this decrease, $20.6 million was due to the sale of 29 apartments in 2001 and 2000 and $3.2 million was due to the sale of eight commercial properties and one industrial warehouse in the Kelly portfolio in 2001 and 2000. These decreases were offset by increases of $3.0 million due to the purchase of 10 operating apartments in 2001 and 2000 and $8.2 million was due to the purchase of eight commercial properties in 2001 and 2000. Decreases in rents of $91,000 also was due to decreased parking revenues for TCI's land properties. Rental rates increased by $1.5 million for TCI's apartments and by $2.1 million for TCI's commercial properties. In 2000, TCI leased its four U.S. hotels to Regis 22
Hotel Corporation, an affiliate of Basic Capital Management, Inc., at an annual base rent totaling $503,477 per year plus 30% of the hotel's gross revenues. Beginning January 1, 2001, TCI no longer leased the hotels and recognized revenues based on the operations of the hotels. From this change, rents increased at TCI's hotels by $4.4 million. Rents are expected to decrease in 2002 as TCI selectively sells income producing properties in 2002. Property operations expenses increased to $80.6 million in 2001 from $78.2 million in 2000. Of this increase, $1.9 million was due to the purchase of 10 operating apartments, $4.4 million was due to the purchase of eight commercial properties and $400,000 was due to the purchase of eight land properties in 2001 and 2000. An increase of $3.0 million was due to increased leasing, utility and maintenance costs at TCI's commercial properties. Hotel operating expenses increased by $4.3 million and increases of $300,000 were due to increases in maintenance and taxes for TCI's land parcels. These increases were offset by decreases of $10.9 million due to the sale of 29 apartments in 2001 and 2000 and $1.1 million due to the sale of eight commercial properties and one industrial warehouse in the Kelly portfolio in 2001 and 2000. Property operating expenses are expected to decrease as TCI selectively sells properties in 2002. Interest and other income increased to $2.9 million in 2001, compared to $2.4 million in 2000. The increase was primarily due to TCI funding two loans in the fourth quarter of 2000 and eight loans in 2001. Interest income in 2002 is expected to decrease due to six of TCI's twelve loans maturing in 2002. Prior to the first quarter of 2001, TCI accounted for its investment in ARI, an affiliate, as an available for sale marketable security. In the first quarter of 2001, TCI began accounting for its investment in ARI using the equity method. Equity losses of investees increased to $6.0 million in 2001, from $556,000 in 2000. The losses from equity investees are primarily attributed to increased operating losses for IORI and TCI's accounting for its investment in ARI. Equity losses are expected to increase with decreases in operating income from ARI and IORI as ARI and IORI continue to sell income producing properties. In 2001, gains on sale of real estate totaling $54.3 million were recognized. The gains included $1.6 million on the sale of the Heritage Apartments, $167,000 on the sale of Zodiac Warehouse, $355,000 on the sale of a tract of the McKinney 36 land parcel, $1.0 million on the sale of Forest Ridge Apartments, $1.6 million on the sale of Park at Colonade Apartments, $1.0 million on the sale of a tract of the Round Mountain land parcel, $4.6 million on the sale of Fontenelle Apartments, $601,000 on the sale of Bent Tree Gardens Apartments, $9.1 million on the sale of Waterstreet Office Building, $4.2 million on the sale of Technology Trading Center, $1.4 million on the sale of McCallum Glen Apartments, $836,000 on the sale of Daley Office Plaza, $204,000 on the sale of Chesapeake Office Center, $4.5 million on the sale of McCallum Crossing Apartments, $1.3 million on the sale of Carseka Apartments, $7.3 million on the sale of Sunset Lake Apartments, $2.2 million on the sale of Oak Run Manor Apartments, $1.8 million on the sale of Park Lane Apartments, $4,000 on the sale of Viewridge Office Building, $1.7 million on the sale of South Cochran Apartments, $1.2 million on the sale of Madison at Bear Creek Apartments, $1.9 million on the sale of Summerstone Apartments, a $819,000 previously deferred gain on the sale of the Town and Country Shopping Center, and $5.3 million in gains on sale of real estate from ARI, an equity investee. These gains were partially offset by a loss of $71,000 on the Moss Creek land parcel, a loss of $138,000 on the sale of the Valley Rim Office Building, and a loss of $215,000 on the sale of a tract of the Eagle Crest land parcel. In 2000, gains on sale of real estate totaling $50.6 million were realized; $572,000 on the sale of Hunters Bend Apartments, a $4.8 million previously deferred gain on the sale of McKinney land, TCI's share of gains recognized by an equity affiliate of $4.6 million, $3.6 million on the sale of Westgate of Laurel Apartments, $3.2 million on the sale of Apple Creek Apartments, $1.2 million on the sale of Villas at Fair Park Apartments, $633,000 on the sale of Chateau Charles Hotel, $1.5 million on the sale of Brookfield Warehouses, $1.5 million on the sale of Villas at Countryside Apartments, $706,000 on the sale of Ashley Crest Apartments, $206,000 on the sale of Shady Trail Warehouse, $1.0 million on the sale of Eagle Rock Apartments, $184,000 on the sale of a portion of the Allen land parcel, $3.8 million on the sale of Woodbridge Apartments, $2.1 million on the sale of 23
the McKinney land, $3.1 million on the sale of a portion of the Watters Road/Highway 121 land parcel, $5.4 million on the sale of Shadow Run Apartments, $3.0 million on the sale of Parkwood Knoll Apartments, $2.6 million on the sale of Villa Piedra Apartments, $1.1 million on the sale of Country Bend Apartments, $5.1 million on the sale of Fountain Village Apartments, and $793,000 on the sale of Crescent Place Apartments. See NOTE 3. "REAL ESTATE." Interest expense decreased to $41.0 million in 2001 from $48.1 million in 2000. Of this decrease, $6.0 million was due to the sale of 29 apartments in 2001 and 2000, $1.3 million was due to the sale of eight commercial properties and one industrial warehouse in the Kelly portfolio in 2001 and 2000, and $316,000 was due to the sale of two land parcels subject to debt in 2000. A decrease of $252,000 was due to the refinancing of six commercial properties in 2000, and an increase of $18,000 was due to the refinancing of three apartment properties in 2000, and decreases of $1.1 million were due to land loan payoffs and principal paydowns in 2001 and 2000. Of the remaining decrease, $248,000 was due to lower variable interest rates at TCI's apartments, $1.6 million was due to lower variable interest rates at TCI's commercial properties and $278,000 was due to lower variable interest rates at TCI's hotels. These decreases were offset by increases of $817,000 due to the purchase of 10 operating apartments in 2001 and 2000, and $3.2 million due to the purchase of eight commercial properties in 2001 and 2000. Interest expense is expected to decrease as TCI sells properties. Depreciation expense of $19.7 million in 2001, approximated the $19.7 million in 2000. Advisory fee expense of $5.3 million in 2001, approximated the $5.3 million in 2000. Advisory fees are expected to decrease as TCI sells properties. Net income fee to affiliate was $1.9 million in 2001, as compared to $2.4 million in 2000. The net income fee is payable to TCI's advisor based on 7.5% of TCI's net income. Incentive fee to affiliate was $3.2 million in 2001. The incentive fee is payable to TCI's advisor based on 10% of aggregate sales consideration less TCI's cost of all properties sold during the year. Incentive fees are expected to increase as TCI selectively sells properties. No incentive fee was paid in 2000. General and administrative expenses increased to $11.4 million in 2001, from $8.5 million in 2000. Increases of $1.8 million, $615,000, $249,000, and $219,000 were due to increases in consulting fees, legal fees, taxes, and insurance, respectively. General and administrative expenses are expected to remain constant or decrease from decreased litigation and consulting fees. Realized losses on investments of $3.1 million were recognized in 2001. TCI recognized a previously unrealized loss on ARI's marketable equity securities of $3.1 million in 2001. 2000 Compared to 1999. TCI had net income of $29.8 million in 2000, as compared to $30.2 million in 1999. Net income for 2000 included gains on the sale of real estate of $50.6 million. Net income for 1999 included gains on the sale of real estate of $40.5 million. Fluctuations in the components of revenue and expense between 2000 and 1999 are discussed below. Rents increased to $139.7 million in 2000 from $82.1 million in 1999. Of the increase, $2.5 million was due to the completion of the Limestone Canyon Apartments in December 1999; $8.5 million was due to properties purchased or obtained through foreclosure in 2000 and 1999; $57.4 million was due to the properties obtained in the acquisition of CMET and the remaining $2.1 million was primarily due to increased apartment and commercial property occupancy and rental rates. These increases were partially offset by a decrease of $10.6 million due to properties sold in 2000 and 1999, and a decrease of $2.5 million from the four hotels. 24
Property operating expenses increased to $78.2 million in 2000 from $44.5 million in 1999. Of the increase, $4.3 million was due to properties purchased in 2000 and 1999 and $32.8 million was due to the properties obtained in the acquisition of CMET. These increases were partially offset by a decrease of $3.8 million due to properties sold in 2000 and 1999. Interest and other income increased to $2.4 million in 2000 from $453,000 in 1999. The increase in interest income was due to the funding of notes receivable in 2000. See NOTE 4. "NOTES AND INTEREST RECEIVABLE." Interest expense increased to $48.1 million in 2000 from $27.7 million in 1999. Of this increase, $4.5 million was due to properties purchased in 2000 and 1999, $17.5 million was due to the properties obtained in the acquisition of CMET and $843,000 was due to property financings and refinancings during 2000 and 1999. These increases were partially offset by a decrease of $3.3 million due to properties sold and mortgages paid off in 2000 and 1999. Depreciation expense increased to $19.7 million in 2000 from $11.7 million in 1999. Of the increase, $1.6 million was due to properties purchased in 2000 and 1999, $7.4 million was due to properties obtained in the acquisition of CMET and the remainder from property additions and tenant improvements. These increases were partially offset by a decrease of $1.7 million due to properties sold in 2000 and 1999. Advisory and net income fees increased to $7.7 million in 2000 from $5.7 million in 1999. The increase was due to an increase in the advisory fee from an increase in gross assets, the basis for the fee. The increase in gross assets was due in part to the assets obtained in the acquisition of CMET. Net income fees of $2.4 million in 2000 approximated $2.5 million in 1999. See NOTE 13. "ADVISORY AGREEMENT." General and administrative expenses increased to $8.5 million in 2000 from $3.3 million in 1999. The increase was primarily due to legal fees incurred on litigation related matters, taxes and an increase in advisor cost reimbursements. Equity losses from investees were $556,000 in 2000 compared to income of $102,000 in 1999. The decrease was primarily due to increased operating expenses of IORI, an equity investee. See NOTE 7. "INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES." In 2000, gains on sale of real estate totaling $50.6 million were realized; $572,000 on the sale of Hunters Bend Apartments, a $4.8 million previously deferred gain on the sale of McKinney land, TCI's share of gains recognized by an equity affiliate of $4.6 million, $3.6 million on the sale of Westgate of Laurel Apartments, $3.2 million on the sale of Apple Creek Apartments, $1.2 million on the sale of Villas at Fair Park Apartments, $633,000 on the sale of Chateau Charles Hotel, $1.5 million on the sale of Brookfield Warehouses, $1.5 million on the sale of Villas at Countryside Apartments, $706,000 on the sale of Ashley Crest Apartments, $206,000 on the sale of Shady Trail Warehouse, $1.0 million on the sale of Eagle Rock Apartments, $184,000 on the sale of a portion of the Allen land parcel, $3.8 million on the sale of Woodbridge Apartments, $2.1 million on the sale of the McKinney land, $3.1 million on the sale of a portion of the Watters Road/Highway 121 land parcel, $5.4 million on the sale of Shadow Run Apartments, $3.0 million on the sale of Parkwood Knoll Apartments, $2.6 million on the sale of Villa Piedra Apartments, $1.1 million on the sale of Country Bend Apartments, $5.1 million on the sale of Fountain Village Apartments, and $793,000 on the sale of Crescent Place Apartments. See NOTE 3. "REAL ESTATE." In 1999, gains on sale of real estate totaling $40.5 million were realized; $1.9 million on the sale of Mariner's Pointe Apartments, $8.3 million on the sale of 74 New Montgomery Office Building, $675,000 on the sale of Republic land, $5.2 million on the sale of Parke Long Industrial Warehouse, $153,000 on the sale of a portion of the Moss Creek land parcel, $5.3 million on the sale of Corporate Center Industrial Warehouse, $747,000 on the sale of Laws land, $4.4 million on the sale of Sullyfield Industrial Warehouse, $5.6 million on 25
the sale of Spa Cove Apartments, $4.7 million on the sale of Woods Edge Apartments and $3.6 million, TCI's share of the gains realized by three equity investees on the sale of two shopping centers and two office buildings. See NOTE 3. "REAL ESTATE" and NOTE 7. "INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES." Environmental Matters Under various federal, state and local environmental laws, ordinances and regulations, TCI may be potentially liable for removal or remediation costs, as well as certain other potential costs, relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery for personal injury associated with such materials. Management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on TCI's business, assets or results of operations. Inflation The effects of inflation on TCI's operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect sales values of properties and the ultimate gain to be realized from property sales. To the extent that inflation affects interest rates, TCI's earnings from short-term investments, the cost of new financings as well as the cost of variable interest rate debt will be affected. Tax Matters For the year 1999, TCI elected and in the opinion of management, qualified to be taxed as a REIT as defined under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. During the third quarter of 2000, due to a concentration in ownership, TCI no longer met the requirements for tax treatment as a REIT under the Code. Under the Code, TCI is prohibited from re-qualifying for REIT tax status for at least five years. 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK TCI's future operations, cash flow and fair values of financial instruments are partially dependent upon the then existing market interest rates and market equity prices. Market risk is the changes in the market rates and prices, and the effect of the changes on future operations. Market risk is managed by matching a property's anticipated net operating income to an appropriate financing. The following table contains only those exposures that existed at December 31, 2001. Anticipation of exposures or risk on positions that could possibly arise was not considered. TCI's ultimate interest rate risk and its effect on operations will depend on future capital market exposures, which cannot be anticipated with a probable assurance level. Dollars in thousands. <TABLE> <S> <C> <C> <C> <C> <C> <C> <C> Assets Notes receivable Variable interest rate-fair value..................... $ 2,932 2002 2003 2004 2005 2006 Thereafter Total ------- ------- ------- ------- ------- ---------- -------- Instrument's maturities..... $ -- $ 1,738 $ 1,369 $ -- $ -- $ -- $ 3,107 Instrument's amortization... -- -- -- -- -- -- -- Interest.................. 213 90 39 -- -- -- 342 Average rate.............. 7.0% 6.0% 5.8% -- -- -- Fixed interest rate-fair value. $ 20,378 2002 2003 2004 2005 2006 Thereafter Total ------- ------- ------- ------- ------- ---------- -------- Instrument's maturities..... $12,206 $ 5,047 $ 1,970 $ -- $ -- $ -- $ 19,223 Instrument's amortization... 48 45 49 56 62 99 359 Interest.................. 1,493 684 262 20 14 8 2,481 Average rate.............. 13.9% 13.2% 11.8% 10.4% 10.4% 10.4% Liabilities Non-trading Instruments-Equity Price Risk Notes payable Variable interest rate-fair value..................... $142,097 2002 2003 2004 2005 2006 Thereafter Total ------- ------- ------- ------- ------- ---------- -------- Instrument's maturities..... $71,956 $18,739 $24,194 $ 9,510 $ 1,636 $ 9,877 $135,912 Instrument's amortization... 1,453 1,014 905 680 409 6,081 10,542 Interest.................. 6,168 3,487 2,650 1,541 1,032 9,159 24,037 Average rate.............. 6.3% 6.2% 5.6% 5.9% 6.3% 6.3% Fixed interest rate-fair value. $319,778 2002 2003 2004 2005 2006 Thereafter Total ------- ------- ------- ------- ------- ---------- -------- Instrument's maturities..... $75,187 $17,818 $48,826 $15,864 $14,530 $97,937 $270,162 Instrument's amortization... 4,159 3,526 3,565 3,130 3,106 23,930 41,416 Interest.................. 23,125 18,651 17,296 13,733 12,445 55,671 140,921 Average rate.............. 8.5% 8.3% 8.0% 7.8% 7.8% 7.8% </TABLE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS <TABLE> <CAPTION> Page ---- <S> <C> Report of Independent Certified Public Accountants........................................... 29 Consolidated Balance Sheets--December 31, 2001 and 2000...................................... 30 Consolidated Statements of Operations--Years Ended December 31, 2001, 2000 and 1999.......... 31 Consolidated Statements of Stockholders' Equity--Years Ended December 31, 2001, 2000 and 1999 32 Consolidated Statements of Cash Flows--Years Ended December 31, 2001, 2000 and 1999.......... 33 Notes to Consolidated Financial Statements................................................... 36 Schedule III--Real Estate and Accumulated Depreciation....................................... 59 Schedule IV--Mortgage Loans on Real Estate................................................... 66 </TABLE> All other schedules are omitted because they are not required, are not applicable or the information required is included in the Consolidated Financial Statements or the notes thereto. 28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors of Transcontinental Realty Investors, Inc. We have audited the accompanying consolidated balance sheets of Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. We have also audited the schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe our audits provide a reasonable basis for our opinion. As described in Note 20, Transcontinental Realty Investors, Inc.'s management has indicated its intent to both sell income producing properties and refinance or extend debt secured by real estate, to meet its liquidity needs. As discussed in Note 1, TCI adopted the provisions of SFAS. 144, Accounting for Impairment of Long Lived Assets, in 2001. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the schedules referred to above present fairly, in all material respects, the information set forth therein. BDO SEIDMAN, LLP Dallas, Texas March 11, 2002 29
TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> December 31, --------------------- 2001 2000 ---------- -------- (dollars in thousands, except per share) <S> <C> <C> Assets Real estate held for investment......................................................... $ 712,832 $727,227 Less--accumulated depreciation.......................................................... (90,661) (88,187) ---------- -------- 622,171 639,040 Foreclosed real estate held for sale.................................................... 516 1,824 Notes and interest receivable Performing (including $1,970 from related parties in 2001)............................. 17,620 8,709 Nonperforming, nonaccruing............................................................. 5,247 -- ---------- -------- 22,867 8,709 Less--allowance for estimated losses.................................................... (818) (537) ---------- -------- 22,049 8,172 Investment in real estate entities...................................................... 14,230 5,287 Investment in marketable equity securities of affiliate, at market...................... -- 10,177 Cash and cash equivalents............................................................... 10,346 22,323 Other assets (including $14,170 in 2001 and $14,058 in 2000 from affiliates and related parties).................................................................. 39,840 45,062 ---------- -------- $ 709,152 $731,885 ========== ======== Liabilities and Stockholders' Equity Liabilities Notes and interest payable.............................................................. $ 461,037 $501,734 Other liabilities (including $1,068 in 2001 and $1,580 in 2000 to affiliates and related parties)...................................................................... 25,966 23,722 ---------- -------- 487,003 525,456 Commitments and contingencies Minority interest....................................................................... 5,381 4,369 Series B; $.01 par value; authorized, 300,000 shares; issued and outstanding 300,000 shares (liquidation preference $1,500)....................................... -- 1,500 Stockholders' equity Preferred Stock Series A; $.01 par value; authorized, 6,000 shares; issued and outstanding 5,829 shares (liquidation preference $583)........................................................ -- -- Series C; $.01 par value; authorized, issued and outstanding 30,000 shares; (liquidation preference $3,000)...................................................... -- -- Common Stock, $.01 par value; authorized, 10,000,000 shares; issued and outstanding 8,042,594 shares in 2001 and 8,636,354 shares in 2000................................. 80 86 Paid-in capital......................................................................... 271,761 278,245 Accumulated distributions in excess of accumulated earnings............................. (55,073) (74,712) Unrealized (loss) gain on marketable equity securities of affiliate..................... -- (3,059) ---------- -------- 216,768 200,560 ---------- -------- $ 709,152 $731,885 ========== ======== </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 30
TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> For the Years Ended December 31, --------------------------------------- 2001 2000 1999 ------------ ---------- ---------- (dollars in thousands, except per share) <S> <C> <C> <C> Property revenue Rents (including $120 in 2001, $2,263 in 2000 and $1,653 in 1999 from affiliates and related parties).......................... $ 134,911 $ 139,662 $ 82,101 Property expense Property operations (including $2,599 in 2001, $4,321 in 2000, and $2,864 in 1999 to affiliates and related parties)......... 80,562 78,170 44,514 ------------ ---------- ---------- Operating income................................................ 54,349 61,492 37,587 Other income Interest and other income....................................... 2,948 2,370 453 Income (loss) from equity investees............................. (5,950) (556) 102 Gain on sale of real estate..................................... 54,270 50,550 40,517 ------------ ---------- ---------- 51,268 52,364 41,072 Other expense Interest........................................................ 41,058 48,114 27,720 Depreciation.................................................... 19,705 19,749 11,702 Provision for loss.............................................. 281 -- -- Advisory fee to affiliate....................................... 5,346 5,258 3,219 Net income fee to affiliate..................................... 1,850 2,415 2,450 Incentive fee to affiliate...................................... 3,167 -- -- General and administrative (including $2,582 in 2001, $2,146 in 2000 and $1,367 in 1999 to affiliates)..................... 11,412 8,506 3,335 Realized loss on investments.................................... 3,059 -- -- Minority interest............................................... (72) 32 14 ------------ ---------- ---------- 85,806 84,074 48,440 ------------ ---------- ---------- Net income....................................................... 19,811 29,782 30,219 Preferred dividend requirement................................... (172) (22) (30) ------------ ---------- ---------- Net income applicable to Common shares........................... $ 19,639 $ 29,760 $ 30,189 ============ ========== ========== Basic and diluted earnings per share Net income applicable to Common shares........................... Basic........................................................... $ 2.32 $ 3.45 $ 7.05 Diluted......................................................... $ 2.28 $ 3.45 $ 7.05 Weighted average Common shares used in computing earnings per share Basic........................................................... 8,478,377 8,631,621 4,283,574 Diluted......................................................... 8,615,465 8,637,290 4,283,574 </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 31
TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY <TABLE> <CAPTION> Accumulated Distributions Accumulated Common Stock in Excess of Other ---------------- Paid-in Accumulated Comprehensive Stockholders' Shares Amount Capital Earnings Income Equity --------- ------ -------- ------------- ------------- ------------- (dollars in thousands, except shares) <S> <C> <C> <C> <C> <C> <C> Balance, January 1, 1999......... 3,878,463 $39 $218,087 $(126,994) $ -- $ 91,132 Comprehensive income Unrealized gain on marketable equity securities of affiliate. -- -- -- -- 718 718 Net income....................... -- -- -- 30,219 -- 30,219 -------- 30,937 Sale of Common Stock under dividend reinvestment plan..... 4,578 -- 53 -- -- 53 Shares issued in conjunction with acquisition of Continental Mortgage and Equity Trust...... 4,743,570 47 59,979 -- -- 60,026 Common dividends ($.60 per share)......................... -- -- -- (3,006) -- (3,006) Preferred dividends ($5.00 per share)......................... -- -- -- (30) -- (30) --------- --- -------- --------- ------- -------- Balance, December 31, 1999....... 8,626,611 86 278,119 (99,811) 718 179,112 Comprehensive income Unrealized (loss) on marketable equity securities of affiliate. -- -- -- -- (3,777) (3,777) Net income....................... -- -- -- 29,782 -- 29,782 -------- 26,005 Sale of Common Stock under dividend reinvestment plan..... 9,743 -- 126 -- -- 126 Common dividends ($.54 per share)......................... -- -- -- (4,661) -- (4,661) Preferred dividends ($3.77 per share)......................... -- -- -- (22) -- (22) --------- --- -------- --------- ------- -------- Balance, December 31, 2000....... 8,636,354 86 278,245 (74,712) (3,059) 200,560 Issuance of Series C Preferred Stock, 30,000 shares -- -- 3,000 -- -- 3,000 Comprehensive income Realized (loss) on marketable equity securities of affiliate -- -- -- -- 3,059 3,059 Net income....................... -- -- -- 19,811 -- 19,811 -------- 22,870 Fractional shares................ (560) Repurchase of Common Stock....... (593,200) (6) (9,484) -- -- (9,490) Series A Preferred Stock cash dividend ($5.00 per share)..... -- -- -- (29) -- (29) Series B Preferred Stock cash dividend ($.38 per share)...... -- -- -- (115) -- (115) Series C Preferred Stock cash dividends ($.95 per share)..... -- -- -- (28) -- (28) --------- --- -------- --------- ------- -------- Balance, December 31, 2001....... 8,042,594 $80 $271,761 $ (55,073) $ -- $216,768 ========= === ======== ========= ======= ======== </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 32
TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> For the Years Ended December 31, ------------------------------- 2001 2000 1999 -------- -------- -------- (dollars in thousands) <S> <C> <C> <C> Cash Flows from Operating Activities Rents collected (including $359 in 2001 and $1,040 in 1999 from affiliates)................................................... $136,076 $136,767 $ 81,244 Interest collected (including $411 in 2000 from affiliates).......... 1,645 1,008 449 Interest paid........................................................ (39,452) (45,142) (25,543) Payments for property operations (including $2,599 in 2001, $4,321 in 2000 and $2,864 in 1999 to affiliates and related parties)...... (80,113) (80,148) (44,039) Advisory and net income fee paid to affiliate........................ (7,881) (10,486) (3,958) Incentive fee paid to affiliate...................................... (2,903) -- -- General and administrative expenses paid (including $2,582 in 2001, $2,146 in 2000 and $1,367 in 1999 to affiliates)................... (10,877) (7,936) (3,488) Distributions from operating cash flow of equity investees........... 646 172 331 Other................................................................ 1,964 4,676 (905) -------- -------- -------- Net cash (used in) provided by operating activities................ (895) (1,089) 4,091 Cash Flows from Investing Activities Collections on notes receivable (including $12,000 in 2000 from affiliates)................................................... 6,042 20,532 37 Funding of notes receivable (including $1,970 in 2001 and $12,000 in 2000 to affiliates)............................................. (19,455) (17,500) -- Real estate improvements and construction............................ (33,617) (14,664) (21,826) Proceeds from sale of real estate.................................... 100,818 79,869 104,210 Refunds/(deposits) on pending purchase............................... (724) 1,887 (2,912) Acquisitions of real estate (including $1,998 in 2001, $2,741 in 2000 and $1,815 in 1999 to affiliates and related parties).............. (19,669) (32,450) (45,510) Distributions from investing cash flow of equity investees........... -- 1,296 4,709 Contributions to equity investees.................................... (151) (3,974) (111) -------- -------- -------- Net cash provided by investing activities.......................... 33,244 34,996 38,597 </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 33
TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued <TABLE> <CAPTION> For the Years Ended December 31, ------------------------------- 2001 2000 1998 -------- --------- -------- (dollars in thousands) <S> <C> <C> <C> Cash Flows from Financing Activities Payments on notes payable.............................................. $(66,063) $(107,547) $(99,163) Proceeds from notes payable............................................ 29,094 63,009 91,959 Reimbursements from/to advisor......................................... 3,368 (2,634) -- Advance to affiliate................................................... (553) -- -- Dividends paid......................................................... (172) (4,683) (3,036) Shares of Common Stock repurchased..................................... (9,490) -- -- Deferred financing costs (including ($45 in 2001, $464 in 2000 and $422 in 1999 to affiliates)................................. (510) (1,121) (1,740) Sale of Common Stock under dividend reinvestment plan.................. -- 126 53 -------- --------- -------- Net cash used in financing activities................................ (44,326) (52,850) (11,927) -------- --------- -------- Net increase (decrease) in cash and cash equivalents.................... (11,977) (18,943) 30,761 Cash and cash equivalents, beginning of year............................ 22,323 41,266 10,505 -------- --------- -------- Cash and cash equivalents, end of year.................................. $ 10,346 $ 22,323 $ 41,266 ======== ========= ======== Reconciliation of net income to net cash provided by (used in) operating activities Net income............................................................. $ 19,811 $ 29,782 $ 30,219 Adjustments to reconcile net income to net cash provided by (used in) operating activities.................................... Depreciation and amortization.......................................... 19,705 19,702 13,470 Equity in (income) loss of equity investees............................ 5,950 556 (102) Realized loss on investments........................................... 3,059 -- -- Gain on sale of real estate............................................ (54,270) (50,550) (40,517) Distributions from operating cash flow of equity....................... 646 172 331 Increase in interest receivable........................................ (137) (28) (1) (Increase) decrease in other assets.................................... 2,283 (1,463) (7,093) Increase (decrease) in interest payable................................ (185) 299 375 Increase in other liabilities.......................................... 2,243 441 7,409 -------- --------- -------- Net cash (used in) provided by operating activities.................. $ (895) $ (1,089) $ 4,091 ======== ========= ======== Schedule of noncash investing and financing activities Carrying value of real estate acquired through foreclosure in satisfaction of notes receivable..................................... $ -- $ 318 $ -- Notes payable from purchase of real estate............................. 37,776 58,949 6,848 Series B Preferred Stock issued in conjunction with purchase of real estate....................................................... (1,500) 1,500 -- Series C Preferred Stock, issued in conjunction with purchase of real estate....................................................... 3,000 -- -- Debt assumed from sales of real estate................................. 42,784 16,798 9,680 Limited partnership interest received on sale of real estate........... 1,500 -- -- </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 34
TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued <TABLE> <CAPTION> For the Years Ended December 31, --------------------- 2001 2000 1999 ---- ---- --------- (dollars in thousands) <S> <C> <C> <C> Acquisition of Continental Mortgage and Equity Trust Carrying value of notes and interest receivable.......................... $ -- $ -- $ 390 Carrying value of real estate............................................ -- -- 258,787 Carrying value of equity investees....................................... -- -- 267 Carrying value of investment in marketable equity securities of affiliate -- -- 13,236 Carrying value of other assets........................................... -- -- 20,640 Carrying value of notes and interest payable............................. -- -- (220,860) Carrying value of other liabilities...................................... -- -- (13,242) </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 35
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accompanying Consolidated Financial Statements of Transcontinental Realty Investors, Inc. and consolidated entities have been prepared in conformity with generally accepted accounting principles, the most significant of which are described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES." These, along with the remainder of the Notes to Consolidated Financial Statements, are an integral part of the Consolidated Financial Statements. The data presented in the Notes to Consolidated Financial Statements are as of December 31 of each year and for the year then ended, unless otherwise indicated. Dollar amounts in tables are in thousands, except per share amounts. Certain balances for 2000 and 1999 have been reclassified to conform to the 2001 presentation. NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and company business. Transcontinental Realty Investors, Inc. ("TCI"), a Nevada corporation, is successor to a California business trust which was organized on September 6, 1983, and commenced operations on January 31, 1984. TCI invests in real estate through direct ownership, leases and partnerships and it also invests in mortgage loans on real estate. In October 2001, TCI announced a preliminary agreement for the acquisition of TCI by American Realty Investors, Inc. ("ARI"). See ITEM 1. "BUSINESS" and NOTE 20. "COMMITMENTS AND CONTINGENCIES AND LIQUIDITY." Basis of consolidation. The Consolidated Financial Statements include the accounts of TCI and controlled subsidiaries and partnerships. All significant intercompany transactions and balances have been eliminated. Accounting estimates. In the preparation of Consolidated Financial Statements in conformity with generally accepted accounting principles it was necessary for management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expense for the year then ended. Actual results could differ from those estimates. Interest recognition on notes receivable. It is TCI's policy to cease recognizing interest income on notes receivable that have been delinquent for 60 days or more. In addition, accrued but unpaid interest income is only recognized to the extent that the net realizable value of the underlying collateral exceeds the carrying value of the receivable. Allowance for estimated losses. Valuation allowances are provided for estimated losses on notes receivable considered to be impaired. Impairment is considered to exist when it is probable that all amounts due under the terms of the note will not be collected. Valuation allowances are provided for estimated losses on notes receivable to the extent that the Company's investment in the note exceeds the estimated fair value of the collateral securing such note. Accounting pronouncements. In June 2001, the Financial Accounting Standards Board finalized FASB Statement No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that TCI recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001. It also requires, upon adoption of SFAS 142, that TCI reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that TCI identify reporting units in order to assess potential future impairment of goodwill, reassess the useful lives of other existing recognized 36
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) intangible assets, and cease amortization of intangible assets with an indefinite useful life. SFAS 142 requires that an intangible asset with an indefinite useful life be tested for impairment in accordance with specified guidelines. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires TCI to complete a transitional goodwill impairment test six months from the date of adoption. TCI is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. Currently, TCI does not believe that the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. SFAS 143 requires that the fair value for an asset retirement obligation be recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made, and that the carrying value of the asset, including capitalized asset retirement costs, be tested for impairment. SFAS 143, is effective for fiscal years beginning after June 15, 2002. Management does not believe this statement will have a material effect on TCI's financial position or results of operations. Real estate held for investment and depreciation. Real estate held for investment is carried at cost. Statement of Financial Accounting Standards No. 144 ("SFAS No. 144") requires that a property 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 property. If impairment exists, an impairment loss is recognized, by a charge against earnings, equal to the amount by which the carrying amount of the property exceeds the fair value less cost to sell of the property. If impairment of a property is recognized, the carrying amount of the property is reduced by the amount of the impairment, and a new cost for the property is established. Such new cost is depreciated over the property's remaining useful life. Depreciation is provided by the straight-line method over estimated useful lives, which range from five to 40 years. Real estate held for sale. Foreclosed real estate is initially recorded at new cost, defined as the lower of original cost or fair value minus estimated costs of sale. SFAS No. 144 also requires that properties held for sale be reported at the lower of carrying amount or fair value less costs of sale. If a reduction in a held for sale property's carrying amount to fair value less costs of sale is required, a provision for loss is recognized by a charge against earnings. Subsequent revisions, either upward or downward, to a held for sale property's estimated fair value less costs of sale is recorded as an adjustment to the property's carrying amount, but not in excess of the property's carrying amount when originally classified as held for sale. A corresponding charge against or credit to earnings is recognized. Properties held for sale are not depreciated. Revenue recognition on the sale of real estate. Sales of real estate are recognized when and to the extent permitted by Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No. 66"). Until the requirements of SFAS No. 66 for full profit recognition have been met, transactions are accounted for using either the deposit, the installment, the cost recovery or the financing method, whichever is appropriate. Investment in noncontrolled equity investees. The equity method is used to account for investments in partnerships which TCI does not control and for its investment in the shares of common stock of Income Opportunity Realty Investors, Inc., ("IORI") and ARI. Under the equity method, an initial investment, recorded at cost, is increased by a proportionate share of the investee's operating income and any additional advances and decreased by a proportionate share of the investee's operating losses and distributions received. Operating segments. Management has determined reportable operating segments to be those that are used for internal reporting purposes, which disaggregates operations by type of real estate. Fair value of financial instruments. The following assumptions were used in estimating the fair value of notes receivable and notes payable. For performing notes receivable, the fair value was estimated by discounting 37
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) future cash flows using current interest rates for similar loans. For nonperforming notes receivable, the estimated fair value of TCI's interest in the collateral property was used. For notes payable, the fair value was estimated using current rates for mortgages with similar terms and maturities. Cash equivalents. For purposes of the Consolidated Statements of Cash Flows, all highly liquid debt instruments purchased with an original maturity of three months or less were considered to be cash equivalents. Earnings per share. Income per share is presented in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Income per share is computed based upon the weighted average number of shares of Common Stock outstanding during each year. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the year. Dilutive common equivalent shares consist of stock options and convertible preferred stock. The weighted average common shares used to calculate diluted earnings per share for the years ended December 31, 2001 and 2000 include 301,548 and 25,000 shares, respectively, to reflect the dilutive effect of options and convertible preferred stock to purchase shares of common stock. Employee stock option plans. Employee stock options are presented in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Compensation cost is limited to the excess of the quoted market price. No compensation cost is recorded if the quoted market price is below the exercise price. See NOTE 11. "STOCK OPTIONS." NOTE 2. ACQUISITION OF CONTINENTAL MORTGAGE AND EQUITY TRUST On November 30, 1999, TCI acquired all of the outstanding shares of beneficial interest of Continental Mortgage and Equity Trust ("CMET") in a tax free exchange of shares. TCI issued 1.181 shares of its Common Stock for each outstanding CMET share. The acquisition was accounted for as a purchase. The consolidation of TCI's accounts with those of CMET resulted in an increase in TCI's net real estate of $258.8 million. This amount was allocated to the individual real estate assets based on their relative individual fair market values. Pro forma operating results for 1999, as if CMET had been acquired on January 1, would have been: <TABLE> <CAPTION> 1999 -------- <S> <C> Revenues........................... $143,579 Property operating expenses........ (79,295) Interest........................... (47,273) Depreciation....................... (19,150) Advisory fee....................... (4,952) Net income fee..................... (3,083) General and administrative expenses (5,442) Provision for losses............... -- -------- (Loss) from operations............. (15,616) Equity in income of investees...... 302 Gains on sale of real estate....... 47,117 -------- Net income......................... $ 31,803 ======== </TABLE> 38
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 3. REAL ESTATE In 2001, TCI purchased the following properties: <TABLE> <CAPTION> Units/ Purchase Net Cash Debt Interest Maturity Property Location Rooms/Acres Price Paid Incurred Rate Date - -------- ------------------ ----------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Apartments Baywalk................. Galveston, TX 192 Units $ 6,590 $ 390 $ 5,856 7.45% 02/11 By the Sea.............. Corpus Christi, TX 153 Units 6,175 862 5,538 7.07 05/09 Courtyard............... Midland, TX 133 Units 1,425 425 1,051 9.25 04/06 Falcon Lakes(1)......... Arlington, TX 284 Units 1,435 1,437 -- -- -- Island Bay.............. Galveston, TX 458 Units 20,360 3,225 16,232 7.40 07/11 Limestone Ranch(1)...... Lewisville, TX 252 Units 505 -- -- -- -- (2) Marina Landing.......... Galveston, TX 256 Units 12,050 518 10,912 5.30 01/02 River Oaks(1)........... Wiley, TX 180 Units 531 578 -- -- -- Sendero Ridge(1)........ San Antonio, TX 384 Units 1,850 2,635 -- -- -- Tivoli(1)............... Dallas, TX 190 Units 3,000 2,475 1,000 12.00 12/02 Verandas at City View(1) Fort Worth, TX 314 Units 2,544 276 2,197 4.75 03/02 Waters Edge IV(1)....... Gulfport, MS 80 Units 441 441 -- -- -- Hotel Akademia(3)............. Wroclaw, Poland 165 Rooms 2,184 2,669 -- -- -- Land Mira Lago............... Farmers Branch, TX 8.88 Acres 541 -- -- -- -- (2) Pac Trust............... Farmers Branch, TX 7.11 Acres 1,175 1,231 -- -- -- Seminary West........... Fort Worth, TX 5.36 Acres 222 232 -- -- -- Solco-Valley Ranch...... Dallas, TX 6.07 Acres 1,454 1,525 -- -- -- </TABLE> - -------- (1) Land purchased for apartment construction. (2) Land was received from ARI, a related party, in exchange for the Glenwood Apartments. (3) Land purchased for hotel construction. In 2000, TCI 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> Apartments Apple Lane.............. Lawrence, KS 75 Units $ 1,575 $ 595 $ 1,005 8.63% 05/07 Autumn Chase............ Midland, TX 64 Units 1,338 458 936 9.45(1) 04/05 Paramount Terrace....... Amarillo, TX 181 Units 3,250 561 2,865 9.38 09/01(2) Primrose................ Bakersfield, CA 162 Units 4,100 1,189 3,000 9.25(1) 03/07 Quail Creek............. Lawrence, KS 95 Units 3,250 1,088 2,254 7.44 07/03 Office Building 9033 Wilshire........... Los Angeles, CA 44,253 Sq.Ft. 9,225 2,536 6,861 8.07 08/09 Bay Plaza II............ Tampa, FL 78,882 Sq.Ft. 4,825 4,786 -- -- -- Brandeis................ Omaha, NE 319,234 Sq.Ft. 14,000 4,052 8,750 9.5 11/03 Countryside Portfolio(3) Sterling, VA 265,718 Sq.Ft. 44,940 4,825 36,297 7.75 12/02 Land DF Fund................. Collin County, TX 79.5 Acres 2,545 1,047 1,545 10.00 03/01(4) Folsom.................. Dallas, TX 36.38 Acres 1,750 1,738 -- -- -- Lamar/Parmer............ Austin, TX 17.07 Acres 1,500 517 1,030 10.00 12/00(5) Limestone Canyon II..... Austin, TX 9.96 Acres 504 424 -- -- -- Manhattan............... Farmers Branch, TX 108.9 Acres 10,743 6,144 5,000 14.00 02/01(6) Netzer.................. Collin County, TX 20 Acres 400 418 -- -- -- </TABLE> - -------- 39
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (1) Variable interest rate. (2) The loan was extended to March 2002. (3) The Countryside Portfolio consisted of four commercial buildings: the 133,422 sq. ft. Countryside Retail Center, the 72,062 sq. ft. Harmon Office Building, the 35,127 sq. ft. Mimado Office Building and the 25,107 sq. ft. Ambulatory Surgical Center. (4) The DF Fund land was sold in September 2000. (5) The mortgage loan was paid off in March 2001. (6) The mortgage loan was paid off in June 2000. In 2001, TCI 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> Apartments Bent Tree Gardens.... Addison, TX 204 Units $ 9,000 $2,669 $ 6,065(1) $ 601 Carseka.............. Los Angeles, CA 54 Units 4,000 2,138 1,466 1,352 Fontenelle Hills..... Bellevue, NE 338 Units 16,500 3,680 12,454(1) 4,565 Forest Ridge......... Denton, TX 56 Units 2,000 682 1,151 1,014 Glenwood............. Addison, TX 168 Units 3,659 -- 2,537(1) -- (2) Heritage............. Tulsa, OK 136 Units 2,286 206 1,948 1,575 Madison at Bear Creek Houston, TX 180 Units 5,400 828 3,442(1) 1,162(4) McCallum Glen........ Dallas, TX 275 Units 8,450 2,633 5,004(1) 1,375(3) McCallum Crossing.... Dallas, TX 322 Units 11,500 1,841 8,101(1) 4,486 Oak Run.............. Pasadena, TX 160 Units 5,800 1,203 4,364 2,227 Park at Colonade..... San Antonio, TX 211 Units 5,800 927 4,066 1,592 Park Lane............ Dallas, TX 97 Units 2,750 1,526 1,103 1,827 South Cochran........ Los Angeles, CA 64 Units 4,650 1,897 1,873 1,660 Summerstone.......... Houston, TX 242 Units 7,225 1,780 5,180(1) 1,884 Sunset Lakes......... Waukegan, IL 414 Units 15,000 6,089 7,243 7,316 Office Buildings Chesapeake Center.... San Diego, CA 57,493 Sq.Ft. 6,575 3,111 2,844 204 Daley................ San Diego, CA 64,425 Sq.Ft. 6,211 2,412 3,346 836 Valley Rim........... San Diego, CA 54,194 Sq.Ft. 5,500 1,367 3,516 (138) Viewridge............ San Diego, CA 25,062 Sq.Ft. 2,010 701 1,272 4 Waterstreet.......... Boulder, CO 106,257 Sq.Ft. 22,250 7,126 12,949 9,154 Industrial Warehouse Technology Trading... Sterling, VA 197,659 Sq.Ft. 10,775 4,120 6,214 4,163 Zodiac............... Dallas, TX 35,435 Sq.Ft. 762 183 564 167 Land Eagle Crest.......... Farmers Branch, TX 4.41 Acres 300 291 -- (215) McKinney 36.......... McKinney, TX 1.822 Acres 476 476 -- 355 Moss Creek........... Greensboro, NC 4.79 Acres 15 13 -- (71) Round Mountain....... Austin, TX 110.0 Acres 2,560 2,455 -- 1,047 </TABLE> - -------- (1) Debt assumed by purchaser. (2) The Glenwood Apartments were exchanged with ARI, a related party, for two parcels of land; the 10.5 acre Limestone Ranch and the 8.88 acre Mira Lago. (3) Excludes $1.5 million deferred gain from seller financing. See Note 4. "Notes and Interest Receivable.") (4) Excludes a $608,000 deferred gain from seller financing. (See Note 4. "Notes and Interest Receivable.") 40
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In 2000, TCI sold the following properties: <TABLE> <CAPTION> Units/Sq.Ft. Sales Net Cash Debt Gain on Property Location Rooms/Acres Price Received Discharged Sale - -------- ----------------- ------------- ------- -------- ---------- ------- <S> <C> <C> <C> <C> <C> <C> Apartments Apple Creek................ Dallas, TX 216 Units $ 4,300 $2,155 $1,723 $3,240 Ashley Crest............... Houston, TX 168 Units 3,950 1,102 2,812(1) 706 Country Bend............... Fort Worth, TX 166 Units 4,700 1,894 2,445 1,097 Crescent Place............. Houston, TX 120 Units 3,485 1,034 2,151 793 Eagle Rock................. Los Angeles, CA 99 Units 5,600 1,967 3,246 1,021 Fountain Village........... Tucson, AZ 410 Units 11,700 3,088 7,569 5,086 Hunters Bend............... San Antonio, TX 96 Units 1,683 418 1,127(1) 572 Parkwood Knoll............. San Bernadino, CA 178 Units 9,100 3,007 5,491 2,967 Shadow Run................. Pinellas Park, FL 276 Units 12,350 2,521 8,653 5,367 Villa Piedra............... Los Angeles, CA 132 Units 7,400 2,348 4,686 2,588 Villas at Countryside...... Sterling, VA 102 Units 8,100 2,686 5,334(1) 1,520 Villas at Fairpark......... Los Angeles, CA 49 Units 3,435 792 2,386 1,188 Westgate of Laurel......... Laurel, MD 218 Units 11,290 2,599 7,525(1) 3,575 Woodbridge................. Denver, CO 194 Units 6,856 3,328 2,845 3,796 Office Building Brookfield Corporate Center Chantilly, VA 63,504 Sq.Ft. 4,850 1,729 2,838 1,455 Industrial Warehouse Shady Trail................ Dallas, TX 42,900 Sq.Ft. 900 340 521 206 Hotel Chateau Charles............ Lake Charles, LA 245 Rooms 1,000 928 -- 633 Land Allen(2)................... Allen, TX 5.49 Acres 370 86 281 184 McKinney(3)................ McKinney, TX 255 Acres 8,783 5,035 4,423 2,091 Watters/Hwy. 121(4)........ McKinney, TX 24.06 Acres 3,620 3,620 -- 3,089 </TABLE> - -------- (1) Debt assumed by purchaser. (2) The Allen sale consisted of tracts of three land parcels: a 2.62 acre tract of the Stacy Road land parcel; a 2.23 acre tract of the Sandison land parcel; and a .64 acre tract of the Whisenant land parcel. (3) The McKinney sale included three land parcels: the 20 acre Netzer land parcel; the 79.54 acre DF Fund land parcel; and the 156.19 acre OPUBCO land parcel. (4) The Watters/Highway 121 sale consisted of a six acre tract of the Watters land parcel and an 18.061 acre tract of the State Highway 121 land parcel. 41
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 4. NOTES AND INTEREST RECEIVABLE Notes and interest receivable consisted of the following: <TABLE> <CAPTION> 2001 2000 ----------------- ---------------- Estimated Estimated Fair Book Fair Book Value Value Value Value --------- ------- --------- ------ <S> <C> <C> <C> <C> Notes receivable Performing................. $17,680 $17,442 $8,664 $8,668 Nonperforming, nonaccruing. 5,630 5,247 -- -- ------- ------- ------ ------ $23,310 22,689 $8,664 8,668 ======= ====== Interest receivable........... 178 41 ------- ------ $22,867 $8,709 ======= ====== </TABLE> Interest income is not recognized on nonperforming notes receivable. For the years 2001 and 1999, unrecognized interest income on nonperforming notes totaled $192,500 and $26,000, respectively. Notes receivable at December 31, 2001, mature from 2002 through 2008 with interest rates ranging from 5.8% to 16.0% per annum, with a weighted average rate of 12.2%. Notes receivable are generally nonrecourse and are generally collateralized by real estate. Scheduled principal maturities of $12.2 million are due in 2002. In March 2001, TCI funded a $3.5 million mortgage loan secured by a second lien on a retail center in Montgomery County, Texas. In June 2001, an additional $1.5 million was funded. The note receivable bears interest at 16.0% per annum, requires monthly interest only payments of $67,000 and matured in September 2001. In October 2001, TCI extended the loan until February 2002, receiving $100,000 as an extension fee. In December 2001, TCI received a $1.5 million principal payment. In February 2002, TCI sold a $2.0 million senior participation interest in the loan to IORI, a related party. TCI and IORI will receive 43% and 57%, respectively, of the remaining principal and interest payments. Also in February 2002, TCI received $23,000 as an extension fee and the loan was extended until April 2002. In June 2001, in conjunction with the sale of 275 unit McCallum Glen Apartments in Dallas, Texas, TCI funded a $1.5 million mortgage loan secured by a second lien on the apartments. The note receivable bears interest at 10% per annum, requires monthly interest only payments and matures in June 2003. In July 2001, TCI agreed to fund a $4.4 million line of credit secured by 1,714.16 acres of unimproved land in Tarrant County, Texas. The note receivable bears interest at 15% per annum, requires monthly interest only payments beginning in September 2001 and matures in July 2003. As of March 2002, TCI has funded $3.8 million of the line of credit, and received no interest payments. Also in July 2001, TCI funded a $1.7 million mortgage loan secured by a second lien on 44.6 acres of unimproved land in Fort Worth, Texas. The note receivable bears interest at 16.0% per annum, requires monthly payments of accrued interest beginning September 2001 and each month thereafter and matures January 2002. In January 2002, the note was extended until April 2002. As of March 2002, TCI has received no interest payments. In August 2001, TCI agreed to fund up to $5.6 million secured by an office building in Dallas, Texas. The note receivable bears interest at a variable rate, currently 9.0% per annum, requires monthly interest only payments and matures in January 2003. As of March 2002, TCI has funded a total of $2.3 million. 42
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In October 2001, TCI funded a $4.0 million loan secured by a second lien on a 375,752 sq. ft. office building in St. Louis, Missouri. The note receivable bears interest at 9.0% per annum, requires monthly interest only payments of $30,000 and matured in February 2002. In February 2002, TCI extended the loan maturity to February 2003. In December 2001, TCI provided $608,000 of purchase money financing in conjunction with the sale of the Madison at Bear Creek Apartments in Houston, Texas. The note receivable bore interest at 7% per annum, required payment of the entire outstanding principal and all accrued and unpaid interest in January 2002. The loan was secured by a second lien on the property. The note was paid in full according to the terms in January 2002. In February 2000, a mortgage loan with a principal balance of $28,000 was paid off, including accrued but unpaid interest. In December 2000, TCI funded a $2.5 million mortgage loan secured by a second lien on unimproved land, 442 acres in Tarrant County, Texas, 1,130 acres in Denton County, Texas, and 26 acres in Collin County, Texas. The note receivable bore interest at 18.0% per annum, required monthly payments interest only and matured in June 2001. In June 2001, the loan and all accrued but unpaid interest was paid in full. Also in December 2000, TCI funded a $3.0 million mortgage loan secured by a second lien on four office buildings in San Antonio, Texas. The note receivable bore interest at 16.0% per annum, required monthly payments of interest only and matured in June 2001. In June 2001, the note was extended until November 2001 with a $750,000 loan principal paydown. With the paydown, the note was renegotiated to replace the existing collateral with new collateral consisting of a 120,000 sq.ft. office building and industrial warehouse in Carrollton, Texas. The renegotiated note originally was to mature in May 2002. In February 2002, the maturity date on the loan was extended to July 2002. At December 31, 1999, mortgage notes receivable with a combined principal balance of $4.6 million and a carrying value of $356,000, secured by first and second liens on a closed hotel in Lake Charles, Louisiana were in default. Title to the collateral property was obtained in February 2000 through foreclosure. No loss was incurred on foreclosure as the estimated fair value of the property, less estimated costs of sale, exceeded the carrying value of the mortgage notes receivable. In June 2000, the property was sold for an amount in excess of its carrying value. In December 1999, TCI provided $1.2 million of purchase money financing in conjunction with the sale of the Town and Country Office Building in Houston, Texas. The note receivable bore interest at 8.5% per annum, requires monthly payments of interest only, matured in December 2001 and was secured by a first lien on the property sold. In December 2001, the note and all accrued but unpaid interest was paid in full. In conjunction with the loan payoff, a previously deferred gain of $819,000 on the sale of the property was recognized. Also in December 1999, TCI provided $8.5 million of purchase money financing in conjunction with the sale of 253 acres of unimproved land in McKinney and Collin County, Texas. The note receivable bore interest at 8.5% per annum, required a $1.0 million principal paydown in February 2000, required payment of all accrued interest in June 2000 and required payment of all principal and accrued interest at maturity in September 2000. The loan was repaid in accordance with its terms. The sale had originally been recorded under the cost recovery method with the gain being deferred until the note receivable was collected. In conjunction with the loan payoff, TCI recognized a previously deferred gain on the sale of $4.8 million. Related Party. In December 2001, TCI purchased 100% of the outstanding common shares of National Melrose, Inc. ("NM"), a wholly-owned subsidiary of ARI, a related party, for $2.0 million cash. NM owns the 43
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 41,840 sq. ft. Executive Court Office Building in Memphis, Tennessee. ARI has guaranteed that the asset will produce at least a 12% annual return of the purchase price for a period of three years from the purchase date. If the asset fails to produce the 12% annual return, ARI will pay TCI any shortfall. In addition, if the asset fails to produce 12% return for a calendar year, TCI may require ARI to repurchase the shares of NM for the purchase price. Management has classified this related party transaction as a note receivable from ARI. In June 2000, TCI funded a $3.0 million loan to Basic Capital Management, Inc. ("BCM"), TCI's advisor. The loan was secured by 108,802 shares of IORI Common Stock. IORI is also advised by BCM. The loan bore interest at 15.0% per annum and matured in October 2000. All principal and interest were due at maturity. The loan and all accrued but unpaid interest was paid off in August 2000. Also in June 2000, TCI funded a $9.0 million loan to American Realty Trust, Inc. ("ART"), an affiliate of BCM. The loan was secured by 409,934 shares of IORI Common Stock. The loan bore interest at 15.0% per annum and matured in October 2000. All principal and interest were due at maturity. The loan and all accrued but unpaid interest was paid off in October 2000. NOTE 5. ALLOWANCE FOR ESTIMATED LOSSES Activity in the allowance for estimated losses was as follows: <TABLE> <CAPTION> 2001 2000 1999 ---- ---- ----- <S> <C> <C> <C> Balance January 1,..... $537 $543 $ 886 Provision for loss.. 281 -- -- Amounts charged off. -- (6) (593) CMET allowance...... -- -- 250 ---- ---- ----- Balance December 31,... $818 $537 $ 543 ==== ==== ===== </TABLE> NOTE 6. INVESTMENT IN MARKETABLE EQUITY SECURITIES Marketable equity securities consist of 746,972 shares of common stock of ARI, approximately 6.5% of ARI's outstanding shares. ARI is a publicly held real estate company. <TABLE> <CAPTION> 2001 2000 ---- ------- <S> <C> <C> ARI $ -- $10,177 ==== ======= </TABLE> Prior to the first quarter of 2001, TCI accounted for its investment in ARI, a related party, as an available for sale marketable security. In the first quarter of 2001, TCI began accounting for its investment in ARI on the equity method. 44
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 7. INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES Investment in equity method real estate entities consisted of the following: <TABLE> <CAPTION> 2001 2000 ------- ------ <S> <C> <C> American Realty Investors, Inc. ("ARI")........... $10,182 $ -- Income Opportunity Realty Investors, Inc. ("IORI") 3,501 4,326 Tri-City Limited Partnership ("Tri-City")......... 531 524 Nakash Income Associates ("NIA").................. (553) (650) Sacramento Nine ("SAC 9")......................... 539 490 Other............................................. 30 597 ------- ------ $14,230 $5,287 ======= ====== </TABLE> TCI owns an approximate 6.5% interest in ARI, a publicly held real estate company, having a market value of $112.3 million at December 31, 2001. At December 31, 2001, ARI had total assets of $757.5 million and owned 52 apartments, 17 commercial properties, nine hotels and 54 parcels of unimproved land. In 2001, ARI sold 17 apartments, one commercial property and 26 parcels of unimproved land for a total of $187.3 million, receiving net cash of $52.4 million after paying off $110.2 million in mortgage debt and the payment of various closing costs. ARI recognized gains of $83.4 million on the sales of which TCI's equity share was $5.3 million. TCI owns an approximate 24.0% interest in IORI, a publicly held Real Estate Investment Trust ("REIT"), having a market value of $25.9 million at December 31, 2001. At December 31, 2001, IORI had total assets of $91.8 million and owned seven apartments in Texas, seven office buildings (four in California, two in Texas and one in Virginia) and two parcels of unimproved land in Texas. In 2000, IORI sold three apartments, two office buildings and two parcels of unimproved land for a total of $66.0 million, receiving net cash of $30.4 million after paying off $33.6 million in mortgage debt and the payment of various closing costs. IORI recognized gains of $19.6 million on the sales of which TCI's equity share was $4.3 million. IORI also recognized a previously deferred gain on a prior year's sale of $1.2 million of which TCI's equity share was $225,000. In 1999, IORI sold a shopping center in Boca Raton, Florida, for $3.2 million, receiving net cash of $1.5 million after paying off $1.3 million in mortgage debt and the payment of various closing costs. IORI recognized a gain of $490,000 on the sale of which TCI's equity share was $111,000. TCI owns a 63.7% limited partner interest and IORI owns a 36.3% general partner interest in Tri-City, which at December 31, 2001, owned a shopping center in Houston, Texas. In February 2000, the Chelsea Square Shopping Center was financed in the amount of $2.1 million. Tri-City received net cash of $2.0 million after the payment of various closing costs. The mortgage bore interest at a fixed rate of 10.24% per annum until February 2001, and a variable rate thereafter, currently 9.44% per annum, requires monthly payments of principal and interest of $20,601 and matures in February 2005. TCI received a distribution of $1.3 million of the net financing proceeds. In 1999, Tri-City sold a shopping center in Ft. Worth, Texas, and an office building in Carrollton, Texas, for a total of $7.2 million, receiving net cash of $5.4 million after paying off $1.3 million in mortgage debt and the payment of various closing costs. TCI received a distribution of $3.5 million of the net cash. Tri-City recognized gains of $2.9 million on the sales of which TCI's equity share was $1.8 million. TCI owns a non-controlling 60% general partner interest and IORI owns a 40% general partner interest in NIA, which owns a wraparound mortgage note receivable. The NIA partnership agreement requires the consent of both partners for any material changes in the operations of NIA. TCI is a non-controlling 30% general partner in SAC 9, which at December 31, 2001, owned an office building in Rancho Cordova, California. In 1999, SAC 9 sold an office building in Rancho Cordova, California, 45
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) for $7.4 million, receiving net cash of $4.0 million after paying off $3.2 million in mortgage debt and the payment of various closing costs. TCI received a distribution of $1.2 million of the net cash. SAC 9 recognized a gain of $4.7 million on the sale of which TCI's equity share was $1.4 million. In March 2001, in conjunction with the sale of the 211 unit Park at Colonade Apartments in San Antonio, Texas, TCI received a 23% limited partner interest in the acquiring partnership. TCI is to receive payments of $5,000 monthly from the partnership, a $50,000 distribution in June 2001 which was received and its remaining investment in March 2002. In July 2001, TCI assigned its limited partnership interest to the general partner, receiving a discounted payoff of $490,000. In conjunction with this assignment, TCI recognized a previously deferred gain on the sale of the apartments of $540,000. Set forth below are summarized financial data for the entities accounted for using the equity method: <TABLE> <CAPTION> 2001 2000 --------- -------- <S> <C> <C> Real estate, net of accumulated depreciation ($137,407 in 2001 and $9,540 in 2000)......................................... $ 692,747 $ 93,170 Notes receivable.............................................. 31,892 2,402 Other assets.................................................. 132,665 8,973 Notes payable................................................. (651,328) (59,485) Other liabilities............................................. (85,858) (1,815) --------- -------- Shareholders/partners' capital................................ $ 120,118 $ 43,245 ========= ======== </TABLE> TCI's share of the above equity investee capital accounts was $15.0 million in 2001 and $10.3 million in 2000. <TABLE> <CAPTION> 2001 2000 1999 --------- -------- ------- <S> <C> <C> <C> Rents and interest income....................... $ 181,570 $ 16,245 $20,675 Depreciation.................................... (19,930) (2,917) (3,152) Operating expenses.............................. (153,557) (10,835) (8,123) Interest expense................................ (83,154) (5,559) (7,609) --------- -------- ------- Income (loss) before gain on sale of real estate (75,071) (3,066) 1,791 Gain on sale of real estate..................... 83,414 20,878 8,020 --------- -------- ------- Net income...................................... $ 8,343 $ 17,812 $ 9,811 ========= ======== ======= </TABLE> TCI's equity share of: <TABLE> <CAPTION> 2001 2000 1999 -------- -------- ------- <S> <C> <C> <C> Income (loss) before gain on sale of real estate $ (5,950) $ (556) $ 102 Gain on sale of real estate..................... 5,310 4,572 3,569 -------- -------- ------- Net income (loss)............................... $ (640) $ 4,016 $ 3,671 ======== ======== ======= </TABLE> NOTE 8. NOTES AND INTEREST PAYABLE Notes and interest payable consisted of the following: <TABLE> <CAPTION> 2001 2000 ------------------- ------------------- Estimated Book Estimated Book Fair Value Value Fair Value Value ---------- -------- ---------- -------- <S> <C> <C> <C> <C> Notes payable... $461,875 $458,032 $484,445 $498,914 ======== ======== Interest payable 3,005 2,820 -------- -------- $461,037 $501,734 ======== ======== </TABLE> 46
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Scheduled principal payments are due as follows: <TABLE> <S> <C> 2002...... $152,755 2003...... 41,097 2004...... 77,490 2005...... 29,184 2006...... 19,681 Thereafter 137,825 -------- $458,032 ======== </TABLE> Notes payable at December 31, 2001, bore interest at rates ranging from 3.9% to 12.5% per annum, and mature between 2002 and 2043. The mortgages were collateralized by deeds of trust on real estate having a net carrying value of $632.8 million. In 2001, TCI financed the following property: <TABLE> <CAPTION> Debt Debt Net Cash Interest Maturity Property Location Acres Incurred Discharged Received Rate Date - -------- ---------- ---------- -------- ---------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Land..... Red Cross Dallas, TX 2.89 Acres $4,500 $ -- $4,328 12.5%(1) 10/02 </TABLE> - -------- (1) Variable rate. In 2000, TCI financed/refinanced the following properties: <TABLE> <CAPTION> Debt Debt Net Cash Interest Maturity Property Location Units/Sq.Ft. Incurred Discharged Received Rate Date - -------- --------------- -------------- -------- ---------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Apartments Camelot.............. Largo, FL 120 Units $3,800 $ -- $3,100 8.85%(1) 12/05 Country Crossing..... Tampa, FL 227 Units 3,825 2,645 985 9.65(1) 06/03 Crescent Place....... Houston, TX 120 Units 2,165 1,722 370 7.04(1) 03/30 Fontenelle Hills..... Bellevue, NE 338 Units 2,010(2) -- 1,967 8.51 06/10 Madison @ Bear Creek. Houston, TX 180 Units 3,500 2,625 730 7.04(1) 03/30 Office Buildings Bay Plaza II......... Tampa, FL 78,882 Sq.Ft. 3,600 -- 3,400 8.44(1) 01/06 Jefferson............ Washington, DC 71,876 Sq.Ft. 9,875 8,955 557 9.50 07/25 Technology Trading... Sterling, VA 197,659 Sq.Ft. 6,300 3,881 2,065 8.26(1) 05/05 Venture Center....... Atlanta, GA 38,772 Sq.Ft. 2,700 1,113 1,592 8.75 03/10 Westgrove Air Plaza.. Addison, TX 78,326 Sq.Ft. 2,087 1,180 742 9.02(1) 01/05 Industrial Warehouses 5360 Tulane.......... Atlanta, GA 67,850 Sq.Ft. 375 208 134 9.65(1) 04/03 Kelly................ Dallas, TX 330,406 Sq.Ft. 5,000 2,173 2,628 9.50(1) 10/03 Space Center......... San Antonio, TX 101,500 Sq.Ft. 1,125 691 402 9.65(1) 04/03 </TABLE> - -------- (1) Variable interest rate. (2) Second lien on property. NOTE 9. PREFERRED STOCK TCI's Series A Cumulative Convertible Preferred Stock consists of a maximum of 6,000 shares with a par value of $.01 per share and a liquidation preference of $100.00 per share. Dividends are payable at the rate of $5.00 per year or $1.25 per quarter to stockholders of record on the 15th day of each March, June, September and 47
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December when and as declared by the Board of Directors. The Series A Preferred Stock may be converted after November 1, 2003, into Common Stock at the daily average closing price of the Common Stock for the prior five trading days. At December 31, 2001 and 2000, 5,829 shares of Series A Preferred Stock were issued and outstanding. TCI's Series B Cumulative Convertible Preferred Stock consisted of a maximum 300,000 shares with a par value of $.01 per share and a liquidation preference of $5.00 per share. Dividends were payable at the rate of $.38 per share annually or $.095 per quarter to stockholders of record on the tenth day of each March, June, September and December when and as declared by the Board of Directors. After October 25, 2001, the Series B Preferred Stock could be converted into Common Stock at the daily average closing price of the Common Stock for the prior five trading days or redeemed for cash at the option of the holder. At December 31, 2000, 300,000 shares of Series B Preferred Stock were issued and outstanding. In November 2001, the holder redeemed its shares. TCI paid $1.6 million in cash of which $115,000 was accrued dividends. In conjunction with the purchase of the Baywalk, Island Bay and Marina Landing Apartments, TCI issued 30,000 shares of Series C Preferred Stock. TCI's Series C Cumulative Convertible Preferred Stock consists of a maximum of 30,000 shares with a liquidation preference of $100.00 per share. Dividends are payable at the annual rate of $5.00 per share or $1.25 per quarter through September 2002, then $6.00 per share annually or $1.50 per quarter through September 2003, then $7.00 per share annually or $1.75 per quarter thereafter. After September 30, 2006, the Series C Preferred Stock may be converted into Common Stock at 90% of the daily average closing price of the Common Stock for the prior five trading days. The Series C Preferred Stock is redeemable for cash at any time at the option of TCI. At December 31, 2001, 30,000 shares of Series C Preferred Stock were issued and outstanding. NOTE 10. DIVIDENDS TCI paid dividends on its Common Stock of $4.7 million ($.54 per share) in 2000 and $3.0 million ($.60 per share) in 1999. TCI reported to the Internal Revenue Service that 100% of the dividends paid in 2000 represented ordinary income and that 100% of the dividends paid in 1999 represented capital gains. In December 2000, the Board of Directors determined not to pay a fourth quarter dividend to holders of TCI's Common Stock. The non-payment decision was based on the Board determining that TCI needed to retain cash for acquisitions that were anticipated in 2001 and 2002. NOTE 11. STOCK OPTIONS In October 2000, TCI's stockholders approved the 2000 Stock Option Plan ("2000 Plan"). The 2000 Plan is administered by the Stock Option Committee, which currently consists of two Independent Directors of TCI. The exercise price per share of an option will not be less than 100% of the fair market value per share on the date of grant thereof. As of December 31, 2001, TCI had 300,000 shares of Common Stock reserved for issuance under the 2000 Plan. No options have been granted under the 2000 Plan. In October 2000, TCI's stockholders approved the Director's Stock Option Plan (the "Director's Plan") which provides for options to purchase up to 140,000 shares of TCI's Common Stock. Options granted pursuant to the Director's Plan are immediately exercisable and expire on the earlier of the first anniversary of the date on which a Director ceases to be a Director or 10 years from the date of grant. Each Independent Director was 48
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) granted an option to purchase 5,000 Common shares at an exercise price of $14.875 per share on October 10, 2000, the date stockholders approved the plan. On January 1, 2001, each Independent Director was granted an option to purchase 5,000 Common shares at an exercise price of $8.875 per Common share. Each Independent Director will be awarded an option to purchase an additional 5,000 shares on January 1 of each year. <TABLE> <CAPTION> 2001 2000 ------------------ ------------------ Number Exercise Number Exercise of Shares Price of Shares Price --------- -------- --------- -------- <S> <C> <C> <C> <C> Outstanding at January 1,.. 25,000 $14.875 -- $ -- Granted.................... 25,000 8.875 25,000 14.875 Canceled................... -- -- -- -- ------ ------ Outstanding at December 31, 50,000 25,000 $14.875 ====== ====== </TABLE> At December 31, 2001, 50,000 options were exercisable at an average exercise price of $11.875 per Common share. TCI applies Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its option plans. All share options issued by TCI have exercise prices equal to the market price of the shares at the dates of grant. Accordingly, no compensation cost has been recognized for its option plans. Had compensation cost for TCI's option plans been determined based on the fair value at the grant dates consistent with the method of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation," TCI's net income (loss) and net income (loss) per share would have been the pro forma amounts indicated below. <TABLE> <CAPTION> 2001 2000 ---------------- ---------------- As Pro As Pro Reported forma Reported forma -------- ------- -------- ------- <S> <C> <C> <C> <C> Net income applicable to Common shares........... $19,811 $19,217 $29,760 $29,537 Net income applicable to Common shares, per share 2.28 2.23 3.45 3.42 </TABLE> The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: <TABLE> <CAPTION> 2001 2000 ----- ----- <S> <C> <C> Dividend yield........... -- 6.08% Expected volatility...... 65.00% 65.00% Risk-free interest rate.. 1.25% 5.75% Expected lives (in years) 9 9 Forfeitures.............. 10.00% 10.00% </TABLE> The weighted average fair value per share of options granted in 2001 and 2000 was $7.60 and $8.93, respectively. 49
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 12. RENTS UNDER OPERATING LEASES Operations include the leasing of commercial properties (office buildings, industrial warehouses and shopping centers). The leases thereon expire at various dates through 2020. The following is a schedule of minimum future rents on non-cancelable operating leases at December 31, 2001: <TABLE> <S> <C> 2002...... $ 45,856 2003...... 36,380 2004...... 27,551 2005...... 19,499 2006...... 10,726 Thereafter 18,365 -------- $158,377 ======== </TABLE> NOTE 13. ADVISORY AGREEMENT Basic Capital Management, Inc. ("BCM"), an affiliate, has served as TCI's advisor since March 28, 1989. BCM is a company owned by a trust for the benefit of the children of Gene E. Phillips. Mr. Phillips serves as a representative of his children's trust which owns BCM and, in such capacity, has substantial contact with the management of BCM and input with respect to its performance of advisory services to TCI. Under the Advisory Agreement, BCM is required to annually formulate and submit for Board approval a budget and business plan containing a twelve-month forecast of operations and cash flow, a general plan for asset sales and purchases, lending, foreclosure and borrowing activity and other investments. BCM is required to report quarterly to the Board on TCI's performance against the business plan. In addition, all transactions require prior Board approval unless they are explicitly provided for in the approved business plan or are made pursuant to authority expressly delegated to BCM by the Board. The Advisory Agreement also requires prior Board approval for the retention of all consultants and third party professionals, other than legal counsel. The Advisory Agreement provides that BCM shall be deemed to be in a fiduciary relationship to the stockholders and contains a broad standard governing BCM's liability for losses incurred by TCI. The Advisory Agreement provides for BCM to be responsible for the day-to-day operations and to receive an advisory fee comprised of a gross asset fee of .0625% per month (.75% per annum) of the average of the gross asset value (total assets less allowance for amortization, depreciation or depletion and valuation reserves) and an annual net income fee equal to 7.5% of net income. The Advisory Agreement also provides for BCM to receive an annual incentive sales fee. BCM or an affiliate of BCM is to receive an acquisition commission for supervising the purchase or long-term lease of real estate. BCM or an affiliate of BCM is to receive a mortgage or loan acquisition fee with respect to the purchase of any existing mortgage loan. BCM or an affiliate of BCM is also to receive a mortgage brokerage and equity refinancing fee for obtaining loans to or refinancing of TCI's properties. In addition, BCM receives reimbursement of certain expenses incurred by it in the performance of advisory services for TCI. The Advisory Agreement requires BCM or any affiliate of BCM to pay to TCI one-half of any compensation received from third parties with respect to the origination, placement or brokerage of any loan made by TCI. 50
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Under the Advisory Agreement, all or a portion of the annual advisory fee must be refunded if the Operating Expenses of TCI (as defined in the Advisory Agreement) exceed certain limits specified in the Advisory Agreement. BCM was not required to refund any of its 1999, 2000 or 2001 advisory fee. Additionally, if management were to request that BCM render services other than those required by the Advisory Agreement, BCM or an affiliate of BCM would be separately compensated for such additional services on terms to be agreed upon from time to time. As discussed in NOTE 14. "PROPERTY MANAGEMENT," Triad Realty Services, Ltd. ("Triad"), an affiliate of BCM, provides property management services and as discussed in NOTE 15. "REAL ESTATE BROKERAGE," Regis Realty, Inc. ("Regis"), a related party, provides, on a non-exclusive basis, brokerage services. NOTE 14. PROPERTY MANAGEMENT Triad provides property management services for a fee of 5% or less of the monthly gross rents collected on residential properties and 3% or less of the monthly gross rents collected on commercial properties under its management. Triad subcontracts with other entities for property-level management services at various rates. The general partner of Triad is BCM. The limited partner of Triad is GS Realty Services, Inc. ("GS Realty"), a related party. Triad subcontracts to Regis, a related party, which is a company owned by GS Realty, the property-level management and leasing of 51 of TCI's commercial properties, its five hotels and the commercial property owned by Tri-City. Regis is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad. NOTE 15. REAL ESTATE BROKERAGE Regis also provides brokerage services on a non-exclusive basis. Regis is entitled to receive a commission for property purchases and sales, in accordance with a sliding scale of total brokerage fees to be paid by TCI. NOTE 16. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC. Revenue, fees and cost reimbursements to BCM and its affiliates: <TABLE> <CAPTION> 2001 2000 1999 ------- ------ ------- <S> <C> <C> <C> Fees Advisory......................................... $ 5,346 $5,258 $ 3,219 Net income....................................... 1,850 2,415 2,450 Incentive fees................................... 3,167 -- -- Property acquisition............................. 774 1,024 1,815 Real estate brokerage............................ -- 331 2,727 Mortgage brokerage and equity refinancing........ 45 464 422 Property and construction management and leasing commissions*................................... -- -- 3,608 ------- ------ ------- $11,182 $9,492 $14,241 ======= ====== ======= Cost reimbursements................................. $ 2,582 $2,146 $ 1,367 ======= ====== ======= Hotel lease revenue................................. $ -- $2,237 $ 1,653 ======= ====== ======= </TABLE> 51
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Fees paid to GS Realty, a related party: <TABLE> <CAPTION> 2001 2000 ------- ------ <S> <C> <C> Fees Property acquisition............................. $ 1,668 $2,326 Real estate brokerage............................ 3,760 3,250 Property and construction management and leasing commissions.................................... 2,599 4,321 ------- ------ $ 8,027 $9,897 ======= ====== </TABLE> - -------- * Net of property management fees paid to subcontractors, other than Regis and affiliates of BCM. NOTE 17. INCOME TAXES For the year 1999, TCI had elected and qualified to be treated as a Real Estate Investment Trust ("REIT"), as defined in Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and as such, it was not taxed for federal income tax purposes on that portion of its taxable income which was distributed to stockholders. During the third quarter of 2000, due to a concentration of ownership, TCI no longer met the requirements for tax treatment as a REIT under the Code, and is prohibited for re-qualifying for REIT tax status for at least five years. TCI had a loss for federal income tax purposes (after utilization of operating loss carryforwards) in 2001, 2000 and 1999; therefore, it recorded no provision for income taxes. TCI's tax basis in its net assets differs from the amount at which its net assets are reported for financial statement purposes, principally due to the accounting for gains and losses on property sales, the difference in the allowance for estimated losses, depreciation on owned properties and investments in equity method real estate entities. At December 31, 2001, TCI's tax basis in its net assets exceeded their basis for financial statement purposes by $50.1 million. As a result, aggregate future income for income tax purposes will be less than such amount for financial statement purposes. Additionally, at December 31, 2001, TCI had tax net operating loss carryforwards of approximately $47.2 million expiring through the year 2018. The use of such loss carryforwards are subject to certain limitations under the Internal Revenue Code. At December 31, 2001, TCI had a net deferred tax asset of $33.1 million due to tax deductions available to it in future years. However, as management cannot determine that it is more likely than not that TCI will realize the benefit of the deferred tax asset a 100% valuation allowance has been established. NOTE 18. 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 general and administrative expenses. Management evaluates the performance of the operating segments and allocates resources to each of them based on their operating income and cash flow. Items of income that are not reflected in the segments are interest, equity in partnerships, and gains on sale of real estate totaling $3.1 million, $11.2 million and $555,000 for 2001, 2000 and 1999, respectively. Expenses that are not reflected in the segments are general and administrative expenses, minority interest, non-segment interest expense, advisory, incentive sales and net income fees totaling $25.0 million, $16.2 million and $9.0 million for 2001, 2000 and 1999, respectively. Excluded from operating segment assets are assets of $86.5 million at December 31, 2001, and $91.0 million at December 31, 2000, which are not identifiable with an operating segment. There are no intersegment revenues and expenses. See "NOTE 3. "REAL ESTATE" and NOTE 4. "NOTES AND INTEREST RECEIVABLE." 52
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Presented below is the operating income of each operating segment and each segments' assets for the years 2001, 2000 and 1999. <TABLE> <CAPTION> Commercial Land Properties Apartments Hotels Total ------- ---------- ---------- ------- --------- <S> <C> <C> <C> <C> <C> 2001 Rents....................... $ 633 $ 68,676 $ 58,991 $ 6,611 $ 134,911 Property operating expenses. 1,756 38,266 35,947 4,593 80,562 ------- -------- -------- ------- --------- Segment operating income.... $(1,123) $ 30,410 $ 23,044 $ 2,018 $ 54,349 ======= ======== ======== ======= ========= Depreciation................ $ -- $ 12,753 $ 5,817 $ 1,135 $ 19,705 Interest.................... 1,845 21,996 15,887 1,330 41,058 Real estate improvements and construction.............. 1,424 7,365 14,973 9,855 33,617 Asset....................... 62,209 304,657 224,986 30,835 622,687 Property Sales Sales price................. $ 3,351 $ 54,083 $104,020 $ 161,454 Cost of sales............... (2,235) (39,693) (71,384) (113,312) ------- -------- -------- --------- Gain on sale................ $ 1,116 $ 14,390 $ 32,636 $ 48,142(1) ======= ======== ======== ========= </TABLE> - -------- (1) Excludes a previously deferred gain on the sale of Town & Country Shopping Center of $819,000 as well as TCI's shares of gains recognized by ARI, an equity affiliate, of $5.3 million. <TABLE> <CAPTION> Commercial Land Properties Apartments Hotels Total ------- ---------- ---------- ------- -------- <S> <C> <C> <C> <C> <C> 2000 Rents...................... $ 723 $ 61,496 $ 74,700 $ 2,743 $139,662 Property operating expenses 1,097 31,962 44,898 213 78,170 ------- -------- -------- ------- -------- Segment operating income... $ (374) $ 29,534 $ 29,802 $ 2,530 $ 61,492 ======= ======== ======== ======= ======== Depreciation............... $ -- $ 11,358 $ 7,395 $ 996 $ 19,749 Interest................... 3,342 21,907 21,284 1,581 48,114 Real estate improvements... 117 11,700 1,302 1,545 14,664 Asset...................... 59,281 344,657 216,995 19,931 640,864 Property Sales Sales price................ $12,775 $ 5,750 $ 93,949 $ 1,000 $113,474 Cost of sales.............. (7,411) (4,089) (60,433) (367) (72,300) ------- -------- -------- ------- -------- Gain on sale............... $ 5,364 $ 1,661 $ 33,516 $ 633 $ 41,174(1) ======= ======== ======== ======= ======== </TABLE> - -------- (1) Excludes a previously deferred gain of $4.8 million on the sale of land as well as TCI's share of gains recognized by IORI, an equity affiliate, of $4.6 million. 53
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) <TABLE> <CAPTION> Commercial Land Properties Apartments Hotels Total ------- ---------- ---------- ------- -------- <S> <C> <C> <C> <C> <C> 1999 Rents...................... $ 855 $ 33,971 $ 42,162 $ 5,113 $ 82,101 Property operating expenses 917 14,600 26,374 2,623 44,514 ------- -------- -------- ------- -------- Operating income (loss).... $ (62) $ 19,371 $ 15,788 $ 2,490 $ 37,587 ======= ======== ======== ======= ======== Depreciation............... $ -- $ 6,094 $ 4,872 $ 736 $ 11,702 Interest................... 1,891 11,355 13,032 1,442 27,720 Real estate improvements... 52 6,303 1,758 2,243 10,356 Construction expenditures.. -- -- 11,470 -- 11,470 Assets..................... 48,253 272,648 261,252 19,383 601,536 Property Sales Sales price................ $14,544 $ 64,305 $ 37,910 $116,759 Cost of sales.............. 8,179 40,251 25,773 74,203 ------- -------- -------- -------- Gains on sales............. $ 6,365(1) $ 24,054(1) $ 12,137 $ 42,556 ======= ======== ======== ======== </TABLE> - -------- (1) Includes deferred gains from a land sale and from a commercial property sale accounted for using the cost recovery method. See NOTE 3. "REAL ESTATE." NOTE 19. QUARTERLY RESULTS OF OPERATIONS The following is a tabulation of TCI's quarterly results of operations for the years 2001 and 2000 (unaudited): <TABLE> <CAPTION> Three Months Ended -------------------------------------------- March 31, June 30, September 30, December 31, --------- -------- ------------- ------------ <S> <C> <C> <C> <C> 2001 Rents................................. $34,968 $36,074 $32,423 $31,446 Property expense...................... 20,247 20,194 19,643 20,478 ------- ------- ------- ------- Operating income................... 14,721 15,880 12,780 10,968 Interest income....................... 613 645 1,017 673 Income (loss) in equity partnerships.. (1,367) (999) (2,164) (1,420) Gain on sale of real estate........... 6,484 22,265 18,780 6,741 ------- ------- ------- ------- 5,730 21,911 17,633 5,994 Other expense......................... 20,135 23,460 19,297 22,914 ------- ------- ------- ------- Net income (loss)..................... 316 14,331 11,116 (5,952) Preferred dividend requirement........ (7) (8) (7) (150) ------- ------- ------- ------- Net income applicable to Common shares $ 309 $14,323 $11,109 $(6,102) ======= ======= ======= ======= Basic and Diluted Earnings Per Share Net income applicable to Common shares $ .04 $ 1.65 $ 1.28 $ (.74) ======= ======= ======= ======= </TABLE> In the first quarter of 2001, gains on sale of real estate totaling $6.5 million were recognized on the sale of Heritage Apartments, Forest Ridge Apartments, Park at Colonade Apartments, the Zodiac Warehouse, a portion of the McKinney 36 land parcel, a portion of the Round Mountain land parcel, and TCI's share of gains 54
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) recognized by ARI, an equity investee. In the second quarter of 2001, gains on sale of real estate totaling $22.3 million were recognized on the sale of Glenwood Apartments, Fontenelle Hills Apartments, Bent Tree Gardens Apartments, McCallum Glen Apartments, Moss Creek lots land parcel, Waterstreet Office Building, Technology Trading Center, Daley Office Building, and TCI's share of gains recognized by ARI. In the third quarter of 2001, gains on sale of real estate totaling $18.8 million were recognized on the sale of Park Lane Apartments, McCallum Crossing Apartments, Carseka Apartments, Sunset Lakes Apartments, Oak Run Apartments, a portion of the Eagle Crest land parcel, Chesapeake Office Building, and TCI's share of gains recognized by ARI. In the fourth quarter of 2001, gains on sale of real estate totaling $6.7 million were recognized on the sale of South Cochran Apartments, Madison at Bear Creek Apartments, Summerstone Apartments, Valley Rim Office Building, a previously deferred gain on the sale of Town and Country Shopping Center, and TCI's share of gains recognized by ARI. See NOTE 3. "REAL ESTATE" and NOTE 7. "INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES." <TABLE> <CAPTION> Three Months Ended -------------------------------------------- March 31, June 30, September 30, December 31, --------- -------- ------------- ------------ <S> <C> <C> <C> <C> 2000 Rents................................. $34,086 $34,605 $35,164 $35,807 Property expense...................... 18,419 18,345 19,896 21,510 ------- ------- ------- ------- Operating income................... 15,667 16,260 15,268 14,297 Interest income....................... 404 588 936 442 Income (loss) in equity partnerships.. 7 (299) (185) (79) Gain on sale of real estate........... 8,951 8,856 11,755 20,988 ------- ------- ------- ------- 9,362 9,145 12,506 21,351 Other expense......................... 20,673 19,630 20,883 22,888 ------- ------- ------- ------- Net income (loss)..................... 4,356 5,775 6,891 12,760 Preferred dividend requirement........ (7) (7) (8) -- ------- ------- ------- ------- Net income applicable to Common shares $ 4,349 $ 5,768 $ 6,883 $12,760 ======= ======= ======= ======= Basic and Diluted Earnings Per Share Net income applicable to Common shares $ .50 $ .67 $ .80 $ 1.48 ======= ======= ======= ======= </TABLE> In the first quarter of 2000, gains on sale of real estate totaling $9.0 million were recognized on the sale of Hunters Bend Apartments, Westgate of Laurel Apartments and a previous deferred gain on the sale of McKinney land. In the second quarter of 2000, gains on sale of real estate totaling $8.9 million were recognized on the sale of Apple Creek Apartments, Villas at Fairpark Apartments, Chateau Charles Hotel, and TCI's share of gain recognized by IORI, an equity investee. In the third quarter of 2000, gains on sale of real estate totaling $11.8 million were recognized on the sale of Brookfield Corporate Center, Ashley Crest Apartments, a portion of the Allen land, Eagle Rock Apartments, Shady Trail Warehouse, McKinney land, Woodbridge Apartments and Villas at Countryside Apartments. In the fourth quarter of 2000, gains on sale of real estate totaling $21.0 million were recognized on the sale of Shadow Run Apartments, a portion of the Watters Road/Highway 121 land, Parkwood Knoll Apartments, Villa Piedra Apartments, Country Bend Apartments, Fountain Village Apartments and Crescent Place Apartments. See NOTE 3. "REAL ESTATE" and NOTE 7. "INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES." NOTE 20. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY Olive Litigation. In February 1990, TCI, together with CMET, IORI and National Income Realty Trust, three real estate entities with, at the time, the same officers, directors or trustees and advisor as TCI, entered into 55
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) a settlement (the "Settlement") of a class and derivative action entitled Olive et al. v. National Income Realty Trust et al., relating to the operation and management of each of the entities. On April 23, 1990, the Court granted final approval of the terms of the Settlement. The Settlement was modified in 1994 (the "Modification"). On January 27, 1997, the parties entered into an Amendment to the Modification effective January 9, 1997 (the "Olive Amendment"). The Olive Amendment provided for the settlement of additional matters raised by plaintiffs' counsel in 1996. The Court issued an order approving the Olive Amendment on July 3, 1997. The Olive Amendment provided that TCI's Board retain a management/compensation consultant or consultants to evaluate the fairness of the BCM advisory contract and any contract of its affiliates with TCI, CMET and IORI, including, but not limited to, the fairness to TCI, CMET and IORI of such contracts relative to other means of administration. In 1998, the Board engaged a management/compensation consultant to perform the evaluation which was completed in September 1998. In 1999, plaintiffs' counsel asserted that the Board did not comply with the provision requiring such engagement and requested that the Court exercise its retained jurisdiction to determine whether there was a breach of this provision of the Olive Amendment. In January 2000, the Board engaged another management/compensation consultant to perform the required evaluation again. This evaluation was completed in April 2000 and was provided to plaintiffs' counsel. The Board believes that any alleged breach of the Olive Amendment has been fully remedied by the Board's engagement of the second consultant. Although several status conferences have been held on this matter, there has been no Court order resolving whether there was any breach of the Olive Amendment. In June 2000, plaintiffs' counsel asserted that loans made by TCI to BCM and American Realty Trust, Inc. breached the provisions for the Modification. The Board believes that the provisions of the Settlement, the Modification and Olive Amendment terminated on April 28, 1999. However, the Court has ruled that certain provisions continue to be effective after the termination date. This ruling has been appealed by TCI and IORI. On October 23, 2001, TCI, IORI and American Realty Investors, Inc. ("ARI") jointly announced a preliminary agreement with the plaintiff's legal counsel for complete settlement of all disputes in the lawsuit. In February 2002, the court granted final approval for a proposed settlement. Under the proposal, ARI would acquire all of the outstanding shares of IORI and TCI not currently owned by ARI for a cash payment or shares of ARI Preferred Stock. ARI will pay $17.50 cash per TCI share and $19.00 cash per IORI share for the stock held by non-affiliated stockholders. ARI would issue one share of Series G Preferred Stock with a liquidation value of $20.00 per share for each share of TCI Common Stock for stockholders who elect to receive ARI preferred stock in lieu of cash. ARI would issue one share of Series H Preferred Stock with a liquidation value of $21.50 per share for each share of IORI Common Stock for stockholders who elect to receive ARI preferred stock in lieu of cash. Each share of Series G Preferred Stock will be convertible into 2.5 shares of ARI Common Stock during a 75-day period that commences fifteen days after the date of the first ARI Form 10-Q filing that occurs after the closing of the merger transaction. Upon the acquisition of IORI and TCI shares, TCI and IORI would become wholly-owned subsidiaries of ARI. The transaction is subject to the negotiation of a definitive merger agreement and a vote of the shareholders of all three entities. TCI has the same board as IORI and the same advisor as IORI and ARI. Liquidity. Although management anticipates that TCI will generate excess cash from operations in 2002, due to increased rental rates and occupancy at its properties, such excess, however, will not be sufficient to discharge all of TCI's debt obligations as they mature. Management intends to selectively sell income producing real estate, refinance real estate and incur additional borrowings against real estate to meet its cash requirements. 56
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Other Litigation. TCI is also involved in various other lawsuits arising in the ordinary course of business. Management is of the opinion that the outcome of these lawsuits will have no material impact on TCI's financial condition, results of operations or liquidity. NOTE 21. SUBSEQUENT EVENTS In the first quarter of 2002, TCI purchased the following properties: <TABLE> <CAPTION> Purchase Net Cash Debt Interest Maturity Property Location Units/ Acres Price Paid Incurred Rate Date - -------- -------------- ------------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Apartments Blue Lakes Villas(1) Waxahachie, TX 186 Units $1,012 $1,048 $ -- -- % -- Echo Valley(1)...... Dallas, TX 216 Units 787 788 -- -- -- Shopping Center Oak Tree Village(2). Lubbock, TX 45,623 Sq.Ft. 1,734 $ 186 1,430 8.48% 11/07 Land Lakeshore Villas(2). Humble, TX 16.89 Acres 941 294 -- -- -- Rasor(2)............ Plano, TX 24.50 Acres 2,306 120 -- -- -- </TABLE> - -------- (1) Land purchased for apartment construction. (2) Property exchanged with ARI, a related party, for the Plaza at Bachman Retail Center. <TABLE> <CAPTION> Sales Net Cash Debt Gain/(Loss) Property Location Units/Sq.Ft. Price Received Discharged on Sale - -------- --------------- -------------- ------ -------- ---------- ----------- <S> <C> <C> <C> <C> <C> <C> Apartments Primrose............ Bakersfield, CA 162 Units $5,000 $1,722 $2,920 $ 659 Office Building Hartford............ Dallas, TX 174,513 Sq.Ft. 4,000 -- -- -- (1) Industrial Warehouse Central Storage..... Dallas, TX 216,035 Sq.Ft. 4,000 2,095 1,063 1,241 Shopping Center Plaza at Bachman(2). Dallas, TX 80,278 Sq.Ft. 4,707 -- -- -- </TABLE> - -------- (1) Excludes a $920,000 deferred gain from seller financing. (2) Property was exchanged with ARI, a related party, for two parcels of land; the Rasor land parcel and Lakeshore Villas land parcel and the Oak Tree Village Shopping Center. In the first quarter of 2002, TCI refinanced the following property: <TABLE> <CAPTION> Debt Debt Net Cash Interest Maturity Property Location Sq.Ft. Incurred Discharged Received Rate Date - -------- ----------- ------------- -------- ---------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Industrial Warehouse Addison Hanger(1)... Addison, TX 23,650 Sq.Ft. $2,687 $1,580 $942 6.75%(2) 02/07 </TABLE> - -------- (1) The mortgage is cross-collateralized with the 29,000 sq. ft. Addison Hanger II in Addison, Texas. (2) Variable interest rate. 57
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In January 2002, TCI purchased 100% of the outstanding common shares of ART Two Hickory Corporation ("Two Hickory"), a wholly-owned subsidiary of ARI, a related party, for $4.4 million cash. Two Hickory owns the 96,217 sq. ft. Two Hickory Center Office Building in Farmers Branch, Texas. ARI has guaranteed that the asset shall produce at least a 12% annual return of the purchase price for a period of three years from the purchase date. If the asset fails to produce the 12% annual return, ARI shall pay TCI any shortfall. In addition, if the asset fails to produce the 12% return for a calendar year, TCI may require ARI to repurchase the shares of Two Hickory for the purchase price. Management has classified this related party transaction as a note receivable from ARI. In February 2002, TCI sold a $2.0 million senior participation interest in a $3.5 million loan to IORI, a related party. See ITEM 2. "MORTGAGE LOANS." 58
SCHEDULE III TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 <TABLE> <CAPTION> Cost Capitalized Subsequent to Gross Amounts of Which Initial Cost Acquisition Carried at End of Year ------------------- ------------------- ----------------------------- Building & Building & Property/Location Encumbrances Land Improvements Improvements Other Land Improvements Total (1) - ----------------- ------------ ------ ------------ ------------ ------ ------ ------------ --------- (dollars in thousands) Held for Investment: <S> <C> <C> <C> <C> <C> <C> <C> <C> Apartments 4242 Cedar Springs, Dallas, TX......... $ 1,302 $ 372 $ 1,117 $ 51 $ (200)/(2)/ $ 372 $ 968 $ 1,340 4400, Midland, TX...................... 1,069 349 1,396 -- -- 349 1,396 1,745 Apple Lane, Lawrence, KS............... 953 168 1,510 -- -- 168 1,510 1,678 Arbor Point, Odessa, TX................ 1,552 321 1,285 526 -- 321 1,811 2,132 Ashton Way, Midland, TX................ 1,069 384 1,536 52 -- 384 1,588 1,972 Autumn Chase, Midland, TX.............. 907 141 1,265 -- -- 141 1,265 1,406 Baywalk, Galveston, TX................. 5,460 679 6,106 -- -- 679 6,106 6,785 By the Sea, Corpus Christi, TX......... 5,519 644 5,797 -- -- 644 5,797 6,441 Camelot, Largo, FL..................... 3,747 1,230 2,870 235 (281)/(2)/ 1,230 2,825 4,055 Cliffs of Eldorado, McKinney, TX....... 10,500 2,647 10,589 -- -- 2,647 10,589 13,236 Country Crossings, Tampa, FL........... 3,758 772 2,444 196 (358)/(2)/ 772 2,282 3,054 Courtyard, Midland, TX................. 1,040 151 1,359 -- -- 151 1,359 1,510 Coventry, Midland, TX.................. 1,228 236 369 184 -- 236 553 789 El Chapparal, San Antonio, TX.......... 4,203 279 2,821 574 (330)/(2)/ 279 3,065 3,344 Fairway View Estates, El Paso, TX...... 3,453 548 4,935 260 -- 548 5,195 5,744 Fairways, Longview, TX................. 1,908 657 1,532 119 (266)/(2)/ 657 1,385 2,042 Falcon Lakes, Arlington, TX............ -- 1,437 -- 239 1,437 239 1,676 Fountain Lake, Texas City, TX.......... 2,470 861 2,585 19 (254)/(2)/ 861 2,350 3,211 Fountains of Waterford, Midland, TX.... 436 311 1,243 1,538 -- 311 2,781 3,092 Gladstell Forest, Conroe, TX........... 2,402 504 2,015 190 -- 504 2,205 2,709 Grove Park, Plano, TX.................. 4,554 942 3,767 54 (447)/(2)/ 942 3,374 4,316 Harper's Ferry, Lafayette, LA.......... 1,751 349 1,398 223 -- 349 1,621 1,970 Heritage on the River, Jacksonville, FL 7,675 2,070 6,211 330 (719)/(2)/ 2,070 5,822 7,892 Hunters Glen, Midland, TX.............. 1,895 519 2,075 321 -- 519 2,396 2,915 In the Pines, Gainesville, FL.......... 5,514 1,288 5,154 496 (573)/(2)/ 1,288 5,077 6,365 Island Bay, Galveston, TX.............. 15,334 2,095 18,852 -- -- 2,095 18,852 20,947 Limestone Canyon, Austin, TX........... 12,911 1,998 -- 12,247 1,895/(4)/ 1,998 13,365 16,140 Limestone Ranch, Lewisville, TX........ 6,604 1,620 -- 6,605 -- 1,620 6,605 8,225 Marina Landing, Galveston, TX.......... 12,137 1,246 11,161 -- -- 1,240 11,161 12,401 Mountain Plaza, El Paso, TX............ 4,204 837 3,347 139 -- 837 3,486 4,323 </TABLE> <TABLE> <CAPTION> Life on Which Depreciation In Latest Statement of Accumulated Date of Date Operation is Property/Location Depreciation Construction Acquired Computed - ----------------- ------------ ------------ -------- ------------ Held for Investment: <S> <C> <C> <C> <C> Apartments 4242 Cedar Springs, Dallas, TX......... $ 297 1984 06/92 5-40 years 4400, Midland, TX...................... 128 1981 04/98 40 years Apple Lane, Lawrence, KS............... 76 1989 01/00 40 years Arbor Point, Odessa, TX................ 651 1975 08/96 5-40 years Ashton Way, Midland, TX................ 173 1978 04/98 5-40 years Autumn Chase, Midland, TX.............. 56 1985 04/00 40 years Baywalk, Galveston, TX................. 51 1979 09/01 40 years By the Sea, Corpus Christi, TX......... 48 1973 08/01 40 years Camelot, Largo, FL..................... 740 1975 08/93 5-40 years Cliffs of Eldorado, McKinney, TX....... 861 1997 10/98 40 years Country Crossings, Tampa, FL........... 686 1973 04/93 5-40 years Courtyard, Midland, TX................. 23 1976 05/01 40 years Coventry, Midland, TX.................. 220 1977 08/96 5-40 years El Chapparal, San Antonio, TX.......... 1,524 1963 01/88 5-40 years Fairway View Estates, El Paso, TX...... 458 1977 03/99 40 years Fairways, Longview, TX................. 432 1980 03/93 5-40 years Falcon Lakes, Arlington, TX............ -- 2001 10/01 40 years Fountain Lake, Texas City, TX.......... 506 1975 12/94 5-40 years Fountains of Waterford, Midland, TX.... 1,001 1977 05/98 5-40 years Gladstell Forest, Conroe, TX........... 474 1985 06/95 5-40 years Grove Park, Plano, TX.................. 532 1979 06/96 5-40 years Harper's Ferry, Lafayette, LA.......... 520 1972 02/92 5-40 years Heritage on the River, Jacksonville, FL 1,174 1973 12/95 5-40 years Hunters Glen, Midland, TX.............. 413 1982 01/98 5-40 years In the Pines, Gainesville, FL.......... 1,345 1972 12/94 5-40 years Island Bay, Galveston, TX.............. 157 1973 09/01 40 years Limestone Canyon, Austin, TX........... 668 1997 07/98 40 years Limestone Ranch, Lewisville, TX........ -- 2001 05/01 40 years Marina Landing, Galveston, TX.......... 93 1985 09/01 40 years Mountain Plaza, El Paso, TX............ 422 1972 01/98 5-40 years </TABLE> 59
SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 <TABLE> <CAPTION> Cost Capitalized Subsequent to Gross Amounts of Which Initial Cost Acquisition Carried at End of Year ------------------- -------------------- ----------------------------- Building & Building & Property/Location Encumbrances Land Improvements Improvements Other Land Improvements Total (1) - ----------------- ------------ ------ ------------ ------------ ------- ------ ------------ --------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> Oak Park IV, Clute, TX............... $ -- $ 224 $ 674 $ 27 $ (95)/(2)/ $ 224 $ 606 $ 830 Paramount Terrace, Amarillo, TX...... 2,818 340 3,061 -- -- 340 3,061 3,402 Plantation, Tulsa, OK................ 1,966 344 3,096 -- -- 344 3,096 3,440 Primrose, Bakersfield, CA............ 2,934 428 3,852 -- -- 428 3,852 4,280 Quail Creek, Lawrence, KS............ 2,187 343 3,090 -- -- 343 3,090 3,434 Quail Oaks, Balch Springs, TX........ 1,198 90 2,160 152 (187)/(2)/ 90 2,125 2,215 River Oaks, Wiley, TX................ 1,188 590 -- 1,455 -- 590 1,455 2,045 Sandstone, Mesa, AZ.................. 5,648 1,656 6,625 95 -- 1,656 6,720 8,376 Sendero Ridge, San Antonio, TX....... 3,660 2,635 -- 3,926 -- 2,635 3,926 6,561 Somerset, Texas City, TX............. 3,000 936 2,811 158 (452)/(2)/ 936 2,516 3,452 Southgate, Odessa, TX................ 1,788 335 1,338 318 -- 335 1,656 1,991 Southgreen, Bakersfield, CA.......... 2,401 755 3,021 -- -- 755 3,021 3,776 Stone Oak, San Antonio, TX........... 2,847 649 2,598 263 (409)/(2)/ 649 2,452 3,101 Summerfield, Orlando, FL............. 4,540 1,175 4,698 136 -- 1,175 4,834 6,009 Sunchase, Odessa, TX................. 1,822 742 2,967 458 -- 742 3,425 4,167 Terrace Hills, El Paso, TX........... 6,228 1,286 5,145 167 -- 1,286 5,312 6,598 Timbers, Tyler, TX................... 1,634 497 1,988 -- -- 497 1,988 2,485 Tivoli, Dallas, TX................... 1,865 1,355 -- 2,984 -- 1,355 2,984 4,339 Trails at Windfern, Houston, TX...... 3,695 870 3,479 63 (436)/(2)/ 870 3,106 3,976 Treehouse, Irving, TX................ 2,604 716 2,865 260 -- 716 3,125 3,841 Verandas at City View, Fort Worth, TX 2,197 2,545 -- 25 -- 2,545 25 2,570 Waters Edge IV, Gulfport, MS......... -- 443 -- 1,536 -- 443 1,536 1,979 Westwood, Odessa, TX................. -- 85 341 108 -- 85 449 534 Willow Creek, El Paso, TX............ 1,983 608 1,832 76 (156)/(2)/ 608 1,752 2,359 Will-O-Wick, Pensacola, FL........... 3,104 747 2,990 174 (281)/(2)/ 747 2,883 1,499 Willow Wick, North Augusta, SC....... 1,696 324 1,305 39 (170)/(2)/ 324 1,174 3,630 Woodview, Odessa, TX................. 2,079 716 2,864 102 -- 716 2,966 3,682 Office Buildings 1010 Commons, New Orleans, LA........ 8,344 143 15,011 17,551 (1,218)/(2)/ 2,113 29,374 31,487 225 Baronne, New Orleans, LA......... 7,327 1,162 10,457 6,633 (1,293)/(2)/ 1,162 15,797 16,959 </TABLE> <TABLE> <CAPTION> Life on Which Depreciation In Latest Statement of Accumulated Date of Date Operation is Property/Location Depreciation Construction Acquired Computed - ----------------- ------------ ------------ -------- ------------ <S> <C> <C> <C> <C> Oak Park IV, Clute, TX............... $ 148 1981 06/94 5-40 years Paramount Terrace, Amarillo, TX...... 128 1983 05/00 40 years Plantation, Tulsa, OK................ 161 1968 12/99 40 years Primrose, Bakersfield, CA............ 169 1979 04/00 40 years Quail Creek, Lawrence, KS............ 168 1969 01/00 40 years Quail Oaks, Balch Springs, TX........ 1,007 1982 02/87 5-40 years River Oaks, Wiley, TX................ -- 2001 10/01 40 years Sandstone, Mesa, AZ.................. 770 1986 10/97 5-40 years Sendero Ridge, San Antonio, TX....... -- 2001 11/01 40 years Somerset, Texas City, TX............. 668 1985 12/93 5-40 years Southgate, Odessa, TX................ 468 1976 08/96 5-40 years Southgreen, Bakersfield, CA.......... 234 1985 12/98 40 years Stone Oak, San Antonio, TX........... 965 1978 03/90 5-40 years Summerfield, Orlando, FL............. 971 1971 11/94 5-40 years Sunchase, Odessa, TX................. 646 1981 10/97 5-40 years Terrace Hills, El Paso, TX........... 671 1985 03/97 5-40 years Timbers, Tyler, TX................... 203 1973 12/97 40 years Tivoli, Dallas, TX................... -- 2001 12/01 40 years Trails at Windfern, Houston, TX...... 428 1975 05/97 5-40 years Treehouse, Irving, TX................ 543 1974 05/97 5-40 years Verandas at City View, Fort Worth, TX -- 2001 09/01 40 years Waters Edge IV, Gulfport, MS......... -- 2001 11/01 40 years Westwood, Odessa, TX................. 147 1977 08/96 5-40 years Willow Creek, El Paso, TX............ 388 1972 05/94 5-40 years Will-O-Wick, Pensacola, FL........... 225 1974 05/95 5-40 years Willow Wick, North Augusta, SC....... 618 1968 09/94 5-40 years Woodview, Odessa, TX................. 322 1974 05/98 5-40 years Office Buildings 1010 Commons, New Orleans, LA........ 2,484 1971 03/98 5-40 years 225 Baronne, New Orleans, LA......... 2,451 1960 03/98 5-40 years </TABLE> 60
SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 <TABLE> <CAPTION> Initial Cost ------------------- Building & Property/Location Encumbrances Land Improvements - ----------------- ------------ ------ ------------ <S> <C> <C> <C> 4135 Beltline, Addison, TX............. $ 3,100 $ 476 $ 4,280 9033 Wilshire Blvd., Los Angeles, CA... 6,756 956 8,609 Ambulatory Surgery Center, Sterling, VA 6,682 908 8170 AMOCO, New Orleans, LA................. 14,852 895 3,582 Atrium, Palm Beach, FL................. 3,901 1,147 4,590 Bay Plaza, Tampa, FL................... 2,502 895 3,582 Bay Plaza II, Tampa, FL................ 3,599 506 4,550 Bonita Plaza, Bonita, CA............... 4,929 1,168 4,670 Brandeis, Omaha, NE.................... 8,750 1,451 13,061 Corporate Point, Chantilly, VA......... 3,799 830 3,321 Countryside Retail Center, Sterling, VA 21,307/(10)/ 2,088 18,791 Durham Center, Durham, NC.............. 14,246 4,233 16,932 Eton Square, Tulsa, OK................. 10,211 1,469 13,219 Forum, Richmond, VA.................... 5,180 1,360 5,439 Harmon, Sterling, VA................... 8,013 1,054 9,487 Hartford, Dallas, TX................... -- 630 2,520 Institute Place Lofts, Chicago, IL..... 5,629 665 7,057 Jefferson, Washington, DC.............. 9,731 2,774 11,096 Lexington Center, Colorado Springs, CO. 4,133 1,103 4,413 Mimado, Sterling, VA................... -- 582 5,236 NASA, Houston, TX...................... -- 410 3,319 One Steeplechase, Sterling, VA......... 7,905 1,380 5,520 Parkway North, Dallas, TX.............. 3,900 1,173 4,692 Plaza Towers, St. Petersburg, FL....... 7,033 1,760 12,617 Remington Tower, Tulsa, OK............. 3,480 480 4,351 Savings of America, Houston, TX........ 1,200 338 1,353 Signature Athletic Club, Dallas, TX.... 2,613 1,075 2,921 Venture Center, Atlanta, GA............ 2,643 411 2,746 Westgrove Air Plaza, Addison, TX....... 3,948 501 2,004 Windsor Plaza, Windcrest, TX........... -- 1,429 4,441 </TABLE> <TABLE> <CAPTION> Cost Capitalized Subsequent to Gross Amounts of Which Acquisition Carried at End of Year -------------------- ----------------------------- Building & Accumulated Date of Property/Location Improvements Other Land Improvements Total (1) Depreciation Construction - ----------------- ------------ ------- ------ ------------ --------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> <C> 4135 Beltline, Addison, TX............. $ -- $ -- $ 476 $ 4,280 $ 4,756 335 1981/1982 9033 Wilshire Blvd., Los Angeles, CA... 143 -- 956 8,752 9,708 394 1957 Ambulatory Surgery Center, Sterling, VA -- -- 908 8,170 9,078 255 1991 AMOCO, New Orleans, LA................. 6,380 (1,149)/(2)/ 1,233 8,475 9,708 3,843 1974 Atrium, Palm Beach, FL................. 166 -- 1,147 4,756 5,903 474 1985 Bay Plaza, Tampa, FL................... 508 (384)/(2)/ 895 3,706 4,601 560 1988 Bay Plaza II, Tampa, FL................ 90 -- 506 4,640 5,146 185 1985 Bonita Plaza, Bonita, CA............... 1,011 -- 1,168 5,681 6,849 935 1991 Brandeis, Omaha, NE.................... 114 -- 1,451 13,175 14,626 365 1921 Corporate Point, Chantilly, VA......... 834 -- 830 4,155 4,985 1,097 1992 Countryside Retail Center, Sterling, VA 10 -- 2,088 18,801 20,889 578 1986 Durham Center, Durham, NC.............. 1,408 (1,362)/(2)/ 4,233 16,978 21,211 2,229 1988 Eton Square, Tulsa, OK................. 418 -- 1,469 13,637 15,106 806 1985 Forum, Richmond, VA.................... 958 -- 1,360 6,397 7,757 2,018 1987 Harmon, Sterling, VA................... 20 -- 1,054 9,507 10,561 306 1987 Hartford, Dallas, TX................... 815 -- 630 3,335 3,965 984 1980 Institute Place Lofts, Chicago, IL..... 537 -- 665 7,594 8,259 4,351 1910 Jefferson, Washington, DC.............. 1,057 (883)/(2)/ 2,774 11,270 14,044 1,878 1979 Lexington Center, Colorado Springs, CO. 561 -- 1,103 4,974 6,077 755 1986 Mimado, Sterling, VA................... 58 -- 582 5,294 5,876 164 1986 NASA, Houston, TX...................... (661) (272)/(2)/ 172 2,624 2,796 1,629 1979 One Steeplechase, Sterling, VA......... 2,807 72/(4)/ 1,380 8,399 9,779 3,398 1987 Parkway North, Dallas, TX.............. 949 -- 1,173 5,641 6,813 802 1980 Plaza Towers, St. Petersburg, FL....... 7,136 (4,379)/(3)/ 1,241 15,893 17,134 10,027 1979 Remington Tower, Tulsa, OK............. 214 -- 480 4,565 5,045 336 1982 Savings of America, Houston, TX........ 722 -- 338 2,074 2,412 568 1979 Signature Athletic Club, Dallas, TX.... 1,071 (439)/(2)/ 1,075 3,553 4,628 566 1985 Venture Center, Atlanta, GA............ 407 -- 411 3,153 3,564 1,200 1981 Westgrove Air Plaza, Addison, TX....... 626 (945)/(2)/ 501 1,684 2,185 45 1982 Windsor Plaza, Windcrest, TX........... (352) (257)/(2)/ 1,672 3,589 5,261 2,308 1984 </TABLE> <TABLE> <CAPTION> Life on Which Depreciation In Latest Statement of Date Operation is Property/Location Acquired Computed - ----------------- -------- ------------ <S> <C> <C> 4135 Beltline, Addison, TX............. 06/99 40 years 9033 Wilshire Blvd., Los Angeles, CA... 04/00 5-40 years Ambulatory Surgery Center, Sterling, VA 07/00 40 years AMOCO, New Orleans, LA................. 06/97 5-40 years Atrium, Palm Beach, FL................. 06/98 40 years Bay Plaza, Tampa, FL................... 07/97 5-40 years Bay Plaza II, Tampa, FL................ 06/00 40 years Bonita Plaza, Bonita, CA............... 09/97 5-40 years Brandeis, Omaha, NE.................... 11/00 40 years Corporate Point, Chantilly, VA......... 10/94 5-40 years Countryside Retail Center, Sterling, VA 09/00 40 years Durham Center, Durham, NC.............. 07/97 5-40 years Eton Square, Tulsa, OK................. 09/99 5-40 years Forum, Richmond, VA.................... 10/92 2-40 years Harmon, Sterling, VA................... 09/00 5-40 years Hartford, Dallas, TX................... 11/94 2-40 years Institute Place Lofts, Chicago, IL..... 01/93 2-40 years Jefferson, Washington, DC.............. 02/97 5-40 years Lexington Center, Colorado Springs, CO. 12/97 3-40 years Mimado, Sterling, VA................... 09/00 40 years NASA, Houston, TX...................... 10/85 5-40 years One Steeplechase, Sterling, VA......... 12/92 5-40 years Parkway North, Dallas, TX.............. 02/98 2-40 years Plaza Towers, St. Petersburg, FL....... 11/85 1-40 years Remington Tower, Tulsa, OK............. 09/99 40 years Savings of America, Houston, TX........ 03/97 3-40 years Signature Athletic Club, Dallas, TX.... 02/99 5-40 years Venture Center, Atlanta, GA............ 07/89 1-40 years Westgrove Air Plaza, Addison, TX....... 10/97 5-40 years Windsor Plaza, Windcrest, TX........... 11/86 5-40 years </TABLE> 61
SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 <TABLE> <CAPTION> Cost Capitalized Subsequent to Gross Amounts of Which Initial Cost Acquisition Carried at End of Year ------------------- -------------------- ----------------------------- Building & Building & Property/Location Encumbrances Land Improvements Improvements Other Land Improvements Total (1) - ----------------- ------------ ------ ------------ ------------ ------- ------ ------------ --------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> Industrial Warehouses 5360 Tulane, Atlanta, GA.......... $ 375 $ 95 $ 514 $ 50 $ (44)/(2)/ $ 95 $ 520 $ 615 5700 Tulane, Atlanta, GA.......... -- -- -- 720 (101)/(2)/ -- 619 619 Addison Hangar, Addison, TX....... 1,587 928 1,481 32 -- 928 1,513 2,441 Addison Hanger II, Addison, TX.... -- -- 1,150 229 -- -- 1,379 1,379 Central Storage, Dallas, TX....... 1,070 464 1,856 438 (138)/(2)/ 464 2,156 2,620 Encon, Fort Worth, TX............. 3,469 984 3,934 67 -- 984 4,001 4,985 Kelly, Dallas, TX................. 4,378 1,136 4,856 473 (1,196)/(2)(9)/ 1,136 4,133 5,269 McLeod, Orlando, FL............... 1,994 673 2,693 576 (511)/(2)/ 673 2,758 3,431 Ogden, Ogden, UT.................. -- 52 1,568 218 (70)/(2)/ 52 1,716 1,768 Space Center, San Antonio, TX..... 1,110 247 1,332 112 (131)/(2)/ 247 1,313 1,560 Texstar, Arlington, TX............ 1,225 333 1,331 216 -- 333 1,880 Tricon, Atlanta, GA............... 9,665 2,761 6,442 1,791 -- 2,761 8,234 10,995 Shopping Centers Dunes Plaza, Michigan City, IN.... 3,088 1,230 5,430 2,344 (482)/(5)/ 1,343 7,179 8,522 K-Mart, Cary, NC.................. 1,803 1,358 1,157 162 -- 1,358 1,319 2,677 Parkway Center, Dallas, TX........ 1,697 273 1,876 408 -- 273 2,283 2,556 Plaza on Bachman Creek, Dallas, TX -- 734 2,935 1,209 -- 734 4,144 4,878 Promenade, Highlands Ranch, CO.... 7,262 1,749 6,995 105 (679)/(2)/ 1,749 6,420 8,169 Sadler Square, Amelia Island, FL.. 2,812 679 2,715 134 -- 679 2,849 3,528 Sheboygan, Sheboygan, WI.......... 484 242 1,371 45 -- 242 1,416 1,658 Hotels Akademia, Wroclaw, Poland......... 7,266 2,184 -- 9,577 -- 2,184 9,577 11,761 Brompton, Chicago, IL............. 2,302 572 2,365 1,441 -- 572 3,806 4,378 City Suites, Chicago, IL.......... 3,840 950 3,847 1,061 -- 950 4,908 5,858 Majestic Inn, San Francisco, CA... 5,346 1,139 4,555 1,187 -- 1,139 5,742 6,881 Surf, Chicago, IL................. 3,814 945 3,851 1,363 -- 945 5,215 6,160 Land 1013 Commons, New Orleans, LA..... -- 615 -- 46 (36)/(2)/ 625 -- 625 </TABLE> <TABLE> <CAPTION> Life on Which Depreciation In Latest Statement of Accumulated Date of Date Operation is Property/Location Depreciation Construction Acquired Computed - ----------------- ------------ ------------ -------- ------------ <S> <C> <C> <C> <C> Industrial Warehouses 5360 Tulane, Atlanta, GA.......... $ 292 1970 11/97 5-40 years 5700 Tulane, Atlanta, GA.......... 92 1998 11/97 40 years Addison Hangar, Addison, TX....... 91 1992 12/99 5-40 years Addison Hanger II, Addison, TX.... 44 2000 12/99 5-40 years Central Storage, Dallas, TX....... 591 1966 04/96 5-40 years Encon, Fort Worth, TX............. 402 1958 10/97 5-40 years Kelly, Dallas, TX................. 1,155 1966/1973 03/95 5-40 years McLeod, Orlando, FL............... 793 1985 09/94 5-40 years Ogden, Ogden, UT.................. 670 1979 01/86 5-40 years Space Center, San Antonio, TX..... 737 1970 11/97 5-40 years Texstar, Arlington, TX............ 421 1967 12/93 5-40 years Tricon, Atlanta, GA............... 2,818 1971 02/93 2-40 years Shopping Centers Dunes Plaza, Michigan City, IN.... 2,306 1978 03/92 5-40 years K-Mart, Cary, NC.................. 88 1981 08/98 40 years Parkway Center, Dallas, TX........ 964 1979 11/91 5-40 years Plaza on Bachman Creek, Dallas, TX 682 1986 03/98 5-40 years Promenade, Highlands Ranch, CO.... 1,158 1985 07/96 5-40 years Sadler Square, Amelia Island, FL.. 713 1987 11/93 3-40 years Sheboygan, Sheboygan, WI.......... 338 1977 05/92 40 years Hotels Akademia, Wroclaw, Poland......... -- 2001 02/01 40 years Brompton, Chicago, IL............. 488 1995 12/98 5-40 years City Suites, Chicago, IL.......... 731 1995 12/98 5-40 years Majestic Inn, San Francisco, CA... 2,137 1902 12/90 5-40 years Surf, Chicago, IL................. 847 1995 12/98 5-40 years Land 1013 Commons, New Orleans, LA..... -- -- 08/98 -- </TABLE> 62
SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 <TABLE> <CAPTION> Cost Capitalized Subsequent to Gross Amounts of Which Initial Cost Acquisition Carried at End of Year --------------------- --------------------- ------------------------------- Building & Building & Property/Location Encumbrances Land Improvements Improvements Other Land Improvements Total (1) - ----------------- ------------ -------- ------------ ------------ -------- -------- ------------ --------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> Alamo Springs, Dallas, TX...... $ -- $ 1,385 $ -- $ -- $ -- $ 1,385 $ -- $ 1,385 Dominion, Dallas, TX........... -- 3,931 -- -- -- 3,931 -- 3,931 Eagle Crest, Farmers Branch, TX -- 2,500 -- 134 (505)/(9)/ 2,129 -- 2,129 Folsom......................... -- 1,781 -- 450 -- 2,231 -- 2,231 Lamar Parmer, Austin, TX....... -- 1,571 -- 94 -- 1,665 -- 1,665 Las Colinas, Las Colinas, TX... -- 995 -- 5 -- 1,000 -- 1,000 Lemon Carlisle, Dallas, TX..... 1,746 3,576 -- 30 -- 3,606 -- 3,606 Limestone Canyon II............ -- 428 -- 266 38 732 -- 732 Manhattan, Farmers Branch, TX.. -- 11,186 -- 777 44 12,007 -- 12,007 McKinney 36, Collin County, TX. 956 2,203 -- -- (230)/(2)/ 1,973 -- 1,973 Mira Lago, Farmers Branch, TX.. -- 541 -- -- 41 582 -- 582 Pac-Trust, Dallas, TX.......... -- 1,232 -- -- -- 1,232 -- 1,232 Red Cross, Dallas, TX.......... 4,500 8,383 -- -- -- 8,383 -- 8,383 Sandison, Collin County, TX.... 1,040 5,021 -- -- (392)/(2)(7)/ 4,629 -- 4,629 Seminary West, Fort Worth, TX.. -- 234 -- -- -- 234 -- 234 Solco Allen, Collin County, TX. 305 1,388 -- -- (80)/(2)/ 1,308 -- 1,308 Solco-Valley, Dallas, TX....... -- 1,525 -- -- -- 1,525 -- 1,525 Stacy Road, Allen, TX.......... 1,345 2,665 -- -- (193)/(2)/ 2,472 -- 2,472 State Highway 121, Collin County, TX.................... -- 4,354 -- -- (2,581)/(2)(7)/ 1,773 -- 1,773 Watters Road, Collin County, TX -- 1,787 -- -- (200)/(2)/ 1,587 -- 1,587 West End, Dallas, TX........... 5,889 11,405 -- 77 (4,013)/(8)/ 7,469 -- 7,469 Whisenant, Collin County, TX... 133 631 -- -- (59)/(2)(7)/ 572 -- 572 -------- -------- -------- -------- -------- -------- -------- -------- Investment Properties.......... 456,845 171,600 453,830 114,375 (26,974) 167,220 545,611 712,832 -------- -------- -------- -------- -------- -------- -------- -------- Properties Held for Sale Land Fiesta, San Angelo, TX......... -- 44 -- -- -- 44 -- 44 Fruitland, Fruitland Park, FL.. -- 253 -- -- (100)/(6)/ 153 -- 153 Round Mt, Austin, TX........... -- 5,740 -- -- (5,421)/(2)(3)/ 319 -- 319 -------- -------- -------- -------- -------- -------- -------- -------- Properties Held for Sale....... -- 6,037 -- -- (5,521) 516 -- 516 -------- -------- -------- -------- -------- -------- -------- -------- $456,845 $177,637 $453,830 $114,375 $(32,495) $167,736 $545,611 $713,348 ======== ======== ======== ======== ======== ======== ======== ======== </TABLE> <TABLE> <CAPTION> Life on Which Depreciation In Latest Statement of Accumulated Date of Date Operation is Property/Location Depreciation Construction Acquired Computed - ----------------- ------------ ------------ -------- ------------ <S> <C> <C> <C> <C> Alamo Springs, Dallas, TX...... $ -- -- 09/99 -- Dominion, Dallas, TX........... -- -- 03/99 -- Eagle Crest, Farmers Branch, TX -- -- 05/98 -- Folsom......................... -- -- 10/00 -- Lamar Parmer, Austin, TX....... -- -- 01/00 -- Las Colinas, Las Colinas, TX... -- -- 01/96 -- Lemon Carlisle, Dallas, TX..... -- -- 02/98 -- Limestone Canyon II............ -- -- 06/00 -- Manhattan, Farmers Branch, TX.. -- -- 02/00 -- McKinney 36, Collin County, TX. -- -- 01/98 -- Mira Lago, Farmers Branch, TX.. -- -- 05/01 -- Pac-Trust, Dallas, TX.......... -- -- 10/01 -- Red Cross, Dallas, TX.......... -- -- 05/99 -- Sandison, Collin County, TX.... -- -- 05/98 -- Seminary West, Fort Worth, TX.. -- -- 07/01 -- Solco Allen, Collin County, TX. -- -- 05/98 -- Solco-Valley, Dallas, TX....... -- -- 04/01 -- Stacy Road, Allen, TX.......... -- -- 04/97 -- State Highway 121, Collin County, TX.................... -- -- 02/97 -- Watters Road, Collin County, TX -- -- 02/97 -- West End, Dallas, TX........... -- -- 08/97 -- Whisenant, Collin County, TX... -- -- 05/98 -- ------- Investment Properties.......... 90,661 ------- Properties Held for Sale Land Fiesta, San Angelo, TX......... -- -- 12/91 -- Fruitland, Fruitland Park, FL.. -- -- 05/92 -- Round Mt, Austin, TX........... -- -- 12/86 -- ------- Properties Held for Sale....... -- ------- $90,661 ======= </TABLE> 63
SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 - -------- (1) The aggregate cost for federal income tax purposes is $744.4 million. (2) Purchase accounting basis adjustment. (3) Writedown of property to estimated net realizable value. (4) Construction period interest and taxes. (5) Forgiveness of debt and cash received deducted from the basis of the property, offset by land acquired in 1992. (6) Cash received for easement deducted from the basis of the property. (7) The Sandison land is collateralized with the Solco Allen and Whisenant land. All of the land in McKinney and Collin County, Texas is cross-collateralized and cross defaulted. (8) Cash received for condemnation of part of property. (9) Sale of portion of property. (10) The Countryside Retail Center is collateralized with the Mimado Building. 64
SCHEDULE III (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION <TABLE> <CAPTION> 2001 2000 1999 --------- -------- -------- (dollars in thousands) <S> <C> <C> <C> Reconciliation of Real Estate Balance at January 1,....................... $ 729,051 $686,522 $409,986 Additions Purchases, improvements and construction. 97,703 122,683 76,659 Foreclosures............................. -- 352 -- CMET merger.............................. -- -- 290,415 Deductions Sale of real estate...................... (111,986) (80,188) (89,463) Sale of foreclosed properties............ (1,420) (318) (1,075) --------- -------- -------- Balance at December 31,..................... $ 713,348 $729,051 $686,522 ========= ======== ======== Reconciliation of Accumulated Depreciation Balance at January 1,....................... $ 88,187 $ 84,986 $ 61,241 Additions Depreciation............................. 19,705 19,702 11,702 CMET merger.............................. -- -- 31,628 Deductions Sale of real estate...................... (17,231) (16,501) (19,585) --------- -------- -------- Balance at December 31,..................... $ 90,661 $ 88,187 $ 84,986 ========= ======== ======== </TABLE> 65
SCHEDULE IV TRANSCONTINENTAL REALTY INVESTORS, INC. MORTGAGE LOANS ON REAL ESTATE December 31, 2001 <TABLE> <CAPTION> Final Interest Maturity Description Rate Date Periodic Payment Terms ----------- -------- -------- ----------------------------------- <S> <C> <C> <C> FIRST MORTGAGE LOANS Keller Hicks.............................. 16.0% 07/02 Interest only payments of $22,667 Secured by 44.6 acres of unimproved due monthly. land in Fort Worth, TX Executive Court........................... 12.0% 12/04 Excess property cash flow payments. Secured by a 41,840 sq. ft. office building in Memphis, TN WRAPAROUND MORTGAGE LOANS Pinemont.................................. 10.40% 07/08 Monthly principal and interest Secured by an office building in payments of $6,281. Houston, TX. JUNIOR MORTGAGE LOANS Country Elms.............................. 8.00% 05/02 Monthly principal and interest Secured by mobile home park in payments of $3,154. Galesburg, IL. ACLP Park Ten............................. 16.0% 05/02 Interest only payments of $30,000 Secured by an office building and due monthly. industrial warehouse in Carrollton, TX. Lincoln Court Apartments.................. Varies 06/04 Two notes bearing interest at prime Secured by apartment building in plus 1%. Interest only payments of Dallas, TX. $8,841 due monthly. Portofino................................. 16.0% 04/02 Interest only payments of $46,667 Secured by a retail center in due monthly. Montgomery County, TX. Dallas Fund XVII.......................... Varies 01/03 One note bearing interest at prime Secured by an office building in Dallas, plus 3%. TX. Madison at Bear Creek..................... 7.0% 01/02 Principal and interest due January Secured by an apartment in Houston, 2002. TX. One City Center........................... 9.0% 02/02 Interest only payments of $30,000. Secured by a 375,752 sq. ft. office building in St. Louis, MO. Texas Glenn............................... Secured by an apartment in Dallas, TX. 10.0% 06/03 Interest only payments of $12,500. Sendera Ranch............................. Secured by 1,714.16 acres of unimproved land in Tarrant County, TX 15.0% 07/03 Interest only payments of $44,338. Interest.................................. Allowance for estimated losses............ </TABLE> <TABLE> <CAPTION> Principal Amount of Loans Subject to Carrying Delinquent Prior Face Amount Amounts of Principal Description Liens of Mortgage Mortgage (1) or Interest ----------- ------- ----------- ------------ ----------- (dollars in thousands) <S> <C> <C> <C> <C> FIRST MORTGAGE LOANS Keller Hicks.............................. $ -- $ 1,700 $ 1,700 $ 110 Secured by 44.6 acres of unimproved land in Fort Worth, TX Executive Court........................... -- 1,970 1,970 -- Secured by a 41,840 sq. ft. office building in Memphis, TN WRAPAROUND MORTGAGE LOANS Pinemont.................................. 367 467 352 -- Secured by an office building in Houston, TX. JUNIOR MORTGAGE LOANS Country Elms.............................. -- 380 155 -- Secured by mobile home park in Galesburg, IL. ACLP Park Ten............................. 10,750 3,000 2,250 -- Secured by an office building and industrial warehouse in Carrollton, TX. Lincoln Court Apartments.................. 1,255 1,369 1,369 -- Secured by apartment building in Dallas, TX. Portofino................................. 22,160 5,000 3,500 -- Secured by a retail center in Montgomery County, TX. Dallas Fund XVII.......................... 835 1,738 1,738 -- Secured by an office building in Dallas, TX. Madison at Bear Creek..................... $ 3,442 $ 608 $ 608 $ -- Secured by an apartment in Houston, TX. One City Center........................... -- 4,000 4,000 -- Secured by a 375,752 sq. ft. office building in St. Louis, MO. Texas Glenn............................... Secured by an apartment in Dallas, TX. 5,003 1,500 1,500 -- Sendera Ranch............................. Secured by 1,714.16 acres of unimproved land in Tarrant County, TX 7,000 3,547 3,547 -- ------- ------- ------- ----- $50,812 $25,279 22,689 $ -- ======= ======= ===== Interest.................................. 178 Allowance for estimated losses............ (818) ------- $22,049 ======= </TABLE> - -------- (1) The aggregate cost for federal income tax purposes is $22.9 million. 66
SCHEDULE IV (Continued) TRANSCONTINENTAL REALTY INVESTORS, INC. MORTGAGE LOANS ON REAL ESTATE <TABLE> <CAPTION> 2001 2000 1999 ------- -------- ------- (dollars in thousands) <S> <C> <C> <C> Balance at January 1,...................................... $ 8,668 $ 12,061 $ 2,379 Additions New mortgage loans...................................... 20,063 17,500 9,680 CMET merger............................................. -- -- 631 Deductions Collections of principal................................ (6,042) (20,531) (37) Foreclosed properties and deeds-in-lieu of foreclosure.. -- (356) -- Write off of uncollectible mortgage loans............... -- -- (575) Write off of principal due to discount for early payoff. -- (6) (17) ------- -------- ------- Balance at December 31,.................................... $22,689 $ 8,668 $12,061 ======= ======== ======= </TABLE> 67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ----------------- PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT Directors The affairs of Transcontinental Realty Investors, Inc. ("TCI") are managed by a Board of Directors. The Directors are elected at the annual meeting of stockholders or appointed by the incumbent Board and serve until the next annual meeting of stockholders or until a successor has been elected or approved. The Directors of TCI are listed below, together with their ages, terms of service, all positions and offices with TCI or its advisor, Basic Capital Management, Inc. ("BCM"), their principal occupations, business experience and directorships with other companies during the last five years or more. The designation "Affiliated", when used below with respect to a Director, means that the Director is an officer, director or employee of BCM or an officer of TCI. The designation "Independent", when used below with respect to a Director, means that the Director is neither an officer of TCI nor a director, officer or employee of BCM, although TCI may have certain business or professional relationships with such Director as discussed in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Certain Business Relationships." TED P. STOKELY: Age 68, Director (Independent) (since April 1990) and Chairman of the Board (since January 1995). General Manager (since January 1995) of ECF Senior Housing Corporation, a nonprofit corporation; General Manager (since January 1993) of Housing Assistance Foundation, Inc., a nonprofit corporation; Part-time unpaid consultant (since January 1993) and paid consultant (April 1992 to December 1992) of Eldercare Housing Foundation ("Eldercare"), a nonprofit corporation; and Director (since April 1990) and Chairman of the Board (since January 1995) of Income Opportunity Realty Investors, Inc. ("IORI"). HENRY BUTLER: Age 51, Director (Affiliated) (since December 2001). Broker--Land Sales (since 1992) of Basic Capital Management, Inc. ("BCM"); Owner/Operator (1989 to 1991) of Butler Interests, Inc.; and Director (since December 2001) of IORI. EARL D. CECIL: Age 72, Director (Independent) (since March 2002). Financial and business consultant (since January 1994); Division Vice President (February 1987 to December 1993) of James Mitchell & Company, a financial services marketing organization; Director (since November 2001) of ARI; and Director (since March 2002) of IORI. MARTIN L. WHITE: Age 62, Director (Independent) (since January 1995). Chief Executive Officer (since 1995) of Builders Emporium, Inc.; Chairman and Chief Executive Officer (since 1993) of North American Trading Company Ltd.; President and Chief Operating Officer (since 1992) of Community Based Developers, Inc.; and Director (since January 1995) of IORI. Board Committees The Board of Directors held 19 meetings during 2001. For such year, no incumbent Director attended fewer than 75% of the aggregate of (1) the total number of meetings held by the Board during the period for 68
which he had been a Director and (2) the total number of meetings held by all committees of the Board on which he served during the period that he served. The Board of Directors has an Audit Committee, the function of which is to review TCI's operating and accounting procedures. The current members of the Audit Committee, all of whom are Independent Directors, are Messrs. Cecil, Stokely and White. The Audit Committee met four times during 2001. The Board of Directors does not have Nominating or Compensation Committees. Executive Officers The following persons currently serve as executive officers of TCI: Mark Branigan, Executive Vice President--Residential; Louis J. Corna Executive Vice President--Tax; Ronald E. Kimbrough, Executive Vice President and Chief Financial Officer; and David W. Starowicz, Executive Vice President--Acquisitions, Sales and Construction. Their positions with TCI are not subject to a vote of stockholders. Their ages, terms of service, all positions and offices with TCI or BCM, other principal occupations, business experience and directorships with other companies during the last five years or more are set forth below. MARK W. BRANIGAN: Age 47, Executive Vice President--Residential (since June 2001), Executive Vice President and Chief Financial Officer (August 2000 to June 2001), Vice President--Director of Construction (August 1999 to August 2000) and Executive Vice President--Residential Asset Management (January 1992 to October 1997). Executive Vice President--Residential (since June 2001), Executive Vice President and Chief Financial Officer (August 2000 to June 2001), Vice President--Director of Construction (August 1999 to August 2000) and Executive Vice President--Residential Management (January 1992 to October 1997) of BCM, American Realty Trust, Inc. ("ART") and IORI; Executive Vice President and Chief Financial Officer (August 2000 to June 2001) and Director (September 2000 to June 2001) of ARI; and real estate consultant (November 1997 to July 1999). LOUIS J. CORNA: Age 54, Executive Vice President--Tax (since October 2001), Executive Vice President and Chief Financial Officer (June 2001 to October 2001), and Senior Vice President--Tax (December 2001 to June 2001). Executive Vice President--Tax (since October 2001), Executive Vice President and Chief Financial Officer (June 2001 to October 2001), and Senior Vice President--Tax (December 2000 to June 2001) of BCM, ARI and IORI; Private Attorney (January 2000 to December 2000); Vice President--Taxes and Assistant Treasurer (March 1998 to January 2000) of IMC Global, Inc.; and Vice President--Taxes (July 1991 to February 1998) of Whitman Corporation. RONALD E. KIMBROUGH: Age 49, Executive Vice President and Chief Financial Officer (since January 2002). Executive Vice President and Chief Financial Officer (since January 2002) of BCM, ARI and IORI; Controller (from September 2000 to January 2002) of BCM; Vice President and Treasurer (from January 1998 to September 2000) of Syntek West, Inc. and One Realco Corporation; and Consultant (1997). DAVID W. STAROWICZ: Age 46, Executive Vice President--Acquisitions, Sales and Construction (since March 2001), Executive Vice President--Commercial Asset Management (September 1999 to March 2001) and Vice President (May 1992 to September 1999). Executive Vice President--Acquisitions, Sales and Construction (since March 2001), Executive Vice President--Commercial Asset Management (September 1999 to March 2001), Vice President (May 1992 to September 1999) and Asset Manager (November 1990 to May 1992) of BCM, ART and IORI; Executive Vice President--Commercial Asset Management (since August 2000) of ARI. 69
Officers Although not an executive officer, Robert A. Waldman currently serves as Senior Vice President, Secretary and General Counsel. His position with TCI is not subject to a vote of stockholders. His age, term of service, all positions and offices with TCI or BCM, other principal occupations, business experience and directorships with other companies during the last five years or more is set forth below. ROBERT A. WALDMAN: Age 49, Senior Vice President and General Counsel (since January 1995), Vice President (December 1990 to January 1995) and Secretary (December 1993 to February 1997 and since June 1999). Senior Vice President and General Counsel (since January 1995), Vice President (December 1990 to January 1995) and Secretary (December 1993 to February 1997 and since June 1999) of IORI; Senior Vice President, Secretary and General Counsel (since August 2000) of ARI; Senior Vice President and General Counsel (since January 1995), Vice President (January 1993 to January 1995) and Secretary (since December 1989) of ART; and Senior Vice President and General Counsel (since November 1994), Vice President and Corporate Counsel (November 1989 to November 1994), and Secretary (since November 1989) of BCM. In addition to the foregoing officers, TCI has several vice presidents and assistant secretaries who are not listed herein. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Under the securities laws of the United States, the Directors, executive officers, and any persons holding more than ten percent of TCI's shares of Common Stock are required to report their share ownership and any changes in that ownership to the Securities and Exchange Commission (the "Commission"). Specific due dates for these reports have been established and TCI is required to report any failure to file by these dates during 2001. All of these filing requirements were satisfied by TCI's Directors and executive officers and ten percent holders. In making these statements, TCI has relied on the written representations of its incumbent Directors and executive officers and its ten percent holders and copies of the reports that they have filed with the Commission. The Advisor Although the Board of Directors is directly responsible for managing the affairs of TCI and for setting the policies which guide it, TCI's day-to-day operations are performed by BCM under the supervision of the Board. The duties of BCM include, among other things, locating, investigating, evaluating and recommending real estate and mortgage note investment and sales opportunities as well as financing and refinancing sources. BCM also serves as a consultant to the Board in connection with the business plan and investment decisions made by the Board. BCM has served as TCI's advisor since March 1989. BCM is a company of which Messrs. Branigan, Corna, Kimbrough and Starowicz serve as executive officers. BCM is owned by a trust for the benefit of the children of Gene E. Phillips. Mr. Phillips serves as a representative of his children's trust which owns BCM and, in such capacity, has substantial contact with the management of BCM and input with respect to its performance of advisory services to TCI. Under the Advisory Agreement, BCM is required to annually formulate and submit, for Board approval, a budget and business plan containing a twelve-month forecast of operations and cash flow, a general plan for asset sales and purchases, lending, foreclosure and borrowing activity, and other investments, and BCM is required to report quarterly to the Board on TCI's performance against the business plan. In addition, all transactions require prior Board approval, unless they are explicitly provided for in the approved business plan or are made pursuant to authority expressly delegated to BCM by the Board. 70
The Advisory Agreement also requires prior Board approval for the retention of all consultants and third party professionals, other than legal counsel. The Advisory Agreement provides that BCM shall be deemed to be in a fiduciary relationship to the stockholders; contains a broad standard governing BCM's liability for losses by TCI; and contains guidelines for BCM's allocation of investment opportunities as among itself, TCI and other entities it advises. The Advisory Agreement provides for BCM to be responsible for the day-to-day operations of TCI and to receive an advisory fee comprised of a gross asset fee of .0625% per month (.75% per annum) of the average of the gross asset value (total assets less allowance for amortization, depreciation or depletion and valuation reserves) and an annual net income fee equal to 7.5% of TCI's net income. The Advisory Agreement also provides for BCM to receive an annual incentive sales fee equal to 10% of the amount, if any, by which the aggregate sales consideration for all real estate sold by TCI during such fiscal year exceeds the sum of: (1) the cost of each such property as originally recorded in TCI's books for tax purposes (without deduction for depreciation, amortization or reserve for losses), (2) capital improvements made to such assets during the period owned, and (3) all closing costs, (including real estate commissions) incurred in the sale of such real estate; provided, however, no incentive fee shall be paid unless (a) such real estate sold in such fiscal year, in the aggregate, has produced an 8% simple annual return on the net investment including capital improvements, calculated over the holding period before depreciation and inclusive of operating income and sales consideration and (b) the aggregate net operating income from all real estate owned for each of the prior and current fiscal years shall be at least 5% higher in the current fiscal year than in the prior fiscal year. Additionally, pursuant to the Advisory Agreement BCM or an affiliate of BCM is to receive an acquisition commission for supervising the acquisition, purchase or long-term lease of real estate equal to the lesser of (1) up to 1% of the cost of acquisition, inclusive of commissions, if any, paid to nonaffiliated brokers or (2) the compensation customarily charged in arm's-length transactions by others rendering similar property acquisition services as an ongoing public activity in the same geographical location and for comparable property, provided that the aggregate purchase price of each property (including acquisition fees and real estate brokerage commissions) may not exceed such property's appraised value at acquisition. The Advisory Agreement requires BCM or any affiliate of BCM to pay to TCI, one-half of any compensation received from third parties with respect to the origination, placement or brokerage of any loan made by TCI; provided, however, that the compensation retained by BCM or any affiliate of BCM shall not exceed the lesser of (1) 2% of the amount of the loan commitment or (2) a loan brokerage and commitment fee which is reasonable and fair under the circumstances. The Advisory Agreement also provides that BCM or an affiliate of BCM is to receive a mortgage or loan acquisition fee with respect to the acquisition or purchase of any existing mortgage loan by TCI equal to the lesser of (1) 1% of the amount of the loan purchased or (2) a brokerage or commitment fee which is reasonable and fair under the circumstances. Such fee will not be paid in connection with the origination or funding of any mortgage loan by TCI. Under the Advisory Agreement, BCM or an affiliate of BCM also is to receive a mortgage brokerage and equity refinancing fee for obtaining loans or refinancing on properties equal to the lesser of (1) 1% of the amount of the loan or the amount refinanced or (2) a brokerage or refinancing fee which is reasonable and fair under the circumstances; provided, however, that no such fee shall be paid on loans from BCM or an affiliate of BCM without the approval of TCI's Board of Directors. No fee shall be paid on loan extensions. Under the Advisory Agreement, BCM receives reimbursement of certain expenses incurred by it in the performance of advisory services. Under the Advisory Agreement, all or a portion of the annual advisory fee must be refunded by the Advisor if the Operating Expenses of TCI (as defined in the Advisory Agreement) exceed certain limits specified in the 71
Advisory Agreement based on the book value, net asset value and net income of TCI during the fiscal year. BCM was not required to refund any of the 2001 advisory fee under this provision. Additionally, if management were to request that BCM render services to TCI other than those required by the Advisory Agreement, BCM or an affiliate of BCM separately would be compensated for such additional services on terms to be agreed upon from time to time. As discussed below, under "Property Management", TCI has hired Triad Realty Services, Ltd. ("Triad"), an affiliate of BCM, to provide property management services for TCI's properties. Also as discussed below, under "Real Estate Brokerage" TCI has engaged, on a non-exclusive basis, Regis Realty, Inc. ("Regis"), a related party, to perform brokerage services for TCI. BCM may assign the Advisory Agreement only with the prior consent of TCI. The directors and principal officers of BCM are set forth below. <TABLE> <C> <S> Mickey N. Phillips: Director Ryan T. Phillips: Director Mark W. Branigan: Executive Vice President--Residential Louis J. Corna: Executive Vice President--Tax Ronald E. Kimbrough: Executive Vice President and Chief Financial Officer David W. Starowicz: Executive Vice President--Acquisitions, Sales and Construction Dan S. Allred: Senior Vice President--Land Development Michael E. Bogel: Senior Vice President--Project Manager Robert A. Waldman: Senior Vice President, Secretary and General Counsel </TABLE> Mickey N. Phillips is Gene E. Phillips' brother and Ryan T. Phillips is Gene E. Phillips' son. Gene E. Phillips serves as a representative of the trust established for the benefit of his children which owns BCM and, in such capacity, has substantial contact with the management of BCM and input with respect to its performance of advisory services to TCI. Property Management Since February 1, 1990, affiliates of BCM have provided property management services. Currently, Triad provides such property management services for a fee of 5% or less of the monthly gross rents collected on residential properties and 3% or less of the monthly gross rents collected on commercial properties under its management. Triad subcontracts with other entities for the provision of the property-level management services to TCI at various rates. The general partner of Triad is BCM. The limited partner of Triad is GS Realty Services, Inc.("GS Realty"), a related party. Triad subcontracts the property-level management and leasing of 51 of TCI's commercial properties, its four hotels and the commercial property owned by a real estate partnership in which TCI and IORI are partners to Regis, a related party, which is a company owned by GS Realty. Regis is entitled to receive property and construction management fees and leasing commissions in accordance with its property-level management agreement with Triad. Real Estate Brokerage Regis also provides real estate brokerage services to TCI (on a non-exclusive basis). Regis is entitled to receive a real estate commission for property purchases and sales in accordance with the following sliding scale of total fees to be paid: (1) maximum fee of 4.5% on the first $2.0 million of any purchase or sale transaction of which no more than 3.5% would be paid to Regis or affiliates; (2) maximum fee of 3.5% on transaction amounts between $2.0 million-$5.0 million of which no more than 3% would be paid to Regis or affiliates; (3) maximum fee of 2.5% on transaction amounts between $5.0 million-$10.0 million of which no more than 2% would be paid to Regis or affiliates; and (4) maximum fee of 2% on transaction amounts in excess of $10.0 million of which no more than 1.5% would be paid to Regis or affiliates. 72
ITEM 11. EXECUTIVE COMPENSATION TCI has no employees, payroll or benefit plans and pays no compensation to its executive officers. The executive officers of TCI, who are also officers or employees of BCM, TCI's advisor, are compensated by BCM. Such executive officers perform a variety of services for BCM and the amount of their compensation is determined solely by BCM. BCM does not allocate the cash compensation of its officers among the various entities for which it serves as advisor. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT--The Advisor" for a more detailed discussion of the compensation payable to BCM. The only remuneration paid by TCI is to the Directors who are not officers or directors of BCM or its affiliated companies. The Independent Directors (1) review the business plan of TCI to determine that it is in the best interest of stockholders, (2) review the advisory contract, (3) supervise the performance of the advisor and review the reasonableness of the compensation paid to the advisor in terms of the nature and quality of services performed, (4) review the reasonableness of the total fees and expenses of TCI and (5) select, when necessary, a qualified independent real estate appraiser to appraise properties acquired. Each Independent Director receives compensation in the amount of $30,000 per year, plus reimbursement for expenses. The Chairman of the Board receives an additional fee of $3,000 per year. In addition, each Independent Director receives an additional fee of $1,000 per day for any special services rendered by him to TCI outside of his ordinary duties as Director, plus reimbursement of expenses. During 2001, $145,250 was paid to the Independent Directors in total Directors' fees for all services, including the annual fee for service during the period January 1, 2001 through December 31, 2001, and 2001 special service fees as follows: R. Douglas Leonhard, $33,250; Murray Shaw, $15,000; Ted P. Stokely, $34,500; Martin L. White, $32,000; and Edward G. Zampa, $30,500. Director's Stock Option Plan TCI has established a Director's Stock Option Plan ("Director's Plan") for the purpose of attracting and retaining Directors who are not officers or employees of TCI or BCM. The Director's Plan provides for the grant of options that are exercisable at fair market value of TCI's Common Stock on the date of grant. The Director's Plan was approved by stockholders at their annual meeting on October 10, 2000, following which each then-serving Independent Director was granted options to purchase 5,000 shares of Common Stock of TCI. On January 1 of each year, each Independent Director will receive options to purchase 5,000 shares of Common Stock. The options are immediately exercisable and expire on the earlier of the first anniversary of the date on which a Director ceases to be a Director or 10 years from the date of grant. As of March 1, 2002, TCI had 140,000 shares of Common Stock reserved for issuance under the Director's Stock Option Plan of which options for 30,000 shares were outstanding. 73
Performance Graph The following performance graph compares the cumulative total stockholder return on TCI's shares of Common Stock with the Dow Jones Equity Market Index ("DJ Equity Index") and the Dow Jones Real Estate Investment Index ("DJ Real Estate Index"). The comparison assumes that $100 was invested on December 31, 1996, in TCI's shares of Common Stock and in each of the indices and further assumes the reinvestment of all distributions. Past performance is not necessarily an indicator of future performance. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN [GRAPH APPEARS HERE] <TABLE> <CAPTION> 1996 1997 1998 1999 2000 2001 ------ ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> TCI................. 100.00 158.83 131.83 136.40 100.50 181.76 DJ Equity Index..... 100.00 131.82 164.63 202.05 183.32 161.47 DJ Real Estate Index 100.00 118.08 93.15 88.20 112.47 125.74 </TABLE> 74
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners. The following table sets forth the ownership of TCI's Common Stock, both beneficially and of record, both individually and in the aggregate, for those persons or entities known to be beneficial owners of more than 5% of the outstanding shares of Common Stock as of the close of business on March 4, 2002. <TABLE> <CAPTION> Amount and Nature of Percent Beneficial of Name and Address of Beneficial Owner Ownership Class/(1)/ ------------------------------------ ---------- --------- <S> <C> <C> EQK Holdings, Inc./(2)/.......... 3,994,300 49.7% 1800 Valley View Lane Suite 300 Dallas, Texas 75234 Basic Capital Management, Inc.... 1,166,947 14.5% 1800 Valley View Lane Suite 300 Dallas, Texas 75234 </TABLE> - -------- (1) Percentage is based upon 8,042,594 shares of Common Stock outstanding at March 4, 2002. (2) EQK Holdings, Inc. ("EQK") is a wholly-owned subsidiary of ART, which is a wholly-owned subsidiary of ARI. Security Ownership of Management. The following table sets forth the ownership of TCI's Common Stock, both beneficially and of record, both individually and in the aggregate, for the Directors and executive officers of TCI as of the close of business on March 4, 2002. <TABLE> <CAPTION> Amount and Nature of Percent Beneficial of Name of Beneficial Owner Ownership Class/(1)/ - ------------------------ -------------- --------- <S> <C> <C> Ted P. Stokely................................................. 15,000/(2)/ * Martin L. White................................................ 15,000/(2)/ * All Directors and Executive Officers as a group (9 individuals) 5,191,247/(3)/ 64.5% </TABLE> - -------- * Less than 1% (1) Percentage is based upon 8,042,594 shares of Common Stock outstanding at March 4, 2002. (2) Each of Messrs. Stokely and White have options to purchase 15,000 shares of Common Stock of TCI which are exercisable within 60 days of March 2, 2002. (3) Includes 26,475 shares owned by Syntek Asset Management, L.P., 1,166,947 shares owned by BCM and 3,994,300 shares owned by EQK. The executive officers of TCI disclaim beneficial ownership of such shares. Each of the directors of BCM may be deemed to be beneficial owners by virtue of their positions as directors of BCM. The directors of ARI and BCM disclaim such beneficial ownership. Also includes 30,000 shares which may be acquired by the Directors of TCI pursuant to the Director Stock Option Plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Business Relationships In February 1989, the Board of Directors voted to retain BCM as TCI's advisor. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR TO THE REGISTRANT--The Advisor." BCM is a company of which Messrs. Branigan, Corna, Kimbrough and Starowicz serve as executive officers. BCM is owned by a trust for the benefit of the children of Gene E. Phillips. Mr. Phillips serves as a representative of his children's trust which owns BCM and, in such capacity, has substantial contact with the management of BCM and input with respect to BCM's performance of advisory services to TCI. 75
Since February 1, 1991, affiliates of BCM have provided property management services to TCI. Currently, Triad provides such property management services. The general partner of Triad is BCM. The limited partner of Triad is GS Realty, a related party. Triad subcontracts the property-level management and leasing of 51 of TCI's commercial properties, its four hotels and the commercial properties owned by a real estate partnership in which TCI and IORI are partners and Regis, a related party, which is a company owned by GS Realty. Regis also provides real estate brokerage services for TCI, on a non-exclusive basis, and receives brokerage commissions in accordance with the brokerage agreement. The Directors and officers of TCI also serve as directors and officers of IORI. The Directors owe fiduciary duties to IORI as well as to TCI under applicable law. IORI has the same relationship with BCM as TCI. At December 31, 2001, TCI owned approximately 24.0% of the outstanding common shares of IORI. BCM also serves as advisor to ARI. Messrs. Branigan, Corna, Kimbrough and Starowicz serve as executive officers of ARI. From April 1992 to December 31, 1992, Mr. Stokely was employed as a paid consultant and since January 1, 1993, as a part-time unpaid consultant for Eldercare, a nonprofit corporation engaged in the acquisition of low income and elderly housing. Eldercare had a revolving loan commitment from Syntek West, a company owned by Gene E. Phillips. The loan commitment expired in 1998. Related Party Transactions Historically, TCI has engaged in and may continue to engage in business transactions, including real estate partnerships, with related parties. Management believes that all of the related party transactions represented the best investments available at the time and were at least as advantageous to TCI as could have been obtained from unrelated third parties. In 2001, TCI received $120,000 in rent from BCM for BCM's lease at Addison Hanger. In May 2001, TCI exchanged with ARI the 168 unit Glenwood Apartments for two parcels of land; the 10.5 acre Limestone Ranch land parcel in Lewisville, Texas and the 8.88 acre Mira Lago land parcel in Farmers Branch, Texas. ARI received net cash of $3.4 million on the subsequent sale of the apartments. In December 2001, TCI purchased 100% of the outstanding common stock of National Melrose, Inc., a wholly-owned subsidiary of ARI, for $2.0 million in cash. See NOTE 4. "NOTES AND INTEREST RECEIVABLE." In January 2002, TCI purchased 100% of the outstanding common stock of ART Two Hickory Corporation, a wholly-owned subsidiary of ARI, for $4.4 million in cash. See NOTE 21. "SUBSEQUENT EVENTS." In February 2002, TCI sold a $2.0 million senior participation interest in a loan to IORI. See NOTE 4. "NOTES AND INTEREST RECEIVABLE." In March 2002, TCI paid $600,000 cash and exchanged with ARI the 80,278 sq.ft. Plaza at Bachman Creek Shopping Center in Dallas, Texas for the 24.5 acre Rasor land parcel in Plano, Texas, the 16.89 acre Lakeshore Villas land parcel in Humble, Texas, and the 45,623 sq.ft. Oak Tree Village Shopping Center in Lubbock, Texas. ARI received net cash of $4.4 million on the subsequent financing of the shopping center. See NOTE 21. "SUBSEQUENT EVENTS." As more fully described in ITEM 2. "PROPERTIES-Real Estate," TCI is a partner with IORI in the Tri-City Limited Partnership and Nakash Income Associates. TCI owns 345,728 shares of IORI's Common Stock, an approximate 24.0% interest. At December 31, 2001, the market value of the IORI common shares was $6.2 million. 76
At December 31, 2001, TCI owned 746,972 shares of ARI common stock which were primarily purchased in open market transactions in 1990 and 1991 at a total cost of $1.6 million. The officers of TCI also serve as officers of ARI. BCM also serves as advisor to ARI and at March 4, 2002, ARI owned approximately 50% of TCI's outstanding Common Stock. At December 31, 2001, the market value of the ARI common shares was $7.4 million. See ITEM 2. "PROPERTIES--Equity Investments in Real Estate Entities." In 2001, TCI paid BCM, its affiliates and related parties $10.8 million in advisory, incentive and net income fees, $45,000 in mortgage brokerage and equity refinancing fees, $2.4 million in property acquisition fees, $3.8 million in real estate brokerage commissions and $2.6 million in property and construction management fees and leasing commissions, net of property management fees paid to subcontractors, other than affiliates of BCM. In addition, as provided in the Advisory Agreement, BCM received cost reimbursements of $2.6 million. In addition, from time-to-time, TCI and its affiliates have made advances to each other, which generally have not had specific repayment terms and have been reflected in TCI's financial statements as other assets or other liabilities. At December 31, 2001, TCI had receivables of $11.6 million, $1.9 million and $608,000 from BCM, GS Realty, and ARI, respectively. Also at December 31, 2001, TCI owed $1.0 million and $39,000 to GS Realty and BCM, respectively. In January 2002, TCI paid the $1.0 million due to GS Realty and in March 2002, TCI paid the $39,000 to BCM. Restrictions on Related Party Transactions Article FOURTEENTH of TCI's Articles of Incorporation provides that TCI shall not, directly or indirectly, contract or engage in any transaction with (1) any director, officer or employee of TCI, (2) any director, officer or employee of the advisor, (3) the advisor or (4) any affiliate or associate (as such terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of any of the aforementioned persons, unless (a) the material facts as to the relationship among or financial interest of the relevant individuals or persons and as to the contract or transaction are disclosed to or are known by the Board of Directors or the appropriate committee thereof and (b) the Board of Directors or committee thereof determines that such contract or transaction is fair to TCI and simultaneously authorizes or ratifies such contract or transaction by the affirmative vote of a majority of independent directors of TCI entitled to vote thereon. Article FOURTEENTH defines an "Independent Director" as one who is neither an officer or employee of TCI nor a director, officer or employee of TCI's advisor. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: 1. Consolidated Financial Statements Report of Independent Certified Public Accountants Consolidated Balance Sheets--December 31, 2001 and 2000 Consolidated Statements of Operations--Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Stockholders' Equity--Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows--Years Ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements 2. Financial Statement Schedules Schedule III--Real Estate and Accumulated Depreciation Schedule IV--Mortgage Loans on Real Estate 77
All other schedules are omitted because they are not applicable or because the required information is shown in the Consolidated Financial Statements or the Notes thereto. 3. Incorporated Financial Statements Consolidated Financial Statements of Income Opportunity Realty Investors, Inc. (incorporated by reference to Item 8 of Income Opportunity Realty Investors, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2001). Consolidated Financial Statements of American Realty Investors, Inc. (incorporated by reference to Item 8 of American Realty Investors, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2001). 4. Exhibits The following documents are filed as Exhibits to this Report: <TABLE> <CAPTION> Exhibit Number Description - ------ ----------- <C> <S> 3.0 Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to Exhibit No. 3.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). 3.1 Certificate of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to the Registrant's Current Report on Form 8-K, dated June 3, 1996). 3.2 Certificate of Amendment of Articles of Incorporation of Transcontinental Realty Investors, Inc., dated October 10, 2000 (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 3.3 By-Laws of Transcontinental Realty Investors, Inc. (incorporated by reference to Exhibit No. 3.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). 3.4 Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., setting forth the Certificate of Designations, Preferences and Rights of Series A Cumulative Convertible Preferred Stock, dated October 20, 1998 (incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). 3.5 Certificate of Designation of Transcontinental Realty Investors, Inc., setting for the Voting Powers, Designations, References, Limitations, Restriction and Relative Rights of Series B Cumulative Convertible Preferred Stock, dated October 23, 2000 (incorporation by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 3.6 Certificate of Designation of Transcontinental Realty Investors, Inc., Setting for the Voting Powers, Designating, Preferences, Limitations, Restrictions and Relative Rights of Series C Cumulative Convertible Preferred Stock, dated September 28, 2001 (incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). 3.7 Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc. Decreasing the Number of Authorized Shares of and Eliminating Series B Preferred Stock, dated December 14, 2001, filed herewith. 10.0 Advisory Agreement dated as of October 15, 1998, between Transcontinental Realty Investors, Inc. and Basic Capital Management, Inc. (incorporated by reference to Exhibit 10.0 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). </TABLE> (b) Reports on Form 8-K: A Current Report on Form 8-K, dated January 29, 2002, was filed with respect to Item 5. "Other Events and Regulation FD Disclosures," which reports the resignation of R. Douglas Leonhard and Edward G. Zampa as Directors of TCI and the election of Henry A. Butler as Director of TCI and the execution of the Second Amendment in the Olive Litigation. 78
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. <TABLE> <S> <C> <C> TRANSCONTINENTAL REALTY INVESTORS, INC. Dated: March 20, 2002 By: /s/ RONALD E. KIMBROUGH --------------------------------------- Ronald E. Kimbrough Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Acting Principal Executive Officer) </TABLE> Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Name Title Date ---- ----- ---- /s/ TED P. STOKELY Chairman of the Board and March 20, 2002 - ----------------------------- Director Ted P. Stokely /S/ HENRY A. BUTLER Director March 20, 2002 - ----------------------------- Henry A. Butler /S/ EARL D. CECIL Director March 20, 2002 - ----------------------------- Earl D. Cecil /S/ MARTIN L. WHITE Director March 20, 2002 - ----------------------------- Martin L. White /S/ RONALD E. KIMBROUGH Executive Vice President and March 20, 2002 - ----------------------------- Chief Financial Officer Ronald E. Kimbrough (Principal Financial and Accounting Officer and Acting Principal Executive Officer) 79
ANNUAL REPORT ON FORM 10-K EXHIBIT INDEX For the Year Ended December 31, 2001 <TABLE> <CAPTION> Exhibit Number Description - ------- ----------- <C> <S> 3.7 Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc. Decreasing the Number of Authorized Shares of and Eliminating Series B Preferred Stock dated December 14, 2001. </TABLE>