UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2001 ------------- Commission File Number 1-9240 ------ 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) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, $.01 par value 8,635,894 - ---------------------------- ---------------------------------- (Class) (Outstanding at July 31, 2001) 1
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ----------------------------- The accompanying Consolidated Financial Statements have not been audited by independent certified public accountants, but in the opinion of the management of Transcontinental Realty Investors, Inc. ("TCI"), all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of TCI's consolidated financial position, consolidated results of operations and consolidated cash flows at the dates and for the periods indicated, have been included. TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> June 30, December 31, 2001 2000 ------------ ------------ (dollars in thousands) <S> <C> <C> Assets Real estate held for investment............................................ $ 671,099 $ 727,227 Less - accumulated depreciation............................................ (87,945) (88,187) ------------ ------------ 583,154 639,040 Foreclosed real estate held for sale....................................... 485 1,824 Notes and interest receivable Performing................................................................. 11,263 8,709 Less--allowance for estimated losses....................................... (537) (537) ------------ ------------ 10,726 8,172 Investment in real estate entities......................................... 19,946 15,464 Cash and cash equivalents.................................................. 29,717 22,323 Other assets (including $14,658 in 2001 and $10,243 in 2000 from affiliates and related parties)................................. 45,926 45,062 ------------ ------------ $ 689,954 $ 731,885 ============ ============ </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 2
TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS - Continued <TABLE> <CAPTION> June 30, December 31, 2001 2000 ------------ ------------ (dollars in thousands) <S> <C> <C> Liabilities and Stockholders' Equity Liabilities Notes and interest payable................................................. $ 446,535 $ 501,734 Other liabilities (including $1,130 in 2001 and $491 in 2000 to affiliates and related parties)................................... 22,433 23,722 ------------ ------------ 468,968 525,456 Commitments and contingencies Minority interest.......................................................... 4,294 4,369 Redeemable Preferred Stock Series B; $.01 par value; authorized, 300,000 shares; issued and outstanding 300,000 shares (liquidation preference $1,500).......................................... 1,350 1,350 Embedded derivative........................................................ 150 150 Stockholders' equity Preferred Stock Series A; $.01 par value; authorized, 6,000 shares; issued and outstanding 5,829 shares (liquidation preference $583)...................................... -- -- Common Stock, $.01 par value; authorized, 10,000,000 shares; issued and outstanding 8,635,894 shares in 2001 and 8,636,354 in 2000..................................................... 86 86 Paid-in capital............................................................ 278,245 278,245 Accumulated distributions in excess of accumulated earnings.................................................................. (60,080) (74,712) Unrealized (loss) on marketable equity securities of affiliates................................................................ (3,059) (3,059) ------------ ------------ 215,192 200,560 ------------ ------------ $ 689,954 $ 731,885 ============ ============ </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 3
TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> For the Three For the Six Months Months Ended June 30, Ended June 30, ---------------------------- --------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- (dollars in thousands, except per share) <S> <C> <C> <C> <C> Property revenue Rents......................................... $ 36,074 $ 34,605 $ 71,041 $ 68,691 Property expense Property operations (including $1,391 in 2001 and $2,078 in 2000 to affiliates and related parties)................................... 20,194 18,345 40,441 36,763 ---------- ---------- ---------- ---------- Operating income........................... 15,880 16,260 30,600 31,928 Other income Interest and other........................... 645 588 1,258 992 Equity (loss) of equity investees............ (999) (299) (2,366) (292) Gain on sale of real estate.................. 22,265 8,856 28,749 17,807 ---------- ---------- ---------- ---------- 21,911 9,145 27,641 18,507 Other expense Interest..................................... 10,841 11,936 21,953 23,151 Depreciation................................. 4,992 4,208 10,049 9,469 Advisory fee to affiliates................... 1,439 1,380 2,941 2,562 Net income fee to affiliate.................. 1,103 400 1,129 752 Incentive fee paid to affiliate.............. 1,577 -- 1,577 -- General and administrative (including $1,603 in 2001 and $1,344 in 2000 to affiliates and related parties)....................... 3,499 1,715 5,923 4,387 Minority interest............................ 9 (9) 22 (17) ---------- ---------- ---------- ---------- 23,460 19,630 43,594 40,304 ---------- ---------- ---------- ---------- Net income..................................... 14,331 5,775 14,647 10,131 Preferred dividend requirement................. (8) (7) (15) (14) ---------- ---------- ---------- ---------- Net income applicable to Common shares....................................... $ 14,323 $ 5,768 $ 14,632 $ 10,117 ========== ========== ========== ========== Basic and diluted earnings per share Net income applicable to Common shares....................................... $ 1.65 $ .67 $ 1.68 $ 1.17 ========== ========== ========== ========== Weighted average Common shares used in computing earnings per share.............. 8,686,091 8,629,504 8,686,217 8,628,496 ========== ========== ========== ========== </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 4
TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY <TABLE> <CAPTION> Accumulated Common Stock Distributions Accumulated ----------------------- in Excess of Other Paid-in Accumulated Comprehensive Stockholders' Shares Amount Capital Earnings Income Equity ---------- ---------- ---------- ------------- ------------- ------------- (dollars in thousands, except per share) <S> <C> <C> <C> <C> <C> <C> Balance, January 1, 2001............... 8,636,354 $ 86 $ 278,245 (74,712) (3,059) $ 200,560 Net income........................... -- -- -- 14,647 -- 14,647 Fractional shares...................... (460) -- -- -- -- -- Preferred dividends ($2.50 per share)..................... -- -- (15) -- -- (15) ---------- ---------- ---------- ------------- ------------- ------------- Balance, June 30, 2001................. 8,635,894 $ 86 $ 278,245 (60,080) (3,059) $ 215,192 ========== ========== ========== ============= ============= ============= </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 5
TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> For the Six Months Ended June 30, ------------------------- 2001 2000 -------- -------- (dollars in thousands) <S> <C> <C> Cash Flows from Operating Activities Rents collected............................................................ $ 69,805 $ 67,321 Interest collected......................................................... 700 104 Interest paid.............................................................. (20,643) (22,093) Payments for property operations (including $1,391 in 2001 and $2,078 in 2000 to affiliates and related parties)................................................................. (40,775) (38,853) Advisory and net income fee paid to affiliate.............................. (3,480) (4,295) Incentive fee paid to affiliate............................................ (1,577) -- General and administrative expenses paid (including $1,603 in 2001 and $1,344 in 2000 to affiliates and related parties)......................................................... (5,917) (5,234) Distributions from operating cash flow of equity investees................................................................ 50 191 Other...................................................................... 453 201 -------- -------- Net cash used in operating activities.................................... (1,384) (2,658) Cash Flows from Investing Activities Collections on notes receivable............................................ 2,531 1,047 Funding of notes receivable................................................ (5,000) (12,000) Acquisition of real estate (including $130 in 2001 and $1,626 in 2000 to affiliates and related parties)................................................................. (1,815) (21,053) Real estate improvements................................................... (5,524) (6,249) Proceeds from sale of real estate.......................................... 56,530 3,911 Refunds of (deposits on) pending purchases and financings............................................................... (3,049) 1,726 Contributions (to)/from equity investees................................... (1,931) 1,296 -------- -------- Net cash provided by (used in) investing activities.................... 41,742 (31,322) Cash Flows from Financing Activities Payments on notes payable.................................................. (34,571) (42,356) Proceeds from notes payable................................................ 4,600 45,424 Deferred financing costs (including $45 in 2001 and $241 in 2000 to affiliates and related parties).......................... (524) (971) Payments (to) from advisor................................................. (2,510) 5,585 (Advance to)/from affiliate................................................ 56 (3,300) Dividends to stockholders.................................................. (15) (3,121) Sale of Common Stock under dividend reinvestment plan..................................................................... -- 54 -------- -------- Net cash provided by (used in) financing activities........................................................... (32,964) 1,315 Net increase (decrease) in cash and cash equivalents......................... 7,394 (32,665) Cash and cash equivalents, beginning of period............................... 22,323 41,266 -------- -------- Cash and cash equivalents, end of period..................................... $ 29,717 $ 8,601 ======== ======== </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 6
TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued <TABLE> <CAPTION> For the Six Months Ended June 30, -------------------------- 2001 2000 --------- -------- (dollars in thousands) <S> <C> <C> Reconciliation of net income to net cash used in operating activities Net income................................................................... $ 14,647 $ 10,131 Adjustments to reconcile net income to net cash used in operating activities Depreciation and amortization.............................................. 10,049 10,713 Gain on sale of real estate................................................ (28,749) (17,807) Equity loss of equity investees............................................ 2,366 292 Distributions from operating cash flow of equity investees................................................................ 50 191 (Increase) in interest receivable.......................................... (55) (420) (Increase) decrease in other assets........................................ 1,376 (5) Increase (decrease) in interest payable.................................... 221 (247) (Decrease) in other liabilities............................................ (1,289) (5,506) -------- -------- Net cash used in operating activities.................................... $(1,384) $(2,658) ======== ======== Schedule of noncash investing and financing activities Notes payable assumed on purchase of real estate............................. $ 1,051 $ 14,015 Notes payable assumed by buyer on sale of real estate........................ (26,060) (8,652) Unrealized loss on marketable equity securities of affiliate.................................................................. -- (6,156) Limited partnership interest received on sale of real estate........................................................ 2,050 -- </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 7
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION - ----------------------------- TCI is a Nevada corporation and successor to a California business trust which was organized on September 6, 1983. TCI invests in real estate through direct ownership, leases and partnerships. TCI also invests in mortgage loans on real estate. The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Dollar amounts in tables are in thousands, except per share amounts. Operating results for the six month period ended June 30, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. For further information, refer to the Consolidated Financial Statements and notes included in TCI's Annual Report on Form 10-K for the year ended December 31, 2000 (the "2000 Form 10-K"). Certain balances for 2000 have been reclassified to conform to the 2001 presentation. NOTE 2. REAL ESTATE - ------------------- In 2001, TCI purchased the following properties: <TABLE> <CAPTION> Units/ Purchase Net Cash Debt Interest Maturity Property Location Acres/Sq.Ft. Price Paid Incurred Rate Date - ------------------------ ------------------ ------------ --------- -------- ----------- --------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Second Quarter Apartments Courtyard Midland, TX 133 Units $ 1,425 $ 345 $ 1,051 (1) 9.25% 04/06 Land Solco-Valley Ranch Dallas, TX 6.07 Acres 1,454 1,525 -- -- -- Limestone Ranch Lewisville, TX 10.5 Acres 505 (2) -- -- -- -- Mira Lago Farmers Branch, TX 8.88 Acres 541 (2) -- -- -- -- Third Quarter Land Seminary West Fort Worth, TX 5.36 Acres 222 232 -- -- -- </TABLE> - -------------------- (1) Assumed debt. (2) Land was received from a related party in exchange for the Glenwood Apartments. 8
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 2. REAL ESTATE (Continued) - ------- ----------- In the six months ended June 30, 2000, TCI purchased the following properties: <TABLE> <CAPTION> Units/ Purchase Net Cash Debt Interest Maturity Property Location Acres/Sq.Ft. Price Paid Incurred Rate Date - ------------------------ ------------------ ------------- -------- -------- -------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> First Quarter Apartments Quail Creek Lawrence, KS 95 Units $ 3,250 $1,088 $2,254 7.44% 07/03 Apple Lane Lawrence, KS 75 Units 1,575 595 1,005 8.63 05/07 Land Netzer Collin County, TX 20 Acres 400 418 -- -- -- Lamar/Parmer Austin, TX 17.07 Acres 1,500 517 1,030 10.00 12/00 (1) Manhattan Farmers Branch, TX 108.9 Acres 10,743 6,144 5,000 14.00 02/01 (2) DF Fund Collin County, TX 79.5 Acres 2,545 1,047 1,545 10.00 03/01 (3) Second Quarter Apartments Autumn Chase Midland, TX 64 Units 1,338 458 936 9.45 (4) 04/05 Primrose Bakersfield, CA 162 Units 4,100 1,189 3,000 9.25 (4) 03/07 Paramount Terrace Amarillo, TX 181 Units 3,250 561 2,865 9.38 09/01 Office Building 9033 Wilshire Blvd. 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 -- -- -- Land Limestone Canyon II Austin, TX 9.96 Acres 504 424 -- -- -- </TABLE> - --------------- (1) The loan was paid off in March 2001. (2) The loan was paid off in June 2000. (3) The property was sold in September 2000. (4) Variable interest rate In 2001, TCI sold the following properties: <TABLE> <CAPTION> Units/Sq.Ft./ Sales Net Cash Debt Gain/(Loss) Property Location Acres Price Received Discharged on Sale - ------------------------ --------------- ------------- --------- -------- ----------- ------------ <S> <C> <C> <C> <C> <C> <C> First Quarter Apartments Forest Ridge Denton, TX 56 Units $ 2,000 $ 682 $ 1,151 $ 1,014 Heritage Tulsa, OK 136 Units 2,286 206 1,948 1,575 Park at Colonade San Antonio, TX 211 Units 5,800 927 4,066 1,052 (1) Industrial Warehouse Zodiac Dallas, TX 35,435 Sq.Ft. 762 183 564 167 Land McKinney 36 McKinney, TX 1.822 Acres 476 476 -- 355 Round Mountain Austin, TX 110.0 Acres 2,560 2,455 -- 1,047 Second Quarter Apartments Bent Tree Gardens Addison, TX 204 Units 9,000 2,669 6,065 (3) 601 Fontenelle Hills Bellevue, NE 338 Units 16,500 3,680 12,454 (3) 4,565 Glenwood Addison, TX 168 Units 3,659 (2) -- 2,537 (3) -- McCallum Glen Dallas, TX 275 Units 8,450 2,633 5,004 (3) 1,375 (4) </TABLE> 9
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 2. REAL ESTATE (Continued) - ------- ----------- <TABLE> <CAPTION> Units/Sq.Ft./ Sales Net Cash Debt Gain/(Loss) Property Location Acres Price Received Discharged on Sale - ------------------------ -------------- -------------- ------- -------- ---------- ----------- <S> <C> <C> <C> <C> <C> <C> Office Buildings Daley San Diego, CA 64,425 Sq.Ft. $ 6,211 $2,412 $ 3,346 $ 836 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 Land Moss Creek Greensboro, NC 4.79 Acres 15 13 -- (71) Third Quarter Office Buildings Chesapeake Center San Diego, CA 57,493 Sq.Ft. 6,575 3,111 2,844 204 - --------------------- </TABLE> (1) Excludes a $550,000 deferred gain from a limited partnership interest in the sold property. (2) The Glenwood Apartments were exchanged with a related party for two parcels of land; the 10.5 acre Limestone Ranch and the 8.88 acre Mira Lago. (3) Debt assumed by purchaser. (4) Excludes a $1.5 million deferred gain from a limited partnership interest in the sold property. In the six months ended June 30, 2000, TCI sold the following properties: <TABLE> <CAPTION> Units/ Sales Net Cash Debt Gain on Property Location Rooms/Sq.Ft. Price Received Discharged Sale - ------------------------ ---------------- ------------ ------- -------- ----------- ------- <S> <C> <C> <C> <C> <C> <C> First Quarter Apartments Hunters Bend San Antonio, TX 96 Units $ 1,683 $ 418 $1,127 (1) $ 572 Westgate of Laurel Laurel, MD 218 Units 11,290 2,599 7,525 (1) 3,575 Second Quarter Apartments Apple Creek Dallas, TX 216 Units 4,300 2,155 1,723 3,240 Villas at Fairpark Los Angeles, CA 49 Units 3,435 792 2,386 1,188 Hotel Chateau Charles Lake Charles, LA 245 Rooms 1,000 928 -- 633 </TABLE> - --------------------- (1) Debt assumed by purchaser. NOTE 3. NOTES AND INTEREST RECEIVABLE - ------- ----------------------------- 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 matures September 2001. 10
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued) - ------- ----------------------------- In June 2001, a mortgage loan with a principal balance of $2.5 million was paid off including accrued but unpaid interest. 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. Also in July 2001, TCI funded a $3.3 million loan secured by a second lien on a proposed 392 lot, single family subdivision and an additional 1,714.16 acres of excess land in Tarrant County, Texas. The note receivable bears interest at 15.0% per annum, requires monthly payments of accrued interest beginning September 2001 and each month thereafter and matures July 2003. NOTE 4. INVESTMENT IN REAL ESTATE ENTITIES - ------- ---------------------------------- In February 2001, TCI entered into a joint venture with UBM Liegenschaftsverwertung GmbH ("UBM"), an Austrian limited liability company, to invest in the construction and ownership of a 165 room hotel in Wroclaw, Poland. UBM will invest 2.0 million Euro dollars ($1.8 million) and TCI will invest 4.0 million Euro dollars ($3.7 million) and guarantee a 16 million Euro dollars ($15.0 million) mortgage loan for the project. TCI contributed 2.0 million Euro dollars ($1.8 million) in May 2001 and 1.0 million Euro dollars ($858,000) in July 2001. TCI will hold a 66.7% interest. Construction for the project began in the fall of 2000 and completion of the hotel is scheduled for December 2001. 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. In June 2001, in conjunction with the sale of the 275 unit McCallum Glen Apartments in Dallas, Texas, TCI received a 30% limited partner interest in the acquiring partnership. TCI is to receive payments of $12,500 monthly from the partnership and its remaining investment of $1.5 million in June 2003. Prior to the first quarter of 2001, TCI accounted for its investment in American Realty Investors, Inc. ("ARI"), an affiliate, 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. 11
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 5. INVESTMENTS IN EQUITY INVESTEES - ------- ------------------------------- Real estate entities. TCI's investment in real estate entities at June 30, 2001, included equity securities of two publicly traded real estate entities, Income Opportunity Realty Investors, Inc. ("IORI") and ARI, and interests in real estate joint venture partnerships. Basic Capital Management, Inc. ("BCM"), TCI's advisor, serves as advisor to IORI and ARI. TCI accounts for its investment in IORI and ARI and the joint venture partnerships using the equity method. TCI's investment in real estate entities, accounted for using the equity method, at June 30, 2001 was as follows: <TABLE> <CAPTION> Percentage Carrying Equivalent of TCI's Value of Investee Market Value Ownership at Investment at Book Value at of Investment at Investee June 30, 2001 June 30, 2001 June 30, 2001 June 30, 2001 - ------------------ --------------------- ------------------- -------------------- --------------------- <S> <C> <C> <C> <C> IORI.............. 22.8% $ 4,001 $ 38,549 $ 2,835 ARI............... 6.3% 11,050 96,145 7,529 ------- -------- ------- 15,051 $134,694 $10,364 ======== ======= Other 4,895 ------- $19,946 ======= </TABLE> The difference between the carrying value of TCI's investment and the equivalent investee book value is being amortized over the life of the properties held by each investee. Management continues to believe that the market value of each of IORI and ARI undervalues their assets and TCI may, therefore, continue to increase its ownership in these entities. Set forth below is summarized results of operations of equity investees for the six months ended June 30, 2001 Revenues.......................................................... $ 90,650 Equity in income of partnerships.................................. 5,708 Property operating expenses....................................... 74,585 Depreciation...................................................... 9,437 Interest expense.................................................. 40,282 -------- (Loss) before gains on sale of real estate........................ (27,946) Gain on sale of real estate....................................... 46,291 -------- Net income........................................................ $ 18,345 ======== TCI's share of equity investees' loss before gains on the sale of real estate was $2.4 million for the six months ended June 30, 2001, and its share of equity investees' gains on sale of real estate was $2.9 million for the six months ended June 30, 2001. 12
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 6. NOTES AND INTEREST PAYABLE - ------- -------------------------- 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> Second Quarter Land Red Cross Dallas, TX 2.89 Acres $4,500 $ -- $4,328 12.5%(1) 10/02 </TABLE> - ------------------ (1) Variable rate. In the first six months of 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> First Quarter Apartments Crescent Place Houston, TX 120 Units $2,165 $1,722 $ 370 7.04%(1) 03/30 Madison @ Bear Creek Houston, TX 180 Units 3,500 2,625 730 7.04 (1) 03/30 Office Buildings Westgrove Air Plaza Addison, TX 78,326 Sq.Ft. 2,087 1,180 742 9.02 (1) 01/05 Venture Center Atlanta, GA 38,772 Sq.Ft. 2,700 1,113 1,592 8.75 03/10 Second Quarter Apartments Country Crossing Tampa, FL 227 Units 3,825 2,645 985 9.65 (1) 06/03 Fontenelle Hills Bellevue, NE 338 Units 2,010 -- 1,967 8.51 06/10 Office Building Technology Trading Sterling, VA 197,659 Sq.Ft. 6,300 3,881 2,065 8.26 (1) 05/05 Warehouses 5360 Tulane Atlanta, GA 67,850 Sq.Ft. 375 208 134 9.65 (1) 04/03 Space Center San Antonio, TX 101,500 Sq.Ft. 1,125 691 402 9.65 (1) 04/03 </TABLE> - ------------------ (1) Variable interest rate. NOTE 7. OPERATING SEGMENTS - ------- ------------------ Significant differences among the accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation and allocation of administrative expenses. Management evaluates the performance of each of the operating segments and allocates resources to them based on their operating income and cash flow. Items of income that are not reflected in the segments are interest, equity in partnerships and gains on sales of real estate which totaled $21.9 million and $27.6 million for the three and six months ended June 30, 2001 and $9.1 million and $18.5 million for the three and six months ended June 30, 2000. Expenses that are not reflected in the segments are general and administrative expenses, minority interest, incentive fees and advisory and net income 13
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 7. OPERATING SEGMENTS (Continued) - ------- ------------------ fees which totaled $7.6 million and $11.6 million for the three and six months ended June 30, 2001 and $3.5 million and $7.7 million for the three and six months ended June 30, 2000. Also excluded from segment assets are assets of $106.3 million at June 30, 2001, and $78.8 million at June 30, 2000, which are not identifiable with an operating segment. There are no intersegment revenues and expenses. Presented below is the operating income of each operating segment for the three and six months ended June 30, 2001 and 2000, and each segment's assets at June 30. <TABLE> <CAPTION> Three Months Ended Commercial June 30, 2001 Land Properties Apartments Hotels Total - --------------------------------------------- ------- ---------- ---------- ------- -------- <S> <C> <C> <C> <C> <C> Rents........................................ $ 189 $ 18,232 $ 15,704 $ 1,949 $ 36,074 Property operating expenses.................. 183 9,842 9,019 1,150 20,194 ------- -------- -------- ------- -------- Operating income............................. $ 6 $ 8,390 $ 6,685 $ 799 $ 15,880 ======= ======== ======== ======= ======== Depreciation................................. $ -- $ 3,302 $ 1,409 $ 281 $ 4,992 Interest..................................... 518 5,889 4,097 337 10,841 Real estate improvements..................... 2,943 1,033 47 73 4,096 Assets....................................... 60,913 318,983 184,129 19,614 583,639 Commercial Property Sales: Land Properties Apartments Total ------- ---------- ---------- -------- Sales price.................................. $ 15 $ 39,236 $ 37,609 $ 76,860 Cost of sales................................ (86) (25,083) (31,068) (56,237) ------- ---------- ---------- -------- Gain on sale................................. (71) $ 14,153 $ 6,541 $ 20,623 (1) ======= ========== ========== ======== </TABLE> - ---------------------- (1) Excludes TCI's share of gains on sale of real estate recognized by an equity investee of $1.6 million. <TABLE> <CAPTION> Six Months Ended Commercial June 30, 2001 Land Properties Apartments Hotels Total - --------------------------------------------- ------- ---------- ---------- ------- -------- <S> <C> <C> <C> <C> <C> Rents........................................ $ 325 $ 35,835 $ 31,602 $ 3,279 $ 71,041 Property operating expenses.................. 565 19,152 18,376 2,348 40,441 ------- -------- -------- ------- -------- Operating income............................. $ (240) $ 16,683 $ 13,226 $ 931 $ 30,600 ======= ======== ======== ======= ======== Depreciation................................. $ -- $ 6,539 $ 2,977 $ 533 $ 10,049 Interest..................................... 829 11,828 8,598 698 21,953 Real estate improvements..................... 2,943 2,284 81 216 5,524 Assets....................................... 60,913 318,983 184,129 19,614 583,639 Commercial Property Sales: Land Properties Apartments Total ------- ---------- ---------- -------- Sales price.................................. $ 3,051 $ 39,998 $ 47,695 $ 90,744 Cost of sales................................ (1,720) (25,678) (37,513) (64,911) ------- ---------- ---------- -------- Gain on sale................................. $ 1,331 $ 14,320 $ 10,182 $ 25,833 (2) ======= ========== ========== ======== </TABLE> - ------------------ (2) Excludes TCI's share of gains on sale of real estate recognized by an equity investee of $2.9 million. 14
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 7. OPERATING SEGMENTS (Continued) - ------- ------------------ <TABLE> <CAPTION> Three Months Ended Commercial June 30, 2000 Land Properties Apartments Hotels Total - --------------------------------------------- -------------- ---------------- ---------------- -------------- --------------- <S> <C> <C> <C> <C> <C> Rents........................................ $ 177 $ 15,133 $ 18,732 $ 563 $ 34,605 Property operating expenses.................. 119 7,373 10,782 71 18,345 ------- -------- -------- ------- -------- Operating income............................. $ 58 $ 7,760 $ 7,950 $ 492 $ 16,260 ======= ======== ======== ======= ======== Depreciation................................. $ -- $ 2,560 $ 1,401 $ 247 $ 4,208 Interest..................................... 1,100 4,979 5,463 394 11,936 Real estate improvements..................... 55 2,202 272 251 2,780 Assets....................................... 64,122 286,602 263,177 19,640 633,541 </TABLE> <TABLE> <CAPTION> Property Sales: Apartments Hotels Total ---------------- ------------- --------------- <S> <C> <C> <C> Sales price.................................. $ 20,708 $1,000 $ 21,708 Cost of sales................................ (12,134) (367) (12,500) -------- ------ -------- Gain on sale................................. $ 8,575 $ 633 $ 9,208* ======== ====== ======== </TABLE> <TABLE> <CAPTION> Six Months Ended Commercial June 30, 2000 Land Properties Apartments Hotels Total - --------------------------------------------- -------------- ---------------- ---------------- -------------- --------------- <S> <C> <C> <C> <C> <C> Rents........................................ $ 338 $ 29,398 $ 37,959 $ 996 $ 68,691 Property operating expenses.................. 274 14,557 21,794 138 36,763 ------- -------- -------- ------- -------- Segment operating income..................... $ 64 $ 14,841 $ 16,165 $ 858 $ 31,928 ======= ======== ======== ======= ======== Depreciation................................. $ -- $ 5,077 $ 3,898 $ 494 $ 9,469 Interest..................................... 1,975 9,855 10,548 773 23,151 Real estate improvements..................... (10) 4,410 1,098 751 6,249 Assets....................................... 64,122 286,602 263,177 19,640 633,541 </TABLE> <TABLE> <CAPTION> Property Sales: Apartments Total ---------------- --------------- <S> <C> <C> Sales price.................................. $ 7,735 $ 7,735 Cost of sales................................ (3,307) (3,307) ------- ------- Gain on sale................................. $ 4,428 $4,428* ======= ======= </TABLE> - -------------------- * Excludes a $4.8 million previously deferred gain on the sale of land and TCI's share of gains recognized by an equity affiliate of $3.8 million. NOTE 8. COMMITMENTS AND CONTINGENCIES - ------- ----------------------------- Liquidity. Although management anticipates that TCI will generate excess cash from operations in 2001, due to increased rental rates and occupancy and 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. Commitments. In January 2001, TCI exercised its option under the loan documents to extend the maturity date of three loans with a principal balance of $30.6 million secured by three office buildings in New Orleans, Louisiana. The lender has disputed TCI's right to extend the loans. This dispute is subject to litigation pending in the United States District Court for the Eastern District of Louisiana. Litigation. TCI is involved in various 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 9. INCOME TAXES - ------- ------------ Financial statement income varies from taxable income principally due to the accounting for income and losses of investees, gains and losses from 15
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 9. INCOME TAXES (Continued) - ------- ------------ asset sales, depreciation on owned properties, amortization of discounts on notes receivable and payable and the difference in the allowance for estimated losses. TCI had a loss for federal income tax purposes (after utilization of operating loss carryforwards) in the three and six months ended June 30, 2001 and 2000; therefore, it recorded no provision for income taxes. ------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------- --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Introduction - ------------ TCI invests in real estate through acquisitions, leases and partnerships. TCI also invests in mortgage loans. TCI is the successor to a business trust organized on September 6, 1983, and commenced operations on January 31, 1984. Liquidity and Capital Resources - ------------------------------- Cash and cash equivalents totaled $29.7 million at June 30, 2001, compared with $22.3 million at December 31, 2000. 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 and borrowings. Management anticipates that TCI's cash on hand, as well as cash generated from property operations, the sale of properties and the refinancing of certain of TCI's mortgage debt will be sufficient to meet TCI's cash requirements, including debt service obligations and expenditures for property maintenance and improvements. Net cash used in operating activities was $1.4 million for the six months ended June 30, 2001, compared to $2.7 million for the six months ended June 30, 2000. The primary factors affecting TCI's cash from operations are discussed in the following paragraphs. Cash from property operations (rents collected less payments for expenses applicable to rental income) of $29.0 million in the six months ended June 30, 2001, approximated the $28.5 million in 2000. Interest collected increased to $700,000 in the six months ended June 30, 2001, from $104,000 in 2000. The increase was primarily due to TCI funding two loans in the fourth quarter of 2000 and one loan funded in the first quarter of 2001. Interest paid decreased to $20.6 million in the six months ended June 30, 2001, from $22.1 million in the six months ended June 30, 2000. Of 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------- --------------------------------------------------------------- RESULTS OF OPERATIONS (Continued) --------------------- Liquidity and Capital Resources (Continued) - ------------------------------- the decreases, $2.7 million was from the sale of 27 properties in 2001 and 2000 subject to debt, and $964,000 was from loan payoffs and principal paydowns in 2001 and 2000. These decreases were offset by increases of $2.2 million from the purchase of 16 properties in 2001 and 2000 subject to debt. Advisory, incentive and net income fees paid increased to $5.1 million in the six months ended June 30, 2001, from $4.3 million in the six months ended June 30, 2000. The increase was primarily due to an increase in incentive fees of $1.6 million paid. The incentive fee is equal to 10% of the amount by which the aggregate sales consideration for all TCI's properties sold during the year exceeds the total cost of the property plus a simple 8% annual return to TCI's net investment in such property. This increase was offset by decreases in advisor fees and net income fees of $816,000. General and administrative expenses paid increased to $5.9 million in the six months ended June 30, 2001, from $5.2 million in the six months ended June 30, 2000. This increase was mainly due to an increase in legal fees and cost reimbursements to the advisor. In the first six months of 2001, TCI sold seven apartments, two warehouses, two office buildings and three parcels of unimproved land for a total of $90.7 million, receiving net cash of $27.6 million after the payoff of existing debt and the payment of various closing costs. The purchasers assumed $26.1 million in mortgage debt. Also in the first six months of 2001, TCI financed a parcel of unimproved land for $4.5 million, receiving $4.3 million in cash after the payment of various closing costs. Further in the first six months of 2001, TCI purchased one apartment and one parcel of unimproved land for a total of $2.9 million, paying $1.9 million in cash, including various closing costs, and assumed existing mortgage debt of $1.1 million. TCI also exchanged one apartment for two parcels of land in the first six months of 2001. In the third quarter of 2001, TCI sold one office building for $6.6 million, receiving net cash of $3.1 million after the payoff of existing debt and the payment of various closing costs. Also in the third quarter of 2001, TCI purchased one parcel of unimproved land for $232,000 in cash. The Board of Directors has approved the repurchase of a total of 1.4 million shares of TCI's Common Stock. Through June 30, 2001, a total of 409,765 shares had been repurchased at a total cost of $3.3 million. No shares have been repurchased under this program since May 1998. 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 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------- --------------------------------------------------------------- RESULTS OF OPERATIONS (Continued) --------------------- Liquidity and Capital Resources (Continued) - ------------------------------- 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 mortgage note receivable review includes an evaluation of the collateral property securing each 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 - --------------------- TCI had net income of $14.3 million and $14.6 million in the three and six months ended June 30, 2001, including gains on sale of real estate totaling $22.3 million and $28.7 million, compared to net income of $5.8 million and $10.1 million in the corresponding periods in 2000, including gains on sale of real estate totaling $8.9 million and $17.8 million. Fluctuations in this and other components of revenues and expense between the 2001 and 2000 periods are discussed below. Rents in the three and six months ended June 30, 2001, increased to $36.1 million and $71.0 million compared to $34.6 million and $68.7 million in 2000. Of these second quarter increases, $1.4 million was due to increased occupancies and rental rates at TCI's office buildings. Of these year to date increases, $1.9 million for TCI's commercial office buildings and $400,000 for TCI's apartments were due to increased occupancies and rental rates. Property operations expense in the three and six months ended June 30, 2001, increased to $20.2 million and $40.4 million from $18.3 million and $36.8 million in 2000. Of the increases, $1.1 million and $2.3 million were due to increased operating expenses at TCI's four hotels, and $698,000 and $1.4 million were due to increased utility and maintenance costs at TCI's office buildings. Rents and property operating expenses are both expected to decrease as TCI continues to selectively sell properties. Interest and other income increased to $645,000 and $1.3 million in the three and six months ended June 30, 2001, compared to $588,000 and $992,000 in 2000. The increase was primarily due to TCI funding two loans in the fourth quarter of 2000 and one loan in the first quarter of 2001. Interest income for the remaining quarters of 2001 is expected to increase from the additional loans funded in July 2001. In the three and six months ended June 30, 2001, gains on sale of real estate totaling $22.3 million and $28.7 million were recognized. The 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------- --------------------------------------------------------------- RESULTS OF OPERATIONS (Continued) --------------------- Results of Operations (Continued) - --------------------- 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, $1.0 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, a loss of $71,000 on the Moss Creek land parcel and $2.9 million in gains on sale of real estate from an equity investee. In the three and six months ended June 30, 2000, gains on sale of real estate totaling $8.9 million and $17.8 million were recognized, $572,000 on the sale of Hunters Bend Apartments, $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 Fairpark Apartments, $633,000 on the sale of Chateau Charles Hotel, a $4.8 million previously deferred gain on the sale of McKinney land and TCI's share of gains recognized by an equity affiliate of $3.8 million. Interest expense decreased to $10.8 million and $22.0 million in the three and six months ended June 30, 2001, from $11.9 million and $23.2 million in 2000. Of these decreases, $1.4 million and $2.7 million was from the sale of 29 properties subject to debt in 2001 and 2000 and $554,000 and $964,000 was from loan payoffs and principal paydowns in 2001 and 2000 and the remaining decreases were due to decreased interest rates on TCI's variable loan balances. These decreases were offset by increases of $884,000 and $2.2 million from the purchase of 16 properties in 2001 and 2000 subject to debt and $277,000 for the six months from the refinancing of 13 properties in 2001 and 2000. Interest expense for the remaining quarters is expected to decrease as TCI selectively sells properties. Depreciation expense increased to $5.0 million and $10.0 million in the three and six months ended June 30, 2001, from $4.2 million and $9.5 million in 2000. The increase was primarily due to capital improvements to TCI's office buildings. Advisory fee increased to $1.4 million and $2.9 million in the three and six months ended June 30, 2001, from $1.4 million and $2.6 million in 2000. These increases were due to an increase in TCI's gross assets, the basis for such fee. Advisory fees are expected to decrease with decreases in TCI's gross assets. Net income fee to affiliate was $1.1 million in the three and six months ended June 30, 2001, as compared to $400,000 and $752,000 in 2000. The net income fee is payable to TCI's advisor based on 7.5% of TCI's net income. 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------- --------------------------------------------------------------- RESULTS OF OPERATIONS (Continued) --------------------- Results of Operations (Continued) - --------------------- Incentive fee to affiliate was $1.6 million in the three and six months ended June 30, 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. General and administrative expenses increased to $3.5 million and $5.9 million in the three and six months ended June 30, 2001, from $1.7 million and $4.4 million in 2000. These increases were mainly due to an increase in legal fees and other professional fees. 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 on the equity method. Equity losses of investees increased to $1.0 million and $2.4 million in the three and six months ended June 30, 2001 from $299,000 and $292,000 in the three and six months ended June 30, 2000. The losses from equity investees is primarily attributed to TCI's accounting for its investment in ARI. Tax Matters - ----------- Financial statement income varies from taxable income principally due to the accounting for income and losses of investees, gains and losses from asset sales, depreciation on owned properties, amortization of discounts on notes receivable and payable and the difference in the allowance for estimated losses. TCI had a loss for federal income tax purposes (after utilization of operating loss carryforwards) in the three and six months ended June 30, 2001 and 2000; therefore, it recorded no provision for income taxes. 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, and the cost of new financings as well as the cost of variable interest rate debt, will be affected. 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 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------- --------------------------------------------------------------- RESULTS OF OPERATIONS (Continued) --------------------- Environmental Matters (Continued) - --------------------- 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS - ------- ----------------------------------------------------------- At June 30, 2001, TCI's exposure to a change in interest rates on its debt is as follows: <TABLE> <CAPTION> Weighted Effect of 1% Average Increase In Balance Interest Rate Base Rates --------------- --------------------- ------------------- <S> <C> <C> <C> Notes payable: Variable rate.......................... $126,369 8.42% $1,264 =============== ====== Total decrease in TCI's annual net income...................... $1,264 ====== Per share................................ $ .15 ====== </TABLE> -------------------------------------------- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - ------- ----------------- In February 1990, TCI, together with National Income Realty Trust, Continental Mortgage and Equity Trust ("CMET") and Income Opportunity Realty Investors, Inc. ("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. 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 21
ITEM 1. LEGAL PROCEEDINGS (Continued) - ------- ----------------- 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 provisions of the Modification. The Board believes that the provisions of the Settlement, Modification and the Olive Amendment terminated on April 28, 1999. However, in September 2000, the Court ruled that certain provisions of the Modification continue to be effective after the termination date. This ruling has been appealed to the United States Court of Appeals for the Ninth Circuit by TCI and IORI. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- The annual meeting was held on July 10, 2001, at which meeting stockholders were asked to consider and vote upon the election of Directors. At the meeting stockholders elected the following individuals as Directors: Shares Voting -------------------------------------- Withheld Director For Authority - -------------------------------------- ----------------- ------------------- R. Douglas Leonhard................... 7,406,086 53,074 Ted P. Stokely........................ 7,406,048 55,112 Martin L. White....................... 7,405,233 53,927 Edward G. Zampa....................... 7,405,151 54,009 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) Exhibits: None. (b) Reports on Form 8-K as follows: None. 22
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRANSCONTINENTAL REALTY INVESTORS, INC. Date: August 10, 2001 By: /s/ Karl L. Blaha -------------------------- -------------------------------- Karl L. Blaha President Date: August 10, 2001 By: /s/ Louis J. Corna -------------------------- -------------------------------- Louis J. Corna Executive Vice President and Chief Financial Officer (Principal Financial Officer) 23