<PAGE>
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 SEPTEMBER 30, 2000
------------------
Commission File Number 1-15663
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AMERICAN REALTY INVESTORS, INC.
-----------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 75-2847135
------------------------------- -----------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1800 Valley View Lane, Suite 300, Dallas, Texas 75234
------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(469) 522-4200
----------------------------------------
(Registrant's Telephone Number,
Including Area Code)
10670 North Central Expressway, Suite 300, Dallas, Texas 75231
----------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, If Changed from Last
Report)
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 12,381,540
---------------------------- ---------------------------------
(Class) (Outstanding at October 27, 2000)
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
The accompanying Consolidated Financial Statements have not been audited by
independent certified public accountants but in the opinion of the management of
American Realty Investors, Inc. ("ARI"), all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of consolidated results of
operations, consolidated financial position and consolidated cash flows at the
dates and for the periods indicated, have been included.
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
September 30, December 31,
2000 1999
-------------- ------------
(dollars in thousands,
except per share)
Assets
------
Notes and interest receivable
Performing ($10,814 in 2000 and $14,331 in 1999
from affiliates).................................. $ 13,474 $ 38,272
Nonperforming....................................... 2,927 2,909
-------- --------
16,401 41,181
Less - allowance for estimated losses................ (2,577) (2,577)
-------- --------
13,824 38,604
Real estate held for sale............................ 253,562 319,636
Real estate held for investment, net of accumulated
depreciation ($151,499 in 2000 and $183,757 in
1999)............................................... 405,144 451,994
Pizza parlor equipment, net of accumulated
depreciation ($3,004 in 2000 and $2,294 in 1999).... 7,358 6,872
Marketable equity securities, at market value........ 263 394
Cash and cash equivalents............................ 6,754 2,479
Investments in equity investees...................... 41,878 47,686
Intangibles, net of accumulated amortization
($2,117 in 2000 and $1,652 in 1999)................. 13,958 14,305
Other assets (including $15,290 in 2000 from
affiliates)......................................... 46,896 37,576
-------- --------
$789,637 $919,546
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
<PAGE>
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS - Continued
<TABLE>
<S> <C> <C>
September 30, December 31,
2000 1999
------------ ------------
(dollars in thousands,
except per share)
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable ($5,784 in 2000 and
$13,477 in 1999 to affiliates)....................... $633,627 $706,196
Margin borrowings..................................... 14,561 33,264
Accounts payable and other liabilities ($4,700 in
2000 and $12,409 in 1999 to affiliate)............... 30,269 45,983
-------- --------
678,457 785,443
Minority interest..................................... 43,484 87,837
Stockholders' equity
Preferred Stock, $2.00 par value, authorized
50,000,000 shares, issued and outstanding
Series A, 2,600,000 shares in 2000 and 1999
(liquidation preference $26,000)................... 4,600 4,600
Series E, 50,000 shares in 2000 (liquidation
preference $500)................................... 100 --
Common Stock, $.01 par value; authorized 100,000,000
shares, issued 12,381,540 shares in 2000 and
13,496,688 in 1999................................... 124 135
Paid-in capital....................................... 107,214 85,854
Accumulated (deficit)................................. (44,315) (44,295)
Treasury stock at cost, 2,741,646 shares in 2000 and
2,737,216 shares in 1999............................. (27) (28)
-------- --------
67,696 46,266
-------- --------
$789,637 $919,546
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE>
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Property revenue
Rents.............................. $ 34,708 $ 40,260 $ 105,211 $ 122,125
Property operations expenses....... 23,776 27,377 70,451 80,778
----------- ----------- ----------- -----------
Operating income................. 10,932 12,883 34,760 41,347
Land operations
Sales.............................. 89,285 17,434 108,238 62,158
Cost of sales...................... 65,674 11,396 81,116 44,741
----------- ----------- ----------- -----------
Gain on land sales............... 23,611 6,038 27,122 17,417
Pizza parlor operations
Sales.............................. 8,124 7,800 24,388 22,753
Cost of sales...................... 6,798 6,711 20,138 19,509
----------- ----------- ----------- -----------
Gross margin..................... 1,326 1,089 4,250 3,244
Income from operations............... 35,869 20,010 66,132 62,008
Other income
Interest income.................... 283 1,331 3,295 5,029
Equity in income of investees...... 2,577 1,874 2,873 5,270
Gain on sale of real estate........ 3,474 42,552 51,706 69,890
Other.............................. 606 300 419 (740)
----------- ----------- ----------- -----------
6,940 46,057 58,293 79,449
Other expenses
Interest........................... 19,580 22,988 60,153 68,528
Depreciation and amortization...... 4,001 4,479 12,909 13,496
General and administrative......... 3,198 3,839 12,030 12,689
Advisory fee to affiliate.......... 1,197 1,472 3,821 3,958
Litigation settlement.............. -- -- -- 275
Provision for loss................. -- 45 -- 2,072
Minority interest.................. 4,953 23,188 32,219 38,561
----------- ----------- ----------- -----------
32,929 56,011 121,132 139,579
----------- ----------- ----------- -----------
Income before income taxes........... 9,880 10,056 3,293 1,878
Provision for income taxes........... (1,652) -- (1,652) --
----------- ----------- ----------- -----------
Net income........................... 8,228 10,056 1,641 1,878
Preferred dividend requirement....... (590) (570) (1,661) (1,704)
----------- ----------- ----------- -----------
Net income (loss) applicable to
Common shares...................... $ 7,638 $ 9,486 $ (20) $ 174
=========== =========== =========== ===========
Earnings per share
Net income......................... $ .76 $ .88 $ -- $ .02
=========== =========== =========== ===========
Weighted average Common shares used
in computing earnings per share.... 10,013,087 10,759,309 10,496,364 10,753,600
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE>
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2000
<TABLE>
<CAPTION>
Series A Series E
Preferred Preferred Common Treasury Paid-in Accumulated Stockholders'
Stock Stock Stock Stock Capital (Deficit) Equity
--------- --------- ----- ----- ------- --------- -------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000.............. $ 4,600 $ -- $ 135 (28) $ 85,854 (44,295) $ 46,266
Preferred dividends
Series A Preferred Stock ($.75 per
share)........................... -- -- -- -- -- (1,639) (1,639)
Series E Preferred Stock ($.42 per
share)........................... -- -- -- -- -- (22) (22)
Retirement of Treasury Stock.......... -- -- (20) 36 (16) -- --
Repurchase of Common Stock............ -- -- -- -- (746) -- (746)
Sale of Series E Preferred Stock...... -- 100 -- -- 400 -- 500
Common Stock issued in exchange for
NRLP partnership units.............. -- -- 9 (35) 21,722 -- 21,696
Net income............................ -- -- -- -- -- 1,641 1,641
--------- --------- ------ -------- -------- --------- ---------
Balance, September 30, 2000........... $ 4,600 $ 100 $ 124 $ (27) $107,214 $ (44,315) $ 67,696
========= ========= ====== ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
<PAGE>
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------
2000 1999
---------- ----------
(dollars in thousands)
<S> <C> <C>
Cash Flows From Operating Activities
Rents collected.................................... $ 105,131 $ 120,986
Pizza parlor sales collected....................... 24,422 23,445
Interest collected................................. 4,553 3,716
Distributions received from equity investees'
operating cash flow............................... 1,869 935
Payments for property operations................... (81,625) (93,939)
Payments for pizza parlor operations............... (20,030) (20,092)
Interest paid...................................... (55,855) (54,754)
Advisory fee paid to affiliate..................... (3,821) (3,958)
Distributions to minority interest holders......... (6,159) (3,805)
Purchase of marketable equity securities........... (5,307) (2,180)
Proceeds from sale of marketable equity securities. 5,170 2,648
General and administrative expenses paid........... (12,030) (12,738)
Other.............................................. 10,110 5,500
-------- --------
Net cash (used in) operating activities........ (33,572) (34,236)
Cash Flows From Investing Activities
Collections on notes receivable.................... 39,930 19,187
Pizza parlor equipment purchased................... (1,120) (740)
Proceeds from sale of real estate.................. 125,218 166,907
Notes receivable funded............................ (17,260) (40,942)
Earnest money/escrow deposits...................... (5,424) 18,944
Investment in real estate entities................. 3,828 (366)
Acquisition of real estate......................... (19,015) (48,094)
Construction and development....................... (9,415) --
Real estate improvements........................... (8,587) (20,005)
-------- --------
Net cash provided by investing activities...... 108,155 94,891
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
<PAGE>
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------
2000 1999
--------- ---------
(dollars in thousands)
<S> <C> <C>
Cash Flows from Financing Activities
Proceeds from notes payable........................... $ 136,321 $ 112,730
Payments on notes payable............................. (152,871) (175,048)
Deferred borrowing costs.............................. (6,690) (5,947)
Net (payments) to/advances from affiliates............ (34,208) 3,489
Issuance of Series I Preferred Stock.................. 500 --
Margin borrowings, net................................ (10,953) (3,814)
Common dividends paid................................. -- (545)
Preferred dividends paid.............................. (1,661) (1,704)
Sale of Preferred Stock............................... -- 500
Repurchase of Common Stock............................ (746) --
--------- ---------
Net cash (used in) financing activities............ (70,308) (70,339)
Net increase (decrease) in cash and cash
equivalents...................................... 4,275 (9,684)
Cash and cash equivalents, beginning of period......... 2,479 11,523
--------- ---------
Cash and cash equivalents, end of period............... $ 6,754 $ 1,839
========= =========
Reconciliation of net income to net cash (used in)
operating activities
Net income............................................ 1,641 1,878
Adjustments to reconcile net income to net cash
(used in) operating activities
Depreciation and amortization....................... 20,930 23,353
Provision for loss.................................. -- 2,072
Gain on sale of real estate......................... (78,828) (87,307)
Distributions from equity investees' operating
cash flow......................................... 1,869 935
Distributions to minority interest holders.......... 6,159 3,805
Equity in (income) of investees..................... (2,873) (5,270)
Decrease in marketable equity securities............ 131 2,159
(Increase) decrease in accrued interest receivable. 1,258 (1,605)
Decrease in other assets............................ 4,640 13,817
(Decrease) in accrued interest payable.............. (3,723) (6,640)
Increase in accounts payable and other liabilities.. 15,224 18,567
--------- ---------
Net cash (used in) operating activities........... $ (33,572) $ (34,236)
========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
7
<PAGE>
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Nine Months
Ended September 30,
----------------------
2000 1999
---------- ----------
(dollars in thousands)
Schedule of noncash investing and financing activities
Notes payable from acquisition of real estate........... $ 6,262 $70,133
Notes payable assumed by buyer on sale of properties.... 32,460 6,776
Notes receivable from sale of real estate............... 2,790 --
Conversion of note receivable to partnership interest. -- 22,678
Retirement of Common Stock.............................. 20 --
Provision for loss...................................... -- 2,072
Exchange of real estate at carrying value............... 2,989 --
Common Stock in exchange for NRLP units................. 27,353 --
The accompanying notes are an integral part of these Consolidated Financial
Statements.
8
<PAGE>
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
-------------------------------
The accompanying Consolidated Financial Statements have been prepared in
conformity with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Dollar amounts in tables are in thousands, except per share
amounts. Certain balances for 1999 have been reclassified to conform to the
2000 presentation.
Operating results for the nine month period ended September 30, 2000, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. For further information, refer to the Consolidated Financial
Statements and Notes thereto included in the Annual Report on Form 10-K for
American Realty Trust, Inc. ("ART") for the year ended December 31, 1999 (the
"1999 Form 10-K").
NOTE 2. TRANSACTION WITH AMERICAN REALTY TRUST, INC. AND NATIONAL
-------------------------------------------------------------------
REALTY, L.P.
------------
On November 3, 1999, National Realty, L.P. ("NRLP") and ART jointly announced
their agreement to combine, in a tax-free exchange, under the ownership of a new
company, American Realty Investors, Inc. ("ARI"). The share exchange and merger
was subject to a vote of stockholders/unitholders of both entities. Approval
required the vote of the unitholders holding a majority of NRLP's outstanding
units, and the vote of the stockholders holding a majority of ART's outstanding
shares of common and preferred stock. At special meetings held on March 21,
2000, the NRLP unitholders and ART stockholders approved the merger proposal.
The transaction was closed on August 2, 2000. NRLP unitholders, except for ART,
received one share of ARI common stock for each unit of NRLP held. ART
stockholders received .91 shares of ARI common stock for each share of ART
common stock held. Each share of ART preferred stock was converted into one
share of preferred stock of ARI, having substantially the same rights as ART's
preferred stock. The ART shares of common stock ceased trading on the New York
Stock Exchange on August 2, 2000. ARI common stock commenced trading on the New
York Stock Exchange on August 3, 2000. For accounting purposes, the merger was
treated as the purchase of NRLP by ART; accordingly, the historical financial
statements presented for ARI are those of ART.
NOTE 3. NOTES RECEIVABLE
--------------------------
In January 2000, a $365,000 note receivable was collected in full, including
accrued but unpaid interest. In March 2000, ARI collected in full, including
accrued but unpaid interest, a $942,000 note receivable.
In August 1999, a $2.6 million loan was funded to JNC Enterprises, Inc. ("JNC").
The loan was subsequently split into two pieces. The loans were secured by
second liens on 3.5 acre and 1.2561 acre parcels of land in Dallas, Texas, the
guarantee of the borrower and the
9
<PAGE>
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES RECEIVABLE (Continued)
--------------------------
personal guarantees of its shareholders. The loans bore interest at 16.0% per
annum and matured in February 2000. All principal and interest were due at
maturity. In March 2000, the $2.0 million loan secured by the 3.5 acre land
parcel was collected in full, including accrued but unpaid interest. In April
2000, the remaining loan, with a principal balance of $600,000, was collected in
full, including accrued but unpaid interest.
In September 1999, in conjunction with the sale of two apartments, $2.1 million
in purchase money financing was provided, secured by limited partnership
interests in two limited partnerships owned by the buyer. The financing bore
interest at 16.0% per annum, required monthly payments of interest only at 6.0%,
beginning in February 2000 and a $200,000 principal paydown in December 1999,
which was not received, and matured in August 2000. ARI had the option to
obtain the buyer's general and limited partnership interests in the collateral
partnerships in full satisfaction of the financing. In March 2000, ARI agreed
to forbear foreclosing on the collateral securing the note, and released one of
the partnership interests, in exchange for payment of $250,000 and executed
deeds of trusts on certain properties owned by the borrower. In March 2000, the
borrower made a $1.1 million payment, upon receipt of which ARI returned the
deeds of trust and terminated the option agreement. The borrower executed a
replacement promissory note for the remaining note balance of $1.0 million,
which is unsecured, non-interest bearing and matures in April 2003. In April
2000, ARI funded a $100,000 loan to the borrower. The loan is secured by five
second lien deeds of trust, is non-interest bearing and matures in September
2001.
In December 1999, a note with a principal balance of $1.2 million and secured by
a pledge of a partnership interest in a partnership which owns real estate in
Addison, Texas, matured. The maturity date was extended to April 2000 in
exchange for an increase in the interest rate to 14.0% per annum. All other
terms remained the same. Negotiations are in process to further modify and
extend the loan.
In June 1998, a $4.2 million loan was funded to Cuchara Partners, Ltd. and Ski
Rio Partners, Ltd., affiliates of JNC. The loan was secured by (1) a first lien
on approximately 450 acres of land in Huerfano County, Colorado, known as
Cuchara Valley Mountain Ski Resort; (2) an assignment of a $2.0 million
promissory note secured by approximately 2,623 acres of land in Taos County, New
Mexico, known as Ski Rio Resort; and (3) a pledge of all related partnership
interests. The loan bore interest at 16.0% per annum and had an extended
maturity of March 2000. All principal and interest were due at maturity. In the
fourth quarter of 1998, $109,000 was received on the sale of 11 parcels of the
collateral property in Taos, New Mexico. In August and September 1999, paydowns
totaling $3.3 million were received. The loan had a principal balance of $1.6
million at March 31, 2000. In April 2000, the loan was collected in full,
including accrued but unpaid interest.
10
<PAGE>
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES RECEIVABLE (Continued)
--------------------------
In August 1998, ARI funded a $635,000 loan to La Quinta Partners, LLC. The loan
was secured by interest bearing accounts prior to being used as escrow deposits
toward the purchase of a total of 956 acres of land in La Quinta, California,
and the personal guarantee of the manager of the borrower. The loan had an
extended maturity of November 1999. All principal and interest were due at
maturity. In November and December 1998, $250,000 in principal paydowns were
received. In the second quarter of 1999, the loan was modified, increasing the
interest rate to 15.0% per annum and extending the maturity date to November
1999. Accrued but unpaid interest was added to the principal balance, increasing
it by $42,000 to $402,000. In the fourth quarter of 1999, an additional $2,000
was funded, increasing the loan's principal balance to $404,000 at March 31,
2000. In March 2000, $25,000 in interest was collected and the loan's maturity
was extended to April 2000. The borrower did not make the required payments and
the loan was classified as nonperforming. ARI has begun legal proceedings to
collect the balance due. No loss is expected in excess of previously
established reserves if ARI is unable to collect the balance due.
In October 1998, ARI funded a $2.1 million loan to Frisco Panther Partners,
Ltd., an affiliate of JNC. The loan was secured by a second lien on 408.23
acres of land in Frisco, Texas, the guaranty of the borrower and the personal
guarantees of its partners. The loan bore interest at 16.0% per annum and had
an extended maturity of March 2000. All principal and interest were due at
maturity. In April 2000, the loan was collected in full, including accrued but
unpaid interest.
In December 1998, ARI funded $3.3 million of a $5.0 million loan commitment to
JNC. In January 1999, a $1.3 million paydown was received and subsequently in
1999 an additional $3.0 million was funded, increasing the loan balance to $5.0
million. The loan was secured by a second lien on 1,791 acres of land in
Denton County, Texas, and a second lien on 91 acres of land in Collin County,
Texas. The loan bore interest at 16.0% per annum, and had an extended maturity
of March 2000. All principal and interest were due at maturity. At March 31,
2000, the loan had a principal balance of $5.0 million. In April 2000, the loan
was collected in full, including accrued but unpaid interest. In conjunction
with the April 2000 JNC loan payoffs, described above, ARI paid off $5.0 million
in mortgage debt secured by the notes.
In June 2000, ARI sold the 124,322 sq.ft. Marina Playa Office Building in Santa
Clara, California, for $25.8 million, receiving $7.6 million in cash and
providing financing of $18.8 million. Also in June 2000, ARI sold the note
receivable, net of the underlying debt, for $6.2 million, retaining a $3.9
million participation. In August 2000, the remaining balance of the note was
collected in full, including accrued but unpaid interest.
In July 2000, ARI sold 749.1 acres of its Keller land for $10.0 million,
receiving $8.7 million in cash and providing purchase money financing of the
remaining $1.3 million of the purchase price. Through September 2000, $481,000
has been repaid.
11
<PAGE>
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES RECEIVABLE (Continued)
--------------------------
In August 2000, ARI sold 20.5 acres of Mason Goodrich land for $3.6 million,
receiving $1.8 million in cash and providing purchase money financing of the
remaining $1.5 million of the purchase price.
Related Party. In 1998, a loan commitment of $1.8 million was funded to Warwick
of Summit, Inc. ("Warwick"). The loan was secured by a second lien on a
shopping center in Rhode Island, by 100% of the stock of the borrower and by the
personal guarantee of the principal shareholder of the borrower. The loan bears
interest at 14.0% per annum and has an extended maturity of December 2000. All
principal and interest are due at maturity. In December 1999, the borrower sold
the collateral property and $810,000 of the net proceeds of the sale were paid
to ARI of which $386,000 was applied to accrued interest and the remaining
$424,000 was applied to principal reducing the principal balance to $1.7
million. Escrowed monies of $377,000 are to be received in 2000. Through
September 2000, $50,000 has been received. The loan is currently unsecured.
Richard D. Morgan, a Warwick shareholder, was a Director of the general partner
of NRLP, and since August 3, 2000, serves as a Director of ARI.
Beginning in 1997 and through January 1999, a $1.6 million loan commitment was
funded to Bordeaux Investments Two, L.L.C. ("Bordeaux"). The loan is secured by
(1) a 100% membership interest in Bordeaux, which owns a shopping center in
Oklahoma City, Oklahoma; (2) 100% of the stock of Bordeaux Investments One,
Inc., which owns 6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and
(3) the personal guarantees of the Bordeaux partners. The loan bears interest
at 14.0% per annum. In November 1998, the loan was modified to allow interest
payments based on monthly cash flow of the collateral property and the maturity
date was extended to December 1999. In the second quarter of 1999, the loan was
again modified, increasing the loan commitment to $2.1 million and an additional
$33,000 was funded. In the third quarter of 1999, an additional $213,000 was
funded. The property has had no cash flow; therefore, interest on the loan
ceased being accrued in the second quarter of 1999. In October 1999, a $724,000
paydown was received, which was applied first to accrued but unpaid interest due
of $261,000, then to principal, reducing the loan balance to $1.4 million. The
note was further modified, changing the loan commitment to $1.5 million, the
maturity date to December 2000, and payments to net revenues of the shopping
center. Richard D. Morgan, a Bordeaux member, was a Director of the general
partner of NRLP, and since August 3, 2000, serves as a Director of ARI.
In 1999, ARI funded a $2.0 million loan commitment to Lordstown, L.P. The loan
is secured by a second lien on land in Ohio and Florida, by 100% of the general
and limited partner interest in Partners Capital, Ltd., the limited partner of
Lordstown, L.P., and a profits interest in subsequent land sales. A corporation
controlled by Richard D. Morgan, is the general partner of Lordstown, L.P. Mr.
Morgan was a director of the general partner of NRLP, and since August 3, 2000,
serves as a Director of ARI.
12
<PAGE>
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES RECEIVABLE (Continued)
--------------------------
In 1999, ARI funded a $2.4 million loan commitment to 261, L.P. The loan is
secured by 100% of the general and limited partner interest in Partners Capital,
Ltd., the 99% limited partner of 261, L.P., and a profits interest in subsequent
land sales. A corporation controlled by Richard D. Morgan is the general
partner of 261, L.P., and Mr. Morgan was a director of the general partner of
NRLP, and since August 3, 2000, serves as a Director of ARI. In August 2000, the
loan was collected in full, including accrued but unpaid interest.
In February 1999, ARI funded $5.0 million under an unsecured line of credit to
One Realco Corporation, which at September 30, 2000, owned approximately 12.3%
of the outstanding shares of ARI's common stock. The line of credit bears
interest at 12.0% per annum and originally matured in February 2000. All
principal and interest were due at maturity. The line of credit is guaranteed by
Basic Capital Management, Inc. ("BCM"), ARI's advisor. In March 2000, the line
was modified and extended, increasing the loan commitment to $11.0 million, and
an additional $1.2 million was funded. The maturity date was extended to
February 2002. In exchange for the modification and extension, the borrower paid
all accrued but unpaid interest and pledged collateral consisting of a $10.0
million promissory note secured by the stock of World Trade Company, Ltd., which
owns a hotel in Bulgaria. In July 2000, the line was again modified, increasing
the loan commitment to $15.0 million. In September 2000, the line of credit with
a then principal balance of $14.6 million was paid in full, including accrued
and unpaid interest. In September 2000, ARI acquired 100% of the stock of World
Trade Company, Ltd. See NOTE 4. "REAL ESTATE."
During 1998 and 1999, ARI funded a total of $31.0 million of a $52.5 million
loan commitment to Centura Tower, Ltd. ("Centura"). The loan was secured by
2.244 acres of land and an office building under construction in Farmers Branch,
Texas. In August 1999, ARI exercised its option contained in the loan
agreement, and obtained a combined 80% general and limited partnership interest
in Centura in exchange for a $24.1 million capital contribution through
conversion of a portion of its note receivable to an equity interest. ARI has
contracted to purchase an additional 10.0% limited partnership interest in both
Centura and NLP/CH, Ltd., a Centura affiliated partnership that owns land
adjacent to the office building, for a total of $1.3 million. Through October
2000, $763,000 has been paid.
NOTE 4. REAL ESTATE
----------------------
In 2000, ARI sold the following properties:
<TABLE>
<CAPTION>
Net
Units/ Sales Cash Debt Gain on
Property Location Sq.Ft./Acres Price Received Discharged Sale
------------------ --------------- ------------ ------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
First Quarter
Apartments
Summerwind Reseda, CA 172 Units $9,000 $3,082 $5,568 /(1)/ $6,684
Windtree Reseda, CA 159 Units 8,350 2,911 5,063 /(1)/ 6,170
Whispering Pines Canoga Park, CA 102 Units 5,300 1,597 3,437 /(1)/ 3,106
</TABLE>
13
<PAGE>
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
---------------------
<TABLE>
<CAPTION>
Net
Units/ Sales Cash Debt Gain on
Property Location Sq.Ft./Acres Price Received Discharged Sale
----------------- ----------------- ----------------- ------------ -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Shopping Center
Katella Plaza Orange, CA 62,290 Sq.Ft. $ 1,814 $ 283 $ 1,188 $ 194
Land
Duchense Duchense, UT 420 Acres 43 42 -- 16
Frisco Bridges Collin County, TX 15.00 Acres 2,675 706 2,000 297
Frisco Bridges Collin County, TX 19.74 Acres 2,971 -- --/(2)/ --
Mason/Goodrich Houston, TX 1.1 Acres 129 -- 116 70
Mason/Goodrich Houston, TX 12.8 Acres 2,536 -- 1,803 1,783
Nashville Nashville, TN 2.6 Acres 405 -- 345 225
Rasor Plano, TX 43.01 Acres 1,850 -- 1,604 58
Second Quarter
Apartments
Pines Little Rock, AR 257 Units 4,650 1,281 3,063 2,441
Four Seasons Denver, CO 384 Units 16,600 6,543 9,220/(1)/ 8,191
Sherwood Glen Urbandale, IA 180 Units 6,250 1,244 4,626/(1)/ 4,161
Office Building
Marina Playa Santa Clara, CA 124,205 Sq.Ft. 25,750 7,737 7,766 17,395
Land
Rasor Plano, TX 5.4 Acres 915 -- 915 705
Salmon River Salmon River, ID 3.0 Acres 45 44 -- 38
Valley Ranch Irving, TX 22.4 Acres 1,455 -- 1,375 (585)
Parkfield Denver, CO 2.6 Acres 615 (1) 584 512
Frisco Bridges Collin County, TX 24.3 Acres 4,194 (435) 4,000 259
Vista Business
Park Travis County, TX 5.4 Acres 620 14 577 173
McKinney Corners
II Collin County, TX 14.6 Acres 500 (599) 1,050 (40)
Third Quarter
Apartments
Fair Oaks Euless, TX 208 Units 6,850 609 5,711 3,364
Land
Mason/Goodrich Houston, TX 6.8 Acres 1,198 114 991 807
McKinney Corners
I,II,III,IV,V Collin County, TX 82.0 Acres 9,150 613 8,123 1,638
Parkfield Denver, CO 326.8 Acres 13,164 7,969 3,279 3,768
Rasor Plano, TX 41.1 Acres 3,779 3,587 -- 1,902
Pantex Collin County, TX 182.5 Acres 8,160 -- 4,546/(1)/ 959
Rowlett Creek Collin County, TX 80.4 Acres 2,262 919 1,173 462
Vann Cattle Collin County, TX 126.6 Acres 3,564 1,872 1,471 1,257
Mastenbrook Collin County, TX 157.9 Acres 4,445 1,890 2,275 747
Wakefield Collin County, TX 70.3 Acres 1,981 1,239 612 478
Nashville Nashville, TN 3.0 Acres 523 19 450 310
Keller Tarrant County, TX 749.1 Acres 10,000 3,892 4,500 3,373
Frisco Bridges Collin County, TX 127.4 Acres 27,500 7,411 18,570 6,954
Mason/Goodrich Houston, TX 20.5 Acres 3,560 497 1,308 956
</TABLE>
------------
(1) Debt assumed by purchaser.
(2) Exchanged for 3.25 acres of Clark land.
14
<PAGE>
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
---------------------
In 1999, ARI sold the following properties:
<TABLE>
<CAPTION>
Net
Units/ Sales Cash Debt Gain on
Property Location Sq.Ft./Acres Price Received Discharged Sale
---------- ----------- ------------ ------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
First Quarter
Apartments
Olde Towne Middleton, Ohio 199 Units $ 4,600 $4,400 $ $ 2,200
Santa Fe Kansas City, MO 225 Units 4,600 4,300 -- 706
Mesa Ridge Mesa, AZ 480 Units 19,500 8,593 9,400 10,200
Land
Plano Parkway Collin County, TX 4.6 Acres 1,200 -- 1,100 473
Rasor Plano, TX 13.0 Acres 1,600 -- 1,500 979
Mason/Goodrich Houston, TX 9.9 Acres 956 33 860 432
McKinney Corners McKinney, TX 23.7 Acres 7,700 -- 5,500 2,900
Second Quarter
Apartments
Horizon East Dallas, TX 166 Units 4,000 1,200 2,600 1,800
Lantern Ridge Richmond, VA 120 Units 3,400 880 2,400 2,300
Barcelona Tampa, FL 368 Units 9,800 2,200 7,000 2,200
Land
Vista Ridge Lewisville, TX 15.0 Acres 2,600 552 1,800 913
Plano Parkway Collin County, TX 24.5 Acres 4,900 -- 4,700 1,100
Frisco Bridges Collin County, TX 27.6 Acres 16,900 2,700 13,000 4,200
Plano Parkway Collin County, TX 6.0 Acres 1,600 -- 1,600 615
Hotel
Continental Las Vegas, NV 400 Rooms 25,000 5,000 -- 7,900
Third Quarter
Apartments
Country Place Round Rock, TX 152 Units 6,000 1,300 4,300 3,300
Lake Nora Indianapolis, IN 588 Units 29,100 2,700 24,500 15,100
Fox Club Indianapolis, IN 336 Units
Oakhollow Austin, TX 409 Units 35,500 7,800 22,200 24,200
Windridge Austin, TX
Land
JHL Connell Carrollton, TX .13 Acres 53 -- 49 23
Plano Parkway Collin County, TX 11.8 Acres 3,800 1,700 2,000 1,900
Vista Ridge Lewisville, TX 6.7 Acres 1,400 329 975 584
Valley Ranch Irving, TX 1.4 Acres 163 159 -- 128
Keller Tarrant County, TX 2.1 Acres 185 91 90 158
Sun City Sun City, TX 26.5 Acres 260 240 -- 180
Katrina Palm Desert, CA 121.2 Acres 6,600 5,500 -- 186
Frisco Bridges Collin County, TX 13.6 Acres 2,600 -- 2,100 403
Plano Parkway Collin County, TX 6.2 Acres 900 208 650 (40)
Keller, Scout
and Scoggins Tarrant County, TX 185.6 Acres 3,500 758 2,500 1,800
Vista Ridge Lewisville, TX 1.3 Acres 715 665 -- 538
</TABLE>
15
<PAGE>
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. REAL ESTATE (Continued)
--------------------
In 2000, ARI purchased the following properties:
<TABLE>
<CAPTION>
Net
Units/Sq.Ft. Purchase Cash Debt Interest Maturity
Property Location Acres/Rooms Price Paid Incurred Rate Date
------------------- ------------------ ------------ -------- ------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter
Land
Clark Farmers Branch, TX 3.25 Acres $ 2,989 $ -- $ -- /(2)/ -- % --
Kelly lots Collin County, TX .75 Acres 130 20 100 /(1)/ 10.0 03/10
Mastenbrook Collin County, TX 157.86 Acres 3,200 704 2,400 /(1)/ 9.0 09/00
Second Quarter
Land
Sladek Travis County, TX 63.3 Acres 712 316 427 /(1)/ 10.0 05/04
Third Quarter
Hotel
Grand Hotel Sofia(3) Sofia, Bulgaria 145 Rooms 17,975 17,975 -- -- --
</TABLE>
------------
(1) Seller financing.
(2) Exchanged for 19.74 acres of Frisco Bridges land.
(3) Related Party. In September 2000, ARI purchased 100% of the outstanding
stock of World Trade Company, Ltd. from One Realco Corporation, for $18.0
million in cash. World Trade Company owns a hotel in Sofia, Bulgaria.
In 1999, ARI purchased the following properties:
<TABLE>
<CAPTION>
Net
Units/ Purchase Cash Debt Interest Maturity
Property Location Sq.Ft./Acres Price Paid Incurred Rate Date
------------------ -------------------- -------------- -------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter
Land
Frisco Bridges Collin County, TX 336.8 Acres $46,800 $7,800 $39,000 10.25% 01/00
Second Quarter
Land
Rowlett Creek Collin County, TX 80.4 Acres 1,600 400 1,200 8.75 05/04
Leone Irving, TX 8.2 Acres 1,500 300 1,200 8.00 05/03
Vineyards II Tarrant County, TX 18.6 Acres 6,300 2,300 4,000 14.50 06/02
Lake Houston Harris County, TX 33.58 Acres 2,500 2,500 -- -- --
Office Building
Encino Executive
Plaza Los Angeles, CA 177,211 Sq.Ft. 40,100 2,800 34,600 7.74 05/08
Cooley Farmers Branch, TX 27,000 Sq.Ft. 3,500 1,500 2,000 9.00 05/19
Third Quarter
Land
Monterey Riverside County, CA 85.0 Acres 5,600 1,100 4,500 9.00 06/02
Wakefield Allen, TX 70.0 Acres 1,300 688 612 8.50 07/04
</TABLE>
16
<PAGE>
AMERICAN REALTY INVESTORS, INC.
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENTS IN EQUITY INVESTEES
-----------------------------------------
Real estate entities. ARI's investment in real estate entities at September 30,
2000, included equity securities of two publicly traded real estate investment
trusts, Income Opportunity Realty Investors, Inc. ("IORI") and Transcontinental
Realty Investors, Inc. ("TCI"), and interests in real estate joint venture
partnerships. BCM, ARI's advisor, serves as advisor to IORI and TCI.
ARI accounts for its investment in IORI and TCI and the joint venture
partnerships using the equity method. Substantially all of the equity securities
of IORI and TCI are pledged as collateral for borrowings. See NOTE 9. "MARGIN
BORROWINGS."
ARI's investment in real estate entities, accounted for using the equity method,
at September 30, 2000 was as follows:
<TABLE>
<CAPTION>
Percentage Carrying Equivalent
of ARI's Value of Investee Market Value
Ownership at Investment at Book Value at of Investment at
Investee September 30, 2000 September 30, 2000 September 30, 2000 September 30, 2000
-------- ------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
IORI 27.00% $ 8,293 $11,102 $ 2,154
TCI 24.73% 26,874 47,058 13,141
------- -------
35,167 $15,295
=======
Other 6,711
-------
$41,878
=======
</TABLE>
The difference between the carrying value of ARI'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 IORI and TCI
undervalues their assets and ARI may, therefore, continue to increase its
ownership in these entities.
Set forth below is summarized results of operations of equity investees for the
nine months ended September 30, 2000:
Revenues.................................... $116,111
Equity in income of partnerships............ (71)
Property operating expenses................. 75,448
Depreciation................................ 16,729
Interest expense............................ 39,359
--------
(Loss) before gains on sale of real estate.. (15,496)
Gain on sale of real estate................. 50,440
--------
Net income.................................. $ 34,944
========
ARI's share of equity investees' loss before gains on the sale of real estate
was $2.5 million for the nine months ended September 30, 2000, and its share of
equity investees' gains on sale of real estate was $13.3 million for the nine
months ended September 30, 2000.
17
<PAGE>
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENTS IN EQUITY INVESTEES (Continued)
---------------------------------------
ARI's cash flow from IORI and TCI is dependent on the ability of each of them to
make distributions. In the nine months ended September 30, 2000, distributions
totaling $1.5 million were received from IORI and TCI.
In the first nine months ended September 30, 2000, ARI purchased a total of
$976,000 of equity securities of IORI and TCI.
In June 2000, ARI sold its partnership interest in Vestavia Lake Apartments in
Orlando, Florida, resulting in a gain of $787,000 included in equity income
<loss> of investees on the Statement of Operations.
Elm Fork Ranch, L.P. In September 1997, a newly formed limited partnership, of
which ARI is a 1% general partner and 21.5% limited partner, purchased a 422.4
acre parcel of unimproved land in Denton County, Texas, for $16.0 million in
cash. ARI contributed $3.6 million in cash with the remaining $12.4 million
being contributed by the other limited partners. The partnership agreement
designates ARI as the managing general partner. In September 1997, the
partnership obtained financing of $6.5 million secured by the 422.4 acres of
land. The mortgage bears interest at 10% per annum, requires quarterly payments
of interest only and matures in September 2001. The net financing proceeds were
distributed to the partners, ARI receiving $2.9 million of its initial
investment. The partnership agreement also provides that the limited partners
receive a 12% preferred cumulative return on their investment before any sharing
of partnership profits occurs. One Realco, one of the limited partners in the
partnership owns approximately 12.3% of the outstanding shares of ARI's Common
Stock. In June 2000, ARI sold its partnership interest for $2.0 million with an
option to repurchase the interest at any time prior to December 31, 2000 for
$2.0 million plus an amount equal to 20% times the number of days from the date
of agreement to the exercise date. ARI intends to exercise the option, and,
therefore, has recognized neither gain nor (loss) on the sale.
NOTE 6. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO
--------------------------------------------------------
Since 1994, ARI has been purchasing equity securities of entities other than
those of the REITs and NRLP to diversify and increase the liquidity of its
margin accounts. In the first nine months of 2000, ARI purchased $5.3 million
and sold $5.2 million of such securities. These equity securities are
considered a trading portfolio and are carried at market value. At September
30, 2000, ARI recognized an unrealized decrease in the market value of its
trading portfolio securities of $267,000. Also in the first nine months of
2000, ARI realized a net loss of $747,000 from the sale of trading portfolio
securities and received no dividends. Unrealized and realized gains and losses
on trading portfolio securities are included in other income in the accompanying
Consolidated Statements of Operations.
18
<PAGE>
AMERICAN REALTY INVESTORS, INC.
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. NOTES PAYABLE
--------- -------------
In 2000, ARI financed/refinanced or obtained second mortgage financing on the
following:
<TABLE>
<CAPTION>
Net
Acres/ Debt Debt Cash Interest Maturity
Property Location Units/Sq.Ft. Incurred Discharged Received Rate Date
-------------- ------------------ -------------- ------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter
Land
Centura, Clark
and Woolley Farmers Branch, TX 10.08 Acres $ 7,150 $ -- $ 6,960 14.00% 03/03
Frisco Bridges Collin County, TX 127.41 Acres 18,000 11,900 6,190 13.00 03/01
Frisco Bridges Collin County, TX 62.84 Acres 7,800 4,985 2,432 14.00 03/02
Nashville Nashville, TN 144.82 Acres 10,000 2,034 7,039 15.50 07/00
Second Quarter
Apartments
Rockborough Denver, CO 345 Units 2,222 -- 1,942 8.37 11/10
Confederate Point Jacksonville, FL 206 Units 7,440 5,879 1,039 8.12 05/07
Whispering Pines Topeka, KS 320 Units 7,530 6,829 302 8.12 05/07
Chateau Bayou Ocean Springs, MS 122 Units 1,007 -- 988 8.36 05/10
Waters Edge Gulfport, MS 238 Units 7,532 3,993 3,447 8.08 05/07
Land
Katy Harris County, TX 130.6 Acres 4,250 4,042 (9) 13.00 05/01
Third Quarter
Office Buildings
Centura Tower Farmers Branch, TX 410,910 Sq.Ft. 15,000 -- 14,612 16.9 07/02
Fourth Quarter
Land
Tree Farm Dallas, TX 10.36 Acres $ 8,000/(1)/ $ -- $ 7,750 14.0% 10/01
Thompson Farmers Branch, TX 3.99 Acres /(1)/
Tomlin Farmers Branch, TX 9.00 Acres /(1)/
Lacy Longhorn Farmers Branch, TX 17.12 Acres /(1)/
Kelly Fort Worth, TX 30.13 Acres /(1)/
McKinney Corners McKinney, TX 10.98 Acres /(1)/
</TABLE>
-----------
(1) Single note, with all properties as collateral.
NOTE 8. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
------------------------------------------------------------
Fees and cost reimbursement to affiliates for the nine months ended:
September 30,
2000
-------------
Property and construction management fees*.. $ 1,932
Loan placement fees......................... 530
Real estate commissions..................... 4,487
Leasing commissions......................... 877
Reimbursement of administrative expenses.... 2,680
-------
$10,506
=======
-----------------
* Net of property management fees paid to subcontractors, other than Regis
Realty, Inc., which is owned by an affiliate of BCM.
19
<PAGE>
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 9. MARGIN BORROWINGS
--------------------------
ARI has margin arrangements with various brokerage firms which provide for
borrowing of up to 50% of the market value of marketable equity securities. The
borrowings under such margin arrangements are secured by equity securities of
IORI and TCI and ARI's trading portfolio and bear interest rates ranging from
7.0% to 11.0%. Margin borrowings totaled $14.6 million at September 30, 2000.
In June 2000, 1.6 million shares of TCI stock and 54,000 shares of IORI stock
held as collateral on margin loans were sold to satisfy margin calls resulting
in losses totaling $7.9 million. These losses are included in equity income of
investees on the Statement of Operations. See NOTE 5. "INVESTMENT IN EQUITY
INVESTEES."
In April 2000, ARI obtained a security loan in the amount of $5.0 million with a
financial institution. ARI received net cash of $4.6 million after various
closing costs. The loan bears interest at 1% plus prime per annum (currently
10.5%), requires monthly payments of interest only and matures April 2001. The
loan is secured by 1,050,000 shares of ARI Common Stock held by BCM, ARI's
advisor.
In June 2000, TCI advanced ARI $9.0 million. The loan was secured by 409,934
shares of IORI common stock. The loan bore interest at 15% per annum and
matured in October 2000. All principal and interest were due at maturity. A
paydown of $3.2 million plus accrued interest was made in September 2000 with
the remainder of the loan plus accrued interest being paid in October 2000.
NOTE 10. INCOME TAXES
---------------------
Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated losses.
ARI had no taxable income or provision for income taxes in the nine months ended
September 30, 1999. For the nine months ended September 30, 2000, a provision
for income taxes in the amount of $1.7 million was recorded.
NOTE 11. OPERATING SEGMENTS
---------------------------
Significant differences among the accounting policies of the operating segments
as compared to the Consolidated Financial Statements principally involve the
calculation and allocation of administrative expenses. Management evaluates the
performance of each of the operating segments and allocates resources to them
based on their net operating income and cash flow. Expenses that are not
reflected in the segments are $12.0 million of general and administrative
expenses for the nine months ended September 30, 2000 and $12.7 million for
1999. Excluded from operating segment assets are assets of $92.1 million in 2000
and $76.6 million in 1999, which are not identifiable with an operating segment.
There are no intersegment revenues and expenses and ARI conducted all of its
business prior to September 30, 2000, within the United States.
20
<PAGE>
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 11. OPERATING SEGMENTS (Continued)
---------------------------
Presented below are ARI's reportable segments operating income for the nine
months ended September 30, and segment assets at September 30.
<TABLE>
<CAPTION>
Commercial Pizza
2000 Properties Apartments Hotels Land Parlors Receivables Total
--------- ---------- ---------- -------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Rents................. $ 23,831 $ 53,003 $25,501 $ 2,876 $24,388 $ -- $129,599
Property operating
expenses............. 14,838 30,743 17,758 7,112 20,138 -- 90,589
Interest income....... -- -- -- -- -- 3,295 3,295
Interest expense -
notes receivable..... -- -- -- -- -- -- --
-------- -------- ------- -------- ------- ------- --------
Segment operating
income............... $ 8,993 $ 22,260 $ 7,743 $ (4,236) $ 4,250 $ 3,295 $ 42,305
======== ======== ======= ======== ======= ======= ========
Depreciation/
amortization......... $ 5,234 $ 4,752 $ 1,941 $ -- $ 982 $ -- $ 12,909
Interest on debt...... 12,869 15,716 3,704 20,917 854 -- 54,060
Capital expenditures.. 4,404 10,827 495 2,276 1,120 -- 19,122
Assets................ 171,490 148,560 87,966 253,562 22,108 13,824 697,510
</TABLE>
Commercial
Property Sales: Properties Apartments Land Total
---------- ---------- --------- ---------
Sales price $27,564 $57,000 $108,238 $192,802
Cost of sale 9,975 22,883 81,116 113,974
------- ------- -------- --------
Gain on sale $17,589 $34,117 $ 27,122 $ 78,828
======= ======= ======== ========
<TABLE>
<CAPTION>
Commercial Pizza
1999 Properties Apartments Hotels Land Parlors Receivables Total
-------- ---------- ---------- -------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Rents................... $ 22,136 $ 74,727 $24,965 $ 297 $22,753 $ -- $144,878
Property operating
expenses............... 11,887 44,711 17,716 6,464 19,509 -- 100,287
Interest income......... -- -- -- -- -- 5,029 5,029
Interest expense -
notes receivable....... -- -- -- -- -- 784 784
-------- -------- ------- -------- ------- ------- --------
Segment operating
income (loss).......... $ 10,249 $ 30,016 $ 7,249 $ (6,167) $ 3,244 $ 4,245 $ 48,836
======== ======== ======= ======== ======= ======= ========
Depreciation/
amortization........... $ 3,086 $ 7,558 $ 1,884 $ -- $ 968 $ -- $ 13,496
Interest on debt........ 7,404 24,427 3,582 17,640 695 -- 53,748
Capital expenditures.... 6,726 408 1,279 1,149 740 -- 10,302
Assets.................. 176,388 214,310 71,939 314,210 21,357 64,519 862,723
</TABLE>
<TABLE>
<CAPTION>
Property Sales: Apartments Hotels Land Total
-------------- ---------- ------- -------- --------
<S> <C> <C> <C> <C>
Sales price............. $116,350 $25,000 $ 19,461 $160,811
cost of sales........... 54,338 17,122 2,044 73,504
-------- ------- -------- --------
Gain on sale............ $ 62,012 $ 7,878 $ 17,417 $ 87,307
======== ======= ======== ========
</TABLE>
NOTE 12. COMMITMENTS AND CONTINGENCIES
---------------------------------------
In 1996, ARI was admitted to the Valley Ranch, L.P. partnership as general
partner and Class B Limited Partner. The existing general and limited partners
converted their general and limited partner interest into 8,000,000 Class A
units. The units are exchangeable into shares of ARI's Series B Cumulative
Convertible Preferred Stock at the rate of 100 Class A units for each share of
Series B Preferred Stock. In February 1999, the limited partner notified ARI
that it intended to convert 100,000 Class A units into 1,000 shares of Series E
Preferred Stock. In
21
<PAGE>
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 12. COMMITMENTS AND CONTINGENCIES (Continued)
---------------------------------------
March 1999, ARI purchased the 100,000 of the Class A units for $100,000. ARI
subsequently reached an agreement with the other Class A unitholders to acquire
the remaining 7,900,000 Class A units for $1.00 per unit. In 1999 and the first
quarter of 2000, a total of 4,000,000 units were purchased, and an additional
2,000,000 units will be purchased in May 2001 and May 2002.
In the second quarter of 2000, ARI obtained second mortgage financing secured by
three of its apartments totaling $17.1 million.
On October 3, 2000, IORI entered into a stock option agreement which provided
IORI and ARI with an option to purchase 1,858,900 shares of common stock of TCI
from a third party. On October 19, 2000, IORI assigned all of its rights to
purchase such shares to ARI. ARI may exercise the option between January 1, 2001
and April 13, 2001. The total cost to purchase the shares is $30.7 million. In
October 2000, ARI paid $5.6 million of the option price.
Litigation. ARI is involved in various lawsuits arising in the ordinary course
of business. In the opinion of ARI's management, the outcome of these lawsuits
will not have a material impact on ARI's financial condition, results of
operations or liquidity.
NOTE 13. SUBSEQUENT EVENTS
---------------------------
In October 2000, ARI obtained new mortgage financing of $8.0 million secured by
six parcels of undeveloped land, receiving net cash of $7.7 million after
payment of various closing costs.
In October 2000, ARI acquired a 100% interest in EQK Realty Investors, I
("EQK"), a real estate investment trust headquartered in Atlanta, Georgia, for
$1.1 million in cash and $1.25 million in Series A Preferred Stock (125,000
shares). Subsequently, EQK acquired from ARI a shopping center in Lubbock, TX.
--------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Introduction
------------
ARI's predecessor, ART, was organized in 1961 to provide investors with a
professionally managed, diversified portfolio of equity real estate and mortgage
loan investments selected to provide opportunities for capital appreciation as
well as current income.
Transaction with American Realty Trust, Inc. and National Realty, L.P. On
November 3, 1999, NRLP and ART jointly announced their agreement to combine, in
a tax free exchange, under the ownership of a new company to be named ARI. The
share exchange and merger was subject to a vote of stockholders/unitholders of
both entities. Approval required the vote of the unitholders holding a majority
of NRLP's outstanding units, and
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Introduction (Continued)
------------
the vote of the stockholders holding a majority of ART's outstanding shares of
common and preferred stock. At special meetings held on March 21, 2000, the NRLP
unitholders and ART stockholders approved the merger proposal. The transaction
was closed on August 2, 2000. NRLP unitholders, except for ART, received one
share of ARI common stock for each unit of NRLP held. ART stockholders received
.91 shares of ARI common stock for each share of ART common stock held. Each
share of ART preferred stock converted into one share of preferred stock of ARI,
having substantially the same rights as ART's preferred stock. The ART shares of
common stock ceased trading on the New York Stock Exchange on August 2, 2000.
ARI common stock commenced trading on the New York Stock Exchange on August 3,
2000.
Liquidity and Capital Resources
-------------------------------
General. Cash and cash equivalents at September 30, 2000, totaled $6.8 million,
compared with $2.5 million at December 31, 1999. Although ARI anticipates that
during the remainder of 2000 it will generate excess cash flow from property
operations, as discussed below, such excess cash is not sufficient to discharge
all of ARI's debt obligations as they mature. ARI will therefore continue to
rely on externally generated funds, including borrowings against its investments
in various real estate entities, refinancing of properties and, to the extent
necessary, borrowings to meet its debt service obligations, pay taxes, interest
and other non-property related expenses.
At December 31, 1999, notes payable totaling $196.9 million had either scheduled
maturities or required principal reduction payments during 2000. During the
first nine months of 2000, ARI either extended, refinanced, paid down, paid off
or received commitments from lenders to extend or refinance $148.9 million of
the debt scheduled to mature in 2000.
Net cash used in operating activities improved to a use of $33.6 million in the
nine months ended September 30, 2000, from a use of $34.2 million in the nine
months ended September 30, 1999. Fluctuations in the components of cash flow
from operations are discussed in the following paragraphs.
Net cash from property operations (rents collected less payments for expenses
applicable to rental income) decreased to $23.5 million in the nine months ended
September 30, 2000, from $27.0 million in 1999. The decrease is primarily
attributable to the sale of seven apartments in 2000 and 14 apartments in 1999.
ARI expects a decrease in cash flow from property operations during the
remainder of 2000. Such decrease is expected to result from the continued
selective sale of income producing properties.
Net cash from pizza operations (sales less cost of sales) increased to $4.4
million in the nine months ended September 30, 2000, from $3.4 million in the
nine months ended September 30, 1999.
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Liquidity and Capital Resources (Continued)
-------------------------------
Interest collected increased to $4.6 million in the nine months ended September
30, 2000, from $3.7 million in 1999. The increase was attributable to loans
funded in 1999.
Interest paid increased slightly to $55.9 million in the nine months ended
September 30, 2000, from $54.8 million in 1999.
Advisory fees paid of $3.8 million in the nine months ended September 30, 2000,
approximated the $4.0 million in 1999.
General and administrative expenses of $12.0 million in the nine months ended
September 30, 2000, approximated the $12.7 million in 1999.
ARI's cash flow from its investment in IORI and TCI is dependent on the ability
of each of the entities to make distributions. ARI received distributions from
IORI and TCI totaling $1.9 million in the first nine months of 2000 compared to
$935,000 in 1999.
Other cash from operating activities increased to $10.1 million in the nine
months ended September 30, 2000, from $5.5 million in 1999. The increase was
due to a decrease in property prepaids, other miscellaneous property
receivables and property escrows.
In the first nine months of 2000, ARI received a total $11.8 million on the
collection of seven mortgage notes receivable, $26.5 million on the payoff of
four mortgage notes receivable, and $1.6 million in partial paydowns of two
mortgage notes receivable.
In 2000, ARI sold the following properties:
<TABLE>
<CAPTION>
Net
Units/ Sales Cash Debt
Property Location Sq.Ft./Acres Price Received Discharged
------------------ ----------------- ------------- ------- -------- -------------
<S> <C> <C> <C> <C> <C>
First Quarter
Apartments
Summerwind Reseda, CA 172 Units $9,000 $3,082 $ 5,568 /(1)/
Windtree Reseda, CA 159 Units 8,350 2,911 5,063 /(1)/
Whispering Pines Canoga Park, CA 102 Units 5,300 1,597 3,437 /(1)/
Shopping Center
Katella Plaza Orange, CA 62,290 Sq.Ft. 1,814 283 1,188
Land
Duchense Duchense, UT 420 Acres $ 43 $ 42 $ --
Frisco Bridges Collin County, TX 15.00 Acres 2,675 706 2,000
Frisco Bridges Collin County, TX 19.74 Acres 2,971 -- -- /(2)/
Mason/Goodrich Houston, TX 1.1 Acres 129 -- 116
Mason/Goodrich Houston, TX 12.8 Acres 2,536 -- 1,803
Nashville Nashville, TN 2.6 Acres 405 -- 345
Rasor Plano, TX 43.01 Acres 1,850 -- 1,604
</TABLE>
24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Liquidity and Capital Resources (Continued)
-------------------------------
<TABLE>
<CAPTION>
Net
Units/ Sales Cash Debt
Property Location Sq.Ft./Acres Price Received Discharged
------------------------- ------------------ -------------- ------ -------- ------------
<S> <C> <C> <C> <C> <C>
Second Quarter
Apartments
Pines Little Rock, AR 257 Units 4,650 1,281 3,063
Four Seasons Denver, CO 384 Units 16,600 6,543 9,220/(1)/
Sherwood Glen Urbandale, IA 180 Units 6,250 1,244 4,626/(1)/
Office Building
Marina Playa Santa Clara, CA 124,205 Sq.Ft. 25,750 7,627 7,766
Land
Rasor Plano, TX 5.4 Acres 915 -- 915
Salmon River Salmon River, ID 3.0 Acres 45 44 --
Valley Ranch Irving, TX 22.4 Acres 1,455 -- 1,375
Parkfield Denver, CO 2.6 Acres 615 (1) 584
Frisco Bridges Collin County, TX 24.3 Acres 4,194 (435) 4,000
Vista Business Park Travis County, TX 5.4 Acres 620 14 577
McKinney Corners II Collin County, TX 14.6 Acres 500 (599) 1,050
Third Quarter
Apartments
Fair Oaks Euless, TX 208 Units 6,850 609 5,711
Land
Mason/Goodrich Houston, TX 6.8 Acres 1,198 114 991
McKinney Corners I, II,
III, IV and V Collin County, TX 82.0 Acres 9,150 613 8,123
Parkfield Denver, CO 326.8 Acres 13,164 7,969 3,279
Rasor Plano, TX 41.1 Acres 3,779 3,587 --
Pantex Collin County, TX 182.5 Acres 8,160 -- 4,546(1)
Rowlett Creek Collin County, TX 80.4 Acres 2,262 919 1,173
Vann Cattle Collin County, TX 126.6 Acres 3,564 1,872 1,471
Mastenbrook Collin County, TX 157.9 Acres 4,445 1,890 2,275
Wakefield Collin County, TX 70.3 Acres 1,981 1,239 612
Nashville Nashville, TN 3.0 Acres 523 19 450
Keller Tarrant County, TX 749.1 Acres 10,000 3,892 4,500
Frisco Bridges Collin County, TX 127.4 Acres 27,500 7,411 18,570
Mason/Goodrich Houston, TX 20.5 Acres 3,560 497 1,308
</TABLE>
------------------
(1) Debt assumed by purchaser.
(2) Exchanged for 3.25 acres of Clark land.
In 2000, ARI financed/refinanced or obtained second mortgage financing on the
following:
<TABLE>
<CAPTION>
Net
Acres/ Debt Cash Debt
Property Location Units/Sq.Ft. Incurred Received Discharged
---------------- ------------------ ------------ -------- -------- ----------
<S> <C> <C> <C> <C> <C>
First Quarter
Land
Centura, Clark
and Woolley Farmers Branch, TX 10.08 Acres $ 7,150 $6,960 $ --
Frisco Bridges Collin County, TX 127.41 Acres 18,000 6,190 11,900
Frisco Bridges Collin County, TX 62.84 Acres 7,800 2,432 4,985
Nashville Nashville, TN 144.82 Acres 10,000 7,039 2,034
</TABLE>
25
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
----------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Liquidity and Capital Resources (Continued)
-------------------------------
<TABLE>
<CAPTION>
Net
Acres/ Debt Cash Debt
Property Location Units/Sq.Ft. Incurred Received Discharged
------------------- ------------------ -------------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C>
Second Quarter
Apartments
Rockborough Denver, CO 345 Units $ 2,222 $ 1,942 $ --
Confederate Point Jacksonville, FL 206 Units 7,440 1,039 5,879
Whispering Pines Topeka, KS 320 Units 7,530 302 6,829
Chateau Bayou Ocean Springs, MS 122 Units 1,007 988 --
Waters Edge Gulfport, MS 238 Units 7,532 3,447 3,993
Land
Katy Harris County, TX 130.6 Acres 4,250 (9) 4,042
Third Quarter
Office Buildings
Centura Tower Farmers Branch, TX 410,910 Sq.Ft. 15,000 14,612 --
Fourth Quarter
Land
Tree Farm Dallas, TX 10.36 Acres $ 8,000 /(1)/ 7,750 --
Thompson Farmers Branch, TX 3.99 Acres /(1)/
Tomlin Farmers Branch, TX 9.00 Acres /(1)/
Lacy Longhorn Farmers Branch, TX 17.12 Acres /(1)/
Kelly Fort Worth, TX 30.13 Acres /(1)/
McKinney Corners McKinney, TX 10.98 Acres /(1)/
</TABLE>
ARI has margin arrangements with various brokerage firms which provide for
borrowing up to 50% of the market value of ARI's marketable equity securities.
The borrowings under such margin arrangements are secured by equity securities
of IORI, TCI and ARI's trading portfolio and bear interest rates ranging
from 7.0% to 11.0%. Margin borrowing totaled $14.6 million at September 30,
2000. In June 2000, 1.6 million shares of TCI stock and 54,000 shares of IORI
stock held as collateral on margin loans were sold to satisfy margin calls
resulting in losses totaling $7.9 million. These losses are included in equity
income of investees on the Statement of Operations. See NOTE 5. "INVESTMENTS IN
EQUITY INVESTEES."
Management expects that it will be necessary for ARI to sell $65.0 million,
$25.2 million and $11.0 million of its land holdings during each of the next
three years to satisfy the debt on such land as it matures. If ARI is unable to
sell at least the minimum amount of land to satisfy the debt obligations on such
land as it matures, or, if it was not able to extend such debt, ARI would either
sell other of its assets to pay such debt or return the property to the lender.
Management reviews the carrying values of ARI's properties and mortgage note
receivables at least annually and whenever events or a change in circumstances
indicate that impairment may exist. Impairment is considered to exist if, in the
case of a property, the future cash flow from the property (undiscounted and
without interest) is less than the carrying amount of the property. For notes
receivable impairment is considered to exist if it is probable that all amounts
due under the terms of the note will not be collected. In those instances where
26
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Liquidity and Capital Resources (Continued)
-------------------------------
impairment is found to exist, a provision for loss is recorded by a charge
against earnings. ARI's mortgage note receivable review includes an evaluation
of the collateral property securing such note. The property review generally
includes selective property inspections, a review of the property's current
rents compared to market rents, a review of the property's expenses, a review of
maintenance requirements, a review of the property's cash flow, discussions with
the manager of the property and a review of properties in the surrounding area.
Commitments and Contingencies
-----------------------------
In 1996, ARI was admitted to the Valley Ranch, L.P. partnership, as general
partner and Class B Limited Partner. The existing general and limited partners
converted their general and limited partner interest into 8,000,000 Class A
units. The units are exchangeable into shares of ARI's Series B Cumulative
Convertible Preferred Stock at the rate of 100 Class A units for each share of
Series B Preferred Stock. In February 1999, the limited partner notified ARI
that it intended to convert 100,000 Class A units into 1,000 shares of Series B
Preferred Stock. In March 1999, ARI purchased the 100,000 Class A units for
$100,000. ARI subsequently reached agreement with the Class A unitholder to
acquire the remaining 7,900,000 Class A units for $1.00 per unit. In 1999 and
the first quarter of 2000, a total of 4,000,000 units were purchased, and an
additional 2,000,000 units will be purchased in May 2001 and May 2002.
On October 3, 2000, IORI entered into a stock option agreement which provided
IORI and ARI with an option to purchase 1,858,900 shares of common stock of TCI
from a third party. On October 19, 2000, IORI assigned all of its rights to
purchase such shares to ARI. ARI may exercise the option between January 1, 2001
and April 13, 2001. The total cost to purchase the shares is $30.7 million. In
October 2000, ARI paid $5.6 million of the option price.
Results of Operations
---------------------
For the nine months ended September 30, 2000, ARI reported net income of $1.6
million, compared to net income of $1.9 million for the nine months ended
September 30, 1999. The primary factors contributing to ARI's net income are
discussed in the following paragraphs.
Pizza parlor sales and cost of sales were $8.1 million and $6.8 million,
respectively, in the three months ended September 30, 2000 and $24.4 million and
$20.1 million for the nine months ended September 30, 2000 compared to $7.8
million and $6.7 million, respectively, for the three months ended September 30,
1999 and $22.8 million and $19.5 million for the nine months ended September 30,
1999. The increased sales were primarily attributable to the effects of a more
aggressive marketing and advertising strategy.
Rents decreased to $34.7 million and $105.2 million in the three and nine months
ended September 30, 2000, from $40.3 million and $122.1 million in 1999. Rents
from commercial properties increased to $23.8 million for the nine months ended
September 30, 2000, from $22.1 million in 1999, rent from hotels increased to
$25.5 million in the nine months ended September 30, 2000, from $25.0 million in
1999 and rent from apartments decreased to $53.0 million in the nine months
ended September 30, 2000, from $74.7 million in 1999. The increase in commercial
property rents was primarily attributable to the purchase of Encino
27
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Results of Operations (Continued)
---------------------
Executive Plaza in May 1999 and the decrease in apartment rent was due to the
sale of seven apartments in 2000 and 14 apartments in 1999. Rental income is
expected to decrease significantly in the remainder of 2000 as a result of the
income producing properties sold in 1999 and 2000.
Property operations expense decreased to $23.8 million and $70.4 million in the
three and nine months ended September 30, 2000, from $27.4 million and $80.8
million in 1999. Property operations expense for commercial properties
increased to $14.8 million in the nine months ended September 30, 2000, from
$11.9 million in 1999. For hotels, property operations expense increased to
$17.8 million in the nine months ended September 30, 2000, from $17.7 million in
1999. For land, property operations expense increased to $7.1 million in the
nine months ended September 30, 2000 from $6.5 million in 1999. For apartments,
property operations expense decreased to $30.7 million in the nine months ended
September 30, 2000, from $44.7 million in 1999. The increase in commercial
property operations expense was primarily due to the purchase of Encino
Executive Plaza in May 1999. The increase in land operating expenses was
primarily due to increased property taxes. The decrease in property operations
expense for apartments was due to the sale of seven apartments in 2000 and 14
apartments in 1999. Property operations expense is expected to decrease
significantly in the remainder of 2000 as a result of the properties sold in
1999 and 2000.
Interest income from notes receivable decreased to $283,000 and $3.3 million in
the three and nine months ended September 30, 2000 from $1.3 million and $5.0
million in 1999. The decrease is due to the collection of mortgage notes
receivable and related accrued but unpaid interest at maturity in 2000.
Other income increased to $606,000 and $419,000 in the three and nine months
ended September 30, 2000, improved from income of $300,000 in the three months
ended September 30, 1999, and a loss of $740,000 in the nine months ended
September 30, 1999. ARI recognized an unrealized decrease in market value of its
trading portfolio securities of $267,000 in the nine months ended September 30,
2000, compared to $1.8 million in 1999. See NOTE 6. "MARKETABLE EQUITY
SECURITIES -TRADING PORTFOLIO."
Interest expense decreased to $19.6 million and $60.2 million in the three and
nine months ended September 30, 2000 from $23.0 million and $68.5 million in
1999. The decrease was attributable to the sale of seven apartments in 2000 and
14 apartments and 22 parcels of land in 1999. In the remainder of 2000, interest
expense is expected to continue to decrease due to the properties sold in 1999
and 2000.
Depreciation expense decreased to $4.0 million and $12.9 million in the three
and nine months ended September 30, 2000, from the $4.5 million and $13.5
million in 1999. This decrease was due to the sale of seven apartments in 2000
and 14 apartments in 1999.
Advisory fees of $1.2 million and $3.8 million in the three and nine months
ended September 30, 2000, approximated the $1.5 million and $4.0 million in
1999.
28
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Results of Operations (Continued)
---------------------
General and administrative expenses of $3.2 million and $12.0 million in the
three and nine months ended September 30, 2000, approximated the $3.8 million
and $12.7 million in 1999.
Minority interest decreased to $5.0 million and $32.2 million in the three and
nine months ended September 30, 2000, from $23.2 million and $38.6 million in
1999. The decrease is attributable to the decreased earnings of NRLP in the
first seven months of 2000. Minority interest will continue to decrease in the
fourth quarter with ARI's acquisition of the minority interest in NRLP effective
August 3, 2000. See NOTE 2. "TRANSACTION WITH AMERICAN REALTY TRUST, INC. AND
NATIONAL REALTY, L.P."
Equity in income of investees increased to $2.6 million and decreased to $2.9
million in the three and nine months ended September 30, 2000, from $1.9 million
and $5.3 million in 1999. The three month increase in equity income was
attributable to gains from the sale of properties, while the nine month decrease
in equity income was attributable to the loss associated with the sale of TCI
and IORI stock.
In 2000, ARI sold the following properties:
Units/ Gain on
Property Location Sq.Ft./Acres Sale
------------------ ----------------- -------------- -------
First Quarter
Apartments
Summerwind Reseda, CA 172 Units $ 6,684
Windtree Reseda, CA 159 Units 6,170
Whispering Pines Canoga Park, CA 102 Units 3,106
Shopping Center
Katella Plaza Orange, CA 62,290 Sq.Ft. 194
Land
Duchense Duchense, UT 420 Acres 16
Frisco Bridges Collin County, TX 15.00 Acres 297
Frisco Bridges Collin County, TX 19.74 Acres --
Mason/Goodrich Houston, TX 1.1 Acres 70
Mason/Goodrich Houston, TX 12.8 Acres 1,783
Nashville Nashville, TN 2.6 Acres 225
Rasor Plano, TX 43.01 Acres 58
Second Quarter
Apartments
Pines Little Rock, AR 257 Units 2,441
Four Seasons Denver, CO 384 Units 8,191
Sherwood Glen Urbandale, IA 180 Units 4,161
Office Building
Marina Playa Santa Clara, CA 124,205 Sq.Ft. 17,285
29
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Results of Operations (Continued)
---------------------
Units/ Gain on
Property Location Sq.Ft./Acres Sale
--------------------- ------------------ ------------ -------
Land
Rasor Plano, TX 5.4 Acres 705
Salmon River Salmon River, ID 3.0 Acres 38
Valley Ranch Irving, TX 22.4 Acres (585)
Parkfield Denver, CO 2.6 Acres 512
Frisco Bridges Collin County, TX 24.3 Acres 259
Vista Business Park Travis County, TX 5.4 Acres 173
McKinney Corners II Collin County, TX 14.6 Acres (40)
Third Quarter
Apartments
Fair Oaks Euless, TX 208 Units 3,364
Land
Mason/Goodrich Houston, TX 6.8 Acres 807
McKinney Corners I,
II, III, IV and V Collin County, TX 82.0 Acres 1,638
Parkfield Denver, CO 326.8 Acres 3,768
Rasor Plano, TX 41.1 Acres 1,902
Pantex Collin County, TX 182.5 Acres 959
Rowlett Creek Collin County, TX 80.4 Acres 462
Vann Cattle Collin County, TX 126.6 Acres 1,257
Mastenbrook Collin County, TX 157.9 Acres 747
Wakefield Collin County, TX 70.3 Acres 478
Nashville Nashville, TN 3.0 Acres 310
Keller Tarrant County, TX 749.1 Acres 3,373
Frisco Bridges Collin County, TX 127.4 Acres 6,954
Mason/Goodrich Houston, TX 20.5 Acres 956
In 1999, ARI sold the following properties:
Units/ Gain on
Property Location Sq.Ft./Acres Sale
------------------ ----------------- ------------ -------
First Quarter
Apartments
Olde Towne Middleton, Ohio 199 Units $ 2,200
Santa Fe Kansas City, MO 225 Units 706
Mesa Ridge Mesa, AZ 480 Units 10,200
Land
Plano Parkway Collin County, TX 4.6 Acres 473
Rasor Plano, TX 13.0 Acres 979
Mason/Goodrich Houston, TX 9.9 Acres 432
McKinney Corners McKinney, TX 23.7 Acres 2,900
30
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Results of Operations (Continued)
---------------------
Units/ Gain on
Property Location Sq.Ft./Acres Sale
------------------- ------------------ ------------ -------
Second Quarter
Apartments
Horizon East Dallas, TX 166 Units 1,800
Lantern Ridge Richmond, VA 120 Units 2,300
Barcelona Tampa, FL 368 Units 2,200
Land
Vista Ridge Lewisville, TX 15.0 Acres 913
Plano Parkway Collin County, TX 24.5 Acres 1,100
Frisco Bridges Collin County, TX 27.6 Acres 4,200
Plano Parkway Collin County, TX 6.0 Acres 615
Hotel
Continental Las Vegas, NV 400 Rooms 7,900
Third Quarter
Apartments
Country Place Round Rock, TX 152 Units 3,300
Lake Nora Indianapolis, IN 588 Units 12,700
Fox Club Indianapolis, IN 336 Units
Oakhollow Austin, TX 409 Units 24,200
Windridge Austin, TX
Land
JHL Connell Carrollton, TX .13 Acres 23
Plano Parkway Collin County, TX 11.8 Acres 1,900
Vista Ridge Lewisville, TX 6.7 Acres 584
Valley Ranch Irving, TX 1.4 Acres 128
Keller Tarrant County, TX 2.1 Acres 158
Sun City Sun City, TX 26.5 Acres 180
Katrina Palm Desert, CA 121.2 Acres 186
Frisco Bridges Collin County, TX 13.6 Acres 403
Plano Parkway Collin County, TX 6.2 Acres (40)
Keller, Scout and
Scoggins Tarrant County, TX 185.6 Acres 1,800
Vista Ridge Lewisville, TX 1.3 Acres 538
Environmental Matters
---------------------
Under various federal, state and local environmental laws, ordinances and
regulations, ARI may be potentially liable for removal or remediation costs, as
well as certain other potential costs relating to hazardous or toxic substances
(including governmental fines and injuries to persons and property) where
property-level managers have arranged for the removal, disposal or treatment of
hazardous or toxic substances. In addition, certain environmental laws impose
liability for release of asbestos-containing materials into the air, and third
parties may seek recovery for personal injury associated with such materials.
31
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Environmental Matters (Continued)
---------------------
Management is not aware of any environmental liability relating to the above
matters that would have a material adverse effect on ARI's business, assets or
results of operations.
Inflation
---------
The effects of inflation on ARI's operations are not quantifiable. Revenues from
apartment operations fluctuate proportionately with inflationary increases and
decreases in housing costs. Fluctuations in the rate of inflation also affect
the sales values of properties and the ultimate gains to be realized from
property sales. To the extent that inflation affects interest rates, earnings
from short-term investments and the cost of new borrowings as well as the cost
of variable interest rate debt will be affected.
Year 2000
---------
Even though January 1, 2000, has passed and no adverse impact from the
transition to the year 2000 was experienced, no assurance can be provided that
ARI's suppliers and tenants have not been affected in a manner not yet apparent.
As a result, management will continue to monitor ARI's year 2000 compliance and
the year 2000 compliance of its suppliers and tenants.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
-------------------------------------------------------------------
At September 30, 2000, ARI's exposure to a change in interest rates on its debt
is as follows:
Weighted Effect of 1%
Average Increase In
Balance Interest Rate Base Rates
---------- --------------- -------------
(Amounts in thousands, except per share)
Notes payable:
Variable rate.................. $96,866 9.20% $967
Total decrease in ARI's annual
net income..................... $967
====
Per share....................... $.09
====
32
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(a) Exhibits:
Exhibit
Number Description
------ -------------------------------------------------------
3.0 Certificate of Restatement of Articles of Incorporation of
American Realty Investors, Inc., dated August 3, 2000.
3.1 Certificate of Correction of Restated Articles of Incorporation of
American Realty Investors, Inc., dated August 29, 2000
27.0 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K as follows:
A Current Report on Form 8-K, dated August 2, 2000, was filed with respect
to ITEM 2. "ACQUISITION OR DISPOSITION OF ASSETS," and ITEM 7. "FINANCIAL
STATEMENTS AND EXHIBITS," which reports ART's reorganization and
combination with National Realty, L.P.
33
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN REALTY INVESTORS, INC.
Date: November 14, 2000 By: /s/ Karl L. Blaha
------------------------- -----------------------------------
Karl L. Blaha
President
Date: November 14, 2000 By: /s/ Mark W. Branigan
-------------------------- -----------------------------------
Mark W. Branigan
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
34
<PAGE>
AMERICAN REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Quarter ended September 30, 2000
Exhibit Page
Number Description Number
------- -------------------------------------------------- ------
3.0 Certificate of Restatement of Articles of
Incorporation of American Realty Investors,
Inc., dated August 3, 2000.
3.1 Certificate of Correction of Restated Articles
of Incorporation of American Realty Investors,
Inc., dated August 29,
2000.
27.0 Financial Data Schedule.
35
