<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1994
Commission File Number 0-13291
TRANSCONTINENTAL REALTY INVESTORS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 94-6565852
- - ------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas 75231
- - -----------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(214) 692-4700
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, $.01 par value 2,674,850
- - ---------------------------- ------------------------------
(Class) (Outstanding at July 29, 1994)
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements have not been examined by
independent certified public accountants, but in the opinion of the management
of Transcontinental Realty Investors, Inc. (the "Company"), all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the Company's consolidated financial position, consolidated results of
operations and consolidated cash flows at the dates and for the periods
indicated, have been included.
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
-------------- --------------
(dollars in thousands)
<S> <C> <C>
Assets
------
Notes and interest receivable
Performing........................................ $ 16,751 $ 12,270
Nonperforming, nonaccruing........................ 672 1,172
-------------- --------------
17,423 13,442
Real estate held for sale, net of accumulated
depreciation ($442 in 1994 and $641 in 1993)...... 8,429 15,577
Less - allowance for estimated losses.............. (1,144) (5,504)
-------------- --------------
24,708 23,515
Real estate held for investment, net of
accumulated depreciation ($30,328 in 1994 and
$27,509 in 1993).................................. 190,682 179,662
Investment in partnerships......................... 7,343 7,127
Cash and cash equivalents.......................... 6,298 5,902
Other assets (including $299 in 1994 and $117
in 1993 due from affiliates)...................... 4,847 4,889
-------------- --------------
$ 233,878 $ 221,095
============== ==============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable......................... $ 128,519 $ 116,024
Other liabilities (including $233 in 1994 and $182
in 1993 to affiliates)............................ 11,466 8,489
-------------- --------------
139,985 124,513
Stockholders' equity
Common stock, $.01 par value, authorized, 10,000,000
shares; issued and outstanding, 2,674,850 shares.. 27 27
Paid-in capital.................................... 219,049 219,049
Accumulated distributions in excess of
accumulated earnings.............................. (125,183) (122,494)
-------------- --------------
93,893 96,582
-------------- --------------
$ 233,878 $ 221,095
============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
<PAGE> 3
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------------- --------------------------------
1994 1993 1994 1993
-------------- -------------- --------------- -------------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Income
Rentals..................... $ 8,832 $ 8,183 $ 17,272 $ 14,905
Interest.................... 383 340 807 985
Equity in income (losses) of
investees................. 3 (348) (11) (513)
-------------- -------------- --------------- -------------
9,218 8,175 18,068 15,377
Expenses
Property operations......... 7,349 5,613 13,695 11,285
Interest.................... 2,549 2,151 4,928 4,316
Depreciation................ 1,470 1,352 2,928 2,593
Provision for losses........ - 731 - 731
Advisory fee to affiliate... 411 392 842 774
General and administrative.. 373 569 878 1,164
-------------- -------------- --------------- -------------
12,152 10,808 23,271 20,863
-------------- -------------- --------------- -------------
(Loss) before gain on sale of
partnership interests and
extraordinary gain.......... (2,934) (2,633) (5,203) (5,486)
Gain on sale of partnership
interests................... - - 2,514 -
Extraordinary gain........... - 1,045 - 1,045
-------------- -------------- --------------- -------------
Net (loss)................... $ (2,934) $ (1,588) $ (2,689) $ (4,441)
============== ============== =============== =============
Earnings Per Share
(Loss) before gain on sale
of partnership interests
and extraordinary gain.... $ (1.10) $ (.98) $ (1.95) $ (2.03)
Gain on sale of
partnership interests.... - - .94 -
Extraordinary gain.......... - .39 - .39
-------------- -------------- --------------- -------------
Net (loss).................. $ (1.10) $ (.59) $ (1.01) $ (1.64)
============== ============== =============== ==============
Weighted average Common
shares used in computing
earnings per share.......... 2,674,850 2,688,003 2,674,850 2,701,262
============== ============== =============== =============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE> 4
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 1994
<TABLE>
<CAPTION>
Accumulated
Distributions
Common Stock in Excess of
--------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Earnings Equity
---------- --------- ---------- ------------ -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1994..................... 2,674,850 $ 27 $ 219,049 $ (122,494) $ 96,582
Net (loss)................. - - - (2,689) (2,689)
--------- ----------- -------------- -------------- --------------
Balance, June 30,
1994..................... 2,674,850 $ 27 $ 219,049 $ (125,183) $ 93,893
========= =========== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE> 5
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-----------------------------------
1994 1993
-------------- --------------
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Rentals collected................................ $ 17,081 $ 15,232
Interest collected............................... 696 537
Interest paid.................................... (4,188) (3,471)
Payments for property operations................. (15,267) (10,438)
Advisory fee paid to affiliate................... (855) (766)
General and administrative expenses paid......... (1,000) (1,782)
Distributions from investees..................... 212 681
Cash from replacement reserves................... 38 219
Other............................................ 263 814
-------------- --------------
Net cash provided by (used in) operating
activities................................. (3,020) 1,026
Cash Flows from Investing Activities
Funding of notes receivable...................... - (2,704)
Collections on notes receivable.................. 1,413 9,866
Real estate improvements......................... (1,114) (829)
Acquisition of real estate....................... (1,775) (5,085)
Contributions to investees....................... (572) (412)
Proceeds from sale of partnership interests...... 2,651 -
Proceeds from sale of real estate................ 1,619 227
-------------- --------------
Net cash provided by investing activities.... 2,222 1,063
Cash Flows from Financing Activities
Payments on notes payable........................ (1,103) (5,129)
Proceeds from notes payable...................... 2,297 -
Shares repurchased............................... - (380)
-------------- --------------
Net cash provided by (used in) financing
activities................................. 1,194 (5,509)
Net increase (decrease) in cash and cash
equivalents...................................... 396 (3,420)
Cash and cash equivalents, beginning of period.... 5,902 11,780
-------------- --------------
Cash and cash equivalents, end of period.......... $ 6,298 $ 8,360
============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
<PAGE> 6
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-----------------------------------
1994 1993
-------------- --------------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net (loss) to net cash
provided by (used in) operating activities
Net (loss)........................................ $ (2,689) $ (4,441)
Adjustments to reconcile net (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization.................... 3,025 2,750
Provision for losses............................. - 731
Gain on sale of partnership interests............ (2,514) -
Extraordinary gain............................... - (1,045)
Equity in losses of investees.................... 11 513
Distributions from investees in excess of current
period earnings............................... 212 681
(Increase) decrease in interest receivable....... 17 (307)
(Increase) decrease in other assets.............. (64) 1,193
Increase in interest payable..................... 515 547
Increase (decrease) in other liabilities......... (1,533) 404
-------------- --------------
Net cash provided by (used in) operating
activities................................. $ (3,020) $ 1,026
============== ==============
Noncash investing and financing activities
Carrying value of real estate acquired through
foreclosure (in satisfaction of notes
receivable with carrying values of $2,663 in
1993)......................................... $ - $ 2,213
Notes receivable from sale of real estate with
carrying value of $2,679 in 1994 and $667 in
1993.......................................... 5,637 405
Notes payable from acquisition of real estate.... 10,584 -
Carrying value of property acquired through
assumption of debt of $6,559.................. - 6,559
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
<PAGE> 7
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The Company, a Nevada corporation, is successor to a California business trust
which was organized on September 6, 1983. The Company invests in real estate
through direct equity ownership, leases and partnerships and it also invests in
mortgage loans on real estate, including first, wraparound and junior mortgage
loans.
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Operating results for the six month period ended June 30, 1994 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1994. For further information, refer to the Consolidated
Financial Statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1993 (the "1993 Form 10-K").
NOTE 2. REAL ESTATE
In February 1994, the Company sold all of its Maumelle, Arkansas, residential
and commercial subdivisions, retaining 114 residential lots, for $8.4 million.
The Company received $1.7 million in cash and provided purchase money financing
of $6.7 million. The note receivable bears interest at 8.0% per annum,
requires annual payments of principal of $850,000 plus accrued interest through
maturity in February 1998 and provides discounts of up to $1.2 million for
early payments. The note is guaranteed by companies affiliated with the
purchaser. The Company has recorded this transaction as a cost recovery method
sale and accordingly has deferred recognizing a gain on the sale pending
collection of the note receivable. The Company paid a real estate brokerage
commission of $215,000 to Carmel Realty, Inc. ("Carmel Realty"), an affiliate
of the Company's advisor, based on $7.2 million, the sales price of $8.4
million less the discounts allowable of $1.2 million. Through July 1994, the
Company has sold or otherwise disposed of an additional 44 lots for a total of
$101,000 in cash recognizing no gain or loss on the sales.
In April 1994, the Company purchased the Corporate Center at Beaumeade, a two
building, 100,411 square foot industrial facility in Ashburn, Virginia, for
$3.3 million, consisting of $600,000 in cash and new mortgage financing of $2.7
million. The mortgage bears interest at 9.28% per annum, requires monthly
payments of principal and interest of $22,132 and matures on April 30, 1999.
The Company paid a real estate brokerage commission of $119,000 to Carmel
Realty and an acquisition fee of $33,000 to Basic Capital Management, Inc.
("BCM"), the Company's advisor, based on the $3.3 million purchase price.
7
<PAGE> 8
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. REAL ESTATE (Continued)
In June 1994, the Company purchased the Parke Long Industrial Buildings, a four
building, 222,197 square foot office/industrial facility in Chantilly,
Virginia, for $8.8 million, consisting of $900,000 in cash and $7.9 million in
seller mortgage financing. The mortgage bears interest at 6.0% per annum in
the first two years, increasing to 7.0% per annum in the third year, 8.0% per
annum in the fifth year and 9.0% in the ninth year. The mortgage requires
monthly payments of interest only in the first two years and monthly payments
of principal and interest thereafter, and matures in June 2006. The Company
paid a real estate brokerage commission of $246,000 to Carmel Realty and an
acquisition fee of $88,000 to BCM, based on the $8.8 million purchase price.
In June 1994, the Company sold the RCA Building, a vacant 100,800 square foot
office building in Mt. Laurel, New Jersey, which was held for sale, for
$100,000 providing purchase money financing for the entire sales price. The
Company also received an equity participation interest in the subsequent
appreciation of the building, if any. The Company incurred no loss on the sale
beyond the amounts which had been previously provided.
The Company owns Institute Place Lofts, a 142,215 square foot office building
in Chicago, Illinois. The Company did not payoff the $6.5 million mortgage
secured by the property on its June 1, 1993 maturity, as the Company determined
further investment in the property could not be justified without a substantial
modification of the mortgage. For the six months ended June 30, 1994, the
property's cash flow of $358,176 was remitted to the lender all of which was
applied to unpaid real estate taxes. In July 1994, the property was placed in
bankruptcy. The Company is negotiating with the lender to obtain a long-term
modification of this mortgage. If such negotiations are not successful, and
the lender forecloses on the property securing the mortgage, the Company would
recognize a gain of $1.1 million, the amount by which the mortgage balance
exceeds the property's carrying value, which approximates the fair value of the
property.
NOTE 3. NOTES AND INTEREST RECEIVABLE
In January 1994, the Company instituted foreclosure proceedings on a mortgage
note receivable secured by an office building in Madison, Wisconsin. In June
1994, the Company wrote off the debt as uncollectible, the building having been
foreclosed upon by the local taxing authority. The Company recognized no loss
beyond that which had previously been provided.
In June 1994, a note receivable with a principal balance of $2.7 million and
secured by an apartment complex in Dallas, Texas, was paid down and modified.
The Company received $1.3 million in cash and subordinated the remaining note
balance of $1.4 million to the new first mortgage
8
<PAGE> 9
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued)
secured by the property. The $1.4 million note was also split into two new
notes. One new note, in the amount of $600,000, is secured by a second lien
mortgage on the property, bears interest at the prime rate plus 1%, requires
monthly payments of interest only and matures in June 2004. The second new
note in the amount of $769,000, is unsecured, bears interest at the prime rate
plus 1% and requires payments of net cash flow from property operations.
NOTE 4. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES
The Company owned a 55% limited partnership interest in One Penn Square
Associates Limited Partnership ("One Penn Square"), and accordingly accounted
for it under the equity method as control of the partnership was maintained by
the general partner. In January 1992, the partnership stopped making payments
on the first mortgage secured by One East Penn Square Office Building in
Philadelphia, Pennsylvania. An affiliate of the lender owned the remaining 45%
limited partnership interest. In May 1993, the lender filed a foreclosure
action against One Penn Square. The court appointed a receiver for the
property on October 6, 1993. The lender had also filed an action against the
partnership and the Company to set aside, as a fraudulent conveyance, payments
from the partnership in 1992 and in 1993 to the Company of $1.8 million made to
repay the Company's mortgage note secured by a second lien on the One East Penn
Square Office Building. In April 1994, the Company and the lender reached an
agreement which provided that the Company would pay $575,000 to the lender and
convey the Company's interest in the partnership to the lender. In August
1994, the Company made the required $575,000 payment, conveyed its partnership
interest to the lender and the parties executed mutual releases and all
litigation between the parties was dismissed. The Company will recognize an
extraordinary gain of $1.0 million as the carrying value of its investment is
less than the debt secured by the building due to previously recognized equity
losses.
In March 1994, the Company sold its 50% general partnership interests in
Pilgrim Village Associates and Pilgrim Village Associates II general
partnerships which own the Pilgrim Village Apartments I and II, respectively,
in Canton Township, Michigan, to the co- general partner for $2.6 million in
cash. The Company recognized a gain of $2.5 million on the sale.
The following information summarizes the results of operations of the Company's
equity method investees for the six months ended June 30, 1994 (dollars in
thousands):
<TABLE>
<CAPTION>
1994
---------
<S> <C>
Rentals and interest income........................... $ 7,731
Depreciation.......................................... (1,104)
Property operations................................... (4,276)
Interest.............................................. (2,329)
--------
Net income............................................ $ 22
========
</TABLE>
9
<PAGE> 10
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. NOTES PAYABLE
In January 1994, the mortgage secured by the Northtown Mall, a shopping center
in Dallas, Texas, matured. In February 1994, the Company reached an agreement
with the lender to modify and extend the mortgage, with the Company making a
principal paydown of $200,000. The modified mortgage bears interest at 15.0%
per annum, requires monthly payments of interest only, a principal payment of
$200,000 in July 1994, and matures in January 1995. The Company did not make
the July 1994 principal payment when due, as it is in negotiations with the
second lienholder to refinance this debt.
In March 1994, the Company entered into a loan commitment with a Northtown Mall
tenant, providing for a loan to the Company of $1.4 million secured by a second
lien on the shopping center. The proceeds of the loan are being used primarily
for specified renovations and repairs to the shopping center. The loan is
being funded as repairs and renovations are completed. The second lien
mortgage bears interest at 8.5% per annum, requires monthly payments of
interest only and matures in March 1999. As of July 29, 1994, $1.1 million had
been funded under the loan commitment.
In April 1994, the Company refinanced the mortgage debt secured by the Heritage
Apartments in Tulsa, Oklahoma in the amount of $2.1 million. The Company
received net cash of $1.2 million after the payoff of $650,000 in existing
mortgage debt and funding required repair and tax escrows and the payment of
various closing costs associated with the financing. The new mortgage bears
interest at 9.25% per annum, requires monthly payments of principal and
interest of $16,978 and matures May 1, 2001. The Company paid a mortgage
brokerage and equity refinancing fee of $21,000 to BCM based on the $2.1
million refinancing.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company is involved in various lawsuits arising in the ordinary course of
business. The Company's management is of the opinion that the outcome of these
lawsuits will have no material impact on the Company's financial condition.
NOTE 7. SUBSEQUENT EVENTS
In July 1994, the Company refinanced the mortgage debt secured by the
Waterstreet Office Building in Boulder, Colorado in the amount of $8.6 million.
The Company received net cash of $1.4 million after the payoff of $6.8 million
in existing mortgage debt and funding required tenant improvement escrows and
the payment of various closing costs associated with the financing. The new
mortgage bears interest at 9.99% per annum, requires monthly payments of
principal and interest of $82,935 and matures February 28, 1999. The Company
paid a mortgage brokerage and equity refinancing fee of $86,000 to BCM based on
the $8.6 million refinancing.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Transcontinental Realty Investors, Inc. (the "Company") invests in real estate
through direct ownership, leases and partnerships and in mortgage loans,
including first, wraparound and junior mortgage loans. The Company was
organized on September 6, 1983 and commenced operations on January 31, 1984.
Liquidity and Capital Resources
Cash and cash equivalents aggregated $6.3 million at June 30, 1994 compared
with $5.9 million at December 31, 1993. The Company's principal sources of
cash have been and will continue to be from property operations, proceeds from
property and mortgage note sales, the collection of mortgage notes receivable
and borrowings. The Company anticipates that its cash on hand, as well as cash
generated from the collection of mortgage notes receivable, sales of
properties, borrowings against certain of the Company's unencumbered properties
and refinancing or extending certain of its mortgage debt will be sufficient to
meet all of the Company's cash requirements, including debt service obligations
and property maintenance and improvements.
In February 1994, the Company sold all of its Maumelle, Arkansas, residential
and commercial subdivisions, retaining 114 residential lots, for $8.4 million.
The Company received $1.7 million in cash and provided purchase money financing
of $6.7 million. Through July 1994, the Company has sold or otherwise disposed
of 44 of its remaining residential lots for $101,000 in cash.
In March 1994, the Company sold its 50% general partnership interests in
Pilgrim Village Associates and Pilgrim Village Associates II general
partnerships which own the Pilgrim Village Apartments I and II, respectively,
in Canton Township, Michigan, to the co-general partner for $2.6 million in
cash.
In February 1994, the Company modified and extended the first lien mortgage
debt secured by the Northtown Mall in Dallas, Texas, which required a principal
paydown of $200,000. In March 1994, the Company entered into a loan commitment
with a tenant, providing for a loan to the Company of $1.4 million secured by a
second lien on the shopping center. As of July 29, 1994, $1.1 million had been
funded under the commitment. The Company did not make the July 1994 first lien
principal payment when due, as it is in negotiations with this second
lienholder to refinance the first lien.
In April 1994, the Company refinanced the mortgage debt secured by the Heritage
Apartments in Tulsa, Oklahoma. The Company received net cash of $1.2 million
after the payoff of the existing mortgage debt of $650,000 and funding of
required repair and tax escrows and payment of various closing costs associated
with the financing.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Also in April 1994, the Company purchased the Corporate Center at Beaumeade in
Ashburn, Virginia for $3.3 million, consisting of $600,000 in cash and new
mortgage financing of $2.7 million.
In June 1994, the Company purchased the Parke Long Industrial Buildings in
Chantilly, Virginia for $8.8 million, consisting of $900,000 in cash and $7.9
million in seller financing.
Also in June 1994, the Company received a $1.3 million paydown on a mortgage
note receivable.
The Company's Board of Directors has approved the Company's repurchase of a
total of 458,000 shares of its Common Stock. Through July 29, 1994, the
Company had purchased a total of 233,725 shares, for an aggregate purchase
price of $1.7 million. The Company has repurchased none of its shares during
1994.
Results of Operations
The Company's net loss for the three and six months ended June 30, 1994 was
$2.9 million and $2.7 million, respectively, as compared to a net loss of $1.6
million and $4.4 million in the corresponding periods in 1993. Fluctuations in
the components of the Company's revenues and expenses between the 1993 and 1994
periods are described below.
Net rental income (rental income less property operating expenses) was $1.5
million and $3.5 million for the three and six months ended June 30, 1994
compared to $2.6 million and $3.6 million for the corresponding periods in
1993. The decrease in 1994 second quarter net rental income is due to the
buyout of a lease at a shopping center in Dallas, Texas. Offsetting the cost
of the lease buyout in the six months of 1994 is net rental income of $1.5
million from properties acquired subsequent to the second quarter of 1993,
partially offset by a decrease of $615,000 due to decreased rental revenue and
increased property operating expenses at several of the Company's commercial
properties.
Interest income for the three months ended June 30, 1994 was $383,000 compared
to $340,000 in the same period in 1993. The increase is attributable to the
loans acquired in 1993. Interest income decreased to $807,000 in the six
months ended June 30, 1994 compared to $985,000 in the same period in 1993. A
decrease of $285,000 is due to loans paid off in the first quarter of 1993.
The decrease is partially offset by an increase of $189,000 due to loans
acquired in 1993.
Equity in income (losses) of investees was income of $3,000 and a loss of
$11,000 for the three and six months ended June 30, 1994 compared to a loss of
$348,000 and $513,000 for the corresponding periods in 1993. The decrease in
equity losses is due primarily to the Company ceasing to record equity losses
on the One East Penn partnership. See NOTE 4. "INVESTMENTS IN EQUITY METHOD
REAL ESTATE ENTITIES."
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Interest expense for the three months ended June 30, 1994 was $2.5 million as
compared to $2.2 million for the corresponding period in 1993. This increase
is attributable to properties acquired and property refinancings subsequent to
June 30, 1993. This increase is partially offset by a decrease of $107,000
attributable to loans paid off subsequent to June 30, 1993. Interest expense
increased to $4.9 million in the six months ended June 30, 1994 compared to
$4.3 million in the same period in 1993. The increase for the six months is
generally attributable to the same factors as the increase for the three months
ended June 30, 1994.
Depreciation expense increased to $1.5 million and $2.9 million in the three
and six months ended June 30, 1994 as compared to $1.3 million and $2.6 million
in the corresponding periods in 1993. These increases are attributable to
properties acquired by the Company subsequent to June 30, 1993.
The Company recorded a provision for losses of $731,000 in the three and six
months ended June 30, 1993. The 1993 provision for losses was to reduce the
carrying value of a property held for sale to its estimated fair value. No
such provision was required in 1994.
The advisory fee increased to $411,000 and $842,000 in the three and six months
ended June 30, 1994 as compared to $392,000 and $774,000 in the corresponding
periods in 1993. The increase is due to the increase in the Company's gross
assets, the basis for such fee. The advisory fee is expected to continue to
increase during the third and fourth quarters of 1994 as the Company makes
additional property acquisitions.
General and administrative expenses decreased to $373,000 and $878,000 for the
three and six months ended June 30, 1994 compared to $569,000 and $1.2 million
in the corresponding periods in 1993. The decrease is primarily attributable
to decreased legal fees.
In the first quarter of 1994, the Company recognized a gain of $2.5 million on
the sale of its interest in two partnerships. See NOTE 4. "INVESTMENTS IN
EQUITY METHOD REAL ESTATE ENTITIES." In the three and six months ended June
30, 1993, the Company recognized an extraordinary gain of $1.0 million as a
result of the forgiveness of debt related to the Fountain Village mortgage
modification.
On a quarterly basis, the Company's management reviews the carrying value of
the Company's mortgage loans, properties held for investment and properties
held for sale. Generally accepted accounting principles require that the
carrying value of an investment held for sale cannot exceed the lower of its
cost or its estimated net realizable value. In those instances in which
estimates of net realizable value of the Company's properties are less than the
carrying value thereof at the time of evaluation, a provision for loss is
recorded by a charge against
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
operations. The estimate of net realizable value of the mortgage loans is
based on management's review and evaluation of the collateral properties
securing the mortgage loans. The 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 the maintenance requirements,
discussions with the manager of the property and a review of the surrounding
area. Future quarterly reviews could cause the Company's management to adjust
its estimates of net realizable value.
Income Tax Aspects
As more fully discussed in the Company's 1993 Form 10-K, the Company has
elected and, in the opinion of the Company's management, qualified, to be taxed
as a Real Estate Investment Trust ("REIT"), as defined under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended, and as such, will
not be taxed for federal income tax purposes on that portion of its taxable
income which is distributed to stockholders provided that at least 95% of its
REIT taxable income is distributed.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, the Company may be potentially liable for removal or remediation
costs, as well as certain other potential costs relating to hazardous or toxic
substances (including governmental fines and injuries to persons and property)
where property-level managers have arranged for the removal, disposal or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the
air, and third parties may seek recovery from the Company for personal injury
associated with such materials.
The Company's management is not aware of any environmental liability relating
to the above matters that would have a material adverse effect on the Company's
business, assets or results of operations.
Recent Accounting Pronouncement
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 114 - "Accounting by Creditors for
Impairment of a Loan" which amends SFAS No. 5 - "Accounting for Contingencies"
and SFAS No. 15 - "Accounting by Debtors and Creditors for Troubled Debt
Restructurings." The statement requires that impaired loans be measured based
on the present value of expected future cash flows discounted at the loan's
effective interest rate. SFAS No. 114 is effective for fiscal years beginning
after December 15, 1994. The Company's management has not fully evaluated the
effects of
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Recent Accounting Pronouncement (Continued)
implementing this statement but expects that they will not be material as the
statement is applicable to debt restructurings and loan impairments after the
earlier of the effective date of the statement or the Company's adoption of the
statement.
At its January 26, 1994 meeting, the FASB directed its staff to prepare an
exposure draft, that if approved, would eliminate the provisions of SFAS No.
114 that describe how a creditor should recognize income on an impaired loan
and add disclosure requirements on income recognized on impaired loans. The
effective date of SFAS No. 114 is not anticipated to change.
_____________________________________
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Olive Litigation. In February 1990, Transcontinental Realty Investors, Inc.
(the "Company") together with Continental Mortgage and Equity Trust ("CMET"),
Income Opportunity Realty Trust ("IORT") and National Income Realty Trust
("NIRT"), three real estate entities with, at the time, the same officers,
directors or trustees and advisor as the Company, entered into a 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.
On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Modification") which settles subsequent
claims of breaches of the settlement agreement which were asserted by the
plaintiffs and modifies certain provisions of the April 1990 settlement. The
Modification was preliminarily approved by the court on July 1, 1994. The
Modification is subject to final court approval, which is scheduled for
September 30, 1994.
The Modification, among other things, provides for the addition of three new
unaffiliated members of the Company's Board of Directors and sets forth new
requirements for the approval of any transactions with affiliates over the next
five years. In addition, Basic Capital Management, Inc., the Company's
advisor, Gene E. Phillips and William S. Friedman have agreed to pay a total of
$1.2 million to CMET, IORT, NIRT and the Company.
Under the Modification, the Company, CMET, IORT and NIRT and their shareholders
will release the defendants from any claims relating to the plaintiffs'
allegations. The Company, CMET, IORT and NIRT have also agreed to waive any
demand requirement for the plaintiffs to pursue
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ITEM 1. LEGAL PROCEEDINGS (Continued)
claims on behalf of each of them against certain persons or entities. The
Modification also requires that any shares of the Company held by Messrs.
Phillips, Friedman or their affiliates shall be (1) voted in favor of the
reelection of all current Board members that stand for reelection during the
two calendar years following the effective date of the Modification and (ii)
voted in favor of all new Board members appointed pursuant to the terms of the
Modification that stand for reelection during the three calendar years
following the effective date of the Modification.
The Modification also terminates a number of the provisions under the
Stipulation of Settlement, including the requirement that the Company, CMET,
IORT and NIRT maintain a Related Party Transaction Committee and a Litigation
Committee of their respective Boards. The court will retain jurisdiction to
enforce the Modification.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K as follows:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSCONTINENTAL REALTY
INVESTORS, INC.
Date: August 12, 1994 By: /s/ OSCAR W. CASHWELL
Oscar W. Cashwell
President
Date: August 12, 1994 By: /s/ HAMILTON P. SCHRAUFF
Hamilton P. Schrauff
Executive Vice President and
Chief Financial Officer
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