<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, 1996
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Commission File Number 1-9240
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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
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(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 4,012,275
- ---------------------------- --------------------------------
(Class) (Outstanding at August 2, 1996)
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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,
1996 1995
-------------- --------------
Assets (dollars in thousands)
------
<S> <C> <C>
Notes and interest receivable
Performing........................................ $ 9,109 $ 9,916
Nonperforming, nonaccruing........................ 1,082 1,150
-------------- --------------
10,191 11,066
Less - allowance for estimated losses............... (926) (1,049)
-------------- --------------
9,265 10,017
Foreclosed real estate held for sale, net of
accumulated depreciation ($33 in 1996 and 1995)... 2,460 2,460
Real estate held for sale, net of accumulated
depreciation ($529 in 1996 and $1,684 in 1995).... 3,313 3,415
-------------- --------------
15,038 15,892
Real estate held for investment, net of
accumulated depreciation ($46,090 in 1996 and
$42,455 in 1995).................................. 213,915 220,249
Investment in real estate entities.................. 5,135 5,086
Cash and cash equivalents........................... 3,571 9,620
Other assets (including $408 in 1996 and $733 in
1995 from affiliates)............................. 9,834 9,333
-------------- -------------
$ 247,493 $ 260,180
============== ==============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable.......................... $ 155,844 $ 159,889
Other liabilities (including $529 in 1996 and $677
in 1995 to affiliates)............................ 8,055 11,107
-------------- --------------
163,899 170,996
Stockholders' equity
Common stock, $.01 par value, authorized, 10,000,000
shares; issued and outstanding, 4,012,275 shares.. 40 40
Paid-in capital..................................... 219,036 219,036
Accumulated distributions in excess of
accumulated earnings.............................. (135,482) (129,892)
-------------- --------------
83,594 89,184
-------------- -------------
$ 247,493 $ 260,180
============== ==============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
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TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------------- --------------------------------
1996 1995 1996 1995
-------------- -------------- --------------- -------------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Income
Rents....................... $ 10,988 $ 11,853 $ 22,146 $ 22,993
Interest.................... 353 350 765 724
-------------- -------------- --------------- -------------
11,341 12,203 22,911 23,717
Expenses
Property operations......... 6,915 7,586 14,332 14,923
Equity in losses of
investees................. 1 1,070 46 999
Interest.................... 3,669 4,048 7,423 7,602
Depreciation................ 2,098 2,120 4,165 4,109
Advisory fee to affiliate... 468 506 946 994
General and administrative.. 567 602 1,147 1,063
Litigation settlement....... - (500) - (500)
Provision for loss.......... 1,579 - 1,579 -
-------------- -------------- --------------- -------------
15,297 15,432 29,638 29,190
-------------- -------------- --------------- -------------
(Loss) before gain on sale of
real estate and extra-
ordinary gain............... (3,956) (3,229) (6,727) (5,473)
Gain on sale of real estate... - - 1,650 -
Extraordinary gain............ - 48 48 1,341
-------------- -------------- --------------- -------------
Net (loss).................... $ (3,956) $ (3,181) $ (5,029) $ (4,132)
============== ============== =============== =============
Earnings Per Share
(Loss) before
extraordinary gain........ $ (.99) $ (.80) $ (1.27) $ (1.36)
Extraordinary gain.......... - .01 .01 .33
-------------- -------------- --------------- -------------
Net (loss).................. $ (.99) $ (.79) $ (1.26) $ (1.03)
============== ============== =============== =============
Common shares used in
computing earnings per share 4,012,275 4,012,275 4,012,275 4,012,275
============== ============== =============== =============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
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TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 1996
<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,
1996..................... 4,012,275 $ 40 $ 219,036 $ (129,892) $ 89,184
Dividends ($.14 per share). - - - (561) (561)
Net (loss)................. - - - (5,029) (5,029)
------------- ----------- -------------- -------------- --------------
Balance, June 30, 1996..... 4,012,275 $ 40 $ 219,036 $ (135,482) $ 83,594
============= =========== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
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TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-----------------------------------
1996 1995
-------------- --------------
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Rents collected.................................. $ 22,321 $ 22,910
Interest collected............................... 645 629
Interest paid.................................... (7,046) (6,914)
Payments for property operations................. (14,598) (14,343)
Advisory fee paid to affiliate................... (959) (1,015)
General and administrative expenses paid......... (1,194) (1,169)
Distributions from equity investees' operating
cash flow..................................... 43 178
Cash from replacement reserves................... - 277
Litigation settlement............................ - 500
Other............................................ (3,406) 192
-------------- --------------
Net cash provided by (used in) operating
activities................................. (4,194) 1,245
Cash Flows from Investing Activities
Collections on notes receivable.................. 864 208
Real estate improvements......................... (1,542) (5,603)
Acquisition of real estate....................... (891) (166)
Contributions to equity investees................ (140) (408)
Proceeds from sale of real estate................ 1,754 -
-------------- --------------
Net cash provided by (used in) investing
activities................................. 45 (5,969)
Cash Flows from Financing Activities
Payments on notes payable........................ (2,934) (12,208)
Proceeds from notes payable...................... 1,825 15,492
Debt issue costs................................. (74)
Advances from (repayments to) advisor............ (156) 2,418
Distributions to shareholders.................... (561) -
-------------- --------------
Net cash provided by (used in) financing
activities................................. (1,900) 5,702
Net increase (decrease) in cash and cash
equivalents...................................... (6,049) 978
Cash and cash equivalents, beginning of period.... 9,620 563
--------------- --------------
Cash and cash equivalents, end of period.......... $ 3,571 $ 1,541
=============== ==============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
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TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
----------------------------------
1996 1995
-------------- --------------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net (loss) to net cash
provided by (used in) operating activities
Net (loss)......................................... $ (5,029) $ (4,132)
Adjustments to reconcile net (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization.................... 4,381 4,312
Provision for losses............................. 1,579 -
Gain on sale of real estate...................... (1,650) -
Extraordinary gain............................... (48) (1,341)
Equity in losses of investees.................... 46 999
Distributions from equity investees in excess
of current period earnings..................... 43 178
(Increase) decrease in interest receivable....... (2) 26
(Increase) decrease in other assets.............. (746) 238
Increase in interest payable..................... 43 363
Increase (decrease) in other liabilities......... (2,811) 602
-------------- --------------
Net cash provided by (used in) operating
activities................................... $ (4,194) $ 1,245
============== ==============
Noncash investing and financing activities
Real estate obtained in satisfaction of a
note receivable with no carrying value
Carrying value of real estate received........... $ - $ 2,519
Carrying value of debt assumed................... - 2,675
Notes payable from acquisition of real estate...... - -
Acquisition of remaining general partner interests
in three partnerships
Carrying value of assets received................ - 22,807
Carrying value of liabilities assumed............ - 21,481
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
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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 also has invested
in mortgage loans on real estate, including first, wraparound and junior
mortgage loans. The Company is no longer seeking to fund or acquire new
mortgage loans other than those which it may originate in conjunction with
providing purchase money financing of a property sale.
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, 1996 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. 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, 1995 (the "1995 Form 10-K").
Certain balances for 1995 have been reclassified to conform to the 1996
presentation. Shares and per share data have been restated for the three for
two forward stock split effected February 15, 1996.
NOTE 2. NOTES AND INTEREST RECEIVABLE
In March 1996, the Company accepted a discounted payoff of $825,000 in full
settlement of a mortgage note receivable with a principal balance of $875,000.
The Company recorded no loss on the settlement in excess of the reserve
previously established.
In 1993 in conjunction with the sale of a foreclosed residence in Phoenix,
Arizona, the Company provided purchase money financing of $725,000. The note
matures in August 1996 and at June 30, 1996 had a principal balance of
$682,772. On June 19, 1996, the borrower filed for bankruptcy protection. The
Company anticipates incurring no loss if it forecloses on the collateral
property, as the value of the collateral property exceeds the carrying value of
the note.
NOTE 3. REAL ESTATE AND DEPRECIATION
In January 1996, the Company sold the Cheyenne Mountain land, a 7 acre held for
sale parcel of land in Colorado Springs, Colorado for $330,000 in cash. The
Company recognized a gain of $218,000 on the sale.
Also in January 1996, the Company purchased a 4.7 acre parcel of partially
developed land in Las Colinas, Texas for $941,000 in cash. The Company paid a
real estate acquisition commission of $38,000 to
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TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. REAL ESTATE AND DEPRECIATION (Continued)
Carmel Realty, Inc. ("Carmel Realty"), an affiliate of Basic Capital
Management, Inc. ("BCM"), the Company's advisor, and a real estate acquisition
fee of $9,000 to BCM based upon the $941,000 purchase price.
In March 1996, the Company sold the Park Forest Apartments, a 44 unit held for
sale apartment complex in Dearborn Heights, Michigan, for $4.8 million in cash.
The Company received net cash of $1.6 million after paying off the existing
first mortgage of $2.9 million and various closing costs associated with the
sale. The Company paid a real estate sales commission of $165,000 to Carmel
Realty based upon the $4.8 million sales price. The Company recognized a gain
on the sale of $1.4 million.
In June 1996, the Company entered into a contract to sell the Latham Square
Office Building in Oakland, California for $2.2 million in cash, which was $1.4
million less than the property's carrying value. Accordingly at June 30, 1996,
the Company recognized a provision for loss of $1.6 million to reduce the
property's carrying value to its agreeded sales price less estimated costs of
sale. The property has been reclassified from real estate held for investment
to real estate held for sale in the accompanying June 30, 1996 Consolidated
Balance Sheet. See NOTE 7. "SUBSEQUENT EVENTS."
NOTE 4. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES
Set forth below is summarized results of operations for the real estate
entities the Company accounts for using the equity method for the six months
ended June 30, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Rents and interest income............................. 5,811
Depreciation.......................................... (821)
Property operations................................... (3,937)
Interest expense...................................... (1,362)
Provision for loss.................................... -
------
Net loss.............................................. (309)
======
</TABLE>
NOTE 5. NOTES AND INTEREST PAYABLE
In May 1996, the Company refinanced the mortgage debt secured by Parkway Centre
Shopping Center in Dallas, Texas in the amount of $1.8 million. The Company
received net cash of $771,000 after the payoff of $735,000 in existing mortgage
debt and the payment of various closing costs associated with the refinancing.
The new mortgage bears interest at 9.5625% per annum, requires monthly payments
of principal and interest of $16,024 and matures June 1, 2006. The Company
paid a mortgage brokerage and equity refinancing fee of $18,000 to BCM based on
the $1.8 million refinancing.
8
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TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. NOTES AND INTEREST PAYABLE (Continued)
In July 1996, the Company refinanced the matured mortgage debt secured by the
Westgate of Laurel Apartments in Laurel, Maryland in the amount of $7.7
million. The Company received net cash of $126,000 after the payoff of $7.2
million in existing mortgage debt and the payment of various closing costs
associated with the refinancing. The new mortgage bears interest at 9.1875%
per annum, requires monthly payments of principal and interest of $63,202 and
matures August 1, 2006. The Company paid a mortgage brokerage and equity
refinancing fee of $77,000 to BCM based upon the $7.7 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 1996, the Company completed the sale of the Latham Square Office
Building, for $2.2 million, receiving net cash of $2.0 million after the
payment of various closing costs associated with the sale. No gain or loss was
recognized on the sale. The Company paid a real estate sales commission of
$85,000 to Carmel Realty based on the $2.2 million sales price.
____________________________________
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 has invested in mortgage
loans, including first, wraparound and junior mortgage loans. The Company is
the successor to a business trust which was organized on September 6, 1983 and
commenced operations on January 31, 1984.
Liquidity and Capital Resources
Cash and cash equivalents aggregated $3.6 million at June 30, 1996 compared
with $9.6 million at December 31, 1995. The Company's principal sources of
cash have been and will continue to be from property operations, proceeds from
property sales, the collection of mortgage notes receivable and borrowings.
The Company anticipates that its cash on hand, as well as cash generated from
the collection of
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
mortgage notes receivable, sales of properties, borrowings against certain of
the Company's unencumbered properties and refinancing or extensions of certain
of its mortgage debt will be sufficient to meet all of the Company's cash
requirements for the remainder of 1996, including debt service obligations and
expenditures for property maintenance and improvements.
In January 1996, the Company received $330,000 in cash from the sale of the
Cheyenne Mountain land in Colorado Springs, Colorado, net cash of $1.6 million
from the sale of the Park Forest Apartments in Dearborn Heights, Michigan after
paying off the existing first mortgage, both of which properties were held for
sale, and $825,000 in full settlement of a mortgage note receivable.
Also in January 1996, the Company purchased 4.7 acres of partially developed
land in Las Colinas, Texas for $941,000 in cash and paid off at maturity the
underlying lien on the property securing one of its wraparound mortgage notes
receivable in the amount of $893,000.
In May 1996, the Company refinanced the mortgage debt secured by the Parkway
Centre Shopping Center in Dallas, Texas, in the amount $1.8 million. The
Company received net cash of $771,000 after the payoff of $735,000 in existing
mortgage debt and the payment of various closing costs associated with the
refinancing.
In July 1996, the Company refinanced the matured mortgage debt secured by the
Westgate of Laurel Apartments in Laurel, Maryland in the amount of $7.7
million. The Company received net cash of $126,000 after the payoff of $7.2
million in existing mortgage debt and the payment of various closing costs
associated with the refinancing.
In July 1996, the Company completed the sale of the Latham Square Office
Building in Oakland, California. The Company received net cash of $2.0 million
after paying various closing costs associated with the sale.
In the first six months of 1996, the Company paid dividends of $.14 per share,
or a total of $561,000.
The Company's Board of Directors has approved the Company's repurchase of a
total of 458,000 shares of its Common Stock. Through June 30, 1996, 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
1996.
On a quarterly basis, the Company's management reviews the carrying value of
the Company's mortgage notes receivable and properties held for sale and
periodically, but no less than annually, its properties held for investment.
Generally accepted accounting principles require that the carrying value of
such assets cannot exceed the lower of their
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
respective carrying amounts or estimated net realizable value. In the initial
instance when estimated net realizable value of a mortgage note receivable or a
property held for sale is less than the carrying amount at the time of
evaluation, a reserve is established and a corresponding provision for loss is
recorded by a charge against earnings. A subsequent revision to estimated net
realizable value either increases or decreases such reserve with a
corresponding charge against or credit to earnings. In the case of properties
held for investment the carrying value of the property is written down and a
provision for loss is recorded. The estimate of net realizable value of the
Company's mortgage notes receivable is based on management's review and
evaluation of the collateral property securing the mortgage 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, discussions with the manager of
the property and a review of the surrounding area. See "Recent Accounting
Pronouncement," below.
Results of Operations
The Company's net loss for the three and six months ended June 30, 1996 was
$4.0 million and $5.0 million, respectively, as compared to a net loss of $3.2
million and $4.1 million in the corresponding periods in 1995. The Company's
1996 net loss includes an extraordinary gain of $48,000, gains on sales of real
estate of $1.7 million and a provision for loss of $1.6 million. Its 1995 net
loss includes an extraordinary gain of $1.3 million. Fluctuations in these and
other components of the Company's revenues and expenses between the 1995 and
1996 periods are described below.
Rents in the three and six months ended June 30, 1996 were $11.0 million and
$22.0 million as compared to $11.9 million and $23.0 million in the
corresponding periods in 1995. Of this decrease, $2.5 million and $1.4 million
in the three and six months is due to four properties being sold subsequent to
June 30, 1995. This decrease is partially offset by an increase of $408,000
and $202,000 in the three and six months due to the obtaining through
foreclosure of the Gladstell Forest Apartments in June 1995 and $375,000 and
$312,000 in the three and six months due to a decrease in discounts and
concessions at various of the Company's apartment complexes. Additionally, for
the six months ended June 30, 1996, an increase of $470,000 is due to the
acquisition of 100% ownership of Shadow Run Associates partnership, $256,000 is
due to increases in rental rates and occupancy at various of the Company's
apartment complexes and $85,000 is due to increased in common area maintenance
at various of the Company's commercial properties.
Property operations expense in the three and six months ended June 30, 1996 was
$6.9 million and $14.3 million as compared to $7.6 million and $14.9 million in
the corresponding periods in 1995. Of this decrease, $1.4 million and $755,000
in the three and six months is due to four
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
properties being sold subsequent to June 30, 1995. This decrease is partially
offset by an increase of $247,000 and $119,000 in the three and six months due
to the obtaining through foreclosure of the Gladstell Forest Apartments.
Additionally, for the six months ended June 30, 1996 an increase of $244,000
due to the acquisition of 100% ownership of Shadow Run Associates.
Interest income for the three and six months ended June 30, 1996 of $353,000
and $765,000 was comparable to the $350,000 and $724,000 for the corresponding
periods in 1995.
Equity in loss of investees was a loss of $1,000 and $46,000 for the three and
six months ended June 30, 1996 compared to a loss of $1.1 million and $999,000
for the corresponding periods in 1995. The 1995 equity loss is due to the
write- down of a wraparound mortgage note receivable to the balance of the
underlying first lien mortgage by the Nakash Income Associates, a partnership
in which the Company has a 60% general partner interest. The Company's equity
share of the loss was $901,000.
Interest expense decreased to $3.7 million and $7.4 million in the three and
six months ended June 30, 1996 as compared to $4.0 million and $7.6 million for
the corresponding periods in 1995. These decreases are attributable to four
properties being sold subsequent to June 30, 1995.
Depreciation expense for the three and six months ended June 30, 1996 of $2.1
million and $4.2 million was comparable to the $2.1 million and $4.1 million in
the corresponding periods in 1995.
The advisory fee for the three and six months ended June 30, 1996 of $468,000
and $946,000 was comparable to the $506,000 and $994,000 in the corresponding
periods in 1995.
General and administrative expenses for the three and six months ended June 30,
1996 of $567,000 and $1.1 million was comparable to the $602,000 and $1.1
million in the corresponding periods in 1995.
In the three and six months ended June 30, 1996, the Company recognized a
provision for loss of $1.6 million to reduce the carrying value of an office
building to its agreed sales price less costs of sale. No such provision was
recorded in 1995.
In the six months ended June 30, 1996, the Company recognized gains totaling
$1.7 million on the sales of the Cheyenne Mountain land and the Park Forest
Apartments, both of which were held for sale. No such gains were recognized in
1995. In the six months ended June 30, 1996, the Company recognized an
extraordinary gain of $48,000 on the paydown of the mortgage debt secured by
the Dunes Plaza Shopping Center. In the six months ended June 30, 1995, the
Company recognized extraordinary
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
gains of $1.3 million on the payoff of the mortgage debt secured by the
Fountain Village Apartments and a principal paydown and modification of the
mortgage debt secured by the Dunes Plaza Shopping Center.
Tax Matters
As more fully discussed in the Company's 1995 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, (the "Code"). To
continue to qualify for federal taxation as a REIT under the Code, the Company
is required to hold at least 75% of the value of its total assets in real
estate assets, government securities, cash and cash equivalents at the close of
each quarter of each taxable year. The Code also requires a REIT to distribute
at least 95% of its REIT taxable income, plus 95% of its net income from
foreclosure property, all as defined in Section 857 of the Code, on an annual
basis to stockholders.
Inflation
The effects of inflation on the Company's operations are not quantifiable.
Revenues from property operations generally fluctuate proportionately with
inflationary increases and decreases in housing costs. Fluctuations in the
rate of inflation also affect the sales values of properties, and
correspondingly, the ultimate gains to be realized by the Company from property
sales. To the effect that inflation affects interest rates, the Company's
earnings from short- term investments and the cost of new financings as well as
the cost of its variable note financing will be affected.
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.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Recent Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of".
The statement requires that long-lived assets be considered impaired "...if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset." If impairment exists,
an impairment loss shall be recognized, by a charge against earnings, equal to
"...the amount by which the carrying amount of the asset exceeds the fair value
of the asset." If impairment of a long-lived asset is recognized, the carrying
amount of the asset shall be reduced by the amount of the impairment, shall be
accounted for as the asset's "new cost" and such new cost shall be depreciated
over the asset's remaining useful life.
SFAS No. 121 further requires that long-lived assets held for sale "...be
reported at the lower of carrying amount or fair value less cost to sell." If
a reduction in a held for sale asset's carrying amount to fair value less cost
to sell is required, a provision for loss shall be recognized by a charge
against earnings. Subsequent revisions, either upward or downward, to a held
for sale asset's fair value less cost to sell shall be recorded as an
adjustment to the asset's carrying amount, but not in excess of the assets
carrying amount when originally classified or held for sale. A corresponding
charge or credit to earnings is to be recognized. Long-lived assets held for
sale are not to be depreciated. The Company adopted SFAS No. 121 effective
January 1, 1996.
The effect of adopting SFAS No. 121 was the discontinuance of depreciation on
the Company's one apartment complex held for sale of $24,000 and a
corresponding reduction in the Company's reported gain on the March 1996 sale
of the property.
_____________________
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on May 31, 1996, at which
meeting the Company's stockholders were asked to consider and vote upon (i) the
election of Class III Directors of the Company, (ii) the renewal of the
Company's advisory agreement with Basic Capital Management, Inc. ("BCM") and
(iii) approval of an amendment to Article Six of the Company's Articles of
Incorporation removing the provision for the division of the Company's Board of
Directors into three classes.
14
<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (Continued)
At such meeting the Company's stockholders elected the following individual as
a Class III Director of the Company:
<TABLE>
<CAPTION>
Shares Voting
-------------------------
Withheld
Director For Authority
-------- --------- -----------
<S> <C> <C>
Bennett B. Sims 2,933,120 70,610
</TABLE>
Also at such meeting the Company's stockholders approved the renewal of the
Company's advisory agreement with BCM until the next annual meeting of the
Company's stockholders with 2,843,966 votes for the proposal, 100,821 votes
against the proposal and 58,943 votes abstaining and the amendment of Article
Six of the Company's Articles of Incorporation with 2,340,473 votes for the
proposal, 98,686 votes against the proposal and 73,648 votes abstaining.
ITEM 5. OTHER EVENTS
On August 1, 1996, the Company announced an offer to buy back shares of Common
Stock from stockholders owning 99 or fewer shares as of the record date August
1, 1996. The Company will pay a premium of $.50 per share over the average of
the closing market prices as reported from August 8, 1996 through September 30,
1996. The purpose of the buy back offer is to reduce expenses of servicing the
stockholders, including the printing and mailing of investor materials.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
- ------- -----------
27.0 Financial Data Schedule
(b) Reports on Form 8-K as follows:
A Current Report on Form 8-K, dated June 3, 1996, was filed with
respect to Item 5., which reports that on June 30, 1996,
Transcontinental Realty Investors, Inc. effected an amendment, approved
by its stockholders May 31, 1996, to the Company's Articles of
Incorporation which deleted the provision which provided for the
division of the Company's Board of Directors into three separate
classes.
15
<PAGE> 16
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, 1996 By: /s/ Randall M. Paulson
---------------------------- --------------------------------
Randall M. Paulson
President
Date: August 12, 1996 By: /s/ Thomas A. Holland
---------------------------- --------------------------------
Thomas A. Holland
Executive
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16
<PAGE> 17
TRANSCONTINENTAL REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Three Months ended June 30, 1996
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- --------------------------------------------------- ------
<S> <C> <C>
27.0 Financial Data Schedule 18
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,571
<SECURITIES> 0
<RECEIVABLES> 10,191
<ALLOWANCES> 926
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 266,340
<DEPRECIATION> 46,652
<TOTAL-ASSETS> 247,493
<CURRENT-LIABILITIES> 0
<BONDS> 155,844
<COMMON> 40
0
0
<OTHER-SE> 83,554
<TOTAL-LIABILITY-AND-EQUITY> 247,493
<SALES> 0
<TOTAL-REVENUES> 22,146
<CGS> 0
<TOTAL-COSTS> 14,332
<OTHER-EXPENSES> 4,165
<LOSS-PROVISION> 1,579
<INTEREST-EXPENSE> 7,423
<INCOME-PRETAX> (6,727)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,727)
<DISCONTINUED> 0
<EXTRAORDINARY> 48
<CHANGES> 0
<NET-INCOME> (5,029)
<EPS-PRIMARY> (1.26)
<EPS-DILUTED> (1.26)
</TABLE>
