<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 MARCH 31, 1997
Commission File Number 1-9240
TRANSCONTINENTAL REALTY INVESTORS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 94-6565852
- --------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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 3,926,427
- ---------------------------- ---------------------------------
(Class) (Outstanding at April 30, 1997)
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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>
March 31, December 31,
1997 1996
--------- ---------
Assets (dollars in thousands)
<S> <C> <C>
Notes and interest receivable
Performing ......................................... $ 9,152 $ 9,075
Nonperforming, nonaccruing ......................... 417 457
--------- ---------
9,569 9,532
Less - allowance for estimated losses ............... (926) (926)
--------- ---------
8,643 8,606
Foreclosed real estate held for sale ................ 910 910
Real estate held for sale, net of accumulated
depreciation ($76 in 1996) ......................... 281 2,089
--------- ---------
1,191 2,999
Real estate held for investment, net of
accumulated depreciation ($52,526 in 1997 and
$50,310 in 1996) ................................... 226,952 217,410
Investment in real estate entities .................. 4,859 4,578
Cash and cash equivalents ........................... 8,542 960
Other assets (including $349 in 1997 and $960 in
1996 from affiliates) .............................. 9,253 10,818
--------- ---------
$ 259,440 $ 245,371
========= =========
Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable .......................... $ 167,601 $ 158,692
Other liabilities (including $135 in 1997 and $535
in 1996 to affiliates) ............................. 12,921 7,320
--------- ---------
180,522 166,012
Stockholders' equity
Common stock, $.01 par value, authorized, 10,000,000
shares; issued and outstanding, 3,926,427 in 1997
and 3,926,445 in 1996 shares ....................... 39 39
Paid-in capital ..................................... 218,133 218,133
Accumulated distributions in excess of
accumulated earnings ............................... (139,254) (138,813)
--------- ---------
78,918 79,359
--------- ---------
$ 259,440 $ 245,371
========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
2
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TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------------
1997 1996
----------- -----------
(dollars in thousands,
except per share)
<S> <C> <C>
Income
Rents ......................................... $ 12,114 $ 11,158
Interest ...................................... 409 412
----------- -----------
12,523 11,570
Expenses
Property operations ........................... 7,276 7,417
Interest ...................................... 3,824 3,754
Depreciation .................................. 2,255 2,067
Advisory fee to affiliate ..................... 465 478
General and administrative .................... 617 580
----------- -----------
14,437 14,296
----------- -----------
(Loss) from operations ......................... (1,914) (2,726)
Equity in income (losses) of investees ......... 348 (45)
Gain on sale of real estate .................... 1,400 1,650
----------- -----------
(Loss) before extraordinary gain ............... (166) (1,121)
Extraordinary gain ............................. -- 48
----------- -----------
Net (loss) ..................................... $ (166) $ (1,073)
=========== ===========
Earnings Per Share
(Loss) before extraordinary gain ............... $ (.04) $ (.28)
Extraordinary gain ............................. -- .01
----------- -----------
Net (loss) ..................................... $ (.04) $ (.27)
=========== ===========
Weighted average Common shares used in computing
earnings per share ............................ 3,926,439 4,012,275
=========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
3
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TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1997
<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, 1997 .. 3,926,445 $ 39 $ 218,133 $ (138,813) $ 79,359
Fractional shares ......... (18) -- -- -- --
Dividends ($.07 per share) -- -- -- (275) (275)
Net (loss) ................ -- -- -- (166) (166)
---------- ---------- ---------- ---------- ----------
Balance, March 31, 1997 ... 3,926,427 $ 39 $ 218,133 $ (139,254) $ 78,918
========== ========== ========== ========== ==========
</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 Three Months
Ended March 31,
--------------------
1997 1996
-------- --------
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Rents collected .............................. $ 14,343 $ 11,286
Interest collected ........................... 352 334
Interest paid ................................ (3,689) (3,598)
Payments for property operations ............. (10,749) (8,151)
Advisory fee paid to affiliate ............... (414) (491)
General and administrative expenses paid ..... (575) (546)
Distributions from equity investees' operating
cash flow ................................. 72 41
Insurance settlement ......................... 9,529 --
Other ........................................ 50 (1,770)
-------- --------
Net cash provided by (used in) operating
activities ............................. 8,919 (2,895)
Cash Flows from Investing Activities
Acquisition of real estate ................... (3,954) (891)
Proceeds from sale of real estate ............ 2,932 1,754
Collections on notes receivable .............. 20 844
Real estate improvements ..................... (943) (548)
Contributions to equity investees ............ (5) (132)
-------- --------
Net cash provided by (used in) investing
activities ............................. (1,950) 1,027
Cash Flows from Financing Activities
Payments on notes payable .................... (24,071) (1,631)
Proceeds from notes payable .................. 26,584 --
Deferred borrowing costs ..................... (1,126) --
Reimbursements to advisor .................... (499) (751)
Dividends to stockholders .................... (275) (281)
-------- --------
Net cash provided by (used in) financing
activities ............................. 613 (2,663)
Net increase (decrease) in cash and cash
equivalents .................................. 7,582 (4,531)
Cash and cash equivalents, beginning of period 960 9,620
-------- --------
Cash and cash equivalents, end of period ...... $ 8,542 $ 5,089
======== ========
</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 Three Months
Ended March 31,
------------------
1997 1996
-------- -------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net (loss) to net cash
provided by (used in) operating activities
Net (loss) ........................................ $ (166) $(1,073)
Adjustments to reconcile net (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization .................... 2,353 2,156
Gain on sale of real estate ...................... (1,400) (1,650)
Extraordinary gain ............................... -- (48)
Equity in (income) losses of investees ........... (348) 45
Distributions from operating cash flow of equity
investees ..................................... 72 41
(Increase) decrease in interest receivable ....... 2 (1)
Decrease in other assets ......................... 2,246 804
Increase (decrease) in interest payable .......... (22) 9
Increase (decrease) in other liabilities ......... 6,182 (3,178)
------- -------
Net cash provided by (used in) operating
activities ................................. $ 8,919 $(2,895)
======= =======
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
6
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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 three month period ended March 31, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. 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, 1996 (the "1996 Form 10-K").
NOTE 2. REAL ESTATE AND DEPRECIATION
In February 1997, the Company completed the sale of the Fiesta Mart, a 29,000
square foot shopping center in San Angelo, Texas, which was under contract for
sale at December 31, 1996, for $544,000 in cash. The Company received net cash
of $403,000 after the payoff of $90,000 in existing mortgage debt and the
payment of various closing costs associated with the sale. The Company paid a
real estate brokerage commission of $22,000 to Carmel Realty, Inc. ("Carmel
Realty"), an affiliate of Basic Capital Management, Inc. ("BCM"), the Company's
advisor, based on the $544,000 sales price of the property. The Company
recognized no gain or loss on the sale.
Also in February 1997, the Company completed the sale of a .9976 acre parcel of
land in Dallas, Texas, which was under contract for sale at December 31, 1996,
for $2.7 million in cash. The Company received net cash of $2.6 million after
paying various closing costs associated with the sale. The Company paid a real
estate sales commission of $103,000 to Carmel Realty based on the $2.7 million
sales price of the property. The Company recognized a gain of $1.4 million on
the sale.
In March 1997, the Company purchased the Terrace Hills Apartments, a 310 unit
apartment complex in El Paso, Texas, for $6.2 million. The Company paid $1.4
million in cash and obtained new mortgage financing of $4.8 million. The
mortgage bears interest at 8.07% per annum, requires monthly payments of
principal and interest of $35,086 and matures in April 2007. The Company paid
a real estate brokerage commission of $193,000 to Carmel Realty and a real
estate acquisition fee of $62,000 to BCM based on the $6.2 million purchase
price of the property.
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TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. REAL ESTATE AND DEPRECIATION (Continued)
In March 1997, the Company purchased the Crescent Place Apartments, a 120 unit
apartment complex in Houston, Texas, for $2.3 million. The Company paid
$500,000 in cash and obtained new mortgage financing of $1.8 million. The
mortgage bears interest at 8.5% per annum, requires monthly payments of
principal and interest of $13,552 and matures in April 2004. The Company paid
a real estate brokerage commission of $91,000 to Carmel Realty and a real
estate acquisition fee of $24,000 to BCM based on the $2.3 million purchase
price of the property.
Also in March 1997, the Company purchased the Savings of America Building, a
68,634 square foot office building in Houston, Texas, for $1.6 million in cash.
The Company paid a real estate acquisition commission of $64,000 to Carmel
Realty and a real estate brokerage fee of $16,000 to BCM based on the $1.6
million purchase price of the property.
NOTE 3. 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 three months
ended March 31, 1997 (dollars in thousands):
<TABLE>
<S> <C>
Rents and interest income ................... $5,404
Depreciation ................................ 492
Property operations ......................... 2,357
Interest expense ............................ 988
------
Net income .................................. $1,567
</TABLE>
NOTE 4. NOTES AND INTEREST PAYABLE
In January 1997, the Company refinanced the matured mortgage debt secured by 74
New Montgomery, an office building in San Francisco, California, in the amount
of $6.3 million. The Company received net cash of $1.0 million after the
payoff of $5.2 million in existing mortgage debt. The remainder of the
refinancing proceeds were used to fund a tax escrow and to pay various closing
costs associated with the refinancing. The new mortgage bears interest at a
variable rate, currently 9.25% per annum, requires monthly payments of
principal and interest of $53,996 and matures in January 2004. The Company
paid a mortgage brokerage and equity refinancing fee of $63,000 to BCM based on
the $6.3 million refinancing.
Also in January 1997, the Company refinanced the matured mortgage debt secured
by the Woods Edge Apartments in Rockville, Maryland in the amount of $6.2
million. The Company received no net cash. The refinancing proceeds were used
to payoff $5.9 million in existing mortgage debt, fund a tax escrow and pay
various closing costs associated with the refinancing. The new mortgage bears
interest at 8.125% per annum, requires monthly payments of principal and
interest of
8
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TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. NOTES AND INTEREST PAYABLE (Continued)
$46,035 and matures in February 2007. The Company paid a mortgage brokerage
and equity refinancing fee of $62,000 to BCM based on the $6.2 million
refinancing.
In February 1997, the Company refinanced the matured mortgage debt secured by
the Spa Cove Apartments in Annapolis, Maryland in the amount of $12.2 million.
The Company received net cash of $245,000 after the payoff of $11.6 million in
existing mortgage debt. The remainder of the refinancing proceeds were used to
fund a tax escrow and pay various closing costs associated with the
refinancing. The new mortgage bears interest at 8.015% per annum, requires
monthly payments of principal and interest of $89,529 and matures in March
2007. The Company paid a mortgage brokerage and equity refinancing fee of
$122,000 to BCM based on the $12.2 million refinancing.
In March 1997, the Company refinanced the mortgage debt scheduled to mature in
December 1997, secured by President's Square, a shopping center in San Antonio,
Texas, in the amount of $1.9 million. The Company received net cash of
$600,000 after the payoff of $1.2 million in existing debt and the payment of
various closing costs associated with the refinancing. The new mortgage bears
interest at 9.44% per annum, requires monthly payments of principal and
interest of $16,521 and matures in March 2009. The Company paid a mortgage
brokerage and equity refinancing fee of $19,000 to BCM based on the $1.9
million refinancing.
In August 1996, the Company modified and extended the matured mortgage debt
secured by the Northtown Mall Shopping Center in Dallas, Texas. The Company
paid $450,000 in principal paydowns to extend the loan's maturity date to March
31, 1997. The Company did not payoff the mortgage at maturity. The Company is
in negotiations with the lender to extend the loan and expects to be successful
in such negotiations, but if it is not, the Company intends to payoff the loan.
NOTE 5. 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 6. SUBSEQUENT EVENTS
In April 1997, the Company sold a foreclosed single family residence in
Scottsdale, Arizona, for net cash of $778,000. The Company will recognize a
gain of approximately $50,000 on the sale. The Company paid a real estate
sales commission of $31,000 to Carmel Realty based on the $778,000 sales price
of the property.
In May 1997, the Company purchased the Treehouse Apartments, a 160 unit
apartment complex in Irving, Texas, for $3.4 million in cash. The
9
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TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. SUBSEQUENT EVENTS (Continued)
Company paid a real estate brokerage commission of $122,000 to Carmel Realty
and a real estate acquisition fee of $34,000 to BCM based on the $3.4 million
purchase price of the property.
In May 1997, the Company accepted a discounted payoff of $2,075,000 in
settlement of a mortgage note receivable with a principal balance of
$2,110,000. The Company expects no loss on the settlement in excess of the
amount previously reserved.
-------------------------
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
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 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 $8.5 million at March 31, 1997 compared
with $960,000 at December 31, 1996. 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 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 including debt service obligations and
expenditures for property maintenance and improvements.
In the first three months of 1997, the Company paid dividends of $.07 per
share, or a total of $275,000.
The Company's Board of Directors has approved the Company's repurchase of a
total of 458,000 shares of its Common Stock. Through March 31, 1997, the
Company had purchased a total of 350,588 shares, for an aggregate purchase
price of $1.7 million. The Company has repurchased none of its shares during
1997.
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)
In January 1997, the Company received a $10.0 million final payment on an
insurance settlement from the 1995 hail storm and flood damage to the Republic
Towers Office Building in Dallas, Texas. The Company is not currently able to
estimate the amount of such proceeds that will be expended to complete repairs
to the building.
In January 1997, the Company refinanced the mortgage debt secured by 74 New
Montgomery, an office building in San Francisco, California in the amount of
$6.3 million. The Company received net cash of $1.0 million after the payoff
of $5.2 million in existing debt and the payment of various closing costs
associated with the refinancing.
Also in January 1997, the Company refinanced the mortgage debt secured by the
Woods Edge Apartments in Rockville, Maryland in the amount of $6.2 million.
The Company received no net cash. The refinancing proceeds were used to payoff
$5.9 million in existing mortgage debt, fund a tax escrow and pay various
closing costs associated with the refinancing.
In February 1997, the Company refinanced the mortgage debt secured by the Spa
Cove Apartments in Annapolis, Maryland in the amount of $12.2 million. The
Company received net cash of $245,000 after the payoff of $11.6 million in
existing mortgage debt, funding a tax escrow and pay various closing costs
associated with the refinancing.
In February 1997, the Company completed the sale of two properties under
contract for sale at December 31, 1996, (i) the Fiesta Mart, a shopping center
in San Angelo, Texas and, (ii) a .9976 acre parcel of land in Dallas, Texas.
The Company received net cash of $3.0 million after the payoff of $90,000 in
existing mortgage debt secured by the Fiesta Mart and the payment of various
closing costs associated with the sales.
In March 1997, the Company purchased (i) the Crescent Place Apartments in
Houston, Texas for $2.3 million, consisting of $500,000 in cash and new
mortgage financing of $1.8 million, (ii) the Savings of America Building, an
office building in Houston, Texas, for $1.6 million in cash and (iii) Terrace
Hills, an apartment complex in El Paso, Texas, for $6.2 million consisting of
$1.4 million in cash and new mortgage financing of $4.8 million.
Also in March 1997, the Company refinanced the mortgage debt secured by
President's Square, a shopping center in San Antonio, Texas. The Company
received net cash of $600,000 after the payoff of $1.2 million in existing
mortgage debt and the payment of various closing costs associated with the
refinancing.
In April 1997, the Company sold a foreclosed single family residence in
Scottsdale, Arizona, for net cash of $778,000 and purchased the Treehouse
Apartments in Irving, Texas, for $3.4 million in cash.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
In May 1997, the Company purchased the Treehouse Apartments, a 160 unit
apartment complex in Irving, Texas, for $3.4 million in cash. Also in May
1997, the Company accepted a discounted payoff of $2,075,000 in settlement of a
mortgage note receivable with a principal balance of $2,110,000.
The Company's management reviews the carrying values of the Company's
properties and mortgage note receivable at least annually and whenever events
or a change in circumstances indicate that impairment may exist. Impairment is
considered to exist if, in the case of a property, the future cash flow from
the property (undiscounted and without interest) is less than the carrying
amount of the property. For notes receivable impairment is considered to exist
if it is probable that all amounts due under the terms of the note will not be
collected. In those instances where impairment is found to exist, a provision
for loss is recorded by a charge against earnings. The Company'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.
Results of Operations
The Company's net loss for the three months ended March 31, 1997 was $166,000
as compared to a net loss of $1.0 million in the corresponding period in 1996.
The Company's 1997 net loss includes gains on the sale of real estate of $1.4
million. The 1996 net loss includes an extraordinary gain of $48,000 and gains
on sales of real estate of $1.7 million. Fluctuations in these and other
components of the Company's revenues and expenses between the 1996 and 1997
periods are discussed below.
Rents in the three months ended March 31, 1997 were $12.1 million compared to
$11.2 million in the corresponding period in 1996. Of this increase, $293,000
relates to an increase in rental rates at the Company's commercial properties,
$182,000 relates to a decrease in discounts and concessions given primarily at
the Company's office buildings, and $650,000 is due to the acquisition of eight
properties subsequent to March 31, 1996. These increases are partially offset
by $443,000 in rents lost due to the sale of three properties subsequent to
March 31, 1996.
Property operations expense in the three months ended March 31, 1997 was $7.3
million as compared to $7.4 million in the corresponding period in 1996. Of
this decrease, $300,000 is due to the sale of three properties subsequent to
March 31, 1996 and $400,000 is due to a decrease in
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
operating expenses at Republic Towers. These decreases are partially offset by
an increase of $570,000 due to the acquisition of eight properties subsequent
to March 31, 1996.
Interest income for the three months ended March 31, 1997 of $409,000 was
comparable to the $412,000 for the corresponding period in 1996.
Equity in earnings of investees was income of $348,000 for the three months
ended March 31, 1997 compared to a loss of $45,000 for the corresponding period
in 1996. Included in equity earnings of investees for the three months ended
March 31, 1997 is a $399,000 gain on sale of real estate, the Company's equity
share of the gain recognized by Income Opportunity Realty Investors, Inc. on
the sale of one of its apartment complexes.
Interest expense for the three months ended March 31, 1997 and 1996 remained
constant at $3.8 million.
Depreciation expense increased to $2.3 million for the three months ended March
31, 1997 compared to $2.1 million in the corresponding period in 1996. The
increase is due to the acquisition of eight properties subsequent to March 31,
1996 with three of the properties being acquired in the first quarter of 1997.
Advisory fees decreased to $465,000 for the three months ended March 31, 1997
compared to $478,000 in the corresponding period in 1996. Advisory fees are
expected to increase with increases in the Company's gross assets, as a result
of property acquisitions in 1997, the basis for such fee.
General and administrative expenses increased to $617,000 for the three months
ended March 31, 1997 compared to $580,000 in the corresponding period in 1996.
The increase is mainly due to legal fees related to the Olive litigation.
In the three months ended March 31, 1997, the Company recognized net gains
totaling $1.4 million on the sale of (i) the Fiesta Mart, a shopping center and
(ii) a parcel of land in downtown Dallas, both of which were under contract for
sale at December 31, 1996. In the three months ended March 31, 1996, the
Company recognized net gains of $1.7 million on the sales of Cheyenne Mountain
land and the Park Forest Apartments. In the three months ended March 31, 1996,
the Company recognized an extraordinary gain of $148,000 on the paydown of the
mortgage debt secured by the Dunes Plaza, a shopping center. No such gain was
recognized in 1997.
Tax Matters
As more fully discussed in the Company's 1996 Form 10-K, the Company has
elected and, in the opinion of the Company's management, qualified to be
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Tax Matters (Continued)
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.
----------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Olive Litigation. In February 1990, the Company, together with Continental
Mortgage and Equity Trust ("CMET"), Income Opportunity Realty Investors, Inc.
("IORI") and National Income Realty Trust, three real
14
<PAGE> 15
ITEM 1. LEGAL PROCEEDINGS (Continued)
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. pending
before the United States District Court for the Northern District of California
and relating to the operation and management of each of the entities (the
"Olive Litigation"). On April 23, 1990, the court granted final approval of
the terms of a Stipulation of Settlement.
On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Olive Modification") that settled
subsequent claims of breaches of the settlement that were asserted by the
plaintiffs and that modified certain provisions of the April 1990 settlement.
The Olive Modification was preliminarily approved by the Court on July 1, 1994,
and final court approval was entered on December 12, 1994. The effective date
of the Olive Modification was January 11, 1995.
The Court retained jurisdiction to enforce the Modification, and during August
and September 1996, the Court held evidentiary hearings to assess compliance
with the terms of the Modification by various parties. The Court issued no
ruling or order with respect to the matters addressed at the hearings.
Separately in 1996, legal counsel for the plaintiffs notified the Company's
Board of Directors that he intends to assert that certain actions taken by the
Board of Directors breached the terms of the Modification. On January 27,
1997, the parties entered into an Amendment to the Modification effective
January 9, 1997 (the "Amendment"), which was submitted to the Court for
approval on January 29, 1997. The Amendment provides for the settlement of all
matters raised at the evidentiary hearings and by plaintiffs' counsel in his
notices to the Company's Board of Directors. On May 2, 1997, a hearing was
held for the Court to consider approval of the amendment. As of May 9, 1997,
the Court had not issued an order either approving or disapproving the
amendment.
The Amendment provides for the addition of three new unaffiliated members to
the Company's Board of Directors and sets forth new requirements for the
approval of any transactions with certain affiliates until April 28, 1999. In
addition, the Company, CMET, IORI and their shareholders released the
defendants from any claims relating to the plaintiffs' allegations and matters
which were the subject of the evidentiary hearings. The plaintiffs'
allegations of any breaches of the Modification shall be settled by mutual
agreement of the parties or, lacking such agreement, by an arbitration
proceeding.
Under the Amendment, all shares of the Company owned by Gene E. Phillips or any
of his affiliates shall be voted at all stockholders' meetings held until April
28, 1999 in favor of all new Board members added under the Amendment. The
Amendment also requires that, until April 28, 1999, all shares of the Company
owned by Gene E. Phillips or his affiliates in
15
<PAGE> 16
ITEM 1. LEGAL PROCEEDINGS (Continued)
excess of forty percent (40%) of the Company's outstanding shares shall be
voted in proportion to the votes cast by all non-affiliated shareholders of the
Company.
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:
None.
16
<PAGE> 17
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: May 12, 1997 By: /s/ Randall M. Paulson
---------------------------- --------------------------------
Randall M. Paulson
President
Date: May 12, 1997 By: /s/ Thomas A. Holland
---------------------------- --------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
17
<PAGE> 18
TRANSCONTINENTAL REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Three Months ended March 31, 1997
Exhibit Page
Number Description Number
- ------- ----------- ------
27.0 Financial Data Schedule 19
18
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 8,542
<SECURITIES> 0
<RECEIVABLES> 9,569
<ALLOWANCES> 926
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 280,745
<DEPRECIATION> 52,602
<TOTAL-ASSETS> 259,440
<CURRENT-LIABILITIES> 0
<BONDS> 167,601
39
0
<COMMON> 0
<OTHER-SE> 78,879
<TOTAL-LIABILITY-AND-EQUITY> 259,440
<SALES> 0
<TOTAL-REVENUES> 12,114
<CGS> 0
<TOTAL-COSTS> 7,276
<OTHER-EXPENSES> 2,255
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,824
<INCOME-PRETAX> (166)
<INCOME-TAX> 0
<INCOME-CONTINUING> (166)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (166)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
