<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 SEPTEMBER 30, 1998
------------------
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 3,875,944
- ---------------------------- ---------------------------------
(Class) (Outstanding at October 30, 1998)
1
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements have not been audited by
independent certified public accountants, but in the opinion of the management
of Transcontinental Realty Investors, Inc. (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>
September 30, December 31,
1998 1997
---------- ----------
Assets (dollars in thousands)
<S> <C> <C>
Notes and interest receivable
Performing .......................................... $ 1,610 $ 4,388
Nonperforming, nonaccruing .......................... 806 450
---------- ----------
2,416 4,838
Less - allowance for estimated losses .................. (891) (891)
---------- ----------
1,525 3,947
Foreclosed real estate held for sale ................... 3,867 1,356
Real estate held for sale, net of accumulated
depreciation ($74 in 1998 and $1,350 in 1997) ....... 6,524 3,630
---------- ----------
10,391 4,986
Real estate held for investment, net of
accumulated depreciation ($58,426 in 1998 and
$55,487 in 1997) .................................... 309,039 270,245
Investment in real estate entities ..................... 3,877 4,333
Cash and cash equivalents .............................. 19,657 24,733
Other assets (including $495 in 1998 and $497 in
1997 from affiliates) ............................... 15,614 11,291
---------- ----------
$ 360,103 $ 319,535
========== ==========
Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable ............................. $ 258,782 $ 222,029
Other liabilities (including $681 in 1998 and $1,157
in 1997 to affiliates) .............................. 8,738 10,973
---------- ----------
267,520 233,002
Stockholders' equity
Common stock, $.01 par value, authorized, 10,000,000
shares; issued and outstanding, 3,872,505 shares
in 1998 and 3,889,200 shares in 1997 ................ 39 39
Paid-in capital ........................................ 217,431 217,688
Accumulated distributions in excess of
accumulated earnings ................................ (124,887) (131,194)
---------- ----------
92,583 86,533
---------- ----------
$ 360,103 $ 319,535
========== ==========
</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 Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Income
Rents ................................. $ 18,021 $ 13,781 $ 51,414 $ 39,205
Interest .............................. 200 510 593 1,283
----------- ----------- ----------- -----------
18,221 14,291 52,007 40,488
Expenses
Property operations ................... 10,072 8,378 27,355 23,403
Interest .............................. 5,921 4,242 16,865 12,004
Depreciation .......................... 2,753 2,443 7,882 7,048
Advisory fee to affiliate ............. 671 503 1,927 1,459
Net income fee to affiliate ........... 604 -- 651 --
General and administrative ............ 584 713 1,649 1,977
----------- ----------- ----------- -----------
20,605 16,279 56,329 45,891
----------- ----------- ----------- -----------
(Loss) from operations ................... (2,384) (1,988) (4,322) (5,403)
Equity in income (loss) of
investees ............................. (90) (97) 342 680
Gain on sale of real estate .............. 9,883 -- 12,015 1,455
----------- ----------- ----------- -----------
Net income (loss) ........................ $ 7,409 $ (2,085) $ 8,035 $ (3,268)
=========== =========== =========== ===========
Earnings Per Share
Net income (loss) ........................ $ 1.91 $ (.53) $ 2.07 $ (.83)
=========== =========== =========== ===========
Weighted average Common
shares used in computing
earnings per share .................... 3,871,438 3,899,487 3,876,505 3,910,991
=========== =========== =========== ===========
</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 Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Accumulated
Distributions
Common Stock in Excess of
------------------------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Earnings Equity
------------ ------------ ------------ ------------ ------------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 ....... 3,889,200 $ 39 $ 217,688 $ (131,194) $ 86,533
Repurchase of Common Stock ..... (21,950) -- (336) -- (336)
Sale of Common Stock under
dividend reinvestment
plan ........................ 5,255 -- 79 -- 79
Dividends ($.45 per share) .... -- -- -- (1,728) (1,728)
Net income ..................... -- -- -- 8,035 8,035
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1998 .... 3,872,505 $ 39 $ 217,431 $ (124,887) $ 92,583
============ ============ ============ ============ ============
</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>
For the Nine Months
Ended September 30,
--------------------------
1998 1997
---------- ----------
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Rents collected ................................... $ 51,083 $ 41,841
Interest collected ................................ 592 882
Interest paid ..................................... (15,630) (11,389)
Payments for property operations .................. (27,940) (29,827)
Advisory and net income fee paid to affiliate ..... (2,782) (1,409)
General and administrative expenses paid .......... (1,844) (2,062)
Distributions from operating cash flow of equity
investees ...................................... 112 1,695
Insurance settlement .............................. -- 9,633
Other ............................................. (2,442) 786
---------- ----------
Net cash provided by operating activities ...... 1,149 10,150
Cash Flows from Investing Activities
Acquisition of real estate ........................ (59,260) (24,559)
Real estate improvements .......................... (5,739) (4,408)
Proceeds from sale of real estate ................. 30,383 3,800
Deposits on pending purchases ..................... (655) (510)
Deferred merger costs ............................. (477) --
Collections on notes receivable ................... 2,711 5,028
Distributions of equity investees' investing
cash flow ...................................... 701 --
Contributions to equity investees ................. (16) (727)
---------- ----------
Net cash (used in) investing activities ........ (32,352) (21,376)
Cash Flows from Financing Activities
Payments on notes payable ......................... (29,280) (25,085)
Proceeds from notes payable ....................... 62,677 42,689
Deferred borrowing costs .......................... (1,428) (1,358)
Reimbursements to advisor ......................... (61) (410)
Repurchase of Common Stock ........................ (336) (302)
Sale of Common Stock under dividend reinvestment
plan ........................................... 79 --
Dividends to stockholders ......................... (5,524) (819)
---------- ----------
Net cash provided by financing activities ...... 26,127 14,715
Net increase (decrease) in cash and cash
equivalents ....................................... (5,076) 3,489
Cash and cash equivalents, beginning of period ....... 24,733 960
---------- ----------
Cash and cash equivalents, end of period ............. $ 19,657 $ 4,449
========== ==========
</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 Nine Months
Ended September 30,
----------------------------
1998 1997
----------- -----------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net income (loss) to net cash
provided by operating activities
Net income (loss) ..................................... $ 8,035 $ (3,268)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation and amortization ...................... 8,473 7,294
Gain on sale of real estate ........................ (12,015) (1,455)
Equity in (income) of investees .................... (342) (680)
Distributions from operating cash flow of equity
investees ....................................... 112 1,695
(Increase) in interest receivable .................. (1) (244)
(Increase) in other assets ......................... (3,178) (6,207)
Increase in interest payable ....................... 644 211
Increase (decrease) in other liabilities ........... (579) 12,804
----------- -----------
Net cash provided by operating activities ....... $ 1,149 $ 10,150
=========== ===========
Schedule of noncash investing and financing
activities
Notes payable from purchase of real estate ............ $ 2,970 $ 7,744
</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 and partnerships and 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 nine month period ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the Consolidated
Financial Statements and notes included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997 (the "1997 Form 10- K").
NOTE 2. REAL ESTATE
In January 1998, the Company purchased the 188 unit Mountain Plaza Apartments in
El Paso, Texas, for $4.0 million. The Company paid $1.0 million in cash and
obtained new mortgage financing of $3.0 million. The mortgage bears interest at
8.2% per annum, requires monthly payments of interest only and matures in
January 2000. A real estate brokerage commission of $139,000 was paid to Carmel
Realty, Inc. ("Carmel Realty"), an affiliate of Basic Capital Management, Inc.
("BCM"), the Company's advisor, and a real estate acquisition fee of $39,000 to
BCM.
Also in January 1998, the Company purchased the 212 unit Hunters Glen Apartments
in Midland, Texas, for $2.5 million. The Company paid $600,000 in cash and
obtained seller financing of the remaining $1.9 million of the purchase price.
The financing bears interest at a variable rate, currently 8.0% per annum,
requires monthly payments of interest only for the first 24 months and
thereafter requires monthly payments of principal and interest of $14,302 and
matures in January 2003. A real estate brokerage commission of $94,000 was paid
to Carmel Realty and a real estate acquisition fee of $25,000 to BCM.
Further in January 1998, the Company purchased the Laws Street land, a 1.41 acre
parcel in Dallas, Texas, for $1.9 million in cash. A real estate brokerage
commission of $39,000 was paid to Carmel Realty and a real estate acquisition
fee of $19,000 to BCM.
In January 1998, the Company purchased the 204 unit Bent Tree Garden Apartments
in Addison, Texas, for $8.1 million. The Company paid $1.7 million in cash and
obtained new mortgage financing of $6.4 million. The mortgage bears interest at
7.2% per annum, requires monthly payments
7
<PAGE> 8
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. REAL ESTATE (Continued)
of principal and interest of $46,054 and matures in February 2008. A real estate
brokerage commission of $232,000 was paid to Carmel Realty and a real estate
acquisition fee of $81,000 to BCM.
In February 1998, the Company purchased Parkway North, a 71,041 sq. ft. office
building in Dallas, Texas, for $5.4 million. The Company paid $1.5 million in
cash and obtained new mortgage financing of $3.9 million. The mortgage bears
interest at a variable rate, currently 8.69% per annum, requires monthly
payments of interest only and matures in March 2000. A real estate brokerage
commission of $179,000 was paid to Carmel Realty and a real estate acquisition
fee of $54,000 to BCM.
Also in February 1998, the Company purchased the Lemmon Carlisle land, a 2.14
acre parcel in Dallas, Texas, for $3.4 million in cash. A real estate brokerage
commission of $54,000 was paid to Carmel Realty and a real estate acquisition
fee of $34,000 to BCM.
In December 1997, the Company entered into a contract to sell Shaws Plaza, a
103,482 sq. ft. shopping center in Sharon, Massachusetts, for $3.8 million. The
agreed sales price was $1.4 million less than the property's carrying value.
Accordingly, at December 31, 1997, a provision for loss of $1.4 million was
recognized to reduce the property's carrying value to its sales price less
estimated costs of sale. In March 1998, the sale was completed, the Company
received net cash of $1.2 million after paying off $2.6 million of existing
mortgage debt and the payment of various closing costs. A real estate brokerage
commission of $134,000 was paid to Carmel Realty. No gain or loss was incurred
on the sale.
In March 1998, the Company purchased the Plaza on Bachman Creek, a 80,278 sq.
ft. retail/office complex in Dallas, Texas, for $3.5 million. The Company paid
$1.1 million in cash and obtained new mortgage financing of $2.4 million. The
mortgage bears interest at a variable rate, currently 9% per annum, requires
monthly payments of principal and interest of $21,593 and matures in March 2018.
A real estate brokerage commission of $124,000 was paid to Carmel Realty and a
real estate acquisition fee of $35,000 to BCM.
In April 1998, the Company purchased in a single transaction the 178 unit Ashton
Way Apartments in Midland, Texas, and the 92 unit 4400 Apartments, also in
Midland, Texas and in May 1998, the Company purchased the 232 unit Woodview
Apartments in Odessa, Texas, for a total of $6.8 million. The Company paid a
total of $1.5 million in cash and obtained new mortgage financing secured by all
three properties totaling $5.3 million. The first mortgage of $4.5 million bears
interest at 7.2% per annum and the second mortgage of $845,000 bears interest at
a variable rate, currently 8.2% per annum. The mortgages require monthly
payments of principal and interest totaling $38,003 and mature in
8
<PAGE> 9
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. REAL ESTATE (Continued)
October 1999 and May 2008, respectively. A real estate brokerage commission of
$244,000 was paid to Carmel Realty and a real estate acquisition fee of $68,000
to BCM.
Also in May 1998, the Company purchased the Eagle Crest land, a 22.99 acre
parcel in Farmers Branch, Texas, for $2.5 million in cash. A real estate
brokerage commission of $95,000 was paid to Carmel Realty and a real estate
acquisition fee of $25,000 to BCM.
Further in May 1998, the Company purchased the 172 unit Emerald Terrace
Apartments in Midland, Texas, for $1.5 million. The Company paid $425,000 in
cash, assumed the existing mortgage of $584,000 and obtained seller financing of
the remaining $491,000 of the purchase price. The mortgages bear interest at
variable and fixed rates, currently 9.91% and 7.5% per annum, respectively,
require monthly payments of principal and interest totaling $10,643 and mature
in November 1999 and June 2008. A real estate brokerage commission of $59,000
was paid to Carmel Realty and a real estate acquisition fee of $15,000 to BCM.
In May 1998, the Company purchased in a single transaction, Daley Plaza, a
62,425 sq. ft. office building in San Diego, California, and View Ridge, a
25,062 sq. ft. office building, also in San Diego, California, for a total of
$6.5 million. The Company paid $1.7 million in cash and obtained new mortgage
financing totaling $4.8 million. The mortgages bear interest at a variable rate,
currently 9.5% per annum, require monthly payments of principal and interest
totaling $42,416 and mature in May 2005. A real estate brokerage commission of
$200,000 was paid to Carmel Realty and a real estate acquisition fee of $65,000
to BCM.
In June 1998, the Company purchased the Atrium, a 74,603 sq. ft. office building
in Palm Beach, Florida, for $5.4 million. The Company paid $1.3 million in cash
and obtained new mortgage financing of $4.1 million. The mortgage bears interest
at a variable rate, currently 7.93% per annum, requires monthly payments of
principal and interest of $31,455 and matures in July 2001. A real estate
brokerage commission of $179,000 was paid to Carmel Realty and a real estate
acquisition fee of $54,000 to BCM.
At June 30, 1998, the Company reclassified from real estate held for
investment to real estate held for sale the following three properties
under contract for sale at such date: (i) Northtown Mall, a 354,174 sq.
ft. shopping center in Dallas, Texas; (ii) Denton Drive Warehouse,
123,800 sq. ft. industrial warehouse in Dallas, Texas, and (iii)
Chesapeake Ridge, a 100,484 sq. ft. office building in San Diego,
California.
In July 1998, the Company purchased Valley Rim, a 54,194 sq. ft. office
building in San Diego, California, for $5.1 million. The Company paid
$1.4 million in cash and obtained new mortgage financing of $3.7
9
<PAGE> 10
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. REAL ESTATE (Continued)
million. The mortgage bears interest at a variable rate, currently 9.5% per
annum, requires monthly payments of principal and interest of $32,576 and
matures in June 2005. A real estate brokerage commission of $172,000 was paid to
Carmel Realty and an acquisition fee of $51,000 to BCM.
Also in July 1998, the Company purchased the Limestone Canyon land, a 27 acre
parcel of undeveloped land in Austin, Texas, for $1.8 million in cash. In
conjunction with the purchase, the Company obtained a financing commitment of
$13.0 million for the construction of a 260 unit apartment complex on the site.
The mortgage bears interest at a variable rate, currently 7.63% per annum,
requires monthly payments of interest only and matures in July 2000. A real
estate brokerage commission of $70,000 was paid to Carmel Realty and an
acquisition fee of $18,000 to BCM. Construction of the apartment complex was
commenced in August 1998 and is expected to be completed by January 2000.
In 1997, Montgomery Ward ("Ward"), a tenant at the Northtown Mall, a 354,174 sq.
ft. shopping center in Dallas, Texas, filed for bankruptcy protection. In an
attempt to keep the Ward lease from being sold, Northtown Mall was placed in
administrative bankruptcy. The Ward lease, however, was sold for the benefit of
the Ward bankruptcy estate. In September 1998, the Company bought back the lease
concurrent with the $15.6 million sale of Northtown Mall. The Company received
net cash of $12.2 million after paying off $2.5 million of existing mortgage
debt, $900,000 for the Ward lease and the payment of various closing costs. In
conjunction with the sale, the Northtown Mall bankruptcy proceeding was
dismissed. A real estate brokerage commission of $135,000 was paid to Carmel
Realty. A gain of $3.3 million was recognized.
In September 1998, the Company completed the sale of Chesapeake Ridge, a 100,484
sq. ft. office building in San Diego, California, under contract for sale at
June 30, 1998, for $13.2 million in cash. The Company received net cash of $7.9
million after paying off $5.3 million of existing mortgage debt and the payment
of various closing costs. A real estate brokerage commission of $317,000 was
paid to Carmel Realty. A gain of $5.9 million was recognized.
NOTE 3. NOTES AND INTEREST RECEIVABLE
In February 1994, the Company provided $6.7 million of purchase money financing
in conjunction with the sale of 1,406 acres of land in 16 developed residential
and commercial subdivisions in Maumelle, Arkansas, secured by a first mortgage
on the properties sold. The borrower did not make the scheduled February 1995
principal and interest payments. In September 1995, a settlement was reached
with the borrower that provided for, among other things the payment by the
borrower of $2.5 million in cash, and the Company's acceptance of a new $1.4
million
10
<PAGE> 11
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued)
note secured by 36.3 acres of commercial land. Such note matured in January
1996. In April 1998, the Company received $2.1 million in full settlement of its
note and accrued, but unpaid, interest. The original sale had been recorded
under the cost recovery method with gain being deferred until the note was
collected. Accordingly, the previously deferred gain of $2.1 million was
recognized on collection of its note receivable.
At June 30, 1998, the Company held a wraparound mortgage note receivable with a
principal balance of $2.5 million secured by a K-Mart in Wake County, North
Carolina. In February 1998, the Company was informed that the first lien
mortgage in the amount of $2.0 million was in default. To protect its interest,
the Company foreclosed on the property in August 1998 and refinanced the first
lien mortgage in the amount of $2.0 million. The Company paid $265,000 in cash
to complete the refinancing. The new mortgage bears interest at 7.51% per annum,
requires monthly payments of principal and interest of $15,721 and matures in
September 2008. A mortgage brokerage and equity refinancing fee of $19,500 was
paid to BCM. No loss was recognized on the foreclosure as the fair value of the
property exceeded the carrying value of the note receivable.
In July 1998, a mortgage note receivable which had been written off in a prior
year, was collected. A gain of $671,000 was recognized.
In August 1998, a mortgage note receivable with a principal balance of $2.0
million and a carrying value of $207,000 secured by a second lien on a hotel in
Lake Charles, Louisiana became delinquent. To protect its interest, the Company
purchased the first lien mortgage for $154,000. Foreclosure proceedings have
commenced and title to the property is expected to be received in the first
quarter of 1999. No loss is expected to be incurred on foreclosure, as the
estimated fair value of the property exceeds the carrying value of the mortgage
notes receivable.
NOTE 4. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES
Set forth below are summarized results of operations of the real estate entities
the Company accounts for using the equity method for the nine months ended
September 30, 1998 (dollars in thousands):
<TABLE>
<S> <C>
Rents and interest income ............................... $13,093
Depreciation ............................................ 1,980
Property operations ..................................... 6,708
Interest expense ........................................ 4,616
Gain on sale of real estate ............................. 496
-------
Net income .............................................. $ 285
=======
</TABLE>
The Company owns a combined 63.7% general and limited partner interest in
Tri-City Limited Partnership ("Tri-City"), which, prior to January
11
<PAGE> 12
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES (Continued)
1998, owned five properties in Texas. In May 1998, Tri-City sold two apartment
complexes for a total of $3.3 million in cash. Tri-City received net cash of
$1.4 million after paying off $1.9 million in existing mortgage debt and the
payment of various closing costs associated with the sale. The Company received
a distribution of $701,000 of such net cash. Tri-City recognized a gain of
$496,000 on the sale of which the Company's equity share was $316,000. Tri-City
paid a real estate brokerage commission of $119,000 to Carmel Realty.
NOTE 5. NOTES AND INTEREST PAYABLE
In March 1998, the Company refinanced the mortgage debt secured by the Tricon
Warehouses in Atlanta, Georgia in the amount of $10.2 million. The Company
received net cash of $5.4 million after paying off $4.8 million in existing
mortgage debt, funding of required escrows and the payment of various closing
costs. The new mortgage bears interest at a variable rate, currently 7.53% per
annum, requires monthly payments of principal and interest of $75,576 and
matures in April 2008. A mortgage brokerage and equity refinancing fee of
$102,000 was paid to BCM.
In May 1998, the Company obtained mortgage financing of $2.2 million secured by
the previously unencumbered Lemmon Carlisle land in Dallas, Texas. The Company
received net cash of $2.1 million after the payment of various closing costs.
The mortgage bears interest at 9.25% per annum, requires monthly payments of
interest only and matures in May 2000. A mortgage brokerage and equity
refinancing fee of $22,000 was paid to BCM.
Also in May 1998, the Company refinanced the mortgage debt secured by the Plaza
Office Building in St. Petersburg, Florida, in the amount of $7.4 million. The
Company received net cash of $2.6 million after paying off $4.8 million in
existing mortgage debt, funding of required escrows and the payment of various
closing costs. The new mortgage bears interest at a variable rate, currently
7.57% per annum, requires monthly payments of principal and interest of $55,023
and matures in June 2008. A mortgage brokerage and equity refinancing fee of
$74,000 was paid to BCM.
In July 1998, the Company refinanced the matured mortgage debt secured by the
Villas at Countryside Apartments in Sterling, Virginia, in the amount of $5.4
million. The Company received net cash of $400,000 after paying off $5.0 million
in existing mortgage debt, funding of required escrows and the payment of
various closing costs. The new mortgage bears interest at 6.85% per annum,
requires monthly payments of principal and interest of $35,692 and matures in
August 2005. A mortgage brokerage and equity refinancing fee of $54,000 was paid
to BCM.
In August 1998, the Company obtained second lien financing of $1.8
million secured by the Terrace Hills Apartments in El Paso, Texas. The
12
<PAGE> 13
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. NOTES AND INTEREST PAYABLE (Continued)
Company received net cash of $1.7 million after the payment of various closing
costs. The mortgage bears interest at 7.275% per annum, requires monthly
payments of principal and interest of $11,968 and matures in September 2009. A
mortgage brokerage and equity refinancing fee of $18,000 was paid to BCM.
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 October 1998, the Company purchased the 208 unit Cliffs of Eldorado
Apartments in McKinney, Texas, for $12.8 million. The Company paid $1.6 million
in cash, assumed the existing mortgage of $10.6 million and issued 5,829 shares
of Series A Cumulative Convertible Preferred Stock with a total liquidation
value of $583,000. The assumed mortgage bears interest at 8.125% per annum,
requires monthly payments of principal and interest of $75,197 and matures in
November 2037. A real estate brokerage commission of $312,000 was paid to Carmel
Realty and a real estate acquisition fee of $128,000 to BCM.
Also in October 1998, the Company completed the sale of the Denton Drive
Warehouse, a 123,800 sq. ft. industrial warehouse in Dallas, Texas, under
contract for sale at June 30, 1998, for $1.2 million in cash. The Company
received net cash of $891,000 after paying off $309,000 in existing mortgage
debt and the payment of various closing costs. A real estate brokerage
commission of $46,000 was paid to Carmel Realty. A gain of approximately
$200,000 will be recognized.
Further in October 1998, the Company refinanced the matured mortgage debt
secured by the Bonita Plaza Office Building in Bonita, California in the amount
of $5.2 million. The Company received net cash of $1.2 million after paying off
$4.0 million in existing mortgage debt, funding of required escrows and the
payment of various closing costs. The new mortgage bears interest at a variable
rate, currently 7.4% per annum, requires monthly payments of principal and
interest of $37,722 and matures in November 2001. A mortgage brokerage and
equity refinancing fee of $52,000 was paid to BCM.
In October 1998, the Company sold approximately 19 acres of foreclosed land held
for sale in Greensboro, North Carolina for $375,000 in cash. The Company
received net cash of $371,000 after the payment of various closing costs. A real
estate brokerage commission of $15,000 was paid to Carmel Realty. A gain of
approximately $350,000 will be recognized.
13
<PAGE> 14
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 and partnerships and invests 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 $19.7 million at September 30, 1998
compared with $24.7 million at December 31, 1997. 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.
The Company's cash flow from property operations (rents collected less payments
for expenses applicable to rental income) increased from $12.0 million in the
first nine months of September 30, 1997 to $23.1 million in the first nine
months of 1998. Of this increase $4.9 million is the result of the Company
having acquired 32 properties during 1997 and 1998, $1.6 million is due to an
increase in rental rates and common area maintenance income at the Company's
commercial properties and $1.7 million is due to the sale of Republic Towers in
1997. These increases were partially offset by a decrease of $615,000 due to
properties sold during 1997 and 1998.
In January 1998, the Company purchased (i) the Mountain Plaza Apartments in El
Paso, Texas, for $4.0 million, consisting of $1.0 million in cash and mortgage
financing of $3.0 million, (ii) the Hunters Glen Apartments in Midland, Texas,
for $2.5 million, consisting of $600,000 in cash and seller financing of $1.9
million, (iii) a 1.41 acre parcel of land in Dallas, Texas, for $1.9 million in
cash, and (iv) the Bent Tree Garden Apartments in Addison, Texas, for $8.1
million, consisting of $1.7 million in cash and mortgage financing of $6.4
million.
In February 1998, the Company purchased (i) the Parkway North Office Building in
Dallas, Texas, for $5.4 million, consisting of $1.5 million in cash and mortgage
financing of $3.9 million, and (ii) a 2.14 acre parcel of land in Dallas, Texas,
for $3.4 million in cash.
In March 1998, the Company refinanced the mortgage debt secured by the Tricon
Warehouses in Atlanta, Georgia. The Company received net cash of $5.4 million
after paying off $4.8 million in mortgage debt.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Also in March 1998, the Company completed the sale of the Shaws Plaza Shopping
Center in Sharon, Massachusetts. The Company received net cash of $1.2 million
after paying off $2.6 million in mortgage debt.
Further in March 1998, the Company purchased the Plaza on Bachman Creek, a
retail/office complex in Dallas, Texas, for $3.5 million, consisting of $1.1
million in cash and mortgage financing of $2.4 million.
In April 1998, the Company purchased in a single transaction, the Ashton Way and
4400 Apartments in Midland, Texas, for $3.4 million, consisting of $700,000 in
cash and mortgage financing of $2.7 million.
Also in April 1998, the Company received $2.1 million in cash in settlement of a
mortgage note receivable which had been in default.
In May 1998, the Company purchased (i) the Woodview Apartments in Odessa, Texas,
for $3.4 million, consisting of $800,000 in cash and mortgage financing of $2.6
million, (ii) a 22.99 acre parcel of land in Farmers Branch, Texas, for $2.5
million in cash, (iii) the Emerald Terrace Apartments in Midland, Texas, for
$1.5 million, consisting of $425,000 in cash and mortgage financing of $1.1
million, (iv) Daley Plaza Office Building in San Diego, California, for $4.6
million, consisting of $1.1 million in cash and $3.5 million in mortgage
financing, and (v) the View Ridge Office Building in San Diego, California, for
$1.9 million, consisting of $600,000 in cash and $1.3 million in mortgage
financing.
Also in May 1998, the Company obtained mortgage financing on its previously
unencumbered Lemmon Carlisle land. The Company received net cash of $2.1
million.
Further in May 1998, the Company refinanced the mortgage debt secured by the
Plaza Office Building in St. Petersburg, Florida. The Company received net cash
of $2.6 million after paying off $4.8 million in mortgage debt.
In June 1998, the Company purchased the Atrium Office Building in Palm Beach,
Florida, for $5.4 million, consisting of $1.3 million in cash and mortgage
financing of $4.1 million.
In July 1998, the Company purchased the Valley Rim Office Building in San Diego,
California, for $5.1 million, consisting of $1.4 million in cash and mortgage
financing of $3.7 million.
Also in July 1998, the Company purchased the Limestone Canyon land in Austin,
Texas, for $1.8 million in cash.
Further in July 1998, the Company refinanced the matured mortgage debt secured
by the Villas at Countryside Apartments in Sterling, Virginia. The Company
received net cash of $400,000 after paying off $5.0 million in mortgage debt.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
In July 1998, the Company received $671,000 in settlement of a mortgage note
receivable which had been written off as uncollectible in a prior year.
In August 1998, the Company obtained second lien financing secured by the
Terrace Hills Apartments in El Paso, Texas. The Company received net cash of
$1.7 million.
Also in August 1998, the Company sold the Chesapeake Ridge Office Building in
San Diego, California, for $13.2 million in cash. The Company received net cash
of $7.9 million after paying off $5.3 million in mortgage debt.
In September 1998, the Company purchased a first lien mortgage secured by a
hotel in Lake Charles, Louisiana for $154,000 in order to protect its second
lien secured by such property.
Also in September 1998, the Company sold the Northtown Mall Shopping Center in
Dallas, Texas, for $15.6 million. The Company received net cash of $12.2 million
after paying off $2.5 million in mortgage debt and paying $900,000 to buyout a
tenant's lease.
In October 1998, the Company purchased the Cliffs of Eldorado Apartments in
McKinney, Texas, for $12.8 million, consisting of $1.6 million in cash, assumed
mortgage debt of $10.6 million and 5,829 shares of Class A Cumulative
Convertible Preferred Stock with a total liquidation value of $583,000.
Also in October 1998, the Company sold the Denton Drive Warehouse in Dallas,
Texas, for $1.2 million in cash. The Company received net cash of $891,000 after
paying off $309,000 in mortgage debt.
Further in October 1998, the Company refinanced the matured mortgage debt
secured by the Bonita Plaza in Bonita, California. The Company received net cash
of $1.2 million after paying off $4.0 million in mortgage debt.
In October 1998, the Company sold approximately 19 acres of foreclosed
land held for sale in Greensboro, North Carolina, for $375,000. The
Company received net cash of $371,000.
In the first nine months of 1998, the Company paid quarterly dividends of $.45
per share, or a total of $1.7 million. In January 1998, a special dividend of
$1.00 per share which had been declared in December 1997, was also paid.
The Company's Board of Directors has approved the repurchase of a total of
687,000 shares of the Company's Common Stock. Through September 30, 1998, a
total of 409,765 shares had been repurchased at a total cost of $3.3 million.
During the first nine months of 1998, 21,950 shares had been repurchased at a
total cost of $336,000.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
During the first nine months of 1998, the Company sold 5,255 shares of its
Common Stock, through its dividend reinvestment plan for a total of $79,000.
Management reviews the carrying values of the Company's properties and mortgage
notes 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 mortgage note receivable review
includes an evaluation of the collateral property securing each note. The
property review generally includes selective property inspections, discussions
with the manager of the property and visits to selected properties in the
surrounding area and a review of the following (i) the property's current rents
compared to market rents; (ii) the property's expenses; (iii) maintenance
requirements, and (iv) the property's cash flow.
Results of Operations
The Company had net income for the three and nine months ended September 30,
1998, of $7.4 million and $8.0 million as compared to a net loss of $2.1 million
and $3.3 million in the corresponding periods in 1997. The net income for the
three and nine months ended September 30, 1998, includes $9.9 million and $12.0
million of gains on the sale of real estate. The net loss for the three and nine
months ended September 30, 1997, includes gains on sale of real estate of $1.5
million. Fluctuations in this and other components of revenues and expenses
between the 1997 and 1998 periods are discussed below.
Rents in the three and nine months ended September 30, 1998, were $18.0 million
and $51.4 million compared to $13.8 million and $39.2 million in the
corresponding periods in 1997. Of these increases, $405,000 and $1.6 million was
due to an increase in rental rates and common area maintenance income at the
Company's commercial properties and $4.3 million and $11.6 million was due to
the acquisition of 32 properties in 1997 and 1998. These increases were
partially offset by decreases of $815,000 and $1.7 million due to the sale of 7
properties in 1997 and 1998. Rents are expected to continue to increase due to
properties acquired in 1997 and 1998.
Interest income decreased to $200,000 and $593,000 in the three and nine months
ended September 30, 1998, compared to $510,000 and $1.3 million in the
corresponding periods in 1997. These decreases were due to 4 mortgage notes
receivable being paid in full in 1997 and 1998. Interest income for the fourth
quarter of 1998 is expected to approximate that of the third quarter of 1998.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Property operations expense in the three and nine months ended September 30,
1998 was $10.1 million and $27.4 million compared to $8.4 million and $23.4
million in the corresponding periods in 1997. Of these increases, $2.7 million
and $6.7 million for the three and nine months ended September 30, 1998, was due
to the acquisition of 32 properties in 1997 and 1998. These increases were
partially offset by decreases of $979,000 and $2.8 million for the three and
nine months ended September 30, 1998, due to the sale of 7 properties during
1997 and 1998 and $20,000 and $97,000 due to a decrease in property replacements
at the Company's commercial properties. Property operating expenses are expected
to continue to increase due to properties acquired in 1997 and 1998.
Interest expense increased to $5.9 million and $16.9 million in the three and
nine months ended September 30, 1998, compared to $4.2 million and $12.0 million
in the corresponding periods in 1997. Of these increases, $1.4 million and $4.3
million for the three and nine months ended September 30, 1998 is due to the
debt incurred or assumed on 25 of the 32 properties acquired in 1997 and 1998
and $371,000 and $873,000 is due to refinancings where the debt balance was
increased and financing obtained on unencumbered properties. These increases
were partially offset by decreases of $85,000 and $430,000 for the three and
nine months ended September 30, 1998, due to the sale of 7 properties in 1997
and 1998. Interest expense for the fourth quarter of 1998 is expected to be
comparable to that of the third quarter of 1998.
Depreciation expense increased to $2.8 million and $7.9 million for the three
and nine months ended September 30, 1998, compared to $2.4 million and $7.0
million in the corresponding periods in 1997. Of these increases, $561,000 and
$1.5 million for the three and nine months ended September 30, 1998 is due to
the acquisition of 32 properties in 1997 and 1998, with 17 of the properties
being acquired in the first nine months of 1998, and $151,000 and $458,000 due
to capital improvements. These increases were partially offset by a decrease of
$371,000 and $978,000 for the three and nine months ended September 30, 1998 due
to 7 properties being sold during 1997 and 1998. Depreciation is expected to
continue to increase during the remainder of 1998 as a result of depreciation on
the properties acquired in 1998.
Advisory fee increased to $671,000 and $1.9 million for the three and nine
months ended September 30, 1998, compared to $503,000 and $1.5 million in the
corresponding periods in 1997. These increases were due to an increase in gross
assets, the basis for such fee. Advisory fees are expected to continue to
increase with increases in the Company's gross assets, the basis for such fee.
Net income fee was $604,000 and $651,000 for the three and nine months ended
September 30, 1998. The net income fee is payable to the Company's advisor based
on 7.5% of the Company's net income. No such fee was incurred for the
corresponding periods in 1997.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
General and administrative expenses decreased to $584,000 and $1.6 million for
the three and nine months ended September 30, 1998, compared to $713,000 and
$2.0 million in the corresponding periods in 1997. The decrease for the three
and nine months ended September 30, 1998 was mainly due to a decrease in legal
fees relating to the Republic Towers and Olive litigation.
Equity in earnings of investees was a loss of $90,000 and income of $342,000 for
the three and nine months ended September 30, 1998, compared to a loss of
$97,000 and income of $680,000 for the corresponding periods in 1997. Included
in equity earnings of investees for the nine months ended September 30, 1998, is
a gain on the sale of real estate of $316,000 which is the Company's equity
share of the gain recognized by Tri-City Limited Partnership ("Tri-City") on the
sale of two apartment complexes. Included in equity earnings of investees for
the nine months ended September 30, 1997, is a gain on sale of real estate of
$747,000, which is the Company's equity share of the gain recognized by Income
Opportunity Realty Investors, Inc. on the sale of two apartment complexes. At
October 30, 1998, the Company owned approximately 22.8% of IORI's outstanding
shares of common stock.
In the three and nine months ended September 30, 1998, the Company recognized
net gains from the sale of real estate totaling $9.9 million and $12.0 million .
In the three months, gains totaling $9.3 million were recognized on the sale of
the Chesapeake Ridge Office Building and Northtown Mall Shopping Center, both of
which were held for sale at June 30, 1998. In addition, gains in the nine
months, includes $671,000 from the collection of a mortgage note receivable
written off as uncollectible in a prior year and the recognition of a $2.1
million deferred gain on the collection of a mortgage note receivable. See NOTE
3. "NOTES AND INTEREST RECEIVABLE." In the nine months ended September 30, 1997,
the Company recognized gains totaling $1.5 million on the sale of the following:
(i) the Fiesta Mart, a shopping center; (ii) a parcel of land in the Dallas
central business district; and, (iii) a foreclosed single family residence.
Tax Matters
As more fully discussed in the Company's 1997 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.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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
extent 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 for personal injury associated with such
materials.
Management is not aware of any environmental liability relating to the above
matters that would have a material adverse effect on the Company's business,
assets or results of operations.
Year 2000
Basic Capital Management, Inc. ("BCM"), the Company's advisor, has
informed the Company that its computer hardware operating system and
computer software have been certified as year 2000 compliant.
Further, Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of BCM,
that performs property management services for the Company's properties, has
informed the Company that it is currently testing year 2000 compliant property
management computer software for the Company's commercial properties. Carmel,
Ltd. expects to begin utilizing such software January 1, 1999. With regards to
the Company's apartment properties, Carmel, Ltd. has informed the Company that
its subcontractors either have in place or will have in place in the first
quarter of 1999, year 2000 compliant property management computer software.
The Company has not incurred, nor does it expect to incur, any costs related to
its accounting and property management computer software being modified,
upgraded or replaced in order to make it year 2000 compliant. Such costs have
been or will be borne by either BCM, Carmel, Ltd. or the property management
subcontractors of Carmel, Ltd.
20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Year 2000 (Continued)
Management has not completed its evaluation of the Company's computer controlled
building systems, such as security, elevators, heating and cooling, etc., to
determine what systems are not year 2000 compliant. Management does not believe
that any necessary modifications to such systems will require significant
expenditures or cause interruptions in operations, as such enhanced operating
systems are readily available.
The Company has or will have in place the year 2000 compliant systems that will
allow it to operate. The risks the Company faces are that certain of its vendors
will not be able to supply goods or services and that financial institutions and
taxing authorities will not be able to accurately apply payments made to them.
Management believes that other vendors are readily available and that financial
institutions and taxing authorities will, if necessary, apply monies received
manually. The likelihood of the above having a significant impact on the
Company's operations is negligible.
---------------------------
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 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 Olive Modification, and during
August and September 1996, the Court held evidentiary hearings to
21
<PAGE> 22
ITEM 1. LEGAL PROCEEDINGS (Continued)
assess compliance with the terms of the Olive 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 intended to assert that certain actions taken by the
Board of Directors breached the terms of the Olive Modification. On January 27,
1997, the parties entered into an Amendment to the Olive Modification effective
January 9, 1997 (the "Olive Amendment"), which was submitted to the Court for
approval on January 29, 1997. The Olive 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 Olive Amendment. As a result of the
hearing, the parties entered into a revised Amendment. The Court issued an order
approving the Olive Amendment on July 3, 1997.
The Olive Amendment provided for the addition of four new unaffiliated members
to the Company's Board of Directors and set 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 Olive Modification shall be settled by mutual agreement of the
parties or, lacking such agreement, by an arbitration proceeding.
Under the Olive Amendment, all shares of the Company owned by Gene E. Phillips
or any of his affiliates shall be voted at all stockholder meetings of the
Company held until April 28, 1999 in favor of all new Board members added under
the Olive Amendment. The Olive Amendment also requires that, until April 28,
1999, all shares of the Company owned by Gene E. Phillips or his affiliates in
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.
In accordance with the Olive Amendment, Richard W. Douglas, Larry E. Harley and
R. Douglas Leonhard were added to the Company's Board of Directors in January
1998 and Murray Shaw was added to the Company's Board of Directors in February
1998.
ITEM 5. OTHER INFORMATION
Proposed Merger with Continental Mortgage and Equity Trust
On September 21, 1998, the Company and Continental Mortgage and Equity Trust
("CMET") jointly announced the agreement of their respective Boards, for the
Company to acquire CMET. Under the proposal the Company would acquire all of the
outstanding shares of beneficial interest of CMET, in a tax free exchange, for
shares of Common Stock of the Company. The Company would issue 1.181 shares of
its Common Stock for each
22
<PAGE> 23
ITEM 5. OTHER INFORMATION
Proposed Merger with Continental Mortgage and Equity Trust
outstanding CMET share. Upon the exchange of shares, CMET would merge into the
Company. The share exchange and merger are subject to the negotiation of a
definitive merger agreement and a vote of the shareholders of both entities.
CMET has the same Board and advisor as the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ --------------------------------------------------------------
<S> <C>
3.1 Articles of Amendment to the Articles of Incorporation of
Transcontinental Realty Investors, Inc., setting forth the
Certificate of Designations, Preferences and Rights of
Series A Cumulative Convertible Preferred Stock, dated
October 20, 1998, filed herewith.
10.0 Advisory Agreement dated as of October 15, 1998, between
Transcontinental Realty Investors, Inc. and Basic Capital
Management, Inc., filed herewith.
27.0 Financial Data Schedule, filed herewith.
</TABLE>
(b) Reports on Form 8-K as follows:
A Current Report on Form 8-K, dated May 29, 1998, was filed July 2,
1998, with respect to Item 2. "Acquisition or Disposition of Assets,"
and Item 7. "Financial Statements and Exhibits," which reports the
acquisition of the Mountain Plaza Apartments, Hunters Glen Apartments,
Bent Tree Garden Apartments, Parkway North, Plaza on Bachman Creek,
Ashton Way Apartments, 4400 Apartments, Woodview Apartments, Emerald
Terrace Apartments, Daley Office Building and Viewridge Office
Building, as amended on Form 8-K/A, filed September 23, 1998.
A Current Report on Form 8-K, dated June 26, 1998, was filed July 21,
1998, with respect to Item 2. "Acquisition or Disposition of Assets,"
and Item 7. "Financial Statements and Exhibits," which reports the
acquisition of the Atrium Office Building and Valley Rim Office
Building, as amended on Form 8-K/A, filed October 16,
1998.
A Current Report on Form 8-K, dated September 21, 1998, was filed
September 28, 1998, with respect to Item 5. "Other Events," which
reports the agreement of the respective Boards of Transcontinental
Realty Investors, Inc. ("TCI") and Continental Mortgage and Equity
Trust to form a single consolidated entity with TCI as the
survivor.
23
<PAGE> 24
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: November 12, 1998 By: /s/ Randall M. Paulson
-------------------------- ------------------------
Randall M. Paulson
President
Date: November 12, 1998 By: /s/ Thomas A. Holland
-------------------------- -----------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
24
<PAGE> 25
TRANSCONTINENTAL REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Nine Months ended September 30, 1998
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------ -------------------------------------------------------------------- ------
<S> <C> <C>
3.1 Articles of Amendment to the Articles of Incorpora- 26
tion of Transcontinental Realty Investors, Inc.
setting forth the Certificate of Designations, Preferences and
Rights of Series A Cumulative Convertible Preferred Stock,
dated October 20, 1998.
10.0 Advisory Agreement dated as of October 15, 1998, 35
between Transcontinental Realty Investors, Inc. and
Basic Capital Management, Inc.
27.0 Financial Data Schedule 67
</TABLE>
25
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF DESIGNATION
of
TRANSCONTINENTAL REALTY INVESTORS, INC.
setting forth the
VOTING POWERS, DESIGNATIONS, PREFERENCES, LIMITATIONS, RESTRICTIONS
AND RELATIVE RIGHTS
of
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
(Pursuant to Section 78.1955 of
the Nevada Revised Statutes)
----------------------------
Pursuant to Section 78.1955 of the Nevada Revised Statutes ("NRS"), the
undersigned, being the President and Secretary, respectively, of
Transcontinental Realty Investors, Inc. (the "Corporation"), a Nevada
corporation, hereby certify that (a) the following resolution was duly adopted
on October 20, 1998, by the Board of Directors of the Corporation (the "Board"),
for the purposes of establishing a separate series of the Corporation's
authorized preferred stock, $0.01 par value ("Preferred Stock") and fixing the
relative rights and preferences of such series of Preferred Stock, and (b) such
resolution has not been subsequently modified or rescinded:
RESOLVED, that in accordance with the provisions of ARTICLE FOURTH of the
Articles of Incorporation of the Corporation, a series of Preferred Stock be,
and hereby is, created, and the voting powers, designations, preferences,
limitations, restrictions and relative, participating, optional or other special
rights of the shares of such series, and the qualifications, limitations or
restrictions thereof, be, and hereby are, as follows:
Section 1. Designation and Amount. The shares of such series shall be designated
as "Series A Cumulative Convertible Preferred Stock" (the "Series A Stock") and
each share of the Series A Stock shall have a par value of $0.01 per share and a
preference on liquidation as specified in Section 6 below. The number of shares
constituting the Series A Stock shall be 6,000. Such number of shares may be
increased or decreased by the Board by filing an amendment to this Certificate
of Designation, provided, however, that no decrease shall reduce the number of
shares of Series A Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants.
26
<PAGE> 2
Section 2. Dividends and Distributions.
(A) The holders of Series A Stock shall be entitled to receive, when, as,
and if declared by the Board and to the extent permitted under the NRS, out of
funds legally available for the purpose and in preference to and with priority
over dividends upon all Junior Securities (as defined in Section 6 below),
quarterly cumulative dividends payable in arrears in cash on the tenth day
following the end of each calendar quarter, unless such day is a Saturday,
Sunday or holiday, in which case such dividends shall be payable on the next
succeeding business day (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date
after the first issuance of a share or fraction of a share of Series A Stock, in
an amount per share (rounded to the next highest cent) equal to 5% per annum of
the Liquidation Value (as defined in Section 6 below), as determined immediately
prior to the beginning of such calendar quarter assuming each year consists of
360 days and each quarter consists of 90 days.
(B) Dividends shall commence accruing cumulatively on outstanding shares of
the Series A Stock from the date of issuance of such shares to and including the
date on which the Redemption Price (as defined in Section 9(A) below) of such
shares is paid, whether or not such dividends have been declared and whether or
not there are profits, surplus or other funds of the Corporation legally
available for the payment of such dividends. For purposes of this Section 2, the
date on which the Corporation has issued any share of Series A Stock is its date
of issuance, regardless of the number of times a transfer of such share is made
on the stock records maintained by or for the Corporation and regardless of the
number of certificates that may be issued to evidence such share (whether by
reason of transfer of such share or for any other reason). Dividends paid on the
shares of Series A Stock in an amount less than the total amount of dividends at
the time accrued and payable on such shares shall be allocated among the holders
of such shares in proportion to their respective Unpaid Accrual Amounts, where
for this purpose the "Unpaid Accrual Amount" of a holder of shares of Series A
Stock at any time equals the total of accrued unpaid dividends on all such
shares held by such holder. The Board may fix a record date for the
determination of holders of shares of Series A Stock entitled to receive payment
of a dividend or distribution declared thereon other than a quarterly dividend
paid on the Quarterly Dividend Payment Date immediately after such dividend
accrued, which record date shall be not more than fifty (50) days prior to the
date fixed for the payment thereof.
(C) So long as any shares of the Series A Stock are outstanding, the
Corporation will not make, directly or indirectly, any distribution (as such
term is defined in the NRS) with respect to Junior Securities unless, on the
date specified for measuring such distribution, (a) all accrued dividends on the
Series A Stock for all past quarterly dividend periods have been paid in full
and the full amount of accrued dividends for the then current quarterly dividend
period has been paid or declared and a sum sufficient for the payment thereof
set apart and (b) after giving effect to such distribution (i) the Corporation
would not be rendered unable to pay its debts as they become due in the usual
course of business; and (ii) the Corporation's total assets would not be less
than the sum of its total liabilities plus the amount that would be needed, if
the Corporation were to be dissolved at the time of the distribution, to satisfy
the preferential rights upon
27
<PAGE> 3
dissolution of the holders of the Series A Stock as provided in this Certificate
of Designation. Dividends shall not be paid (in full or in part) or declared and
set apart for payment (in full or in part) on any series of Preferred Stock
(including the Series A Stock) for any dividend period unless all dividends, in
the case dividends are being paid in full on the Series A Stock, or a ratable
portion of all dividends (i.e., so that the amount paid on each share of each
series of Preferred Stock as a percentage of total accrued and unpaid dividends
for all periods with respect to each such share is equal), in the case dividends
are not being paid in full on the Series A Stock, have been or are,
contemporaneously, paid and declared and set apart for payment on all
outstanding series of Preferred Stock (including the Series A Stock) entitled
thereto for each dividend period terminating on the same or earlier date. If at
any time the Corporation pays less than the total amount of dividends then
accrued with respect to the Series A Stock, such payment will be distributed
ratably among the then holders of Series A Stock so that an equal amount is paid
with respect to each outstanding share.
Section 3. Conversion Rights.
(A) The Series A Stock may be converted at any time and from time to time
in whole or in part after November 1, 2003, at the option of the holders
thereof, in accordance with subsection (D) below at the Conversion Price (as
defined in subsection (B) below) into fully paid and nonassessable shares of
common stock, $.01 par value, of the Corporation ("Common Stock"). The number of
shares of Common Stock to be issued pursuant to such conversion shall be equal
to the number of shares offered for conversion multiplied by the Liquidation
Value per share and divided by the Conversion Price; provided, however, that (1)
as to any shares of Series A Stock which shall have been called for redemption
pursuant to Section 9, the right of conversion shall terminate upon receipt by
the holder of the notice of redemption from the Corporation and (2) on the
earlier of (a) the commencement of any liquidation, dissolution or winding up of
the Corporation by the filing with the Secretary of State of the State of Nevada
or with a federal bankruptcy court or (b) the adoption by the stockholders of
the Corporation of any resolution authorizing the commencement thereof, the
right of conversion shall terminate. Notwithstanding anything to the contrary
herein provided, the Corporation may elect to redeem the shares of Series A
Stock sought to be converted, pursuant to Section 9 hereunder, instead of
issuing shares of Common Stock in replacement thereof, in accordance with the
provisions of Section 3(D) below.
(B) For purposes of this Section 3, the term "Conversion Price" shall be
and mean the simple average of the daily closing price of the Common Stock for
the closing sale price for the five (5) Business Days immediately prior to the
date of conversion on the New York Stock Exchange or, if the Common Stock is not
then being traded on the New York Stock Exchange, then on the principal stock
exchange (including without limitation The Nasdaq Stock Market) on which the
Common Stock is then listed or admitted to trading as determined by the
Corporation ("Principal Stock Exchange") or, if the Common Stock is not then
listed or admitted to trading on a Principal Stock Exchange, the average of the
last reported closing bid and asked prices on such days in the over-the-counter
market or, if no such prices are available, the fair market value per share of
the Common Stock, as determined by the Board in its sole discretion. The
Conversion Price shall not be subject to any adjustment as a result of the
issuance of any additional shares of Common
28
<PAGE> 4
Stock by the Corporation for any purpose, except for stock splits (whether
accomplished by stock dividends or otherwise) or reverse stock splits occurring
during the five (5) Business Days referenced in the calculation of the
Conversion Price. For purposes of calculating the Conversion Price, the term
"Business Day" shall mean a day on which the Principal Stock Exchange is open
for business or, if no such exchange, the term "Business Day" shall have the
meaning given such term in Section 3(D) below.
(C) Upon any conversion, fractional shares of Common Stock shall not be
issued but any fractions shall be adjusted by the delivery of one additional
share of Common Stock in lieu of any cash. Any accrued but unpaid dividends
shall be convertible into shares of Common Stock as provided for in this
Section. The Corporation shall pay all issue taxes, if any, incurred in respect
to the issuance of Common Stock on conversions, provided, however, that the
Corporation shall not be required to pay any transfer or other taxes incurred by
reason of the issuance of such Common Stock in names other than those in which
the Series A Stock surrendered for conversion may stand.
(D) Any conversion of Series A Stock into Common Stock shall be made by the
surrender to the Corporation, at the office of the Corporation set forth in
Section 11 hereof or at the office of the transfer agent for such shares, of the
certificate or certificates representing the Series A Stock to be converted,
duly endorsed or assigned (unless such endorsement or assignment be waived by
the Corporation) together with a written request for conversion. The Corporation
shall either (i) issue as of the date of receipt by the Corporation of such
surrender shares of Common Stock calculated as provided above and evidenced by a
stock certificate delivered to the holder as soon as practicable after the date
of such surrender; or (ii) within two (2) Business Days (unless otherwise
provided, "Business Day" herein shall mean any day other than a Saturday, a
Sunday or a day on which banking institutions in Dallas, Texas are authorized or
obligated by law or executive order to remain closed) after the date of such
surrender advise the holder of the Series A Stock that the Corporation is
exercising its option to redeem the Series A Stock pursuant to Section 9, in
which case the Corporation shall have sixty (60) days from the date of such
surrender to pay to the holder cash in an amount equal to the Redemption Price
(as defined in Section 9(A) below) for each share of Series A Stock so redeemed.
The date of surrender of any Series A Stock shall be the date of receipt by the
Corporation or its agent of such surrendered shares of Series A Stock.
(E) A number of authorized shares of Common Stock sufficient to provide for
the conversion of the Series A Stock outstanding upon the basis hereinbefore
provided shall at all times be reserved for such conversion. If the Corporation
shall propose to issue any securities or to make any change in its capital
structure which would change the number of shares of Common Stock into which
each share of Series A Stock shall be convertible as herein provided, the
Corporation shall at the same time also make proper provision so that thereafter
there shall be a sufficient number of shares of Common Stock authorized and
reserved for conversion of the outstanding Series A Stock on the new basis.
29
<PAGE> 5
(F) In case the Corporation shall propose at any time before all shares of
the Series A Stock have been redeemed by the Corporation or converted into
Common Stock:
(i) to pay any dividend on the Common Stock outstanding payable in
Common Stock or to make any other distribution, other than cash dividends
to the holders of the Common Stock outstanding; or
(ii) to offer for subscription to the holders of the Common Stock
outstanding any additional shares of any class or any other rights or
option; or
(iii) to effect any re-classification or recapitalization of the
Common Stock outstanding involving a change in the Common Stock, other
than a subdivision or combination of the Common Stock outstanding; or
(iv) to merge or consolidate with or into any other corporation
(unless the Corporation is the surviving entity and holders of Common Stock
continue to hold such Common Stock without modification and without receipt
of any additional consideration), or to sell, lease, or convey all or
substantially all its property or business, or to liquidate, dissolve or
wind up;
then, in each such case, the Corporation shall mail to the holders of record of
each of the shares of Series A Stock at their last known address as shown by the
Corporation's records a statement, signed by an officer of the Corporation, with
respect to the proposed action. Such statement shall be so mailed at least
thirty (30) days prior to the date of the taking of such action or the record
date for holders of the Common Stock for the purposes thereof, whichever is
earlier. If such statement relates to any proposed action referred to in clauses
(iii) or (iv) of this subsection (G), it shall set forth such facts with respect
thereto as shall reasonably be necessary to inform the holders of the Series A
Stock as to the effect of such action upon the conversion rights of such
holders.
Section 4. Voting Rights and Powers. The holders of shares of Series A Stock
shall have only the following voting rights:
(A) Except as may otherwise be specifically required by law or
otherwise provided herein, the holders of the shares of Series A Stock
shall not have the right to vote such stock, directly or indirectly, at any
meeting of the stockholders of the Corporation, and such shares of stock
shall not be counted in determining the total number of outstanding shares
to constitute a quorum at any meeting of stockholders.
(B) In the event that, under the circumstances, the holders of the
Series A Stock are required by law to vote upon any matter, the approval of
such series shall be deemed to have been obtained only upon the affirmative
vote of the holders of a majority of the shares of the Series A Stock then
outstanding.
30
<PAGE> 6
(C) Except as set forth herein, or as otherwise provided by the
Articles of Incorporation or by law, holders of the Series A Stock shall
have no voting rights and their consent shall not be required for the
taking of any corporate action.
Section 5. Reacquired Shares. Any shares of Series A Stock purchased or
otherwise acquired by the Corporation in any manner whatsoever or surrendered
for conversion hereunder shall no longer be deemed to be outstanding and all
rights with respect to such shares of stock, including the right, if any, to
receive notices, shall forthwith cease except, in the case of stock surrendered
for conversion hereunder, rights of the holders thereof to receive Common Stock
in exchange therefor. All shares of Series A Stock obtained by the Corporation
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Articles of Incorporation, or in any other Certificates of Designations creating
a series of Preferred Stock or any similar stock or as otherwise required by
law.
Section 6. Liquidation, Dissolution or Winding Up. The Liquidation Value of the
Series A Stock shall be $100.00 per share. Upon any liquidation, dissolution or
winding up of the Corporation, and after paying and providing for the payment of
all creditors of the Corporation, the holders of shares of the Series A Stock
then outstanding shall be entitled, before any distribution of payment is made
upon the Common Stock and any other equity security of any kind, other than
Preferred Stock, which the Corporation at any time has issued, issues or is
authorized to issue (collectively, "Junior Securities"), to receive a
liquidation preference in an amount in cash equal to the Adjusted Liquidation
Value as of the date of such payment, whether such liquidation is voluntary or
involuntary, and the holders of the Series A Stock shall not be entitled to any
other or further distributions of the assets. If, upon any liquidation,
dissolution or winding up of the affairs of the Corporation, the net assets
available for distribution shall be insufficient to permit payment to the
holders of all outstanding shares of all series of Preferred Stock of the amount
to which they respectively shall be entitled, then the assets of the Corporation
to be distributed to such holders will be distributed ratably among them based
upon the amounts payable on the shares of each such series of Preferred Stock in
the event of voluntary or involuntary liquidation, dissolution or winding up, as
the case may be, in proportion to the full preferential amounts, together with
any and all arrearages to which they are respectively entitled. Upon any such
liquidation, dissolution or winding up of the Corporation, after the holders of
Preferred Stock have been paid in full the amounts to which they are entitled,
the remaining assets of the Corporation may be distributed to holders of Junior
Securities, including Common Stock, of the Corporation. The Corporation will
mail written notice of such liquidation, dissolution or winding up, not less
than twenty (20) nor more than fifty (50) days prior to the payment date stated
therein to each record holder of Series A Stock. Neither the consolidation nor
merger of the Corporation with or into any other corporation or corporations,
nor the sale or transfer by the Corporation of less than all or substantially
all of its assets, nor a reduction in the capital stock of the Corporation, nor
the purchase or redemption by the Corporation of any shares of its Preferred
Stock or Common Stock or any other class of its stock will be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this Section
31
<PAGE> 7
6. "Adjusted Liquidation Value" shall mean the Liquidation Value as defined in
this Section 6 plus all accrued and unpaid dividends through the applicable
date.
Section 7. Ranking. Except as provided in the following sentence, the Series A
Stock shall rank on parity as to dividends and upon liquidation, dissolution or
winding up with all other shares of Preferred Stock issued by the Corporation.
The Corporation shall not issue any shares of Preferred Stock of any series
which are superior to the Series A Stock as to dividends or rights upon
liquidation, dissolution or winding up of the Corporation as long as any shares
of the Series A Stock are issued and outstanding without the prior written
consent of the holders of at least a majority of such shares of Series A Stock
then outstanding voting separately as a class.
Section 8. Redemption at the Option of the Holder. The shares of Series A Stock
shall not be redeemable at the option of a holder of Series A Stock.
Section 9. Redemption at the Option of the Corporation.
(A) In addition to the redemption right of the Corporation set forth in
Section 3(A), above, the Corporation shall have the right to redeem all or
a portion of the Series A Stock issued and outstanding at any time and from
time to time, at its option, for cash. The redemption price of the Series A
Stock pursuant to this Section 9 shall be an amount per share equal to the
Adjusted Liquidation Value as of the Redemption Date (the "Redemption
Price").
(B) The Corporation may redeem all or a portion of any holder's shares
of Series A Stock by giving such holder not less than twenty (20) days nor
more than thirty (30) days notice thereof prior to the date on which the
Corporation desires such shares to be redeemed, which date shall be a
Business Day (the "Redemption Date"). Such notice shall be in writing and
shall be hand delivered or mailed, postage prepaid, to the holder (the
"Redemption Notice"). If mailed, such notice shall be deemed to be
delivered when deposited in the United States Mail, postage prepaid,
addressed to the holder of shares of Series A Stock at his address as it
appears on the stock transfer records of the Corporation. The right of the
Corporation to redeem shares of Series A Stock shall remain effective
notwithstanding prior receipt by the Corporation of notice by any holder of
Series A Stock of such holder's intent to convert shares of Series A Stock
in accordance with Section 3 above, provided that the Redemption Notice is
given on or prior to the second Business Day following the date of
surrender of shares made to convert said shares to Common Stock. The
Redemption Notice shall state (i) the total number of shares of Series A
Stock held by such holder; (ii) the total number of shares of the holder's
Series A Stock that the Corporation intends to redeem; (iii) the Redemption
Date and the Redemption Price; and (iv) the place at which the holder(s)
may obtain payment of the applicable Redemption Price upon surrender of the
share certificate(s).
32
<PAGE> 8
(C) If fewer than all shares of the Series A Stock at any time
outstanding shall be called for redemption, such shares shall be redeemed
pro rata, by lot drawn or other manner deemed fair in the sole discretion
of the Board to redeem one or more such shares without redeeming all such
shares of Series A Stock. If a Redemption Notice shall have been so mailed,
at least two (2) Business Days prior to the Redemption Date, the
Corporation shall provide for payment of a sum sufficient to redeem the
applicable number of shares of Series A Stock subject to redemption either
by (i) setting aside the sum required to be paid as the Redemption Price by
the Corporation, separate and apart from its other funds, in trust for the
account of the holder(s) of the shares of Series A Stock to be redeemed, or
(ii) depositing such sum in a bank or trust company (either located in the
state where the principal executive office of the Corporation is
maintained, such bank or trust company having a combined surplus of at
least $20,000,000 according to its latest statement of condition, or such
other bank or trust company as may be permitted by the Articles of
Incorporation, or by law) as a trust fund, with irrevocable instructions
and authority to the bank or trust company to give or complete the notice
of redemption and to pay, on or after the Redemption Date, the applicable
Redemption Price on surrender of certificates evidencing the share(s) of
Series A Stock so called for redemption and, in either event, from and
after the Redemption Date (a) the share(s) of Series A Stock shall be
deemed to be redeemed; (b) such setting aside or deposit shall be deemed to
constitute full payment for such share(s); (c) such share(s) so redeemed
shall no longer be deemed to be outstanding; (d) the holder(s) thereof
shall cease to be a stockholder of the Corporation with respect to such
share(s); and (e) such holder(s) shall have no rights with respect thereto
except the right to receive the Redemption Price for the applicable shares.
Any interest on the funds so deposited shall be paid to the Corporation.
Any and all such redemption deposits shall be irrevocable except to the
following extent: any funds so deposited which shall not be required for
the redemption of any shares of Series A Stock because of any prior sale or
purchase by the Corporation other than through the redemption process,
subsequent to the date of deposit but prior to the Redemption Date, shall
be repaid to the Corporation forthwith and any balance of the funds so
deposited and unclaimed by the holder(s) of any shares of Series A Stock
entitled thereto at the expiration of one calendar year from the Redemption
Date shall be repaid to the Corporation upon its request or demand
therefor, and after any such repayment of the holder(s) of the share(s) so
called for redemption shall look only to the Corporation for payment of the
Redemption Price thereof. All shares of Series A Stock redeemed shall be
canceled and retired and no shares shall be issued in place thereof, but
such shares shall be restored to the status of authorized but unissued
shares of Preferred Stock.
(D) Holders whose shares of Series A Stock have been redeemed hereunder
shall surrender the certificate or certificates representing such shares,
duly endorsed or assigned (unless such endorsement or assignment be waived
by the Corporation), to the Corporation by mail, courier or
33
<PAGE> 9
personal delivery at the Corporation's principal executive office or other
location so designated in the Redemption Notice, and upon the Redemption Date
the Redemption Price shall be payable to the order of the person whose name
appears on such certificate or certificates as the owner thereof, and each
surrendered certificate shall be canceled and retired. In the event fewer than
all of the shares represented by such certificates are redeemed, a new
certificate shall be issued representing the unredeemed shares.
Section 10. Sinking Fund. The Corporation shall not be required to maintain
any so-called "sinking fund" for the retirement on any basis of the Series A
Stock.
Section 11. Notice. Any notice or request made to the Corporation in connection
with the Series A Stock shall be given in writing, and shall conclusively be
deemed to have been given and received three (3) Business Days following deposit
thereof, in the U.S. mails, certified mail, return receipt requested, duly
stamped and addressed to the Corporation, to the attention of its General
Counsel, at its principal executive offices (which shall be deemed to be the
address most recently provided to the Securities and Exchange Commission ("SEC")
as its principal executive offices for so long as the Corporation is required to
file reports with the SEC).
IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Corporation by its President and its Secretary as of the 30th day of
October, 1998.
/s/ Randall M. Paulson
-----------------------------
Randall M. Paulson, President
/s/ Thomas A. Holland
-----------------------------
Thomas A. Holland, Secretary
STATE OF TEXAS )
)
COUNTY OF DALLAS )
This instrument was acknowledged before me on October 30, 1998 by Randall
M. Paulson.
/s/ S. L. Bratton
-----------------------------
Notary Public, State of Texas
34
<PAGE> 1
EXHIBIT 10.0
ADVISORY AGREEMENT
BETWEEN
TRANSCONTINENTAL REALTY INVESTORS, INC.
AND
BASIC CAPITAL MANAGEMENT, INC.
THIS AGREEMENT dated as of October 15, 1998, between Transcontinental
Realty Investors, Inc., a Nevada corporation (the "Company") and Basic Capital
Management, Inc., a Nevada corporation (the "Advisor")
W I T N E S S E T H:
WHEREAS:
1. The Company owns a complex, diversified portfolio of real estate,
mortgages and other assets, including many non-performing or troubled assets.
2. The Company is an active real estate investment trust with funds
available for investment primarily in the acquisition of income-producing real
estate and to a lesser extent in short and medium term mortgages.
3. The Advisor and its employees have extensive experience in the
administration of real estate assets and the origination, structuring and
evaluation of real estate and mortgage investments.
35
<PAGE> 2
NOW THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties agree as follows:
1. DUTIES OF THE ADVISOR. Subject to the supervision of the Board of
Directors, the Advisor will be responsible for the day-to-day operations of the
Company and, subject to Section 17 hereof, shall provide such services and
activities relating to the assets, operations and business plan of the Company
as may be appropriate, including:
(a) preparing and submitting an annual budget and business plan for
approval by the Board of the Company (the "Business Plan");
(b) using its best efforts to present to the Company a continuing
and suitable investment program consistent with the investment policies and
objectives of the Company as set forth in the Business Plan;
(c) using its best efforts to present to the Company investment
opportunities consistent with the Business Plan and such investment program as
the Directors may adopt from time to time;
(d) furnishing or obtaining and supervising the performance of the
ministerial functions in connection with the administration of the day-to-day
operations of the Company,
36
<PAGE> 3
including the investment of reserve funds and surplus cash in
short-term money market investments;
(e) serving as the Company's investment and financial advisor and
providing research, economic, and statistical data in connection with the
Company's investments and investment and financial policies;
(f) on behalf of the Company, investigating, selecting and
conducting relations with borrowers, lenders, mortgagors, brokers, investors,
builders, developers and others; provided however, that the Advisor shall not
retain on the Company's behalf any consultants or third party professionals,
other than legal counsel, without prior Board approval;
(g) consulting with the Directors and furnishing the Directors with
advice and recommendations with respect to the making, acquiring (by purchase,
investment, exchange, or otherwise), holding, and disposition (through sale,
exchange, or otherwise) of investments consistent with the Business Plan of the
Company;
(h) obtaining for the Directors such services as may be required in
acquiring and disposing of investments, disbursing and collecting the funds of
the Company, paying the debts and fulfilling the obligations of the Company, and
handling,
37
<PAGE> 4
prosecuting, and settling any claims of the Company, including foreclosing and
otherwise enforcing mortgage and other liens securing investments;
(i) obtaining for and at the expense of the Company such services as
may be required for property management, loan disbursements, and other
activities relating to the investments of the Company, provided, however, the
compensation for such services shall be agreed to by the Company and the service
provider;
(j) advising the Company in connection with public or private sales
of shares or other securities of the Company, or loans to the Company, but in no
event in such a way that the Advisor could be deemed to be acting as a broker
dealer or underwriter;
(k) quarterly and at any other time requested by the Directors,
making reports to the Directors regarding the Company's performance to date in
relation to the Company's approved Business Plan and its various components, as
well as the Advisor's performance of the foregoing services;
(l) making or providing appraisal reports, where appropriate, on
investments or contemplated investments of the Company;
38
<PAGE> 5
(m) assisting in preparation of reports and other documents
necessary to satisfy the reporting and other requirements of any governmental
bodies or agencies and to maintain effective communications with stockholders of
the Company; and
(n) doing all things necessary to ensure its ability to render the
services contemplated herein, including providing office space and office
furnishings and personnel necessary for the performance of the foregoing
services as Advisor, all at its own expense, except as otherwise expressly
provided for herein.
2. NO PARTNERSHIP OR JOINT VENTURE. The Company and the Advisor are not
partners or joint venturers with each other, and nothing herein shall be
construed so as to make them such partners or joint venturers or impose any
liability as such on either of them.
3. RECORDS. At all times, the Advisor shall keep proper books of
account and records of the Company's affairs which shall be accessible for
inspection by the Company at any time during ordinary business hours.
4. ADDITIONAL OBLIGATIONS OF THE ADVISOR. The Advisor shall refrain
from any action (including, without limitation, furnishing or rendering services
to tenants of property or managing or
39
<PAGE> 6
operating real property) that would (a) adversely affect the status of the
Company as a real estate investment trust, as defined and limited in Sections
856-860 of the Internal Revenue Code, (b) violate any law, rule, regulation, or
statement of policy of any governmental body or agency having jurisdiction over
the Company or over its securities, (c) cause the Company to be required to
register as an investment company under the Investment Company Act of 1940, or
(d) otherwise not be permitted by the Articles of Incorporation of the Company.
5. BANK ACCOUNTS. The Advisor may establish and maintain one or more
bank accounts in its own name, and may collect and deposit into any such account
or accounts, and disburse from any such account or accounts, any money on behalf
of the Company, under such terms and conditions as the Directors may approve,
provided that no funds in any such account shall be commingled with funds of the
Advisor; and the Advisor shall from time to time render appropriate accounting
of such collections and payments to the Directors and to the auditors of the
Company.
6. BOND. The Advisor shall maintain a fidelity bond with a responsible
surety company in such amount as may be required by the Directors from time to
time, covering all directors, officers,
40
<PAGE> 7
employees, and agents of the Advisor handling funds of the Company and any
investment documents or records pertaining to investments of the Company. Such
bond shall inure to the benefit of the Company in respect to losses of any such
property from acts of such directors, officers, employees, and agents through
theft, embezzlement, fraud, negligence, error, or omission or otherwise, the
premium for said bond to be at the expense of the Company.
7. INFORMATION FURNISHED ADVISOR. The Directors shall have the right to
change the Business Plan at any time, effective upon receipt by the Advisor of
notice of such change. The Company shall furnish the Advisor with a certified
copy of all financial statements, a signed copy of each report prepared by
independent certified public accountants, and such other information with regard
to the Company's affairs as the Advisor may from time to time reasonably
request.
8. CONSULTATION AND ADVICE. In addition to the services described
above, the Advisor shall consult with the Directors, and shall, at the request
of the Directors or the officers of the Company, furnish advice and
recommendations with respect to any aspect of the business and affairs of the
Company, including any
41
<PAGE> 8
factors that in the Advisor's best judgment should influence the policies of the
Company.
9. ANNUAL BUSINESS PLAN AND BUDGET. No later than January 15th of each
year, the Advisor shall submit to the Directors a written Business Plan for the
current Fiscal Year of the Company. Such Business Plan shall include a
twelve-month forecast of operations and cash flow with explicit assumptions and
a general plan for asset sales or acquisitions, lending, foreclosure and
borrowing activity, other investments or ventures and proposed securities
offerings or repurchases or any proposed restructuring of the Company. To the
extent possible, the Business Plan shall set forth the Advisor's recommendations
and the basis therefor with respect to all material investments of the Company.
Upon approval by the Board of Directors, the Advisor shall be authorized to
conduct the business of the Company in accordance with the explicit provisions
of the Business Plan, specifically including the borrowing, leasing,
maintenance, capital improvements, renovations and sale of investments set forth
in the Business Plan. Any transaction or investment not explicitly provided for
in the approved Business Plan shall require the prior approval of the Board of
Directors unless made pursuant to authority expressly delegated to the Advisor.
Within sixty (60) days of the end of
42
<PAGE> 9
each calendar quarter, the Advisor shall provide the Board of Directors with a
report comparing the Company's actual performance for such quarter against the
Business Plan.
10. DEFINITIONS. As used herein, the following terms shall have the
meanings set forth below:
(a) "Affiliate" shall mean, as to any Person, any other Person who
owns beneficially, directly, or indirectly, 1% or more of the outstanding
capital stock, shares or equity interests of such Person or of any other Person
which controls, is controlled by, or is under common control with such Person or
is an officer, retired officer, director, employee, partner, or trustee
(excluding noninterested trustees not otherwise affiliated with the entity) of
such Person or of any other Person which controls, is controlled by, or is under
common control with, such Person.
(b) "Appraised Value" shall mean the value of a Real Property
according to an appraisal made by an independent qualified appraiser who is a
member in good standing of the American Institute of Real Estate Appraisers and
is duly licensed to perform such services in accordance with the applicable
state law, or, when pertaining to Mortgage Loans, the value of the underlying
property as determined by the Advisor.
43
<PAGE> 10
(c) "Book Value" of an asset or assets shall mean the value of such
asset or assets on the books of the Company, before provision for amortization,
depreciation, depletion or valuation reserves and before deducting any
indebtedness or other liability in respect thereof, except that no asset shall
be valued at more than its fair market value as determined by the Directors.
(d) "Book Value of Invested Assets" shall mean the Book Value of the
Company's total assets (without deduction of any liabilities), but excluding (i)
goodwill and other intangible assets, (ii) cash, and (iii) cash equivalent
investments with terms which mature in one year or less.
(e) "Business Plan" shall mean the Company's investment policies and
objectives and the capital and operating budget based thereon, approved by the
Board as thereafter modified or amended.
(f) "Fiscal Year" shall mean any period for which an income tax
return is submitted to the Internal Revenue Service and which is treated by the
Internal Revenue Service as a reporting period.
(g) "Gross Asset Value" shall mean the total assets of the Company
after deduction of allowance for amortization, depreciation or depletion and
valuation reserves.
44
<PAGE> 11
(h) "Mortgage Loans" shall mean notes, debentures, bonds, and other
evidences of indebtedness or obligations, whether negotiable or non-negotiable,
and which are secured or collateralized by mortgages, including first,
wraparound, construction and development, and junior mortgages.
(i) "Net Asset Value" shall mean the Book Value of all the assets of
the Company minus all the liabilities of the Company.
(j) "Net Income" for any period shall mean the Net Income of the
Company for such period computed in accordance with generally accepted
accounting principles after deduction of the Gross Asset Fee, but before
deduction of the Net Income Fee, as set forth in Sections 11 (a) and 11(b),
respectively, herein, and inclusive of gain or loss of the sale of assets.
(k) "Net Operating Income" shall mean rental income less property
operations expenses.
(l) "Operating Expenses" shall mean the aggregate annual expenses
regarded as operating expenses in accordance with generally accepted accounting
principles, as determined by the independent auditors selected by the Directors
and including the Gross Asset Fee payable to the Advisor and the fees and
expenses paid to the Directors who are not employees or Affiliates of the
45
<PAGE> 12
Advisor. The operating expenses shall exclude, however, the following:
(i) the cost of money borrowed by the Company;
(ii) income taxes, taxes and assessments on real property and all
other taxes applicable to the Company;
(iii) expenses and taxes incurred in connection with the issuance,
distribution, transfer, registration, and stock exchange listing of the
Company's securities (including legal, auditing, accounting, underwriting,
brokerage, printing, engraving and other fees);
(iv) fees and expenses paid to independent mortgage servicers,
contractors, consultants, managers, and other agents retained by or on behalf of
the Company;
(v) expenses directly connected with the purchase, origination,
ownership, and disposition of Real Properties or Mortgage Loans (including the
costs of foreclosure, insurance, legal, protective, brokerage, maintenance,
repair, and property improvement services) other than expenses with respect
thereto of employees of the Advisor, except legal, internal auditing,
foreclosure and transfer agent services performed by employees of the Advisor;
46
<PAGE> 13
(vi) expenses of maintaining and managing real estate equity
interests and processing and servicing mortgage and other loans;
(vii) expenses connected with payments of dividends, interest or
distributions by the Company to shareholders;
(viii) expenses connected with communications to shareholders and
bookkeeping and clerical expenses for maintaining shareholder relations,
including the cost of printing and mailing share certificates, proxy
solicitation materials and reports;
(ix) transfer agent's registrar's and indenture trustee's fees and
charges; and
(x) the cost of any accounting, statistical, bookkeeping or computer
equipment necessary for the maintenance of books and records of the Company.
Additionally, the following expenses of the Advisor shall be excluded:
(i) employment expenses of the Advisor's personnel (including
Directors, officers, and employees of the Company who are directors, officers,
or employees of the Advisor or its Affiliates), other than the expenses of those
employee services listed at (v) above;
47
<PAGE> 14
(ii) rent, telephone, utilities, and office furnishings and
other office expenses of the Advisor (except those relating to a separate
office, if any, maintained by the Company); and
(iii) the Advisor's overhead directly related to performance of
its functions under this Agreement.
(m) "Person" shall mean and include individuals, corporations,
limited partnerships, general partnerships, joint stock companies or
associations, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts, or other entities and governments and
agencies and political subdivisions thereof.
(n) "Real Property" shall mean and include land, rights in land,
leasehold interests (including but not limited to interests of a lessor or
lessee therein), and any buildings, structures, improvements, fixtures, and
equipment located on or used in connection with land, leasehold interests, and
rights in land or interests therein.
All calculations made pursuant to this Agreement shall be based on
statements (which may be unaudited, except as provided herein) prepared on an
accrual basis consistent with generally accepted accounting principles,
regardless of whether the Company
48
<PAGE> 15
may also prepare statements on a different basis. All other terms shall have the
same meaning as set forth in the Company's Articles of Incorporation and Bylaws.
11. ADVISORY COMPENSATION.
(a) Gross Asset Fee. On or before the twenty-eighth day of each
month during the term hereof, the Company shall pay to the Advisor, as
compensation for the basic management and advisory services rendered to the
Company hereunder, a fee at the rate of .0625% per month of the average of the
Gross Asset Value of the Company at the beginning and at the end of the next
preceding calendar month. Without negating the provisions of Sections 18, 19, 22
and 23 hereof, the annual rate of the Gross Asset Fee shall be .75% per annum.
(b) Net Income Fee. As an incentive for successful investment and
management of the Company's assets, the Advisor will be entitled to receive a
fee equal to 7.5% per annum of the Company's Net Income for each Fiscal Year or
portion thereof for which the Advisor provides services. To the extent the
Company has Net Income in a quarter, the 7.5% Net Income Fee is to be paid
quarterly on or after the third business day following the filing of the report
on Form 10-Q with the Securities and Exchange Commission, except for the payment
for the fourth quarter, ended
49
<PAGE> 16
December 31, which is to be paid on or after the third business day following
the filing of the report on Form 10-K with the Securities and Exchange
Commission. The 7.5% Net Income Fee is to be cumulative within any Fiscal Year,
such that if the Company has a loss in any quarter during the Fiscal Year, each
subsequent quarter's payment during such Fiscal Year shall be adjusted to
maintain the 7.5% per annum rate, with final settlement being made with the
fourth quarter payment and in accordance with audited results for the Fiscal
Year. The 7.5% Net Income Fee is not cumulative from year to year.
(c) Acquisition Commission. For supervising the acquisition,
purchase or long term lease of Real Property for the Company, the Advisor is to
receive an Acquisition Commission equal to the lesser of (i) up to 1% of the
cost of acquisition, inclusive of commissions, if any, paid to nonaffiliated
brokers; or (ii) the compensation customarily charged in arm's-length
transactions by others rendering similar property acquisition services as an
ongoing public activity in the same geographical location and for comparable
property. The aggregate of each purchase price of each property (including the
Acquisition Commissions and all real estate brokerage fees) may not exceed such
property's Appraised Value at acquisition.
50
<PAGE> 17
(d) Incentive Sales Compensation. To encourage periodic sales of
appreciated Real Property at optimum value and to reward the Advisor for
improved performance of the Company's Real Property, the Company shall pay the
Advisor, on or before the 45th day after the close of each Fiscal Year, an
incentive fee equal to 10% of the amount, if any, by which the aggregate sales
consideration for all Real Property sold by the Company during such Fiscal Year
exceeds the sum of: (i) the cost of each such Real Property as originally
recorded in the Company's books for tax purposes (without deduction for
depreciation, amortization or reserve for losses), (ii) capital improvements
made to such assets during the period owned by the Company and (iii) all closing
costs (including real estate commissions) incurred in the sale of such Real
Property; provided, however, no incentive fee shall be paid unless (a) such Real
Property sold in such Fiscal Year, in the aggregate, has produced an 8% simple
annual return on the Company's net investment including capital improvements,
calculated over the Company's holding period, before depreciation and inclusive
of operating income and sales consideration and (b) the aggregate Net Operating
Income from all Real Property owned by the Company for all of the prior Fiscal
Year and the current Fiscal Year shall be
51
<PAGE> 18
at least 5% higher in the current Fiscal Year than in the prior Fiscal Year.
(e) Mortgage or Loan Acquisition Fees. For the acquisition or
purchase from an unaffiliated party of any existing mortgage or loan by the
Company, the Advisor or an Affiliate is to receive a Mortgage or Loan
Acquisition Fee equal to the lesser of (a) 1% of the amount of the mortgage or
loan purchased by the Company or (b) a brokerage or commitment fee which is
reasonable and fair under the circumstances. Such fee will not be paid in
connection with the origination or funding by the Company of any mortgage loan.
(f) Mortgage Brokerage and Equity Refinancing Fees. For obtaining
loans to the Company or refinancing on Company properties, the Advisor or an
Affiliate is to receive a Mortgage Brokerage and Equity Refinancing Fee equal to
the lesser of (a) 1% of the amount of the loan or the amount refinanced or (b) a
brokerage or refinancing fee which is reasonable and fair under the
circumstances; provided, however that no such fee shall be paid on loans from
the Advisor or an Affiliate without the approval of the Board of Directors. No
fee shall be paid on loan extensions.
52
<PAGE> 19
12. LIMITATION ON THIRD PARTY MORTGAGE PLACEMENT FEES. The Advisor or
any of its Affiliates shall pay to the Company, one-half of any compensation
received by the Advisor or any such Affiliate from third parties with respect to
the origination, placement or brokerage of any loan made by the Company,
provided, however, the compensation retained by the Advisor or Affiliate shall
not exceed the lesser of (a) 2% of the amount of the loan committed by the
Company or (b) a loan brokerage and commitment fee which is reasonable and fair
under the circumstances.
13. STATEMENTS. The Advisor shall furnish to the Company not later than
the tenth day of each calendar month, beginning with the second calendar month
of the term of this Agreement, a statement showing the computation of the fees,
if any, payable in respect to the next preceding calendar month (or, in the case
of incentive compensation, for the preceding Fiscal Year, as appropriate) under
the Agreement. The final settlement of incentive compensation for each Fiscal
Year shall be subject to adjustment in accordance with, and upon completion of,
the annual audit of the Company's financial statements; any payment by the
Company or repayment by the Advisor that shall be indicated to be necessary in
accordance therewith shall be made promptly after the completion of such audit
and shall
53
<PAGE> 20
be reflected in the audited statements to be published by the Company.
14. COMPENSATION FOR ADDITIONAL SERVICES. If and to the extent that the
Company shall request the Advisor or any director, officer, partner, or employee
of the Advisor to render services for the Company other than those required to
be rendered by the Advisor hereunder, such additional services, if performed,
will be compensated separately on terms to be agreed upon between such party and
the Company from time to time. In particular, but without limitation, if the
Company shall request that the Advisor perform property management, leasing,
loan disbursement or similar functions, the Company and the Advisor shall enter
into a separate agreement specifying the obligations of the parties and
providing for reasonable additional compensation to the Advisor for performing
such services.
15. EXPENSES OF THE ADVISOR. Without regard to the amount of
compensation or reimbursement received hereunder by the Advisor, the Advisor
shall bear the following expenses:
(a) employment expenses of the personnel employed by the Advisor
(including Directors, officers, and employees of the Company who are directors,
officers, or employees of the Advisor or
54
<PAGE> 21
of any company that controls, is controlled by, or is under common control with
the Advisor), including, but not limited to, fees, salaries, wages, payroll
taxes, travel expenses, and the cost of employee benefit plans and temporary
help expenses except for those personnel expenses described in Sections 16(e)
and (p);
(b) advertising and promotional expenses incurred in seeking
investments for the Company;
(c) rent, telephone, utilities, office furniture and furnishings,
and other office expenses of the Advisor and the Company, except as any of such
expenses relates to an office maintained by the Company separate from the office
of the Advisor; and
(d) miscellaneous administrative expenses relating to performance by
the Advisor of its functions hereunder.
16. EXPENSES OF THE COMPANY. The Company shall pay all of its expenses
not assumed by the Advisor and, without limiting the generality of the
foregoing, it is specifically agreed that the following expenses of the Company
shall be paid by the Company and shall not be paid by the Advisor:
(a) the cost of money borrowed by the Company;
(b) income taxes, taxes and assessments on real property, and all
other taxes applicable to the Company;
55
<PAGE> 22
(c) legal, auditing, accounting, underwriting, brokerage, listing,
registration and other fees, printing, and engraving and other expenses, and
taxes incurred in connection with the issuance, distribution, transfer,
registration, and stock exchange listing of the Company's securities;
(d) fees, salaries, and expenses paid to officers and employees of
the Company who are not directors, officers or employees of the Advisor, or of
any company that controls, is controlled by, or is under common control with the
Advisor;
(e) expenses directly connected with the origination or purchase of
Mortgage Loans and with the acquisition, disposition, and ownership of real
estate equity interests or other property (including the costs of foreclosure,
insurance, legal, protective, brokerage, maintenance, repair, and property
improvement services) and including all compensation, traveling expenses, and
other direct costs associated with the Advisor's employees or other personnel
engaged in (i) real estate transaction legal services, (ii) internal auditing,
(iii) foreclosure and other mortgage finance services, (iv) sale or solicitation
for sale of mortgages, (v) engineering and appraisal services, and (vi) transfer
agent services;
56
<PAGE> 23
(f) expenses of maintaining and managing real estate equity
interests;
(g) insurance, as required by the Directors (including directors'
liability insurance);
(h) the expenses of organizing, revising, amending, converting,
modifying, or terminating the Company;
(i) expenses connected with payments of dividends or interest or
distributions in cash or any other form made or caused to be made by the
Directors to holders of securities of the Company;
(j) all expenses connected with communications to holders of
securities of the Company and the other bookkeeping and clerical work necessary
in maintaining relations with holders of securities, including the cost of
printing and mailing certificates for securities and proxy solicitation
materials and reports to holders of the Company's securities;
(k) the cost of any accounting, statistical, bookkeeping or computer
equipment or computer time necessary for maintaining the books and records of
the Company and for preparing and filing Federal, State and Local tax returns;
(l) transfer agent's, registrar's, and indenture trustee's fees and
charges;
57
<PAGE> 24
(m) legal, accounting, investment banking, and auditing fees and
expenses charged by independent parties performing these services not otherwise
included in clauses (c) and (e) of this Section 16;
(n) expenses incurred by the Advisor, arising from the sales of
Company properties, including those expenses related to carrying out foreclosure
proceedings;
(o) commercially reasonable fees paid to the Advisor for efforts to
liquidate mortgages before maturity, such as the solicitation of offers and
negotiation of terms of sale;
(p) costs and expenses connected with computer services, including
but not limited to employee or other personnel compensation, hardware and
software costs, and related development and installation costs associated
therewith;
(q) costs and expenses associated with risk management (i.e.
insurance relating to the Company's assets);
(r) loan refinancing compensation; and
(s) expenses associated with special services requested by the
Directors pursuant to Section 14 hereof.
17. OTHER ACTIVITIES OF ADVISOR. The Advisor, its officers, directors,
or employees or any of its Affiliates may engage in other business activities
related to real estate investments or act
58
<PAGE> 25
as advisor to any other person or entity (including another real estate
investment trust), including those with investment policies similar to the
Company, and the Advisor and its officers, directors, or employees and any of
its Affiliates shall be free from any obligation to present to the Company any
particular investment opportunity that comes to the Advisor or such persons,
regardless of whether such opportunity is in accordance with the Company's
Business Plan. However, to minimize any possible conflict, the Advisor shall
consider the respective investment objectives of, and the appropriateness of a
particular investment to each such entity in determining to which entity a
particular investment opportunity should be presented. If appropriate to more
than one entity, the Advisor shall present the investment opportunity to the
entity that has had sufficient uninvested funds for the longest period of time.
18. LIMITATION ON OPERATING EXPENSES. To the extent that the Operating
Expenses of the Company for any fiscal year exceed the lesser of (a) 1.5% of the
average of the Book Values of Invested Assets of the Company at the end of each
calendar month of such fiscal year, or (b) the greater of 1.5% of the average of
the Net Asset Value of the Company at the end of each calendar month of such
fiscal year or 25% of the Company's Net Income, the Advisor
59
<PAGE> 26
shall a refund to the Company from the fees paid to the Advisor the amount if
any, by which the Operating Expenses so exceed the applicable amount; provided,
however, that the Advisor shall not be required to refund to the Company, with
respect to any fiscal year, any amount which exceeds the aggregate of the Gross
Asset Fees paid to the Advisor under this Agreement with respect to such fiscal
year.
19. TERM; TERMINATION OF AGREEMENT. This Agreement shall continue in
force until the next Annual Meeting of Stockholders of the Company, and,
thereafter, it may be renewed from year to year, subject to any required
approval of the Stockholders of the Company and, if any Director is an Affiliate
of the Advisor, the approval of a majority of the Directors who are not so
affiliated. Notice of renewal shall be given in writing by the Directors to the
Advisor not less than 60 days before the expiration of this Agreement or of any
extension thereof. This Agreement may be terminated for any reason without
penalty upon 60 days' written notice by the Company to the Advisor or 120 days'
written notice by the Advisor to the Company, in the former case by the vote of
a majority of the Directors who are not Affiliates of the Advisor or by the vote
of holders of a majority of the outstanding shares of the Company.
Notwithstanding the foregoing, however, in the event of any
60
<PAGE> 27
material change in the ownership, control, or management of the Advisor, the
Company may terminate this Agreement without penalty and without advance notice
to the Advisor.
20. AMENDMENTS. This Agreement shall not be changed, modified,
terminated or discharged in whole or in part except by an instrument in writing
signed by both parties hereto, or their respective successors or assigns, or
otherwise as provided herein.
21. ASSIGNMENT. This Agreement shall not be assigned by the Advisor
without the prior consent of the Company. The Company may terminate this
Agreement in the event of its assignment by the Advisor without the prior
consent of the Company. Such an assignment or any other assignment of this
Agreement shall bind the assignee hereunder in the same manner as the Advisor is
bound hereunder. This Agreement shall not be assignable by the Company without
the consent of the Advisor, except in the case of assignment by the Company to a
corporation, association, trust, or other organization that is a successor to
the Company. Such successor shall be bound hereunder and by the terms of said
assignment in the same manner as the Company is bound hereunder.
22. DEFAULT, BANKRUPTCY, ETC. At the option solely of the Directors,
this Agreement shall be and become terminated
61
<PAGE> 28
immediately upon written notice of termination from the Directors to the Advisor
if any of the following events shall occur:
(a) If the Advisor shall violate any provision of this Agreement,
and after notice of such violation shall not cure such default within 30 days;
or
(b) If the Advisor shall be adjudged bankrupt or insolvent by a
court of competent jurisdiction, or an order shall be made by a court of
competent jurisdiction for the appointment of a receiver, liquidator, or trustee
of the Advisor or of all or substantially all of its property by reason of the
foregoing, or approving any petition filed against the Advisor for its
reorganization, and such adjudication or order shall remain in force or unstayed
for a period of 30 days; or
(c) If the Advisor shall institute proceedings for voluntary
bankruptcy or shall file a petition seeking reorganization under the Federal
bankruptcy laws, or for relief under any law for the relief of debtors, or shall
consent to the appointment of a receiver of itself or of all or substantially
all its property, or shall make a general assignment for the benefit of its
creditors, or shall admit in writing its inability to pay its debts generally,
as they become due.
62
<PAGE> 29
The Advisor agrees that if any of the events specified in subsections
(b) and (c) of this Section 22 shall occur, it will give written notice thereof
to the Directors within seven days after the occurrence of such event.
23. ACTION UPON TERMINATION. From and after the effective date of
termination of this Agreement, pursuant to Sections 19, 21 or 22 hereof, the
Advisor shall not be entitled to compensation for further services hereunder but
shall be paid all compensation accruing to the date of termination. The Advisor
shall forthwith upon such termination:
(a) pay over to the Company all monies collected and held for the
account of the Company pursuant to this Agreement;
(b) deliver to the Directors a full accounting, including a
statement showing all payments collected by it and a statement of any monies
held by it, covering the period following the date of the last accounting
furnished to the Directors; and
(c) deliver to the Directors all property and documents of the
Company then in the custody of the Advisor.
24. MISCELLANEOUS. The Advisor shall be deemed to be in a fiduciary
relationship to the shareholders of the Company. The Advisor assumes no
responsibility under this Agreement other than
63
<PAGE> 30
to render the services called for hereunder in good faith, and shall not be
responsible for any action of the Directors in following or declining to follow
any advice or recommendations of the Advisor. Neither the Advisor nor any of its
shareholders, directors, officers, or employees shall be liable to the Company,
the Directors, the holders of securities of the Company or to any successor or
assign of the Company for any losses arising from the operation of the Company
if the Advisor had determined, in good faith, that the course of conduct which
caused the loss or liability was in the best interests of the Company and the
liability or loss was not the result of negligence or misconduct by the Advisor.
However, in no event will the directors, officers or employees of the Advisor be
personally liable for any act or failure to act unless it was the result of such
person's willful misfeasance, bad faith, gross negligence or reckless disregard
of duty.
25. NOTICES. Any notice, report, or other communication required or
permitted to be given hereunder shall be in writing unless some other method of
giving such notice, report, or other communication is accepted by the party to
whom it is given, and
64
<PAGE> 31
shall be given by being delivered at the following addresses of the parties
hereto:
The Directors and/or the Company:
Transcontinental Realty Investors, Inc.
10670 North Central Expressway
Suite 600
Dallas, Texas 75231
Attention: President
The Advisor:
Basic Capital Management, Inc.
10670 North Central Expressway
Suite 600
Dallas, Texas 75231
Attention: Executive Vice President and
Chief Financial Officer
Either party may at any time give notice in writing to the other party
of a change of its address for the purpose of this Section 25.
26. HEADINGS. The section headings hereof have been inserted for
convenience of reference only and shall not be construed to affect the meaning,
construction, or effect of this Agreement.
27. GOVERNING LAW. This Agreement has been prepared, negotiated and
executed in the State of Texas. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of Texas
applicable to agreements made and to be performed entirely in the State of
Texas.
65
<PAGE> 32
28. EXECUTION. This instrument is executed and made on behalf of the
Company by an officer of the Company, not individually but solely as an officer,
and the obligations under this Agreement are not binding upon, nor shall resort
be had to the private property of, any of the Directors, stockholders, officers,
employees, or agents of the Company personally, but bind only the Company
property.
IN WITNESS WHEREOF, TRANSCONTINENTAL REALTY INVESTORS, INC.
and BASIC CAPITAL MANAGEMENT, INC., by their duly authorized
officers, have signed these presents all as of the day and year
first above written.
TRANSCONTINENTAL REALTY INVESTORS, INC.
By: /s/ Randall Paulson
-------------------------------------
Randall M. Paulson
President
BASIC CAPITAL MANAGEMENT, INC.
By: /s/ Thomas A. Holland
-------------------------------------
Thomas A. Holland
Executive Vice President
66
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 19,657
<SECURITIES> 0
<RECEIVABLES> 2,416
<ALLOWANCES> 891
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 377,930
<DEPRECIATION> 58,500
<TOTAL-ASSETS> 360,103
<CURRENT-LIABILITIES> 0
<BONDS> 258,782
0
0
<COMMON> 39
<OTHER-SE> 92,544
<TOTAL-LIABILITY-AND-EQUITY> 360,103
<SALES> 0
<TOTAL-REVENUES> 51,414
<CGS> 0
<TOTAL-COSTS> 27,355
<OTHER-EXPENSES> 7,882
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,865
<INCOME-PRETAX> 8,035
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,035
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,035
<EPS-PRIMARY> 2.07
<EPS-DILUTED> 2.07
</TABLE>
