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, 2001
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Commission File Number 1-15663
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AMERICAN REALTY INVESTORS, INC.
-----------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 75-2847135
--------------------------------- ------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1800 Valley View Lane, Suite 300, Dallas, Texas 75234
-------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(469) 522-4200
------------------------------
(Registrant's Telephone Number,
Including Area Code)
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 11,375,127
- ---------------------------- ---------------------------------
(Class) (Outstanding at October 31, 2001)
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
The accompanying Consolidated Financial Statements have not been audited by
independent certified public accountants but in the opinion of the management of
American Realty Investors, Inc. ("ARI"), all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of consolidated results of
operations, consolidated financial position and consolidated cash flows at the
dates and for the periods indicated, have been included.
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
--------------- -------------
(dollars in thousands,
Assets except per share)
------
Real estate held for investment.......................... $ 506,680 $ 559,461
Less - accumulated depreciation.......................... <130,567> <148,690>
----------- -----------
376,113 410,771
Real estate held for sale................................ 228,476 242,973
Notes and interest receivable
Performing ($20,019 in 2001 and $9,684 in 2000 from
affiliates)........................................ 23,914 13,346
Nonperforming ($6,768 in 2001 and $1,540 in 2000
from affiliates)................................... 7,885 3,062
----------- -----------
31,799 16,408
Less--allowance for estimated losses..................... <2,577> <2,577>
----------- -----------
29,222 13,831
Pizza parlor equipment................................... 11,207 10,191
Less - accumulated depreciation.......................... <3,823> <3,164>
----------- -----------
7,384 7,027
Leasehold interest - oil and gas properties.............. 4,719 --
Less - accumulated depletion............................. <1> --
----------- -----------
4,718 --
Oilfield equipment....................................... 361 --
Less - accumulated depreciation.......................... <17> --
----------- -----------
344 --
Marketable equity securities, at market value............ 108 153
Cash and cash equivalents................................ 5,014 4,177
Investments in equity investees.......................... 78,046 44,777
Intangibles, net of accumulated amortization ($2,566
in 2001 and $2,233 in 2000)........................... 15,883 16,075
Other assets............................................. 35,070 47,231
----------- -----------
$ 780,378 $ 787,015
=========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS - Continued
September 30, December 31,
2001 2000
--------------------------
(dollars in thousands,
except per share)
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable............................... $582,139 $616,331
Margin borrowings........................................ 28,703 13,485
Accounts payable and other liabilities ($13,251 in
2001 and $3,030 in 2000 to affiliate)................... 44,513 41,221
---------- ---------
655,355 671,037
Minority interest........................................ 37,634 42,576
Series F, 3,968.75 shares in 2001 (liquidation
preference $3,969)...................................... 3,969 --
Stockholders' equity
Preferred Stock, $2.00 par value, authorized
50,000,000 shares, issued and outstanding
Series A, 2,724,910 shares in 2001 and 2,721,332
2000 (liquidation preference $27,249)................. 4,850 4,843
Series E, 50,000 shares in 2001 and 2000
(liquidation preference $500)......................... 100 100
Common Stock, $.01 par value; authorized 100,000,000
shares, issued 11,830,127 shares in 2001 and
11,829,217 in 2000...................................... 118 118
Paid-in capital.......................................... 112,195 112,301
Accumulated (deficit).................................... (33,827) (43,943)
Treasury stock at par, 1,637,000 shares in 2001 and
1,718,749 shares in 2000................................ (16) (17)
---------- ---------
83,420 73,402
---------- ---------
$780,378 $787,015
========== =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Nine Months
Ended September Ended September 30,
---------------------- ----------------------
2001 2000 2001 2000
---------- --------- ---------- ----------
(dollars in thousands, except per share)
Property revenue
Rents....................................... $ 32,712 $ 34,708 $ 98,748 $ 105,211
Property operations expenses................ 22,152 23,776 71,246 70,451
--------- --------- --------- ----------
Operating income.......................... 10,560 10,932 27,502 34,760
Land operations
Sales....................................... 8,229 89,285 41,806 108,238
Cost of sales............................... 4,682 65,674 33,546 81,116
--------- --------- --------- ----------
Gain on land sales........................ 3,547 23,611 8,260 27,122
Pizza parlor operations
Sales....................................... 8,723 8,124 25,282 24,388
Cost of sales............................... 7,164 6,798 20,715 20,138
--------- --------- --------- ----------
Gross margin.............................. 1,559 1,326 4,567 4,250
Oil and gas operations
Sales....................................... 97 -- 97 --
Operating expenses.......................... 186 -- 186 --
--------- --------- --------- ----------
Gross margin.............................. (89) -- (89) --
Income from operations........................ 15,577 35,869 40,240 66,132
Other income
Interest income............................. 837 283 1,997 3,295
Equity in income of investees............... 3,452 2,577 9,157 2,873
Gain on sale of real estate................. 12,334 3,474 54,600 51,706
Other....................................... (19) 606 58 419
--------- --------- --------- ----------
16,604 6,940 65,812 58,293
Other expenses
Interest.................................... 19,061 19,580 56,242 60,153
Depreciation, depletion and
amortization.............................. 4,490 4,001 13,169 12,909
General and administrative.................. 4,610 2,873 9,083 11,705
Advisory fee to affiliate................... 1,437 1,522 4,971 4,146
Net income fee to affiliate................. (1,128) -- 638 --
Incentive fee to affiliate.................. 1,642 -- 7,477 --
Minority interest........................... 1,003 4,953 2,483 32,219
--------- --------- --------- ----------
31,115 32,929 94,063 121,132
--------- --------- --------- ----------
Income before income taxes.................... 1,066 9,880 11,989 3,293
Provision for income taxes.................... -- (1,652) -- (1,652)
--------- --------- --------- ----------
Net income.................................... 1,066 8,228 11,989 1,641
Preferred dividend requirement................ (620) (590) (1,868) (1,661)
--------- --------- --------- ----------
Net income (loss) applicable to
Common shares............................. $ 446 $ 7,638 $ 10,121 $ (20)
========= ========= ========= ==========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ -----------------------
2001 2000 2001 2000
------------ ---------- ----------- ----------
(dollars in thousands, except per share)
Earnings per share
Net income.................................... $ .04 $ .76 $ 1.00 $ --
=========== =========== =========== ===========
Weighted average Common shares used
in computing earnings per share............... 10,193,217 10,013,087 10,141,840 10,496,364
=========== =========== =========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2001
Series A Series E
Preferred Preferred Common Treasury Paid-in Accumulated Stockholders'
Stock Stock Stock Stock Capital (Deficit) Equity
--------- --------- ------ -------- --------- ----------- -------------
(dollars in thousands, except per share)
Balance, January 1, 2001.............. $ 4,843 $ 100 $ 118 (17) $ 112,301 (43,943) $ 73,402
Preferred dividends
Series A Preferred Stock ($.75 per
share)........................... -- -- -- -- -- ( 1,846) (1,846)
Series E Preferred Stock ($.45 per
share)........................... -- -- -- -- -- (22) (22)
Common Stock dividends (pre-merger)... -- -- -- -- -- (5) (5)
Retirement of Treasury Stock.......... -- -- -- 1 (1) -- --
Repurchase of Common Stock............ -- -- -- -- (133) -- (133)
Series A Preferred Stock issued....... 7 -- -- -- 28 -- 35
Net income............................ -- -- -- -- -- 11,989 11,989
--------- --------- ------ -------- --------- ---------- ----------
Balance, September 30, 2001........... $ 4,850 $ 100 $ 118 (16) $ 112,195 (33,827) $ 83,420
========= ========= ====== ======== ========= ========== ==========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months
Ended September 30,
------------------------
2001 2000
----------- ----------
(dollars in thousands)
Cash Flows From Operating Activities
Rents collected................................................... $ 98,787 $ 105,131
Pizza parlor sales collected...................................... 25,075 24,422
Interest collected................................................ 397 4,553
Distributions received from equity investees'
operating cash flow.............................................. 53 1,869
Payments for property operations.................................. (79,693) (81,625)
Payments for pizza parlor operations.............................. (20,804) (20,030)
Payments for oil and gas operations............................... (175) --
Interest paid..................................................... (45,691) (55,855)
Advisory fee paid to affiliate.................................... (4,971) (4,146)
Incentive fees paid to affiliate.................................. (1,646) --
Distributions to minority interest holders........................ (2,697) (6,159)
General and administrative expenses paid.......................... (9,079) (11,705)
Other............................................................. 1,239 10,110
---------- ----------
Net cash (used in) operating activities........................ (39,205) (33,435)
Cash Flows From Investing Activities
Collections on notes receivable................................... 4,929 39,930
Pizza parlor equipment purchased.................................. (1,066) (1,120)
Proceeds from sale of real estate................................. 102,415 125,218
Purchase of marketable equity securities.......................... -- (5,307)
Proceeds from sale of marketable equity securities................ -- 5,170
Notes receivable funded........................................... (13,959) (17,260)
Earnest money/escrow deposits..................................... (696) (5,424)
Investment in real estate entities................................ (36,975) 3,828
Acquisition of real estate........................................ -- (19,015)
Construction and development...................................... (3,771) (9,415)
Real estate improvements.......................................... (9,518) (8,587)
Acquisition of leasehold interests................................ (350) --
Purchase of oil field equipment................................... (361) --
---------- ----------
Net cash provided by investing activities........................... 40,648 108,018
The accompanying notes are an integral part of these Consolidated Financial
Statements.
7
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Nine Months
Ended September 30,
----------------------------
2001 2000
------------ ------------
(dollars in thousands)
Cash Flows from Financing Activities
Proceeds from notes payable...................................... $ 136,832 $ 136,321
Payments on notes payable........................................ (144,314) (152,871)
Deferred borrowing costs......................................... (7,633) (6,690)
Net (payments) to/advances from affiliates....................... 1,028 (34,208)
Issuance of Series E Preferred Stock............................. -- 500
Margin borrowings, net........................................... 15,073 (10,953)
Preferred dividends paid......................................... (1,454) (1,661)
Repurchase of Common Stock....................................... (133) (746)
Common dividends paid............................................ (5) --
------------ ----------
Net cash (used in) financing activities.................... (606) (70,308)
Net increase in cash and cash equivalents.................. 837 4,275
Cash and cash equivalents, beginning of period..................... 4,177 2,479
------------ ----------
Cash and cash equivalents, end of period........................... $ 5,014 $ 6,754
============ ==========
Reconciliation of net income to net cash (used in)
operating activities
Net income....................................................... $ 11,989 $ 1,641
Adjustments to reconcile net income to net cash
(used in) operating activities
Depreciation, depletion and amortization...................... 13,169 12,909
Gain on sale of real estate................................... (62,860) (78,828)
Distributions from equity investees' operating
cash flow.................................................. 53 1,869
Increase (decrease) in minority interest...................... (214) 26,060
Equity in (income) of investees............................... (9,157) (2,873)
(Increase) decrease in accrued interest receivable (1,600) 1,258
Decrease in other assets...................................... 11,294 17,666
Increase/(decrease) in accrued interest payable............... 28 (3,723)
(Decrease) in accounts payable and other liabilities (1,907) (9,414)
------------ ----------
Net cash (used in) operating activities.................... $ (39,205) $ (33,435)
============ ==========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
8
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Nine Months
Ended September 30,
--------------------------
2001 2000
---------- ------------
(dollars in thousands)
Schedule of noncash investing and financing activities
Notes payable from acquisition of real estate.......................... $ 2,549 $ 6,262
Notes payable assumed by buyer on sale of properties................... 30,263 32,460
Notes receivable from sale of real estate.............................. 4,329 2,790
Exchange of real estate at carrying value.............................. 3,726 2,989
Common Stock issued in exchange for NRLP units......................... -- 25,817
Issuance of Series A Preferred Stock................................... 35 1,213
Issuance of Series F Preferred Stock................................... 3,969 --
Purchase accounting writedown.......................................... -- (35,846)
9
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
- -------------------------------
The accompanying Consolidated Financial Statements have been prepared in
conformity with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Dollar amounts in tables are in thousands, except per share amounts.
Certain balances for 2000 have been reclassified to conform to the 2001
presentation.
Operating results for the nine month period ended September 30, 2001, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. For further information, refer to the Consolidated Financial
Statements and Notes thereto included in ARI's Annual Report on Form 10-K for
the year ended December 31, 2000 (the "2000 Form 10-K").
NOTE 2. NOTES RECEIVABLE
- --------------------------
In September 1999, in conjunction with the sale of two apartments, $2.1 million
in purchase money financing was provided, secured by limited partnership
interests in two limited partnerships owned by the buyer. The financing bore
interest at 16.0% per annum, required monthly payments of interest only at 6.0%,
beginning in February 2000 and a $200,000 principal paydown in December 1999,
which was not received, and matured in August 2000. ARI had the option to obtain
the buyer's general and limited partnership interests in the collateral
partnerships in full satisfaction of the financing. In March 2000, ARI agreed to
forbear foreclosing on the collateral securing the note, and released one of the
partnership interests, in exchange for payment of $250,000 and executed deeds of
trusts on certain properties owned by the borrower. In March 2000, the borrower
made a $1.1 million payment, upon receipt of which ARI returned the deeds of
trust and terminated the option agreement. The borrower executed a replacement
promissory note for the remaining note balance of $1.0 million, which is
unsecured, non-interest bearing and matures in April 2003. In April 2000, ARI
funded a $100,000 loan to the borrower. The loan is secured by five second lien
deeds of trust, is non-interest bearing and matured in September 2001. At
November 2001, extension terms are being negotiated.
In April 2000, a loan with a then principal balance of $1.2 million, secured by
a pledge of a partnership interest in a partnership which owns real estate in
Addison, Texas, matured. In February 2001, the principal balance was increased
to $1.6 million, the interest rate was increased to 18.0% per annum, and the
maturity date was extended to June 2001. At November 2001, extension terms are
being negotiated.
At December 31, 2000, a loan with a principal balance of $404,000 to La Quinta
Partners, LLC, was in default. In March 2001, a settlement was reached, whereby
ARI collected $410,000 in full satisfaction of the note including accrued but
unpaid interest.
10
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. NOTES RECEIVABLE (Continued)
- --------------------------
In July 2000, ARI sold a 749.1 acre tract of its Keller land parcel for $10.0
million, receiving $8.7 million in cash and providing purchase money financing
of the remaining $1.3 million of the sales price. The loan bears interest at
12.0% per annum. In September 2000, $500,000 in principal and interest was
collected. All remaining principal and interest was due July 31, 2001. The loan
was secured by 100% of the shares of DM Development, Inc. and an assignment of
land sales proceeds. The loan had a principal balance of $817,000 at December
31, 2000. In March 2001, the loan was collected in full, including accrued but
unpaid interest.
In August 2000, ARI sold a 20.5 acre tract of its Mason Goodrich land parcel for
$3.6 million, receiving $2.1 million in cash and providing purchase money
financing of the remaining $1.5 million of the sales price. The loan matured in
December 2000. In February 2001, the loan was collected in full, including
accrued but unpaid interest.
In March 2001, ARI sold a 20.0 acre tract of its Katrina land parcel for $2.8
million, receiving $700,000 in cash and providing purchase money financing of
the remaining $2.1 million of the sales price. The loan bears interest at 12.0%
per annum and matured in July 2001. All principal and interest were due at
maturity. At November 2001, extension terms are being negotiated.
In April 2001, ARI sold a 20.0 acre tract of its Katrina land parcel for $2.9
million receiving $700,000 in cash and providing purchase money financing of the
remaining $2.2 million of the sales price. The loan bore interest at 10.0% per
annum and matured in June 2001. In May 2001, ARI sold an 80% senior interest in
the note to a financial institution. In June 2001, the interest rate was
increased to 12.0% and the maturity date was extended to August 2001. All
principal and accrued but unpaid interest are due at maturity. In July 2001, the
note was collected in full, including accrued but unpaid interest.
Related Party. In March 2001, ARI funded $13.6 million of a $15.0 million
unsecured line of credit to One Realco Corporation ("One Realco") which owns
approximately 14.7% of the outstanding shares of ARI's Common Stock. The line of
credit bears interest at 12.0% per annum. All principal and interest are due at
maturity in February 2002. The line of credit is guaranteed by Basic Capital
Management, Inc, ("BCM"), ARI's advisor.
In October 1999, ARI funded a $4.7 million loan to Realty Advisors, Inc., an
affiliate. The loan is secured by all of the outstanding shares of common stock
of American Reserve Life Insurance Company. The loan bears interest at 10.25%
per annum and matured in November 2001. In January 2000, $100,000 in principal
was collected. All remaining principal and accrued interest were due at
maturity. A three year extension has been agreed upon, pending a change in
collateral.
11
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. NOTES RECEIVABLE (Continued)
- --------------------------
In December 2000, an unsecured loan with a principal balance of $1.6 million to
Warwick of Summit, Inc. ("Warwick") matured. All principal and interest were due
at maturity. At September 2001, the loan, and $390,000 of accrued interest,
remained unpaid. At November 2001, settlement terms are being negotiated.
Richard D. Morgan, a Warwick shareholder, served as a director of ARI until
October 2001.
In December 2000, a loan with a principal balance of $1.6 million to Bordeaux
Investments Two, L.L.C. ("Bordeaux"), matured. The loan is secured by (1) a 100%
interest in Bordeaux, which owns a shopping center in Oklahoma City, Oklahoma;
(2) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of
undeveloped land in Oklahoma City, Oklahoma; and (3) the personal guarantees of
the Bordeaux members. At September 2001, the loan, and $436,000 of accrued
interest, remained unpaid. At November 2001, settlement terms are being
negotiated. Richard D. Morgan, a Bordeaux member, served as a director of ARI
until October 2001.
In March 2000, a loan with a principal balance of $2.4 million to Lordstown,
L.P., matured. The loan is secured by a second lien on land in Ohio and Florida,
by 100% of the general and limited partner interest in Partners Capital, Ltd.,
the limited partner of Lordstown, L.P., and a profits interest in subsequent
land sales. At September 2001, the loan, and $687,000 of accrued interest,
remained unpaid. At November 2001, settlement terms are being negotiated. A
corporation controlled by Richard D. Morgan is the general partner of Lordstown,
L.P. Mr. Morgan served as a director of ARI until October 2001.
NOTE 3. REAL ESTATE
- ---------------------
In 2001, ARI sold the following properties:
Units/ Sales Net Cash Debt Gain (Loss)
Property Location Sq.Ft./Acres Price Received Discharged on Sale
- --------------- ---------------- ------------- -------- ---------- ----------- -------------
First Quarter
Apartments
Carriage Park Tampa, FL 46 Units $ 2,005 $ 757 $ 1,069 $ 663
Rockborough Denver, CO 345 Units 16,675 3,654 12,215/(1)/ 13,471
Shopping Center
Regency Pointe Jacksonville, FL 67,063 Sq.Ft. 7,350 5,126 1,500 2,292
Land
Frisco Bridges Collin County, TX 27.8 Acres 4,500 4,130 -- 25
Katrina Palm Desert, CA 20.0 Acres 2,831 (124) 596 -- /(2)/
Las Colinas Las Colinas, TX 1.7 Acres 825 233 400 539
Plano Parkway Plano, TX 11.3 Acres 1,445 312 950 --
Scoggins Tarrant County, TX 232.8 Acres 2,913 892 1,800 181
Scout Tarrant County, TX 408.0 Acres 5,087 1,586 3,200 2,969
Tree Farm Dallas County, TX 10.4 Acres 2,888 (87) 2,644 75
Second Quarter
Apartments
Kimberly Woods Tucson, AZ 279 Units 8,450 1,667 6,191(1) 6,052
Place One Tulsa, OK 407 Units 12,935 3,310 7,539 8,623
12
AMERICAN REALTY INVESTORS, INC.
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
------------------------------------------------------
NOTE 3. REAL ESTATE (Continued)
- ---------------------
Units/ Sales Net Cash Debt Gain (Loss)
Property Location Sq.Ft./Acres Price Received Discharged on Sale
- ----------------- --------------- ------------- -------- ---------- ------------ -----------
Shadowood Addison, TX 184 Units $ 7,125 $1,980 $ 4,320 $ 4,644
Glenwood Addison, TX 168 Units 6,650 3,166 2,549 (560)
Bent Tree Addison, TX 292 Units 12,050 2,480 8,867 7,081
Land
Katrina Palm Desert, CA 20.0 Acres 2,940 78 -- 516
Mason/Goodrich Houston, TX 22.1 Acres 4,168 (34) 3,750 2,896
Plano Parkway Plano, TX 12.0 Acres 740 672 -- (991)
Yorktown Harris County, TX 120.4 Acres 5,239 (160) 4,991 (1,497)
Third Quarter
Apartments
Club Mar Sarasota, FL 248 Units 8,500 1,905 6,199/(1)/ 2,328
Covered Bridge Gainesville, FL 176 Units 7,900 2,463 4,339 5,982
Crossing at Church Tampa, FL 52 Units 1,880 750 948 623
Ashford Tampa, FL 56 Units 2,145 593 1,182 (985)
Chalet I Topeka, KS 162 Units 5,650 1,288 4,108/(1)/ 3,952
Chalet II Topeka, KS 72 Units 2,100 485 1,550/(1)/ 434
Land
Elm Fork Denton County, TX 10.0 Acres 1,002 (30) 958 284
Katrina Palm Desert, CA 6.1 Acres 1,196 1,108 -- 570
Chase Oaks Plano, TX 22.3 Acres 2,874 663 2,027 870
Nashville Nashville, TN 2.0 Acres 26 (1) 24 (82)
Nashville Nashville, TN 1.2 Acres 8 -- 4 (959)
Rasor Plano, TX 6.6 Acres 350 267 -- 34
Katrina Palm Desert, CA 2.2 Acres 800 (24) 737 514
Chase Oaks Plano, TX 4.9 Acres 1,973 1,832 -- 1,416
Fourth Quarter
Apartments
Nora Pines Indianapolis, IN 254 Units 9,850 2,548 5,574 6,631
Land
Katrina Palm Desert, CA 1.4 Acres 284 (9) 253 117
_______________________
(1) Debt assumed by purchaser.
(2) Gain deferred until ARI-provided financing is collected.
In 2000, ARI sold the following properties:
Units/ Sales Net Cash Debt Gain/(Loss)
Property Location Sq.Ft./Acres Price Received Discharged on Sale
- ----------------- --------------- ------------- -------- ---------- ------------ -----------
First Quarter
Apartments
Summerwind Reseda, CA 172 Units $9,000 $3,082 $5,568/(1)/ $6,684
Windtree Reseda, CA 159 Units 8,350 2,911 5,063/(1)/ 6,170
Whispering Pines Canoga Park, CA 102 Units 5,300 1,597 3,437/(1)/ 3,106
Shopping Center
Katella Plaza Orange, CA 62,290 Sq.Ft. 1,814 283 1,188 194
Land
Duchense Duchense, UT 420 Acres 43 42 -- 16
Frisco Bridges Collin County, TX 15.00 Acres 2,675 706 2,000 297
Frisco Bridges Collin County, TX 19.74 Acres 2,971 -- --/(2)/ --
Mason/Goodrich Houston, TX 1.1 Acres 129 -- 116 70
13
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. REAL ESTATE (Continued)
- ---------------------
Units/ Sales Net Cash Debt Gain/(Loss)
Property Location Sq.Ft./Acres Price Received Discharged on Sale
- -------------------- ---------------- ------------- --------- ---------- ----------- -----------
Mason/Goodrich Houston, TX 12.8 Acres $ 2,536 $ -- $ 1,803 $ 1,783
Nashville Nashville, TN 2.6 Acres 405 -- 345 225
Rasor Plano, TX 43.01 Acres 1,850 -- 1,604 58
Second Quarter
Apartments
Pines Little Rock, AR 257 Units 4,650 1,281 3,063 2,441
Four Seasons Denver, CO 384 Units 16,600 6,543 9,220/(1) 8,191
Sherwood Glen Urbandale, IA 180 Units 6,250 1,244 4,626/(1) 4,161
Office Building
Marina Playa Santa Clara, CA 124,205 Sq.Ft. 25,750 7,737 7,766 17,285
Land
Rasor Plano, TX 5.4 Acres 915 -- 915 705
Salmon River Salmon River, ID 3.0 Acres 45 44 -- 38
Valley Ranch Irving, TX 22.4 Acres 1,455 -- 1,375 (585)
Parkfield Denver, CO 2.6 Acres 615 (1) 584 512
Frisco Bridges Collin County, TX 24.3 Acres 4,194 (435) 4,000 259
Vista Business Park Travis County, TX 5.4 Acres 620 14 577 173
McKinney Corners II Collin County, TX 14.6 Acres 500 (599) 1,050 (40)
Third Quarter
Apartments
Fair Oaks Euless, TX 208 Units 6,850 609 5,711 3,474
Land
Mason/Goodrich Houston, TX 6.8 Acres 1,198 114 991 807
McKinney Corners
I,II,III,IV,V Collin County, TX 82.0 Acres 9,150 613 8,123 1,638
Parkfield Denver, CO 326.8 Acres 13,164 7,969 3,279 3,768
Rasor Plano, TX 41.1 Acres 3,779 3,587 -- 1,902
Pantex Collin County, TX 182.5 Acres 8,160 -- 4,546/(1)/ 959
Rowlett Creek Collin County, TX 80.4 Acres 2,262 919 1,173 462
Vann Cattle Collin County, TX 126.6 Acres 3,564 1,872 1,471 1,257
Mastenbrook Collin County, TX 157.9 Acres 4,445 1,890 2,275 747
Wakefield Collin County, TX 70.3 Acres 1,981 1,239 612 478
Nashville Nashville, TN 3.0 Acres 523 19 450 310
Keller Tarrant County, TX 749.1 Acres 10,000 3,892 4,500 3,373
Frisco Bridges Collin County, TX 127.4 Acres 27,500 7,411 18,570 6,954
Mason/Goodrich Houston, TX 20.5 Acres 3,560 497 1,308 956
___________________
(1) Debt assumed by purchaser.
(2) Exchanged for 3.25 acres of Clark land.
In 2001, ARI purchased the following properties:
Units/ Purchase Net Cash Debt Interest Maturity
Property Location Sq.Ft./Acres Price Paid Incurred Rate Date
- -------------- --------------- ------------ -------- --------- ----------- ---------- --------
Second Quarter
Apartments
Glenwood Addison, TX 168 Units $6,246 -/(1)/ $ 2,549/(2)/ 9.25% 10/04
14
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. REAL ESTATE (Continued)
- ---------------------
______________
(1) 8.88 acres of Hollywood Casino land and 10.5 acres of Vista Ridge land
given as consideration. Exchanged with a related party.
(2) Assumed debt of seller. Exchanged with a related party.
In 2000, ARI purchased the following properties:
Units/sq.ft. Purchase Net Cash Debt Interest Maturity
Property Location Acres/Rooms Price Paid Incurred Rate Date
- ----------------- ----------------- ------------ -------- -------- ---------- --------- --------
First Quarter
Land
Clark Farmers Branch, TX 3.25 Acres $ 2,989 $ -- $ --/(2)/ -- % --
Kelly lots Collin County, TX .75 Acres 130 20 100/(1)/ 10.0 03/10
Mastenbrook Collin County, TX 157.86 Acres 3,200 704 2,400/(1)/ 9.0 09/00
Second Quarter
Land
Sladek Travis County, TX 63.3 Acres 712 316 427/(1)/ 10.0 05/04
Third Quarter
Hotel
Grand Hotel Sofia (3) Sofia, Bulgaria 145 Rooms 17,975 17,975 -- -- --
_____________
(1) Seller financing.
(2) Exchanged for 19.74 acres of Frisco Bridges land.
(3) Related Party. ARI purchased 100% of the outstanding stock of World Trade
Company, Ltd., owner of an 80% interest in the hotel, from One Realco
Corporation, an affiliate, for $18.0 million in cash.
NOTE 4. OIL AND GAS OPERATIONS
- --------------------------------
In May 2001, ARI purchased the leasehold interests in 37 oil and gas mineral
development properties, which include 131 drilled wells. The total proved
reserves are 6.5 million barrels of oil and 3.3 billion cubic feet of natural
gas. The total purchase price was $4.7 million, plus a 40% profit participation.
The Operator's Interest was purchased for $375,000, with $25,000 cash paid at
closing. ARI gave a note payable for the remaining $350,000. The note bears no
interest, and matures in May 2002. Monthly principal payments of $25,000 are
required. The Working Interests were purchased for $4.3 million, with $125,000
cash paid at closing. ARI gave a note payable for $250,000. The note bears no
interest, and matures in November 2001. One-half of the principal was paid in
August 2001. The remaining $4.0 million was paid by issuing 3,968.75 shares of
ARI Series F Preferred Stock, which is redeemable quarterly in an amount equal
to 20% of net cash flow from the oil and gas operations. The stock has a
liquidation value of $1,000 per share, and pays no dividends. Through September
2001, sales have totaled $97,000, total operating expenses are $186,000, and
oilfield equipment purchases have been $361,000.
15
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENTS IN EQUITY INVESTEES
- -----------------------------------------
Real estate entities. ARI's investment in real estate entities at September 30,
2001, included equity securities of two affiliated publicly traded real estate
investment companies, Income Opportunity Realty Investors, Inc. ("IORI") and
Transcontinental Realty Investors, Inc. ("TCI"), and interests in real estate
joint venture partnerships. BCM, ARI's advisor, serves as advisor to IORI and
TCI.
ARI accounts for its investment in IORI and TCI and the joint venture
partnerships using the equity method. Substantially all of the equity securities
of IORI and TCI are pledged as collateral for borrowings. See NOTE 8. "MARGIN
BORROWINGS."
ARI's investment in real estate entities at September 30, 2001 was as follows:
Percentage Carrying Equivalent
of ARI's Value of Investee Market Value
Ownership at Investment at Book Value at of Investment at
Investee September 30, 2001 September 30, 2001 September 30, 2001 September 30, 2001
- ----------- ------------------ ------------------ ------------------ ------------------
IORI 28.49% $ 6,872 $ 10,109 $ 5,329
TCI 49.99% 68,837 108,777 53,275
---------- ----------
75,709 $ 58,604
==========
Other 2,337
----------
$ 78,046
==========
Management continues to believe that the market value of both IORI and TCI
undervalues their assets, and, therefore, ARI may continue to increase its
ownership in these entities in 2001, as its liquidity permits. On October 3,
2000, ARI and IORI entered into a stock option agreement which provided IORI and
ARI with an option to purchase 1,858,900 shares of Common Stock of TCI from a
third party. On October 19, 2000, IORI assigned all of its rights to purchase
such shares to ARI. The total cost to purchase the TCI shares was $30.8 million.
In October 2000, ARI paid $5.6 million of the option price. In April 2001, the
remainder of the option price was paid and ARI acquired the TCI shares.
Set forth below is summarized results of operations of equity investees for the
nine months ended September 30, 2001:
Revenues................................................... $115,641
Equity in income of partnerships........................... (2,886)
Property operating expenses................................ 83,562
Depreciation............................................... 16,578
Interest expense........................................... 35,949
--------
(Loss) before gains on sale of real estate................. (23,334)
Gain on sale of real estate................................ 46,485
--------
Net income................................................. $ 23,151
========
16
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENTS IN EQUITY INVESTEES (Continued)
- ---------------------------------------
ARI's share of equity investees' loss before gains on the sale of real estate
was $8.8 million for the nine months ended September 30, 2001, and its share of
equity investees' gains on sale of real estate was $18.0 million for the nine
months ended September 30, 2001.
ARI's cash flow from IORI and TCI is dependent on the ability of each of them to
make distributions. In the fourth quarter of 2000, IORI and TCI suspended
distributions.
In June 2000, ARI sold 1.6 million shares of TCI stock, resulting in a $7.7
million loss, and 54,000 shares of IORI stock, resulting in a $246,000 loss.
These losses are included in equity income (loss) of investees on the Statement
of Operations.
ART Florida Portfolio II, Ltd. In June 2000, Vestavia Lakes Apartments
partnership, in Orlando, Florida, in which ART Portfolio II, Ltd. owned an
interest, was sold. A loss was incurred on the sale, of which ARI's share was
$967,000, which is included in equity income (loss) of investees in the
accompanying Consolidated Financial Statements.
Elm Fork Ranch, L.P. In June 2000, ARI sold its partnership interests for $2.0
million in cash, retaining an option to repurchase its interests. In January
2001, ARI purchased 100% of the partnership interests for $9.2 million,
including financing of $9.0 million.
NOTE 6. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO
- --------------------------------------------------------
Since 1994, ARI has been purchasing equity securities of entities other than
those of IORI and TCI to diversify and increase the liquidity of its margin
accounts. In the first nine months of 2001, ARI did not purchase or sell any
such securities. These equity securities are considered a trading portfolio and
are carried at market value. At September 30, 2001, ARI recognized an unrealized
decrease in the market value of its trading portfolio securities of $43,000.
Unrealized and realized gains and losses on trading portfolio securities are
included in other income in the accompanying Consolidated Statements of
Operations.
NOTE 7. NOTES PAYABLE
- -----------------------
In 2001, ARI financed/refinanced or obtained second mortgage financing on the
following:
Acres/Rooms/ Debt Debt Net Cash Interest Maturity
Property Location Sq.Ft. Incurred Discharged Received Rate Date
- ----------------- ---------------- ------------ --------- ---------- -------- --------- --------
First Quarter
Land
Mason/Goodrich Houston, TX 235.0 Acres $ 6,750 -- $ 6,302 14.00% 01/02
Pioneer Crossing Austin, TX 350.1 Acres 7,000 -- 6,855 16.90 03/05
Pioneer Crossing Austin, TX 14.5 Acres 2,500 -- 2,350 14.50 01/02
17
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. NOTES PAYABLE (Continued)
- ---------------------
Acres/Rooms/ Debt Debt Net Cash Interest Maturity
Property Location Sq.Ft. Incurred Discharged Received Rate Date
- -------------------- -------------------- ----------------- ----------- ---------- -------- ---------- --------
Second Quarter
Land
Hollywood Casino Farmers Branch, TX 51.7 Acres 2,500 /(1)/ -- 1,916 9.00 04/03
Valwood Dallas County, TX 19.4 Acres --/(1)/ -- -- -- --
Katrina Palm Desert, CA 300.5 Acres 22,000 15,584 4,417 12.50 /(2)/ 10/02
Jeffries Ranch Oceanside, CA 82.4 Acres 5,250/(3)/ 750 3,944 14.50 06/02
Willow Springs Riverside, CA 1,485.7 Acres --/(3)/ -- -- -- --
Hotel
Williamsburg
Hospitality House Williamsburg, VA/(4)/ 296 Rooms 10,309 -- 9,851 36.00 01/02
Shopping Center
Cullman Cullman, AL 92,486 Sq.Ft. --/(3)/ 129 -- -- --
Third Quarter
Apartments
Woodlake Carrollton, TX 256 Units --/(5)/ -- -- -- --
Sun Hollow El Paso, TX 216 Units --/(5)/ -- -- -- --
Waters Edge III Gulfport, MS 238 Units --/(5)/ -- -- -- --
Office Building
Centura Tower Farmers Branch, TX 410,910 Sq.Ft. 28,739 28,384 (526) 10.50 07/02
Rosedale Towers Minneapolis, MN 84,798 Sq.Ft. 7,500/(5)/ -- 7,500 5.00 07/02
Land
Marine Creek Fort Worth, TX 54.2 Acres 1,500 750 701 9.00 01/03
Mercer Crossing Carrollton, TX 31.3 Acres 2,937 1,986 16 13.00 03/03
Chase Oaks Plano, TX 6.9 Acres 1,633 1,000 425 13.00 03/03
Vista Ridge LI Lewisville, TX 90.3 Acres 9,085 9,119 (101) 13.00 03/03
Vista Ridge MF Lewisville, TX 23.0 Acres 1,345 1,000 228 13.00 03/03
- ------------------
(1) Single note, with all properties as collateral.
(2) Variable interest rate.
(3) Single note, with all properties as collateral.
(4) Also secured by 1,846,000 shares of TCI common stock.
(5) Single note, with all properties as collateral.
In 2000, ARI financed/refinanced or obtained second mortgage financing on the
following:
Acres/ Debt Debt Net Cash Interest Maturity
Property Location Units/Sq.Ft. Incurred Discharged Received Rate Date
- ---------------- ------------------ ------------ -------- ---------- -------- --------- --------
First Quarter
Land
Centura, Clark
and Woolley Farmers Branch, TX 10.1 Acres $ 7,150 $ -- $ 6,960 14.00% 03/03
Frisco Bridges Collin County, TX 127.4 Acres 18,000 11,900 6,190 13.00 03/01
Frisco Bridges Collin County, TX 62.8 Acres 7,800 4,985 2,432 14.00 03/02
Nashville Nashville, TN 144.8 Acres 10,000 2,034 7,039 15.50 07/00
18
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. NOTES PAYABLE (Continued)
- ---------------------
Acres/ Debt Debt Net Cash Interest Maturity
Property Location Units/Sq.Ft. Incurred Discharged Received Rate Date
- ------------------- ------------------ -------------- ------------ ---------- -------- --------- --------
Second Quarter
Apartments
Rockborough Denver, CO 345 Units 2,222 $ -- $ 1,942 8.37% 11/10
Confederate Point Jacksonville, FL 206 Units 7,440 5,879 1,039 8.12 05/07
Whispering Pines Topeka, KS 320 Units 7,530 6,829 302 8.12 05/07
Chateau Bayou Ocean Springs, MS 122 Units 1,007 -- 988 8.36 05/10
Waters Edge Gulfport, MS 238 Units 7,532 3,993 3,447 8.08 05/07
Land
Katy Harris County, TX 130.6 Acres 4,250 4,042 (9) 13.00 05/01
Third Quarter
Office Buildings
Centura Tower Farmers Branch, TX 410,910 Sq.Ft. 15,000 -- 14,612 16.90 07/02
Fourth Quarter
Land
Tree Farm Dallas, TX 10.4 Acres 8,000/(1)/ -- 7,750 14.00 10/01
Thompson Farmers Branch, TX 4.0 Acres /(1)/
Tomlin Farmers Branch, TX 9.0 Acres /(1)/
Lacy Longhorn Farmers Branch, TX 17.1 Acres /(1)/
Keller Fort Worth, TX 30.1 Acres /(1)/
McKinney Corners McKinney, TX 11.0 Acres /(1)/
_________________
(1) Single note, with all properties as collateral.
NOTE 8. MARGIN BORROWINGS
- -------------------------
ARI has margin arrangements with various brokerage firms which provide for
borrowing of up to 50% of the market value of marketable equity securities. The
borrowings under such margin arrangements are secured by equity securities of
IORI, TCI and ARI's trading portfolio and bear interest rates ranging from 6.0%
to 24.0%. Margin borrowings totaled $28.7 million at September 30, 2001.
In April 2000, ARI obtained a security loan in the amount of $5.0 million with a
financial institution. ARI received net cash of $4.6 million after various
closing costs. The loan bears interest at 1% over the prime rate (currently 6.0%
per annum), requires monthly payments of principal and interest and matures
September 2002. The loan is secured by 1,050,000 shares of ARI Common Stock held
by BCM, ARI's advisor.
In March 2001, ARI obtained a security loan in the amount of $3.5 million from a
financial institution. ARI received net cash of $3.5 million after paying
various closing costs. The loan bore interest at 16.0% per annum. In April and
May 2001, a total of $2.0 million in principal paydowns were made. In July 2001,
the loan was repaid in full, including accrued but unpaid interest. The loan was
secured by 472,000 shares of TCI owned by ARI and 128,000 shares of ARI owned by
One Realco.
In September 2001, ARI obtained a security loan in the amount of $20.0 million
from a financial institution. ARI received net cash of $16.1
19
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 8. MARGIN BORROWINGS (Continued)
- --------------------------
million after the payment of various closing costs and $3.4 million repayment of
principal and accrued interest on an existing loan with the same lender. Of the
total loan amount, $19.5 million bears interest at 24% per annum, while the
remaining $500,000 bears interest at 20% per annum. The loan requires monthly
payments of interest only and matures in September 2002. The loan is secured by
2,602,608 shares of TCI common stock held by ARI and 920,507 shares of TCI
common stock held by BCM, ARI's advisor.
In October 2001, ARI obtained a security loan in the amount of $1.0 million from
a financial institution. ARI received net cash of $1.0 million after payment of
various closing costs. The loan bears interest at 1% over the prime rate
(currently 6.0% per annum), requires monthly payments of interest only and
matures in October 2003. The loan is callable upon 60 days prior notice, and is
secured by 200,000 shares of ARI Common Stock held by BCM, ARI's advisor.
NOTE 9. INCOME TAXES
- ---------------------
Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated losses.
ARI had a loss for federal income tax purposes in the three and nine months
ended September 30, 2001; therefore, it recorded no provision for income taxes.
For the nine months ended September 30, 2000, a provision for income taxes in
the amount of $1.7 million was recorded.
NOTE 10. OPERATING SEGMENTS
- ---------------------------
Significant differences among the accounting policies of the operating segments
as compared to the Consolidated Financial Statements principally involve the
calculation and allocation of administrative expenses. Management evaluates the
performance of each of the operating segments and allocates resources to them
based on their net operating income and cash flow. Items of income that are not
reflected in the segments are equity in income of investees and other income
which totaled $3.4 million and $9.2 million for the three and nine months ended
September 30, 2001 and $3.2 million and $3.3 million for the three and nine
months ended September 30, 2000. Expenses that are not reflected in the segments
are general and administrative expenses, minority interest, incentive fees,
advisory fees and net income fees which totaled $7.6 million and $24.7 million
for the three and nine months ended September 30, 2001 and $9.3 million and
$48.1 million for the three and nine months ended September 30, 2000. Excluded
from operating segment assets are assets of $119.9 million in 2001 and $92.1
million in 2000, which are not identifiable with an operating segment. There are
no intersegment revenues and expenses and ARI conducted all of its business
within the United States, with the exception of Hotel Sofia (Bulgaria).
20
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 10. OPERATING SEGMENTS (Continued)
- ---------------------------
Presented below are ARI's reportable segments operating income for the three and
nine months ended September 30, and segment assets at September 30.
Inter-
Three Months Ended Commercial U.s. National Pizza Oil & Receivables/
September 30, 2001 Properties Apartments Hotels Hotels Land Parlors Gas Other Total
- --------------------- ---------- ---------- ------- -------- -------- ------- ------ ------------ --------
Operating revenue.... $ 8,866 $ 13,580 $ 8,750 $ 1,283 $ 40 $ 8,723 $ 97 $ 193 $ 41,532
Interest income...... -- -- -- -- -- -- -- 837 837
Operating expenses... 4,951 9,308 4,283 1,396 2,206 7,164 186 8 29,502
-------- -------- ------- ------- -------- ------- ------ --------- --------
$ 3,915 $ 4,272 $ 4,467 $ (113) $ (2,166) $ 1,559 $ (89) $ 1,022 $ 12,867
======== ======== ======= ======= ======== ======= ====== ========= ========
Depreciation......... $ 1,842 $ 1,101 $ 629 $ 554 $ -- $ 345 $ 18 $ 1 4,490
Interest............. 3,834 3,466 1,102 325 7,940 932 -- 1,462 19,061
Capital
expenditures....... 5,700 -- 116 -- 1,006 303 -- -- 7,125
Assets............... 166,811 115,326 68,024 25,952 228,476 21,626 5,062 29,222 660,499
Property Sales: Apartments Land Total
---------- -------- --------
Sales price.......... $ 28,175 $ 8,229 $ 36,404
Cost of sale......... 15,841 4,682 20,523
-------- -------- ---------
Gain on sale......... $ 12,334 $ 3,547 $ 15,881
======== ======== ========
Inter-
Nine Months Ended Commercial U.s. National Pizza Oil & Receivables/
September 30, 2001 Properties Apartments Hotels Hotels Land Parlors Gas Other Total
- -------------------- ---------- ---------- -------- -------- --------- ------- ------ ------------ ---------
Operating revenue... $ 25,599 $ 44,822 $24,688 $ 3,009 $ 145 $25,282 $ 97 $ 485 $124,127
Interest income..... -- -- -- -- -- -- -- 1,997 1,997
Operating expenses.. 14,981 27,827 18,781 2,821 6,750 20,715 186 86 92,147
-------- -------- ------- ------- -------- ------- ------ ------- --------
$ 10,618 $ 16,995 $ 5,907 $ 188 $ (6,605) $ 4,567 $ (89) $ 2,396 $ 33,977
======== ======== ======= ======= ======== ======= ====== ======= ========
Depreciation........ $ 5,428 $ 3,644 $ 1,938 $ 1,204 $ -- $ 931 $ 18 $ 6 $ 13,169
Interest............ 12,412 14,086 3,375 519 21,308 741 -- 3,801 56,242
Capital
expenditures...... 10,511 20 436 1,000 1,322 1,066 361 -- 14,716
Assets.............. 166,811 115,326 68,024 25,952 228,476 21,626 5,062 29,222 660,499
Commercial
Property Sales: Properties Apartments Land Total
---------- --------- -------- ---------
Sales price......... $ 7,350 $ 94,065 $ 41,806 $143,221
Cost of sale........ 5,058 41,757 33,546 80,361
-------- -------- -------- --------
Gain on sale........ $ 2,292 $ 52,308 $ 8,260 $ 62,860
======== ======== ======== ========
Three Months Ended Commercial Pizza Receivables/
September 30, 2000 Properties Apartments Hotels Land Parlors Other Total
- ---------------------- ---------- ---------- ------- -------- ------- ------------ --------
Operating revenue..... $ 7,353 $ 16,694 $ 9,033 $ 1,628 $ 8,124 $ -- $ 42,832
Interest income....... -- -- -- -- -- 283 283
Operating expenses.... 4,899 10,354 6,298 2,225 6,798 -- 30,574
--------- -------- ------- -------- ------- ----------- --------
$ 2,454 $ 6,340 $ 2,735 $ (597) $ 1,326 $ 283 $ 12,541
========= ======== ======= ======== ======= =========== ========
Depreciation.......... $ 1,733 $ 1,303 $ 703 $ -- $ 262 $ -- $ 4,001
Interest.............. 4,605 4,899 1,252 6,740 285 1,799 19,580
Capital expenditures.. 2,875 1,339 178 516 959 -- 5,867
Assets................ 171,490 148,560 87,966 253,562 22,108 13,824 697,510
Property Sales: Apartments Land Total
---------- -------- --------
Sales price........... $ 6,850 $ 89,285 $ 96,135
Cost of sale.......... 3,376 65,674 69,050
-------- -------- --------
Gain on sale.......... $ 3,474 $ 23,611 $ 27,085
======== ======== ========
21
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 10. OPERATING SEGMENTS (Continued)
- ---------------------------
Nine Months Ended Commercial Pizza Receivables/
September 30, 2000 Properties Apartments Hotels Land Parlors Other Total
- ----------------------- ---------- ---------- -------- --------- -------- ------------ ---------
Operating revenue...... $ 23,831 $ 53,003 $25,501 $ 2,876 $24,388 $ -- $129,599
Interest income........ -- -- -- -- -- 3,295 3,295
Operating expenses..... 14,838 30,743 17,758 7,112 20,138 -- 90,589
-------- -------- ------- -------- ------- ---------- --------
$ 8,993 $ 22,260 $ 7,743 $ (4,236) $ 4,250 $ 3,295 $ 42,305
======== ======== ======= ======== ======= ========== ========
Depreciation........... $ 5,234 $ 4,752 $ 1,941 $ -- $ 982 $ -- $ 12,909
Interest............... 12,869 15,716 3,704 20,917 854 6,093 60,153
Capital expenditures... 4,404 10,827 495 2,276 1,120 -- 19,122
Assets................. 171,490 148,560 87,966 253,562 22,108 13,824 697,510
Commercial
Property Sales: Properties Apartments Land Total
---------- ---------- --------- ---------
Sales price............ $ 27,564 $ 57,000 $108,238 $192,802
Cost of sale........... 10,085 22,773 81,116 113,974
-------- -------- -------- --------
Gain on sale........... $ 17,479 $ 34,227 $ 27,122 $ 78,828
======== ======== ======== ========
NOTE 11. COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Liquidity. Management expects that ARI will generate excess cash from
operations, due to increased rental rates and occupancy at its properties;
however, such excess will not be sufficient to discharge all of ARI's debt
obligations as they mature. ARI will rely on aggressive land sales, selected
income producing property sales and, to the extent necessary, additional
borrowings to meet its cash requirements.
Commitments. In March 1999, ARI reached an agreement with the Class A
unitholders of Valley Ranch, L.P. to acquire their eight million Class A units
for $1.00 per unit. In 1999, three million units were purchased. Additionally,
one million units were purchased in January 2000 and two million units were
purchased in May 2001. ARI has committed to purchase the remaining two million
units in May 2002.
In April 2001, ARI reached an agreement with the Class A unitholders of ART
Palm, L.P., to acquire 7,236,250 of their Class A units in December 2001, for
$5.8 million.
Litigation. ARI is involved in various lawsuits arising in the ordinary course
of business. In the opinion of ARI's management, the outcome of these lawsuits
will not have a material impact on ARI's financial condition, results of
operations or liquidity.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Introduction
- ------------
ARI's predecessor was organized in 1961 to provide investors with a
professionally managed, diversified portfolio of equity real estate and mortgage
loan investments selected to provide opportunities for capital appreciation as
well as current income. In 2001, ARI's asset portfolio was expanded by the
purchase of leasehold interests in 37 oil and gas mineral development
properties. See NOTE 4. "OIL AND GAS OPERATIONS." All of the oil and gas
operations are in East Texas.
Liquidity and Capital Resources
- -------------------------------
General. Cash and cash equivalents at September 30, 2001, totaled $5.0 million,
compared with $4.2 million at December 31, 2000. Although ARI anticipates that
during the remainder of 2001 it will generate excess cash flow from property
operations, as discussed below, such excess cash is not sufficient to discharge
all of ARI's debt obligations as they mature. ARI will therefore continue to
rely on externally generated funds, including aggressive land sales, selected
sales of income producing properties, borrowings against its investments in
various real estate entities, refinancing of properties and, to the extent
necessary, borrowings to meet its debt service obligations, pay taxes, interest
and other non-property related expenses.
At December 31, 2000, notes payable totaling $193.4 million had either scheduled
maturities or required principal reduction payments during 2000. During the
first nine months of 2001, ARI either extended, refinanced, paid down, paid off
or received commitments from lenders to extend or refinance $123.3 million of
the debt scheduled to mature in 2001.
Net cash used in operating activities increased to a use of $39.2 million in the
nine months ended September 30, 2001, from a use of $33.4 million in the nine
months ended September 30, 2000. Fluctuations in the components of cash flow
from operations are discussed in the following paragraphs.
Net cash from property operations (rents collected less payments for property
operations) decreased to $19.1 million in the nine months ended September 30,
2001, from $23.5 million in 2000. The decrease is primarily attributable to the
sale of nine apartments in 2000 and 13 apartments in 2001. ARI expects a
decrease in cash flow from property operations during the remainder of 2001.
Such decrease is expected to result from the continued selective sale of income
producing properties.
Net cash from pizza operations (sales less cost of sales) of $4.3 million in the
nine months ended September 30, 2001, approximated the $4.4 million in 2000.
Net cash used in oil and gas operations (sales collected less payments for lease
operating expenses) was $175,000 in the nine months ended September 30, 2001.
Operations began in June 2001.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
Interest collected decreased to $397,000 in the nine months ended September 30,
2001, from $4.6 million in 2000. The decrease was attributable to the collection
of $36.0 million of mortgage notes receivable in 2000 and $4.9 million in 2001.
Interest paid decreased to $45.7 million in the nine months ended September 30,
2001, from $55.9 million in 2000. The decrease was attributable to the sale of
all or portions of 24 land parcels and nine apartments in 2000, and all or
portions of 13 land parcels, one commercial property and 13 apartments in 2001,
resulting in the payoff, paydown or assumption by the purchaser of mortgage
debt.
Advisory fees paid increased to $5.0 million in the nine months ended September
30, 2001, from the $4.1 million in 2000. The increase is attributable to the
inclusion of National Realty, L.P. assets in the basis for the advisory fees,
after August 2000.
Incentive fees paid were $1.6 million in the nine months ended September 30,
2001. The fees, earned in 2000, are 10% of the excess of net capital gains over
net capital losses realized from sales of assets.
General and administrative expenses paid decreased to $9.1 million in the nine
months ended September 30, 2001, from $11.7 million in 2000. The decrease is
primarily attributable to reduced consulting and partnership fees, and reduced
cost reimbursements paid to the advisor.
ARI's cash flow from its investments in IORI and TCI is dependent on the ability
of each of the entities to make distributions. In the fourth quarter of 2000,
IORI and TCI suspended distributions. Accordingly, ARI received no current
distributions in the nine months ended September 30, 2001, compared to $1.9
million in the nine months of 2000. However, in May 2001, ARI received $53,000
in accumulated dividends on shares of Continental Mortgage and Equity Trust that
should have been exchanged for TCI Common Stock in 1999.
Other cash from operating activities was $1.2 million in the nine months ended
September 30, 2001 compared to $10.1 million in 2000. The change was primarily
attributable to a greater decrease in property prepaids, miscellaneous property
receivables and property escrows in 2000 than in 2001.
In 2001, ARI sold the following properties:
Units/ Sales Net Cash Debt Gain (Loss)
Property Location Sq.Ft./acres Price Received Discharged On Sale
- ----------------- ---------------- ------------- ------- -------- ------------- -----------
First Quarter
Apartments
Carriage Park Tampa, FL 46 Units $ 2,005 $ 757 $ 1,069 $ 663
Rockborough Denver, CO 345 Units 16,675 3,654 12,215/(1)/ 13,471
Shopping Center
Regency Pointe Jacksonville, FL 67,063 Sq.Ft. 7,350 5,126 1,500 2,292
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
Units/ Sales Net Cash Debt Gain (Loss)
Property Location Sq.Ft./acres Price Received Discharged On Sale
- -------------------- ------------------ ------------ ------- -------- ------------ -----------
Land
Frisco Bridges Collin County, TX 27.8 Acres $ 4,500 $ 4,130 $ -- $ 25
Katrina Palm Desert, CA 20.0 Acres 2,831 (124) 596 --/(2)/
Las Colinas Las Colinas, TX 1.7 Acres 825 233 400 539
Plano Parkway Plano, TX 11.3 Acres 1,445 312 950 --
Scoggins Tarrant County, TX 232.8 Acres 2,913 892 1,800 181
Scout Tarrant County, TX 408.0 Acres 5,087 1,586 3,200 2,969
Tree Farm Dallas County, TX 10.4 Acres 2,888 (87) 2,644 75
Second Quarter
Apartments
Kimberly Woods Tucson, AZ 279 Units 8,450 1,667 6,191/(1)/ 6,052
Place One Tulsa, OK 407 Units 12,935 3,310 7,539 8,623
Shadowood Addison, TX 184 Units 7,125 1,980 4,320 4,644
Glenwood Addison, TX 168 Units 6,650 3,166 2,549 (560)
Bent Tree Addison, TX 292 Units 12,050 2,480 8,867 7,081
Land
Katrina Palm Desert, CA 20.0 Acres 2,940 78 -- 516
Mason/Goodrich Houston, TX 22.1 Acres 4,168 (34) 3,750 2,896
Plano Parkway Plano, TX 12.0 Acres 740 672 -- (991)
Yorktown Harris County, TX 120.4 Acres 5,239 (160) 4,991 (1,497)
Third Quarter
Apartments
Club Mar Sarasota, FL 248 Units 8,500 1,905 6,199/(1)/ 2,328
Covered Bridge Gainesville, FL 176 Units 7,900 2,463 4,339 5,982
Crossing at Church Tampa, FL 52 Units 1,880 750 948 623
Ashford Tampa, FL 56 Units 2,145 593 1,182 (985)
Chalet I Topeka, KS 162 Units 5,650 1,288 4,108/(1)/ 3,952
Chalet II Topeka, KS 72 Units 2,100 485 1,550/(1)/ 434
Land
Elm Fork Denton County, TX 10.0 Acres 1,002 (30) 958 284
Katrina Palm Desert, CA 6.1 Acres 1,196 1,108 -- 570
Chase Oaks Plano, TX 22.3 Acres 2,874 663 2,027 870
Nashville Nashville, TN 2.0 Acres 26 (1) 24 (82)
Nashville Nashville, TN 1.2 Acres 8 -- 4 (59)
Rasor Plano, TX 6.6 Acres 350 267 -- 34
Katrina Palm Desert, CA 2.2 Acres 800 (24) 737 514
Chase Oaks Plano, TX 4.9 Acres 1,973 1,832 -- 1,416
Fourth Quarter
Apartments
Nora Pines Indianapolis, IN 254 Units 9,850 2,548 5,574 6,631
Land
Katrina Palm Desert, CA 1.4 Acres 284 (9) 253 117
_____________________
(1) Debt assumed by purchaser.
(2) Gain deferred until ARI-provided financing is collected.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
In 2001, ARI purchased the following properties:
Units/ Purchase Net Cash Debt Interest Maturity
Property Location Sq.ft./acres Price Paid Incurred Rate Date
- ---------------- ----------- ------------ -------- ----------- ------------ --------- --------
Second Quarter
Apartments
Glenwood Addison, TX 168 Units $ 6,246 $ --/(1)/ $ 2,549/(2)/ 9.25% 10/04
_____________
(1) 8.88 acres of Hollywood Casino land and 10.5 acres of Vista Ridge land
given as consideration. Exchanged with a related party.
(2) Assumed debt of seller. Exchanged with a related party.
In 2001, ARI financed/refinanced or obtained second mortgage financing on the
following:
Acres/rooms/ Debt Debt Net Cash Interest Maturity
Property Location Sq.ft. Incurred Discharged Received Rate Date
- -------------------- --------------------- -------------- ------------ ---------- -------- ------------ --------
First Quarter
Land
Mason/Goodrich Houston, TX 235.0 Acres $ 6,750 $ -- $ 6,302 14.00% 01/02
Pioneer Crossing Austin, TX 350.1 Acres 7,000 -- 6,855 16.90 03/05
Pioneer Crossing Austin, TX 14.5 Acres 2,500 -- 2,350 14.50 01/02
Second Quarter
Land
Hollywood Casino Farmers Branch, TX 51.7 Acres 2,500/(1)/ -- 1,916 9.00 04/03
Valwood Dallas County, TX 19.4 Acres --/(1)/ -- -- -- --
Katrina Palm Desert, CA 300.5 Acres 22,000 15,584 4,417 12.50/(2)/ 10/02
Jeffries Ranch Oceanside, CA 82.4 Acres 5,250/(3)/ 750 3,944 14.50 06/02
Willow Springs Riverside, CA 1,485.7 Acres --/(3)/ -- -- -- --
Hotel
Williamsburg
Hospitality House Williamsburg, VA/(4)/ 296 Rooms 10,309 -- 9,851 36.00 01/02
Shopping Center
Cullman Cullman, AL 92,486 Sq.Ft. --/(3)/ 129 -- -- --
Third Quarter
Apartments
Woodlake Carrollton, TX 256 Units --/(5)/ -- -- -- --
Sun Hollow El Paso, TX 216 Units --/(5)/ -- -- -- --
Waters Edge III Gulfport, MS 238 Units --/(5)/ -- -- -- --
Office Building
Centura Tower Farmers Branch, TX 410,910 Sq.Ft. 28,739 28,384 (526) 10.50 07/02
Rosedale Towers Minneapolis, MN 84,798 Sq.Ft. 7,500/(5)/ -- 7,500 5.00 07/02
Land
Marine Creek Fort Worth, TX 54.2 Acres 1,500 750 701 9.00 01/03
Mercer Crossing Carrollton, TX 31.3 Acres 2,937 1,986 16 13.00 03/03
Chase Oaks Plano, TX 6.9 Acres 1,633 1,000 425 13.00 03/03
Vista Ridge LI Lewisville, TX 90.3 Acres 9,085 9,119 (101) 13.00 03/03
Vista Ridge MF Lewisville, TX 23.0 Acres 1,345 1,000 228 13.00 03/03
___________________
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
(1) Single note, with all properties as collateral.
(2) Variable interest rate.
(3) Single note, with all properties as collateral.
(4) Also secured by 1,846,000 shares of TCI common stock.
(5) Single note, with all properties as collateral.
ARI has margin arrangements with various financial institutions and brokerage
firms which provide for borrowing up to 50% of the market value of ARI's
marketable equity securities. The borrowings under such margin arrangements are
secured by equity securities of IORI and TCI and ARI's trading portfolio and
bear interest rates ranging from 6.0% to 24.0%. Margin borrowing totaled $28.7
million at September 30, 2001.
Management expects that it will be necessary for ARI to sell $219.1 million,
$51.7 million and $6.4 million of its land holdings during each of the next
three years to satisfy the debt on such land as it matures. If ARI is unable to
sell at least the minimum amount of land to satisfy the debt obligations on such
land as it matures, or, if it was not able to extend such debt, ARI would either
sell other assets to pay such debt or return the property to the lender.
Management reviews the carrying values of ARI's properties and mortgage note
receivables at least annually and whenever events or a change in circumstances
indicate that impairment may exist. Impairment is considered to exist if, in the
case of a property, the future cash flow from the property (undiscounted and
without interest) is less than the carrying amount of the property. For notes
receivable impairment is considered to exist if it is probable that all amounts
due under the terms of the note will not be collected. In those instances where
impairment is found to exist, a provision for loss is recorded by a charge
against earnings. ARI's mortgage note receivable review includes an evaluation
of the collateral property securing such note. The property review generally
includes selective property inspections, a review of the property's current
rents compared to market rents, a review of the property's expenses, a review of
maintenance requirements, a review of the property's cash flow, discussions with
the manager of the property and a review of properties in the surrounding area.
Commitments and Contingencies
- -----------------------------
In March 1999, ARI reached an agreement with the Class A unitholders of Valley
Ranch, L.P. to acquire their eight million Class A units for $1.00 per unit. In
1999, three million units were purchased. Additionally, one million units were
purchased in January 2000 and two million units were purchased in May 2001. ARI
has committed to purchase the remaining two million units in May 2002.
In April 2001, ARI reached an agreement with the Class A unitholders of ART
Palm, L.P., to acquire 7,236,250 of their Class A units in December 2001 for
$5.9 million.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Recent Accounting Pronouncements
- --------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires the
fair value of a liability for an asset retirement obligation to be recognized in
the period which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived assets. SFAS No. 143 is effective for the
fiscal year beginning after June 15, 2002. We believe the adoption of this
statement will have no material impact on our financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long Lived Assets." SFAS No. 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
Therefore discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively.
Results of Operations
- ---------------------
For the nine months ended September 30, 2001, ARI reported net income of $12.0
million, compared to net income of $1.6 million for the nine months ended
September 30, 2000. The primary factors contributing to ARI's net income are
discussed in the following paragraphs.
Rents decreased to $32.7 million and $98.7 million in the three and nine months
ended September 30, 2001, from $34.7 million and $105.2 million in 2000. Rents
from commercial properties increased to $25.6 million for the nine months ended
September 30, 2001, from $23.8 million in 2000, rent from hotels increased to
$27.7 million in the nine months ended September 30, 2001, from $25.5 million in
2000 and rent from apartments decreased to $44.8 million in the nine months
ended September 30, 2001, from $53.0 million in 2000. The increase in
commercial property rents was primarily attributable to higher occupancy in
buildings completed in late 1999 and early 2000. The increase in hotel rent was
primarily due to the opening of Hotel Sofia in 2001. The decrease in apartment
rent was due to the sale of nine apartments in 2000 and 13 apartments in 2001.
Rental income is expected to decrease significantly in the remainder of 2001 as
a result of the income producing properties sold in 2001 and 2000.
Property operations expense decreased to $22.2 million in the three months ended
September 30, 2001, from $23.8 million in 2000, and increased to $71.2 million
in the nine months ended September 30, 2001, from $70.5 million in 2000.
Property operations expense for commercial properties increased to $15.0 million
in the nine months ended September 30, 2001, from $14.8 million in 2000. For
hotels, property operations expense increased to $21.6 million in the nine
months ended September 30, 2001, from $17.8 million in 2000. For land, property
operations expense decreased to $6.8 million in the nine months ended September
30,
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Results of Operations (Continued)
- ---------------------
2001 from $7.1 million in 2000. For apartments, property operations expense
decreased to $27.8 million in the nine months ended September 30, 2001, from
$30.7 million in 2000. The increase in hotel property operations expense was
primarily due to the opening of Hotel Sofia in 2001. The decrease in land
operating expenses was primarily due to the 13 land parcels sold in 2000. The
decrease in property operations expense for apartments was due to the sale of
nine apartments in 2000 and 13 apartments in 2001. Property operations expense
is expected to decrease significantly in the remainder of 2001 as a result of
the properties sold in 2000 and 2001.
Pizza parlor sales and cost of sales were $8.7 million and $7.2 million,
respectively, in the three months ended September 30, 2001 and $25.3 million and
$20.7 million for the nine months ended September 30, 2001 compared to $8.1
million and $6.8 million, respectively, for the three months ended September 30,
2000 and $24.4 million and $20.1 million for the nine months ended September 30,
2000. The increased sales were primarily attributable to the effects of a more
aggressive marketing and advertising strategy.
Interest income from notes receivable increased to $837,000 in the three months
ended September 30, 2001 from $283,000 in 2000, and decreased to $2.0 million in
the nine months ended September 30, 2001, from $3.3 million in 2000. The three
month increase is due to new loans funded in 2001. The nine month decrease is
due to the collection of mortgage notes receivable and related interest at
maturity in 2000 and 2001.
Oil and gas sales were $97,000 in the three and nine months ended September 30,
2001, representing start-up production from six wells. Oil and gas operating
expenses were $186,000 in the three and nine months ended September 30, 2001.
Operating expenses include lifting costs and repairs and maintenance.
Other income decreased to a loss of $19,000 and income of $58,000 in the three
and nine months ended September 30, 2001, from $606,000 and $419,000 in 2000.
ARI recognized an unrealized decrease in market value of its trading portfolio
securities of $43,000 in the nine months ended September 30, 2001 compared to
$267,000 in 2000. See NOTE 6. "MARKETABLE EQUITY SECURITIES - TRADING
PORTFOLIO."
Interest expense decreased to $19.1 million and $56.2 million in the three and
nine months ended September 30, 2001, from $19.6 million and $60.2 million in
2000. The decrease was attributable to the sale of 13 apartments, one commercial
property and 19 parcels of land in 2001 and nine apartments, four commercial
properties and 36 parcels of land in 2000. In the remainder of 2001, interest
expense is expected to continue to decrease due to the properties sold in 2000
and 2001.
Depreciation, depletion and amortization expense increased to $4.5 million and
$13.2 million in the three and nine months ended September 30, 2001, from the
$4.0 million and $12.9 million in 2000. This increase was due to the Hotel Sofia
opening in 2001.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Results of Operations (Continued)
- ---------------------
General and administrative expenses increased to $4.6 million and decreased to
$9.1 million in the three and nine months ended September 30, 2001, from $2.9
million and $11.7 million in 2000. The three month increase is primarily due to
increases in legal and audit fees while the nine month decrease is primarily due
to reduced consulting and partnership fees, and reduced cost reimbursements paid
to the advisor.
Advisory fees of $1.4 million for the three months ended September 30, 2001
approximated the $1.5 million for the same period in 2000 and increased to $5.0
million for the nine months ended September 30, 2001 from $4.1 million in 2000.
The increase is due to the addition of the National Realty, L.P. assets to the
advisory fees basis, after August 2000.
Net income fee to affiliate was $<1.1> million and $638,000 in the three and
nine months ended September 30, 2001. The income fee payable to ARI's advisor is
10% of the net income for the year, in excess of a 10% return on shareholders'
equity.
Incentive fee to affiliate was $1.6 million and $7.5 million in the three and
nine months ended September 30, 2001. The incentive fee payable to ARI's advisor
is 10% of the excess of net capital gains over net capital losses realized from
sales of assets. Incentive fees are expected to increase as ARI selectively
sells properties.
Minority interest decreased to $1.0 million and $2.5 million in the three and
nine months ended September 30, 2001, from $5.0 million and $32.2 million in
2000. The decrease is attributable to the acquisition of National Realty, L.P.
by ARI in August 2000.
Equity in income of investees increased to $3.5 million and $9.2 million in the
three and nine months ended September 30, 2001, from $2.6 million and $2.9
million in 2000. The increase in equity income was attributable to the loss
associated with the sale of TCI and IORI stock in 2000 and gains from property
sales by TCI in 2001.
Tax Matters
- -----------
Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated losses.
ARI had a loss for federal income tax purposes in the three and nine months
ended September 30, 2001; therefore, it recorded no provision for income taxes.
For the nine months ended September 30, 2000, a provision for income taxes in
the amount of $1.7 million was recorded.
Environmental Matters
- ---------------------
Under various federal, state and local environmental laws, ordinances and
regulations, ARI may be potentially liable for removal or
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Environmental Matters (Continued)
- ---------------------
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 ARI's business, assets or
results of operations.
Inflation
- ---------
The effects of inflation on ARI's operations are not quantifiable. Revenues from
apartment operations fluctuate proportionately with inflationary increases and
decreases in housing costs. Fluctuations in the rate of inflation also affect
the sales values of properties and the ultimate gains to be realized from
property sales. To the extent that inflation affects interest rates, earnings
from short-term investments and the cost of new borrowings as well as the cost
of variable interest rate debt will be affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
- ---------------------------------------------------------------------
At September 30, 2001, ARI's exposure to a change in interest rates on its debt
is as follows:
Weighted Effect of 1%
Average Increase In
BALANCE Interest Rate Base Rates
---------- --------------- -------------
(Amounts in thousands, except per share)
Notes payable:
Variable rate.................. $135,845 12.00% $ 1,358
Total decrease in ARI's annual
==========
net income..................... $ 1,358
==========
Per share....................... $ .13
==========
_________________________________________
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
- ---------------------------
On October 23, 2001, ARI, Transcontinental Realty Investors, Inc. ("TCI"), and
Income Opportunity Realty Investors, Inc. ("IORI") jointly announced a
preliminary agreement with the plaintiff's legal counsel of the derivative
action entitled Olive et al. V. National Income Realty
31
ITEM 5. OTHER INFORMATION (Continued)
- ---------------------------
Trust, et al. for complete settlement of all disputes in the lawsuit. Under the
proposal, ARI would acquire all of the outstanding shares of IORI and TCI not
currently owned by ARI for a cash payment or shares of ARI preferred stock. ARI
will pay $17.50 cash per TCI share and $19.00 cash per IORI share for the stock
held by non-affiliated stockholders.
ARI would issue one share of Series G Preferred Stock with a liquidation value
of $20.00 per share for each share of TCI Common Stock for stockholders who
elect to receive ARI Preferred Stock in lieu of cash. ARI would issue one share
of Series H Preferred Stock with a liquidation value of $21.50 per share for
each share of IORI Common Stock for stockholders who elect to receive ARI
Preferred Stock in lieu of cash. The preferred shares will be convertible into
ARI Common Stock during a six month period commencing on the first anniversary
of the effective date of the transaction. Upon the acquisition of IORI and TCI
shares, TCI and IORI would become wholly-owned subsidiaries ARI. The transaction
is subject to the negotiation of a definitive merger agreement (not yet
accomplished), approval of the court (not yet scheduled) and a vote of the
shareholders of all three entities. ARI has the same advisor as TCI and IORI,
and TCI and IORI have the same board of directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibits:
None.
(b) Reports on Form 8-K as follows:
None.
32
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN REALTY INVESTORS, INC.
Date: November 13, 2001 By: /s/ Karl L. Blaha
------------------------- -----------------------------------
Karl L. Blaha
President
Date: November 13, 2001 By: /s/ Brent Horak
-------------------------- -----------------------------------
Brent Horak
Vice President and
Chief Financial Officer
(Principal Financial Officer)
33