UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2002
--------------
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 April 26, 2002)
1
This Form 10-Q/A Amendment No. 1 amends the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002 as follows:
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - pages 2, 3
Consolidated Statements of Operations - page 4
Consolidated Statements of Stockholders' Equity - page 5
Consolidated Statements of Cash Flows - page 7
NOTE 1. "BASIS OF PRESENTATION" - page 8
NOTE 2. "REAL ESTATE" - pages 8, 9
NOTE 7. "NOTES PAYABLE" - pages 15, 16
NOTE 10. "OPERATING SEGMENTS" - page 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"Liquidity and Capital Resources" - pages 21, 22, 24, 25
"Results of Operations" - pages 25, 27
This amendment is made to revise the accounting for gain recognition in
connection with a property transaction. For the three months ended March 31,
2002, the change resulted in a reduction from net income of $1,205,000 to a net
loss of $(8,937,000) and a corresponding reduction in earnings per share from
net income of $.05 per share to a net loss of $(.84) per share. Total assets at
March 31, 2002 were reduced by $10,668,000.
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
Revised
March 31, December 31,
2002 2001
------------ ------------
(dollars in thousands,
Assets except per share)
------
Real estate held for investment .................................... $ 473,583 $ 495,437
Less - accumulated depreciation .................................... (116,003) (121,777)
------------ ------------
357,580 373,660
Real estate held for sale .......................................... 212,626 214,543
Notes and interest receivable
Performing ($21,217 in 2002 and $18,896 in 2001 from
affiliates) .................................................. 23,320 22,612
Nonperforming ($6,747 in 2002 and $6,994 in 2001
from affiliates) ............................................. 7,764 10,347
------------ ------------
31,084 32,959
Less--allowance for estimated losses ............................... (2,577) (2,577)
------------ ------------
28,507 30,382
Pizza parlor equipment ............................................. 10,845 10,454
Less - accumulated depreciation .................................... (4,052) (3,747)
------------ ------------
6,793 6,707
Leasehold interest - oil and gas properties ........................ 4,719 4,719
Less - accumulated depletion ....................................... (1) (1)
------------ ------------
4,718 4,718
Oilfield equipment ................................................. 511 511
Less - accumulated depreciation .................................... (21) (21)
------------ ------------
490 490
Marketable equity securities, at market value ...................... 162 96
Cash and cash equivalents .......................................... 903 709
Investments in equity investees .................................... 76,460 77,933
Intangibles, net of accumulated amortization ($2,681
in 2002 and $2,666 in 2001) ...................................... 15,580 15,594
Other assets ....................................................... 31,996 33,931
------------ ------------
$ 735,815 $ 758,763
============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS - Continued
Revised
March 31, December 31,
2002 2001
----------------------------
(dollars in thousands,
except per share)
Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable ($14,240 in 2002 and $1,598 in
2001 to affiliates) ............................................... $ 563,840 $ 564,298
Margin borrowings ..................................................... 27,105 28,040
Accounts payable and other liabilities ($6,320 in 2002 and
$11,389 in 2001 to affiliates) .................................... 40,951 48,960
--------- ---------
631,896 641,298
Minority interest 23,155 27,612
Series F Preferred Stock, 3,968.75 shares in 2002 and 2001
(liquidation preference $3,969) ................................... 3,969 3,969
Commitments and contingencies
Stockholders' equity
Preferred Stock, $2.00 par value, authorized 50,000,000
shares, issued and outstanding
Series A, 2,724,910 shares in 2002 and 2001
(liquidation preference $27,249) .............................. 4,850 4,850
Series E, 50,000 shares in 2002 and 2001 (liquidation
preference $5,000) ............................................ 100 100
Common Stock, $.01 par value, authorized 100,000,000
shares; issued 11,375,127 shares in 2002 and 2001 ................. 114 114
Paid-in capital ....................................................... 112,184 112,184
Accumulated (deficit) ................................................. (40,912) (31,364)
Accumulated other comprehensive income ................................ 459 --
--------- ---------
76,795 85,884
--------- ---------
$ 735,815 $ 758,763
========= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Revised
For the Three Months
Ended March 31,
--------------------------
2002 2001
----------- -----------
(dollars in thousands,
except per share)
Property revenue
Rents ............................................... $ 29,352 $ 33,213
Property operations expenses ........................ 19,892 23,451
----------- -----------
Operating income ................................ 9,460 9,762
Land operations
Sales ............................................... 5,580 20,490
Cost of sales ....................................... 3,381 16,701
----------- -----------
Gain on land sales .............................. 2,199 3,789
Pizza parlor operations
Sales ............................................... 8,540 7,826
Cost of sales ....................................... 6,953 6,422
----------- -----------
Gross margin .................................... 1,587 1,404
Income from operations .................................. 13,246 14,955
Other income
Interest income ..................................... 612 384
Equity in income (loss) of investees ................ 119 (5)
Loss on sale of investments in equity investees ..... (531) --
Gain on sale of real estate ......................... 5,615 16,426
Other ............................................... 184 33
----------- -----------
5,999 16,838
Other expenses
Interest ............................................ 18,792 18,070
Depreciation, depletion and amortization ............ 3,555 4,079
General and administrative .......................... 3,312 2,398
Advisory fee to affiliate ........................... 1,736 1,760
Incentive fee to affiliate .......................... -- 1,521
Minority interest ................................... 787 1,575
----------- -----------
28,182 29,403
----------- -----------
Net income (loss) ....................................... (8,937) 2,390
Preferred dividend requirement .......................... (611) (642)
----------- -----------
Net income (loss) applicable to Common shares ........... $ (9,548) $ 1,748
=========== ===========
Earnings per share
Net income (loss) ................................... $ (.84) $ .17
=========== ===========
Weighted average Common shares used in computing earnings
per share ........................................... 11,375,127 10,104,268
=========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2002
Accumulated
Series A Series E Other
Preferred Preferred Common Paid-in Accumulated Comprehensive Stockholders'
Stock Stock Stock Capital (Deficit) Income Equity
--------- --------- -------- -------- ---------- ------------- -------------
(dollars in thousands, except per share)
Balance, January 1, 2002 ................... $ 4,850 $ 100 $ 114 $112,184 $(31,364) $ -- $ 85,884
Comprehensive income
Foreign currency translation gain ....... -- -- -- -- -- 459 459
Net loss ................................ -- -- -- -- (8,937) -- (8,937)
--------
(8,478)
Preferred dividends
Series A Preferred Stock ($.25 per
share) ............................... -- -- -- -- (604) -- (604)
Series E Preferred Stock ($.15 per
share) ............................... -- -- -- -- (7) -- (7)
-------- -------- -------- -------- -------- -------- --------
Balance, March 31, 2002 .................... $ 4,850 $ 100 $ 114 $112,184 $(40,912) $ 459 $ 76,795
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Revised
For the Three Months
Ended March 31,
----------------------------
2002 2001
----------------------------
(dollars in thousands)
Cash Flows From Operating Activities
Rents collected ............................................... $ 29,045 $ 33,070
Pizza parlor sales collected .................................. 8,303 7,848
Interest collected ............................................ 666 231
Payments for property operations .............................. (21,603) (29,149)
Payments for pizza parlor operations .......................... (7,352) (6,324)
Interest paid ................................................. (15,184) (15,986)
Advisory fee paid to affiliate ................................ (1,736) (1,760)
Distributions to minority interest holders .................... (787) (574)
General and administrative expenses paid ...................... (3,312) (2,398)
Other ......................................................... 398 (881)
--------- ---------
Net cash used in operating activities ................... (11,562) (15,923)
Cash Flows From Investing Activities
Collections on notes receivable ............................... 3,689 2,695
Pizza parlor equipment purchased .............................. (391) (292)
Proceeds from sale of real estate ............................. 22,175 30,771
Notes receivable funded ....................................... (1,868) (13,654)
Earnest money/escrow deposits ................................. 232 (4,347)
Investment in real estate entities ............................ 1,071 --
Acquisition of partnership interest ........................... -- (9,734)
Real estate improvements ...................................... (2,063) (3,435)
--------- ---------
Net cash provided by investing activities ............... 22,845 2,004
Cash Flows from Financing Activities
Proceeds from notes payable ................................... 26,084 28,998
Payments on notes payable ..................................... (29,628) (16,111)
Deferred borrowing costs ...................................... (915) (1,858)
Net (payments to)/advances from affiliates .................... (5,069) 4,159
Margin borrowings, net ........................................ (950) 2,402
Repurchase of Common Stock .................................... -- (133)
Preferred dividends paid ...................................... (611) (37)
--------- ---------
Net cash (used in) provided by financing activities ..... (11,089) 17,420
Net increase in cash and cash equivalents ............... 194 3,501
Cash and cash equivalents, beginning of period .................... 709 4,177
--------- ---------
Cash and cash equivalents, end of period .......................... $ 903 $ 7,678
========= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Revised
For the Three Months
Ended March 31,
--------------------------
2002 2001
----------- -----------
(dollars in thousands)
Reconciliation of net income to net cash used in
operating activities
Net income (loss) ..................................................... $ (8,937) $ 2,390
Adjustments to reconcile net income to net cash
used in operating activities
Depreciation, depletion and amortization ........................... 3,555 4,079
Gain on sale of real estate ........................................ (7,814) (20,215)
Distributions to minority interest holders ......................... -- 1,001
Equity in (income) loss of investees ............................... (119) 5
Loss on sale of investments in equity investees .................... 531 --
(Increase) decrease in accrued interest receivable ................. 54 (153)
Decrease in other assets ........................................... 2,551 1,187
Increase (decrease) in accrued interest payable .................... 712 (199)
Decrease in accounts payable and other liabilities ................. (2,095) (4,018)
----------- -----------
Net cash used in operating activities ........................... $ (11,562) $ (15,923)
=========== ===========
Schedule of noncash investing and financing
Notes payable assumed by buyer on sale of real estate $ 1,389 $ 12,215
Notes receivable from sale of real estate ............................. -- 2,123
The accompanying notes are an integral part of these Consolidated Financial
Statements.
7
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 2001 have been reclassified to conform to the 2002
presentation.
The financial statements and accompanying footnotes have been amended to revise
the accounting for gain recognition in connection with a property transaction.
For the three months ended March 31, 2002, the change resulted in a reduction
from net income of $1,205,000 to a net loss of $(8,937,000) and a corresponding
reduction in earnings per share from net income of $.05 per share to a net loss
of $(.84) per share. Total assets at March 31, 2002 were reduced by $10,668,000.
Operating results for the three month period ended March 31, 2002, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. 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, 2001 (the "2001 Form 10-K").
NOTE 2. REAL ESTATE
In 2002, ARI purchased the following property:
Purchase Net Cash Debt Interest Maturity
Property Location Sq.Ft./Acres Price Paid Incurred Rate Date
----------------- --------------- -------------- --------- -------- -------- -------- --------
First Quarter
Shopping Center
Plaza on Bachman
Creek/(1)/ Dallas, TX 80,278 Sq.Ft. $ 3,103 $ -- $ -- -- --
Second Quarter
Land
Willow Springs Beaumont, CA 20.7 Acres 140 152 -- -- --
---------------
(1) Exchanged with Transcontinental Realty Investors, Inc. ("TCI"), a related
party, for the Oaktree Village Shopping Center, Rasor land parcel and
Lakeshore Villas land parcel.
In 2002, ARI sold the following properties:
Units/ Sales Net Cash Debt Gain/(Loss)
Property Location Acres/Sq.Ft. Price Received Discharged on Sale
----------------- ----------------- ------------- --------- -------- ---------- -----------
First Quarter
Apartments
Mallard Lake/(1)/ Greensboro, NC 336 Units $ 14,400 $ -- $ 7,362 $ --
Villas Plano, TX 208 Units 8,525 3,701 4,023 5,615
Land
Katrina Palm Desert, CA 2.1 Acres 1,323 (40) 1,237 978
Lakeshore Villas/(2)/ Harris County, TX 16.9 Acres 1,499 215 -- --
Rasor/(2)/ Plano, TX 24.5 Acres 1,211 174 -- --
Thompson II Dallas County, TX .2 Acres 21 20 -- (11)
Vista Ridge Lewisville, TX 10.0 Acres 1,525 130 1,220 401
Shopping Center
Oaktree Village/(2)/ Lubbock, TX 45,623 Sq.Ft. 2,302 131 1,389/(3)/ --
8
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. REAL ESTATE (Continued)
Units/ Sales Net Cash Debt Gain/(Loss)
Property Location Acres/Sq.Ft. Price Received Discharged on Sale
----------------- --------------- ------------------ ----- ----------- ----------- ------------
Second Quarter
Land
Mason Goodrich Houston, TX 7.9 Acres $ 672 $ 46 $ 554 $ 258
----------------
(1) Exchanged for Governor's Square, Grand Lagoon, Park Avenue, Greenbriar,
Regency and Westwood Apartments.
(2) Exchanged with TCI, a related party, for the Plaza on Bachman Creek
Shopping Center.
(3) Debt assumed by purchaser.
In 2001, ARI sold the following properties:
Units/ Sales Net Cash Debt Gain on
Property Location Acres/Sq.Ft. Price Received Discharged 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
Land
Frisco Bridges Collin County, TX 27.8 Acres 4,500 4,130 -- 25
Katrina Palm Desert, CA 20.0 Acres 2,831 (124) 596 830/(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
Shopping Center
Regency Pointe Jacksonville, FL 67,063 Sq.Ft. 7,350 5,126 1,500 2,232
----------------
(1) Debt assumed by purchaser.
(2) Gain deferred until 2002, when ARI-provided financing was collected.
NOTE 3. NOTES RECEIVABLE
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 bore interest at 12.0%
per annum and matured in July 2001. All principal and interest were due at
maturity. In January 2002, $274,000 in principal and $226,000 in interest was
collected. In March 2002, the note was collected in full, including accrued but
unpaid interest.
In November 2001, ARI sold a 12.7 acre tract of its Santa Clarita parcel for
$1.9 million, receiving $1.5 million in cash and providing purchase money
financing of the remaining $437,000 of the sales price. The loan bears interest
at 8.0% per annum and matures in November 2002. All principal and accrued but
unpaid interest are due at maturity.
9
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES RECEIVABLE (Continued)
Also in November 2001, ARI sold the Blackhawk Apartments for $7.1 million,
receiving $1.5 million in cash after the assumption of $4.0 million of mortgage
debt and providing purchase money financing of the remaining $1.6 million of the
sales price. The loan bore interest at 10.0% per annum and matured in May 2002.
Monthly principal and interest payments were required. In April 2002, the note
was collected in full, including accrued but unpaid interest.
In December 1999, a note with a 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. The maturity date was extended to April 2000 in
exchange for an increase in the interest rate to 14.0% per annum. All other
terms remained the same. In February 2001, the loan amount was increased to $1.6
million and the maturity date was extended to June 2001. In February 2002, $1.5
million in principal and $87,000 in interest were collected. At May 2002, terms
are being negotiated for collection of the remaining $84,000 in principal plus
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 14.8% of the outstanding shares of ARI's Common Stock. The line of
credit bears interest at 12.0% per annum. All principal and interest were due at
maturity in February 2002. The line of credit is guaranteed by Basic Capital
Management, Inc. ("BCM"), ARI's advisor. In June 2001, $394,000 in principal and
$416,000 in interest was collected. In December 2001, $21,000 in principal and
$804,000 in interest was collected. In February 2002, the maturity date was
extended to February 2004. In March 2002, ARI funded an additional $1.8 million,
increasing the outstanding principal balance to $15.0 million. All principal and
interest are due at maturity. Ronald E. Kimbrough, Executive Vice President and
Chief Financial Officer of ARI, is a 10% shareholder of One Realco. Mr.
Kimbrough does not participate in day-to-day operations or management of One
Realco.
In October 1999, ARI funded a $4.7 million loan to Realty Advisors, Inc., an
affiliate. The loan was secured by all of the outstanding shares of common stock
of American Reserve Life Insurance Company. The loan bore interest at 10.25% per
annum and matured in November 2001. In January 2000, $100,000 was collected. In
November 2001, the maturity date was extended to November 2004. The collateral
was changed to a subordinate pledge of 850,000 shares of ARI Common Stock owned
by BCM. The shares are also pledged to a lender on ARI's behalf. The interest
rate was changed to 2% over the prime rate, currently 6.75% per annum, and the
accrued but unpaid interest of $984,000 was added to the principal. The new
principal balance is $5.6 million. All principal and accrued interest are due at
maturity.
In December 2000, an unsecured loan with a principal balance of $1.8 million to
Warwick of Summit, Inc. ("Warwick") matured. All principal
10
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES RECEIVABLE (Continued)
and interest were due at maturity. In February 2002, $275,000 of interest was
received. At March 2002, the loan, and $239,000 of accrued interest, remained
unpaid. At May 2002, 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 March 2002, the loan, and $520,000 of accrued interest,
remained unpaid. At May 2002, 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 $2.5 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 March 2002, the loan, and $820,000 of accrued interest, remained
unpaid. At May 2002, 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 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 matured 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.
NOTE 5. INVESTMENTS IN EQUITY INVESTEES
Real estate entities. ARI's investment in real estate entities at March 31,
2002, included equity securities of two publicly traded real estate
11
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENTS IN EQUITY INVESTEES (Continued)
companies, Income Opportunity Realty Investors, Inc. ("IORI") and 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. 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, accounted for using the equity method,
at March 31, 2002 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 March 31, 2002 March 31, 2002 March 31, 2002 March 31, 2002
---------------- -------------- -------------- -------------- ----------------
IORI ............... 28.49% $ 8,234 $ 11,480 $ 7,440
TCI ................ 49.99% 67,147 107,650 66,745
-------- --------
75,381 $ 74,185
========
Other .............. 1,079
--------
$ 76,460
========
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 2002, 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 TCI common stock 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. See ITEM
2. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" for discussion of the proposed acquisition of TCI and IORI by ARI.
Set forth below is summarized results of operations of equity investees for the
three months ended March 31, 2002:
Revenues .................................................................... $ 35,097
Equity in income of partnerships ............................................ (1,778)
Property operating expenses ................................................. 26,308
Depreciation ................................................................ 5,742
Interest expense ............................................................ 10,218
----------
(Loss) before gains on sale of real estate .................................. (8,949)
Gain on sale of real estate ................................................. 11,320
----------
Net income .................................................................. $ 2,371
==========
12
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 $4.0 million for the three months ended March 31, 2002, and its share of
equity investees' gains on sale of real estate was $4.1 million for the three
months ended March 31, 2002.
ARI's cash flow from IORI and TCI is dependent on the ability of each entity to
make distributions. In the fourth quarter of 2000, IORI and TCI suspended
distributions.
ART Florida Portfolio II, Ltd. In January 2002, Investors Choice Florida Public
Funds II, in which ART Florida Portfolio II, Ltd. owned an interest, sold Villas
Continental Apartments. ARI received $1.0 million in cash from the sale. ARI's
share of the loss incurred on the sale was $531,000, which is included in loss
on sale of investments in equity investees in the Consolidated Statement of
Operations.
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. These equity securities are considered a trading portfolio and are
carried at market value. In the first quarter of 2002, ARI did not purchase or
sell any such securities. At March 31, 2002, ARI recognized an unrealized
increase in the market value of its trading portfolio securities of $66,000.
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 2002, ARI financed/refinanced or obtained second mortgage financing on the
following:
Units/ Debt Debt Net Cash Interest Maturity
Property Location Acres/Sq.Ft. Incurred Discharged Received Rate Date
------------------ -------------- --------------- -------- ---------- -------- -------- --------
First Quarter
Office Building
Rosedale Towers Minneapolis, MN 84,798 Sq.Ft. $ 5,109 $ -- $ 5,109 12.000% 12/04 /(1)/
Two Hickory Centre Farmers Branch, TX 96,127 Sq.Ft. 4,448 -- 4,448 12.000 12/04 /(2)/
Land
Walker Dallas County, TX 90.6 Acres 8,500 8,500 (1,411) 11.250 /(3)/ 01/03
Shopping Center
Plaza on Bachman
Creek Dallas, TX 80,278 Sq.Ft. 5,000 -- 4,444 6.625 /(3)/ 04/04
Second Quarter
Apartments
Confederate Point Jacksonville, FL 206 Units 1,929 -- 1,929 12.000 04/05 /(4)/
Foxwood Memphis, TN 220 Units 1,093 -- 1,093 12.000 04/05 /(5)/
Woodsong Smyrna, GA 190 Units 2,544 -- 2,544 12.000 04/05 /(6)/
13
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. NOTES PAYABLE (Continued)
Units/ Debt Debt Net Cash Interest Maturity
Property Location Acres/Sq.Ft. Incurred Discharged Received Rate Date
------------------ ------------------ ---------------- ---------- ------------ ---------- ---------- ------------
Office Building
One Hickory Centre Farmers Branch, TX 102,615 Sq.Ft. $ 4,468 $ -- $ 4,468 12.000% 04/05 /(7)/
---------------
(1) In January 2002, IORI, a related party, purchased 100% of the outstanding
common shares of Rosedale Corporation ("Rosedale"), a wholly-owned
subsidiary of ARI, for $5.1 million. Rosedale owns the Rosedale Towers
Office Building. ARI has guaranteed that the asset will produce at least a
12% annual return on the purchase price for a period of three years from
the purchase date. If the asset fails to produce the 12% return, ARI will
pay IORI any shortfall. In addition, if the asset fails to produce the 12%
return for a calendar year, IORI may require ARI to repurchase the shares
of Rosedale for the purchase price. Management has classified this related
party transaction as a note payable to IORI.
(2) In January 2002, TCI, a related party, purchased 100% of the common shares
of ART Two Hickory Corporation ("Two Hickory"), a wholly-owned subsidiary
of ARI, for $4.4 million. Two Hickory owns the Two Hickory Centre Office
Building. ARI has guaranteed that the asset will produce at least a 12%
annual return on the purchase price for a period of three years from the
purchase date. If the asset fails to produce the 12% return, ARI will pay
TCI any shortfall. In addition, if the asset fails to produce the 12%
return for a calendar year, TCI may require ARI to repurchase the shares of
Two Hickory for the purchase price. Management has classified this related
party transaction as a note payable to TCI.
(3) Variable interest rate.
(4) In April 2002, TCI, a related party, purchased all of the general and
limited partnership interests in Garden Confederate Point, L.P.
("Confederate Point") from ARI for $1.9 million. Confederate Point owns the
Confederate Point Apartments. ARI has guaranteed that the asset will
produce at least a 12% annual return on the purchase price for a period of
three years from the purchase date. If the asset fails to produce the 12%
return, ARI will pay TCI any shortfall. In addition, if the asset fails to
produce the 12% return for a calendar year, TCI may require ARI to
repurchase the interests in Confederate Point for the purchase price.
Management has classified this related party transaction as a note payable
to TCI.
(5) In April 2002, TCI, a related party, purchased all of the general and
limited partnership interests in Garden Foxwood, L.P. ("Foxwood") from ARI
for $1.1 million. Foxwood owns the Foxwood Apartments. ARI has guaranteed
that the asset will produce at least a 12% annual return on the purchase
price for a period of three years from the purchase date. If the asset
fails to produce the 12% return, ARI will pay TCI any shortfall. In
addition, if the asset
14
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. NOTES PAYABLE (Continued)
fails to produce the 12% return for a calendar year, TCI may require ARI to
repurchase the interests in Foxwood for the purchase price. Management has
classified this related party transaction as a note payable to TCI.
(6) In April 2002, TCI, a related party, purchased all of the general and
limited partnership interests in Garden Woodsong, L.P. ("Woodsong") from
ARI for $2.5 million. Woodsong owns the Woodsong Apartments. ARI has
guaranteed that the asset will produce at least a 12% annual return on the
purchase price for a period of three years from the purchase date. If the
asset fails to produce the 12% return, ARI will pay TCI any shortfall. In
addition, if the asset fails to produce the 12% return for a calendar year,
TCI may require ARI to repurchase the interests in Woodsong for the
purchase price. Management has classified this related party transaction as
a note payable to TCI.
(7) In April 2002, TCI, a related party, purchased 100% of the common shares of
ART One Hickory Corporation ("One Hickory"), a wholly-owned subsidiary of
ARI, for $4.5 million. One Hickory owns the One Hickory Centre Office
Building. ARI has guaranteed that the asset will produce at least a 12%
annual return on the purchase price for a period of three years from the
purchase date. If the asset fails to produce the 12% return, ARI will pay
TCI any shortfall. In addition, if the asset fails to produce the 12%
return for a calendar year, TCI may require ARI to repurchase the shares in
One Hickory for the purchase price. Management has classified this related
party transaction as a note payable to TCI.
In April 2002, ARI sold nine residential properties to partnerships controlled
by Metra Capital, LLC ("Metra"), for a total sales price of $34.2 million. These
properties include: the 12 unit Bay Anchor Apartments in Panama City, Florida;
the 168 unit Governor Square Apartments in Tallahassee, Florida; the 54 unit
Grand Lagoon Cove Apartments in Panama City, Florida; the 92 unit Oak Hill
Apartments in Tallahassee, Florida; the 121 unit Park Avenue Villas Apartments
in Tallahassee, Florida; the 62 unit Seville Apartments in Tallahassee, Florida;
the 120 unit Westwood Apartments in Mary Ester, Florida; the 64 unit Windsor
Tower Apartments in Ocala, Florida and the 546 unit Woodhollow Apartments in San
Antonio, Texas. Innovo Group, Inc. ("Innovo"), is a limited partner in the
partnerships that purchased the properties. Joseph Mizrachi, a Director of ARI,
controls approximately 11.67% of the outstanding common stock of Innovo.
Management has determined to treat this sale as a refinancing transaction. ARI
will continue to report the assets and the new debt incurred by Metra on its
financial statements. ARI received net cash of $8.3 million after paying off the
existing debt of $19.3 million and various closing costs,including $342,000 in
brokerage commissions to Third Millennium Partners, LLC. Of the total new debt
of $29.2 million, $8.8 million bears interest at 5.00% per annum and matures in
May 2003, $17.0 million bears interest at 7.12% per annum and matures in May
2007
15
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. NOTES PAYABLE (Continued)
and $3.4 million bears interest at 7.57% per annum and matures in May 2012. ARI
also received $6.3 million of 8% non-recourse, non-convertible Series A
Preferred Stock ("Preferred Shares") of Innovo.
The dividend on the Preferred Shares will be funded entirely and solely through
member distributions from cash flows generated by the operation and subsequent
sale of the sold properties. In the event the cash flows for the properties are
insufficient to cover the 8% annual dividend, Innovo will have no obligation to
cover any shortfall.
The Preferred Shares have a mandatory redemption feature, and are redeemable
from the cash proceeds received by Innovo from the operation and sale of the
properties. All member distributions that are in excess of current and accrued
8% dividends must be used by Innovo to redeem the Preferred Shares. Since
redemption of the shares is subject to the above future events, management has
elected to record no basis in the Preferred Shares.
In 2001, ARI financed/refinanced or obtained second mortgage financing on the
following:
Debt Debt Net Cash Interest Maturity
Property Location Acres 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
NOTE 8. MARGIN BORROWINGS
ARI has margin arrangements with various financial institutions and 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 and TCI and ARI's trading portfolio securities and
bear interest rates ranging from 5.75% to 24.0%. Margin borrowing totaled $27.1
million at March 31, 2002.
In April 2000, ARI obtained a security loan in the amount of $5.0 million from a
financial institution. ARI received net cash of $4.6 million after paying
various closing costs. The loan bears interest at 1% over the prime rate,
currently 5.75% per annum, requires monthly payments of interest and matures in
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.
16
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 8. MARGIN BORROWINGS (Continued)
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 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 5.75% 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 no taxable income or provision for income taxes in the three months
ended March 31, 2002 or 2001.
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 (loss) of investees, loss on sale
of investments in equity investees and other income which totaled $(228,000) for
the three months ended March 31, 2002 and $28,000 for 2001. 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 $6.4
million for the three months ended March 31, 2002 and $7.3 million for 2001.
Excluded from operating segment assets are assets of $116.3 million in 2002 and
$96.2 million in 2001, 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, which is
located in Bulgaria.
17
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
months ended March 31, and segment assets at March 31.
Commercial U.S. International Pizza Receivables/
2002 Properties Apartments Hotels Hotels Land Parlors Other Total
------------------- ---------- ---------- ------- ------------- ---------------------- ------------- --------
Operating revenue ....... $ 10,555 $ 10,931 $ 6,558 $ 1,003 $ 62 $ 8,540 $ 243 $ 37,892
Interest income ......... -- -- -- -- -- -- 612 612
Operating expenses ...... 5,494 6,136 5,229 575 2,374 6,953 84 26,845
---------- ---------- ------- ------------- -------- --------- ------------ --------
Operating income
(loss) ............... $ 5,061 $ 4,795 $ 1,329 $ 428 $ (2,312) $ 1,587 $ 771 $ 11,659
========== ========== ======= ============= ======== ========= ============ ========
Depreciation ............ $ 1,582 $ 927 $ 523 $ 264 $ -- $ 257 $ 2 $ 3,555
Interest ................ 4,807 3,328 1,131 30 6,168 203 3,125 18,792
Capital expenditures .... 1,289 212 161 -- 393 391 -- 2,446
Assets .................. 172,354 95,231 67,299 22,696 212,626 20,794 28,507 619,507
Commercial
Property Sales: Properties Apartments Land Total
---------- ---------- -------- --------
Sales price ............. $ 2,302 $ 11,957 $ 5,580 $ 19,839
Cost of sale ............ 2,302 6,342 3,381 12,025
---------- ---------- -------- --------
Gain on sale ............ $ -- $ 5,615 $ 2,199/(1)/ $ 7,814
========== ========== ======== ========
-------------------
(1) Includes $830 gain recognized in 2002 upon collection of note receivable for
2001 land sale.
Commercial U.S. International Pizza Receivables/
2001 Properties Apartments Hotels Hotels Land Parlors Other Total
------------------- ---------- ---------- --------- ------------ ---------------------- ------------- -------
Operating revenue ....... $ 9,133 $ 16,126 $ 7,001 $ 694 $ 63 $ 7,826 $ 196 $ 41,039
Interest income ......... -- -- -- -- -- -- 384 384
Operating expenses ...... 5,146 9,826 6,050 534 1,919 6,422 (24) 29,873
---------- ---------- ------- ------------ -------- --------- ------------- --------
Operating income
(loss) ............... $ 3,987 $ 6,300 $ 951 $ 160 $ (1,856) $ 1,404 $ 604 $ 11,550
========== ========== ======= ============ ======== ========= ============= ========
Depreciation ............ $ 1,781 $ 1,339 $ 629 $ -- $ -- $ 329 $ 1 $ 4,079
Interest ................ 4,487 5,185 1,267 97 5,290 272 1,472 18,070
Capital expenditures .... 2,218 -- 152 1,000 65 338 -- 3,773
Assets .................. 161,996 141,926 69,016 29,190 245,644 21,598 27,520 696,890
Commercial
Property Sales: Properties Apartments Land Total
---------- ---------- -------- -------
Sales price ............. $ 7,350 $ 18,680 $ 20,490 $ 46,520
Cost of sale ............ 5,058 4,546 16,701 26,305
---------- ---------- -------- --------
Gain on sale ............ $ 2,292 $ 14,134 $ 3,789 $ 20,215
========== ========== ======== ========
NOTE 11. COMMITMENTS AND CONTINGENCIES
Liquidity. Management expects that excess cash generated from operations during
the remainder of 2002 will not be sufficient to discharge all of ARI's debt
obligations as they mature. Therefore, ARI will rely on aggressive land sales,
selected income producing property sales and, to the extent necessary,
additional borrowings to meet its cash requirements.
18
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
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.
Litigation. ART 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.
_______________________________
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.
On October 23, 2001, ARI, TCI, and IORI jointly announced a preliminary
agreement with the plaintiff's legal counsel of the derivative action entitled
Olive et al. V. National Income Realty Trust, et al. for complete settlement of
all disputes in the lawsuit. In February 2002, the court granted final approval
of the proposed settlement. Under the proposal, ARI will acquire all of the
outstanding common 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 will 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 affirmatively elect to receive ARI Preferred Stock in lieu of
cash. ARI will 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 affirmatively elect to receive ARI Preferred Stock in lieu of cash. All
affiliated stockholders will receive ARI Preferred Stock. Each share of Series G
Preferred Stock will be convertible into 2.5 shares of ARI Common Stock, and
each share of Series H Preferred Stock will be convertible into 2.25 shares of
ARI Common Stock during a 75-day period that commences fifteen days after the
date of the first ARI Form 10-Q filing that occurs after the closing of the
merger transaction. Upon the acquisition of IORI and TCI shares, TCI and IORI
would become wholly-owned subsidiaries of ARI. The
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction (Continued)
transaction is subject to the negotiation of a definitive merger agreement 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.
Liquidity and Capital Resources
General. Cash and cash equivalents at March 31, 2002, totaled $903,000, compared
with $709,000 at December 31, 2001. Although ARI anticipates that during the
remainder of 2002 it will generate excess cash from operations, as discussed
below, such excess cash is not sufficient to discharge all of ARI's debt
obligations as they mature. ARI will therefore again 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, 2001, notes payable totaling $267.5 million had either scheduled
maturities or required principal reduction payments during 2002. During the
first quarter of 2002, ARI either extended, refinanced, paid down, paid off or
received commitments from lenders to extend or refinance $28.5 million of the
debt scheduled to mature in 2002.
Net cash used in operating activities decreased to $11.6 million in the three
months ended March 31, 2002, from $15.9 million in the three months ended March
31, 2001. 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 expenses
applicable to rental income) increased to $7.4 million in the three months ended
March 31, 2002 from $3.9 million in 2001. The increase is primarily attributable
to a decline in the payments for operating expenses in 2002 from an elevated
level in 2001, when there was a significant paydown of accounts payable. ARI
expects a decrease in cash flow from property operations during the remainder of
2002. 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) decreased to $1.0
million in the three months ended March 31, 2002, from $1.5 million in the three
months ended March 31, 2001. The decrease is primarily attributable to a
decrease in accounts payable and an increase in accounts receivable in 2002.
Interest collected increased to $666,000 in the three months ended March 31,
2002, from $231,000 in 2001. The increase was attributable to the collection of
$531,000 in past due interest.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Interest paid decreased to $15.2 million in the three months ended March 31,
2002, from $16.0 million in 2001. The decrease is attributable to the paydown
and payoff of mortgages on properties sold in 2001.
Advisory fees paid of $1.7 million in the three months ended March 31, 2002,
approximated the $1.8 million in 2001.
General and administrative expenses paid increased to $3.3 million in the three
months ended March 31, 2002 from $2.4 million in 2001. The increase is primarily
attributable to an increase in legal fees.
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 distributions
in the first quarter of 2002 and 2001.
Other cash from operating activities improved to $398,000 in the three months
ended March 31, 2002, from a use of $881,000 in 2001. The improvement was
primarily attributable to a decrease in property prepaids.
In the first quarter of 2002, ARI received a total $3.7 million on the
collection of one mortgage note receivable and partial paydown of two mortgage
notes receivable.
In 2002, ARI purchased the following property:
Purchase Net Cash Debt Interest Maturity
Property Location Sq.Ft./Acres Price Paid Incurred Rate Date
---------------- ------------ -------------- -------- -------- -------- -------- --------
First Quarter
Shopping Center
Plaza on Bachman
Creek/(1)/ Dallas, TX 80,278 Sq.Ft. $ 3,103 $ -- $ -- -- --
Second Quarter
Land
Willow Springs Beaumont, CA 20.7 Acres 140 152 -- -- --
----------
(1) Exchanged with TCI, a related party, for the Oaktree Village Shopping
Center, Rasor land parcel and Lakeshore Villas land parcel.
In 2002, ARI sold the following properties:
Units/ Sales Net Cash Debt Gain/(Loss)
Property Location Acres/Sq.Ft. Price Received Discharged on Sale
---------------- ------------ -------------- -------- ---------- ---------- -----------
First Quarter
Apartments
Mallard Lake/(1)/ Greensboro, NC 336 Units $ 14,400 $ -- $ 7,362 $ --
Villas Plano, TX 208 Units 8,525 3,701 4,023 5,615
Land
Katrina Palm Desert, CA 2.1 Acres 1,323 (40) 1,237 978
21
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 Acres/Sq.Ft. Price Received Discharged on Sale
--------------------- ------------ -------------- -------- ---------- ---------- -----------
Lakeshore Villas/(2)/ Harris County, TX 16.9 Acres $ 1,499 $ 215 $ -- $ --
Rasor/(2)/ Plano, TX 24.5 Acres 1,211 174 -- --
Thompson II Dallas County, TX .2 Acres 21 20 -- (11)
Vista Ridge Lewisville, TX 10.0 Acres 1,525 130 1,220 401
Shopping Center
Oaktree Village/(2)/ Lubbock, TX 45,623 Sq.Ft. 2,302 131 1,389 /(3)/ --
Second Quarter
Land
Mason Goodrich Houston, TX 7.9 Acres 672 46 554 258
------------
(1) Exchanged for Governor's Square, Grand Lagoon, Park Avenue, Greenbriar,
Regency and Westwood Apartments.
(2) Exchanged with TCI, a related party, for the Plaza on Bachman Creek
Shopping Center.
(3) Debt assumed by purchaser.
In 2002, ARI financed/refinanced or obtained second mortgage financing on the
following:
Units/ Debt Debt Net Cash Interest Maturity
Property Location Acres Sq.Ft. Incurred Discharged Received Rate Date
------------------ ------------ -------------- -------- ---------- -------- -------- --------
First Quarter
Office Building
Rosedale Towers Minneapolis, MN 84,798 Sq.Ft. $ 5,109 $ -- $ 5,109 12.000% 12/04 /(1)/
Two Hickory Centre Farmers Branch, TX 96,127 Sq.Ft. 4,448 -- 4,448 12.000 12/04 /(2)/
Land
Walker Dallas County, TX 90.6 Acres 8,500 8,500 (1,411) 11.250 /(3)/ 01/03
Shopping Center
Plaza on Bachman
Creek Dallas, TX 80,278 Sq.Ft. 5,000 -- 4,444 6.625 /(3)/ 04/04
Second Quarter
Apartments
Confederate Point Jacksonville, FL 206 Units 1,929 -- 1,929 12.000 04/05 /(4)/
Foxwood Memphis, TN 220 Units 1,093 -- 1,093 12.000 04/05 /(5)/
Woodsong Smyrna, GA 190 Units 2,544 -- 2,544 12.000 04/05 /(6)/
Office Building
One Hickory Centre Farmers Branch, TX 102,615 Sq.Ft. 4,468 -- 4,468 12.000 04/05 /(7)/
------------
(1) In January 2002, IORI, a related party, purchased 100% of the outstanding
common shares of Rosedale Corporation ("Rosedale"), a wholly-owned
subsidiary of ARI, for $5.1 million. Rosedale owns the Rosedale Towers
Office Building. ARI has guaranteed that the asset will produce at least a
12% annual return on the purchase price for a period of three years from
the purchase date. If the asset fails to produce the 12% return, ARI will
pay IORI any shortfall. In addition, if the asset fails to produce the 12%
return for a calendar year, IORI may require ARI to repurchase the
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
shares of Rosedale for the purchase price. Management has classified this
related party transaction as a note payable to IORI.
(2) In January 2002, TCI, a related party, purchased 100% of the common shares
of ART Two Hickory Corporation ("Two Hickory"), a wholly-owned subsidiary
of ARI, for $4.4 million. Two Hickory owns the Two Hickory Centre Office
Building. ARI has guaranteed that the asset will produce at least a 12%
annual return on the purchase price for a period of three years from the
purchase date. If the asset fails to produce the 12% return, ARI will pay
TCI any shortfall. In addition, if the asset fails to produce the 12%
return for a calendar year, TCI may require ARI to repurchase the shares of
Two Hickory for the purchase price. Management has classified this related
party transaction as a note payable to TCI.
(3) Variable interest rate.
(4) In April 2002, TCI, a related party, purchased all of the general and
limited partnership interests in Garden Confederate Point, L.P.
("Confederate Point") from ARI for $1.9 million. Confederate Point owns the
Confederate Point Apartments. ARI has guaranteed that the asset will
produce at least a 12% annual return on the purchase price for a period of
three years from the purchase date. If the asset fails to produce the 12%
return, ARI will pay TCI any shortfall. In addition, if the asset fails to
produce the 12% return for a calendar year, TCI may require ARI to
repurchase the interests in Confederate Point for the purchase price.
Management has classified this related party transaction as a note payable
to TCI.
(5) In April 2002, TCI, a related party, purchased all of the general and
limited partnership interests in Garden Foxwood, L.P. ("Foxwood") from ARI
for $1.1 million. Foxwood owns the Foxwood Apartments. ARI has guaranteed
that the asset will produce at least a 12% annual return on the purchase
price for a period of three years from the purchase date. If the asset
fails to produce the 12% return, ARI will pay TCI any shortfall. In
addition, if the asset fails to produce the 12% return for a calendar year,
TCI may require ARI to repurchase the interests in Foxwood for the purchase
price. Management has classified this related party transaction as a note
payable to TCI.
(6) In April 2002, TCI, a related party, purchased all of the general and
limited partnership interests in Garden Woodsong, L.P. ("Woodsong") from
ARI for $2.5 million. Woodsong owns the Woodsong Apartments. ARI has
guaranteed that the asset will produce at least a 12% annual return on the
purchase price for a period of three years from the purchase date. If the
asset fails to produce the 12% return, ARI will pay TCI any shortfall. In
addition, if the asset fails to produce the 12% return for a calendar year,
TCI
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
may require ARI to repurchase the interests in Woodsong for the purchase
price. Management has classified this related party transaction as a note
payable to TCI.
(7) In April 2002, TCI, a related party, purchased 100% of the common shares of
ART One Hickory Corporation ("One Hickory"), a wholly-owned subsidiary of
ARI, for $4.5 million. One Hickory owns the One Hickory Centre Office
Building. ARI has guaranteed that the asset will produce at least a 12%
annual return on the purchase price for a period of three years from the
purchase date. If the asset fails to produce the 12% return, ARI will pay
TCI any shortfall. In addition, if the asset fails to produce the 12%
return for a calendar year, TCI may require ARI to repurchase the shares in
One Hickory for the purchase price. Management has classified this related
party transaction as a note payable to TCI.
In April 2002, ARI sold nine residential properties to partnerships controlled
by Metra Capital, LLC ("Metra"), for a total sales price of $34.2 million. These
properties include: the 12 unit Bay Anchor Apartments in Panama City, Florida;
the 168 unit Governor Square Apartments in Tallahassee, Florida; the 54 unit
Grand Lagoon Cove Apartments in Panama City, Florida; the 92 unit Oak Hill
Apartments in Tallahassee, Florida; the 121 unit Park Avenue Villas Apartments
in Tallahassee, Florida; the 62 unit Seville Apartments in Tallahassee, Florida;
the 120 unit Westwood Apartments in Mary Ester, Florida; the 64 unit Windsor
Tower Apartments in Ocala, Florida and the 546 unit Woodhollow Apartments in San
Antonio, Texas. Innovo Group, Inc. ("Innovo"), is a limited partner in the
partnerships that purchased the properties. Joseph Mizrachi, a Director of ARI,
controls approximately 11.67% of the outstanding common stock of Innovo.
Management has determined to treat this sale as a refinancing transaction. ARI
will continue to report the assets and the new debt incurred by Metra on its
financial statements. ARI received net cash of $8.3 million after paying off the
existing debt of $19.3 million and various closing costs, including $342,000 in
brokerage commissions to Third Millennium Partners, LLC. Of the total new debt
of $29.2 million, $8.8 million bears interest at 5.00% per annum and matures in
May 2003, $17.0 million bears interest at 7.12% per annum and matures in May
2007 and $3.4 million bears interest at 7.57% per annum and matures in May 2012.
ARI also received $6.3 million of 8% non-recourse, non-convertible Series A
Preferred Stock ("Preferred Shares") of Innovo.
The dividend on the Preferred Shares will be funded entirely and solely through
member distributions from cash flows generated by the operation and subsequent
sale of the sold properties. In the event the cash flows for the properties are
insufficient to cover the 8% annual dividend, Innovo will have no obligation to
cover any shortfall.
The Preferred Shares have a mandatory redemption feature, and are redeemable
from the cash proceeds received by Innovo from the operation and sale of the
properties. All member distributions that are in excess
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
of current and accrued 8% dividends must be used by Innovo to redeem the
Preferred Shares. Since redemption of the shares is subject to the above future
events, management has elected to record no basis in the Preferred Shares.
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 5.75% to 24.0%. Margin borrowing totaled $27.1
million at March 31, 2002.
Management expects that it will be necessary for ARI to sell $102.0 million,
$34.1 million and $1.2 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 of its assets to pay such debt or transfer the property to the
lender.
Management reviews the carrying values of ARI'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. If impairment is found to
exist, a provision for loss is recorded by a charge against earnings to the
extent that the investment in the note exceeds management's estimate of the fair
value of the collateral property securing each note. The mortgage note
receivable review includes an evaluation of the collateral property securing
such note. The property review generally includes: (1) selective property
inspections; (2) a review of the property's current rents compared to market
rents; (3) a review of the property's expenses; (4) a review of maintenance
requirements; (5) a review of the property's cash flow; (6) discussions with the
manager of the property; and (7) a review of properties in the surrounding area.
Commitments and Contingencies
In March 1999, an agreement was reached 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.
Results of Operations
For the three months ended March 31, 2002, ARI reported net loss of $8.9
million, compared to net income of $2.4 million for the three months
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
ended March 31, 2001. The primary factors contributing to ARI's net income are
discussed in the following paragraphs.
Rents decreased to $29.4 million in the three months ended March 31, 2002, from
$33.2 million in 2001. Rents from commercial properties increased to $10.6
million for the three months ended March 31, 2002, from $9.1 million in 2001,
rent from hotels of $7.6 million in the three months ended March 31, 2002,
approximated the $7.7 million in 2001 and rents from apartments decreased to
$10.9 million in the three months ended March 31, 2002, from $16.1 million in
2001. The increase in commercial property rents was primarily attributable to
increased occupancy and the decrease in apartment rent was due to the sale of 17
apartments in 2001. Rental income is expected to decrease significantly in the
remainder of 2002 as a result of the income producing properties sold in 2001
and 2002.
Property operations expense decreased to $19.9 million in the three months ended
March 31, 2002, from $23.5 million in 2001. Property operations expense for
commercial properties of $5.5 million in the three months ended March 31, 2002,
approximated the $5.1 million in 2001. For hotels, property operations expense
decreased to $5.8 million in the three months ended March 31, 2002, from $6.6
million in 2001. For land, property operations expense increased to $2.4 million
in the three months ended March 31, 2002 from $1.9 million in 2001. For
apartments, property operations expense decreased to $6.1 million in the three
months ended March 31, 2002, from $9.8 million in 2001. The decrease in hotel
operations expense was primarily attributable to reduced utility, personnel and
administrative costs. The increase in land operations expense was primarily
attributable to increased real estate taxes. The decrease in apartment
operations expense was primarily attributable to the sale of 17 apartments in
2001.
Pizza parlor sales and cost of sales increased to $8.5 million and $7.0 million,
respectively, in the three months ended March 31, 2002 from $7.8 million and
$6.4 million in 2001. The increase was primarily attributable to the opening of
three new stores in 2001, plus an 8.75% increase in same-store sales volume.
Interest income from notes receivable increased to $612,000 in the three months
ended March 31, 2002 from $384,000 in 2001, due to the funding of $21.9 million
of mortgage notes receivable in 2001.
Interest expense increased to $18.8 million in the three months ended March 31,
2002 from $18.1 million in 2001. The increase was primarily attributable to
higher balances payable on stock loans, at higher interest rates.
Depreciation, depletion and amortization expense decreased to $3.6 million in
the three months ended March 31, 2002 from $4.1 million in 2001. The decrease is
due to the sale of 17 apartments and one commercial property in 2001.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Advisory fees of $1.7 million in the three months ended March 31, 2002
approximated the $1.8 million in 2001.
There was no incentive fee to affiliate in the three months ended March 31, 2002
compared to $1.5 million in 2001. The incentive fee is due only if ARI is also
subject to the net income fee. At March 2002, the net income fee requirements
are not met; therefore, no incentive fee is due. This fee represents 10% of the
excess of net capital gains over net capital losses from sales of operating
properties. The amount of this fee for the remainder of 2002 will be dependent
on the number of operating properties sold, the net capital gains realized and
whether the net income fee is due.
General and administrative expenses increased to $3.3 million in the three
months ended March 31, 2002 compared to $2.4 million in 2001. The increase is
primarily attributable to increased legal fees.
Minority interest decreased to $787,000 in the three months ended March 31, 2002
from $1.6 million in 2001. The decrease is attributable to the repurchase of
partnership units by ARI in 2001.
Equity in income of investees increased to $119,000 in the three months ended
March 31, 2002 from a loss $5,000 in 2001. The increase in equity income was
attributable to increased net income for IORI and TCI.
Loss on sale of investments in equity investees was $531,000 for the three
months ended March 31, 2002. See NOTE 5. "INVESTMENTS IN EQUITY INVESTEES."
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, ARI 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 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
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Inflation (Continued)
---------
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 March 31, 2002, 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
---------- --------------- ------------
Notes payable:
Variable rate .................. $ 130,934 11.224% $ 1,309
========== =======
Total decrease in ARI's annual
net income ..................... $ 1,309
=======
Per share ......................... $ .12
=======
_______________
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
99.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, filed herewith.
(b) Reports on Form 8-K as follows:
A Current Report on Form 8-K, dated April 26, 2002, was filed with respect
to Item 5. "Other Events," which reports the proposal to explore a
business combination with Prime Group Realty Trust.
28
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: October 11, 2002 By: /s/ Ronald E. Kimbrough
------------------------- -----------------------------------
Ronald E. Kimbrough
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer and
Acting Principal Executive Officer)
29
AMERICAN REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Quarter ended March 31, 2002
Exhibit Page
Number Description Number
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as 31
Adopted Pursuant to Section 906 of the 31 Sarbanes-Oxley
Act of 2002.
99.2 Certification Pursuant to Section 302 of the Sarbanes- 32
Oxley Act of 2002.
30