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 JUNE 30, 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 July 31, 2002)
1
This Form 10-Q/A Amendment No. 1 amends the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 as follows:
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - pages 2, 3
Consolidated Statements of Operations - pages 4, 5
Consolidated Statements of Stockholders' Equity - page 6
Consolidated Statements of Cash Flows - page 8
NOTE 1. "BASIS OF PRESENTATION" - page 9
NOTE 2. "REAL ESTATE" - pages 10, 11
NOTE 10. "OPERATING SEGMENTS - pages 21, 22
NOTE 11. "DISCONTINUED OPERATIONS" - page 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources - pages 29, 30
Results of Operations - pages 33, 35
This amendment is made to revise the accounting for gain recognition in
connection with a property transaction in the first quarter of 2002. For the
three months ended June 30, 2002, the change resulted in an increase in the net
loss from $(14,112,000) to $(14,638,000) and a corresponding change in earnings
per share from a net loss of $(1.29) per share to a net loss of $(1.34) per
share. For the six months ended June 30, 2002, the change resulted in an
increase in the net loss from $(12,907,000) to $(23,575,000) and a corresponding
change in earnings per share from a net loss of $(1.24) per share to a net loss
of $(2.18) per share. Total assets at June 30, 2002 were reduced by $10,668,000.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements as of and for the three and
six month period ended June 30, 2002, 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
June 30, December 31,
2002 2001
--------- ------------
(dollars in thousands,
Assets except per share)
------
Real estate held for investment ...................................................... $ 442,583 $ 495,437
Less - accumulated depreciation ...................................................... (112,614) (121,777)
--------- ------------
329,969 373,660
Real estate held for sale ............................................................ 195,881 214,543
Notes and interest receivable
Performing ($26,420 in 2002 and $18,896 in 2001 from affiliates) ................. 28,206 22,612
Nonperforming ($6,499 in 2002 and $6,994 in 2001 from affiliates) ................ 7,516 10,347
--------- ------------
35,722 32,959
Less--allowance for estimated losses ................................................. (2,577) (2,577)
--------- ------------
33,145 30,382
Pizza parlor equipment ............................................................... 11,563 10,454
Less - accumulated depreciation ...................................................... (4,190) (3,747)
--------- ------------
7,373 6,707
Leasehold interest - oil and gas properties .......................................... -- 4,719
Less - accumulated depletion ......................................................... -- (1)
--------- ------------
-- 4,718
Oilfield equipment ................................................................... -- 511
Less - accumulated depreciation ...................................................... -- (21)
--------- ------------
-- 490
Marketable equity securities, at market value ........................................ 90 96
Cash and cash equivalents ............................................................ 2,631 709
Investments in equity investees ...................................................... 81,170 77,933
Intangibles, net of accumulated amortization ($2,696 in 2002 and $2,666 in 2001) ..... 15,565 15,594
Other assets ($1,591 in 2002 from affiliates) ........................................ 36,839 33,931
--------- ------------
$ 702,663 $ 758,763
========= ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS - Continued
REVISED
June 30, December 31,
2002 2001
---------------------------
(dollars in thousands,
except per share)
Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable ($6,181 in 2002 and $1,598 in 2001 to affiliates) ....................... $ 532,557 $ 564,298
Margin borrowings .................................................................................. 26,005 28,040
Accounts payable and other liabilities ($1,631 in 2002 and $11,389 in 2001 to affiliates) .......... 58,087 48,960
--------- ---------
616,649 641,298
Minority interest .................................................................................. 22,193 27,612
Series F Preferred Stock, 3,968.75 shares in 2001 (liquidation preference $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, 3,324,910 shares in 2002 and 2,724,910 shares in 2001 (liquidation
preference $33,249), including 900,000 shares in 2002 and 300,000 shares
in 2001 held by subsidiaries ............................................................... 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 ................................................................................ (56,161) (31,364)
Accumulated other comprehensive income ............................................................. 2,734 --
--------- ---------
63,821 85,884
--------- ---------
$ 702,663 $ 758,763
========= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
REVISED REVISED
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- -------
Property revenue (dollars in thousands, except per share)
Rents ................................................... $ 28,705 $ 27,273 $ 56,842 $ 53,830
Property operations expenses ............................ 20,481 23,486 39,800 42,543
-------- -------- -------- --------
Operating income ..................................... 8,224 3,787 17,042 11,287
Land operations
Sales ................................................... 15,121 13,087 20,701 33,577
Cost of sales ........................................... 13,957 12,163 17,338 28,864
-------- -------- -------- --------
Gain on land sales ................................... 1,164 924 3,363 4,713
Pizza parlor operations
Sales ................................................... 9,736 8,733 18,276 16,559
Cost of sales ........................................... 7,794 7,129 14,747 13,551
-------- -------- -------- --------
Gross margin ......................................... 1,942 1,604 3,529 3,008
Income from operations ..................................... 11,330 6,315 23,934 19,008
Other income
Interest income ......................................... 785 776 1,397 1,160
Equity in loss of investees ............................. (5,221) (3,841) (9,233) (5,288)
Loss on sale of investments in equity
investees ............................................ -- (387) (531) (387)
Other ................................................... 142 44 326 77
-------- -------- -------- --------
(4,294) (3,408) (8,041) (4,438)
Other expenses
Interest ................................................ 18,068 16,091 36,269 31,543
Depreciation and amortization ........................... 4,461 4,221 7,909 7,773
General and administrative .............................. 3,169 1,557 6,481 4,473
Advisory fee to affiliate ............................... 1,516 2,292 3,252 3,534
Net income fee to affiliate ............................. -- 1,766 -- 1,766
Incentive fee to affiliate .............................. -- 4,314 -- 5,835
Minority interest ....................................... 773 (95) 1,560 1,480
-------- -------- -------- --------
27,987 30,146 55,471 56,404
-------- -------- -------- --------
Net loss from continuing operations ........................ (20,951) (27,239) (39,578) (41,834)
Discontinued operations:
Income (loss) from operations ........................... 14 (6) (42) (889)
Gain on sale of real estate ............................. 2,150 25,840 7,765 42,266
Equity in gain on sale of real estate
by equity investees .................................. 4,149 9,938 8,280 11,380
-------- -------- -------- --------
Net income from discontinued operations .................... 6,313 35,772 16,003 52,757
Net income (loss) .......................................... (14,638) 8,533 (23,575) 10,923
Preferred dividend requirement ............................. (589) (606) (1,200) (1,248)
-------- -------- -------- --------
Net income (loss) applicable to
Common shares ........................................... $(15,227) $ 7,927 $(24,775) $ 9,675
======== ======== ======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - Continued
REVISED REVISED
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------------------------------
2002 2001 2002 2001
----------- ----------- ----------- ------------
(dollars in thousands, except per share)
Earnings per share
Net loss from continuing operations ..................................... $ (1.89) $ (2.75) $ (3.58) $ (4.26)
Discontinued operations ................................................. .55 3.53 1.40 5.22
----------- ----------- ----------- -----------
Net income (loss) applicable to Common shares ........................... $ (1.34) $ .78 $ (2.18) $ .96
=========== =========== =========== ===========
Weighted average Common shares used in computing earnings per share ........ 11,375,127 10,128,124 11,375,127 10,116,196
=========== =========== =========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 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 ........... -- -- -- -- -- 2,734 2,734
Net loss .................................... -- -- -- -- (23,575) -- (23,575)
--------
(20,841)
Common Stock dividends (pre-merger) ............ -- -- -- -- (22) -- (22)
Preferred dividends
Series A Preferred Stock ($.50 per share) ... -- -- -- -- (1,185) -- (1,185)
Series E Preferred Stock ($.30 per
share) ................................... -- -- -- -- (15) -- (15)
-------- -------- -------- -------- -------- -------- --------
Balance, June 30, 2002 ......................... $ 4,850 $ 100 $ 114 $112,184 $(56,161) $ 2,734 $ 63,821
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
REVISED
For the Six Months
Ended June 30,
-----------------------
2002 2001
---------- ----------
(dollars in thousands)
Cash Flows From Operating Activities
Rents collected .................................................................... $ 57,333 $ 65,738
Pizza parlor sales collected ....................................................... 18,070 16,579
Interest collected ................................................................. 966 300
Distributions received from equity investees' operating
cash flow ........................................................................ -- 53
Payments for property operations ................................................... (38,751) (56,666)
Payments for pizza parlor operations ............................................... (14,857) (13,689)
Interest paid ...................................................................... (30,329) (31,221)
Advisory fee paid to affiliate ..................................................... (3,252) (3,534)
Distributions to minority interest holders ......................................... (1,522) (1,583)
General and administrative expenses paid ........................................... (6,481) (4,473)
Other .............................................................................. (2,375) (2,497)
-------- --------
Net cash used in operating activities ........................................ (21,198) (30,993)
Cash Flows From Investing Activities
Collections on notes receivable .................................................... 5,346 4,471
Pizza parlor equipment purchased ................................................... (1,239) (713)
Proceeds from sale of real estate .................................................. 34,645 77,693
Notes receivable funded ............................................................ (1,920) (13,783)
Earnest money/escrow deposits ...................................................... 1,236 (960)
Investment in real estate entities ................................................. 71 (36,976)
Acquisition of real estate ......................................................... (1,359) --
Construction and development ....................................................... (6,676) --
Real estate improvements ........................................................... (2,568) (6,465)
Acquisition of leasehold interests ................................................. -- (150)
Purchase of oilfield equipment ..................................................... -- (213)
-------- --------
Net cash provided by investing activities .................................... 27,536 22,904
Cash Flows from Financing Activities
Proceeds from notes payable ........................................................ 75,613 77,924
Payments on notes payable .......................................................... (65,035) (79,875)
Deferred borrowing costs ........................................................... (4,125) (4,941)
Net (payments to)/advances from affiliates ......................................... (7,612) 18,832
Margin borrowings, net ............................................................. (2,050) (1,286)
Repurchase of Common Stock ......................................................... -- (133)
Preferred dividends paid ........................................................... (1,185) (643)
Common dividends paid .............................................................. (22) --
-------- --------
Net cash (used in) provided by financing activities .......................... (4,416) 9,878
Net increase in cash and cash equivalents .................................... 1,922 1,789
Cash and cash equivalents, beginning of period ......................................... 709 4,177
-------- --------
Cash and cash equivalents, end of period ............................................... $ 2,631 $ 5,966
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
7
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
REVISED
For the Six Months
Ended June 30,
------------------------
2002 2001
----------- -----------
(dollars in thousands)
Reconciliation of net income (loss) to net cash used in operating activities
Net income (loss) .................................................................. $(23,575) $ 10,923
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation and amortization ................................................... 8,087 8,679
Gain on sale of real estate ..................................................... (11,128) (46,979)
Distributions from equity investees' operating cash flow ........................ -- 53
Distributions to minority interest holders ...................................... 38 (103)
Equity in (income) loss of investees ............................................ 953 (6,092)
Loss on sale of investments in equity investees ................................. 531 387
Increase in accrued interest receivable ......................................... (431) (860)
(Increase) decrease in other assets ............................................. 1,530 3,243
Increase (decrease) in accrued interest payable ................................. 1,108 (243)
Increase (decrease) in accounts payable and other liabilities ................... 1,689 (1)
-------- --------
Net cash used in operating activities ........................................ $(21,198) $(30,993)
======== ========
Schedule of noncash investing and financing
Notes payable assumed by buyer on sale of real estate .............................. $ 56,495 $ 18,406
Exchange of real estate at carrying value .......................................... -- 3,726
Notes receivable from sale of real estate .......................................... -- 4,329
Issuance of Series F Preferred Stock ............................................... -- 3,969
Cancellation of Series F Preferred Stock ........................................... (3,969) --
Note receivable from sale of leasehold interests ................................... 1,300 --
Sale of real estate to affiliate to satisfy debt ................................... 24,886 --
Acquisition of assets from affiliate to satisfy debt ............................... (16,268) --
The accompanying notes are an integral part of these Consolidated Financial
Statements.
8
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 in
the first quarter of 2002. For the three months ended June 30, 2002 the change
resulted in an increase in the net loss from $(14,112,000) to $(14,638,000) and
a corresponding change in earnings per share from a net loss of $(1.29) per
share to a net loss of $(1.34) per share. For the six months ended June 30,
2002, the change resulted in an increase in the net loss from $(12,907,00) to
$(23,575,000) and a corresponding change in earnings per share from a net loss
of $(1.24) per share to a net loss of $(2.18) per share. Total assets at June
30, 2002 were reduced by $10,668,000.
Operating results for the six month period ended June 30, 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").
On January 1, 2002, ARI adopted Statement 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). The Statement superceded
Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS No. 121") and Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" ("APB 30"), for segments of a
business to be disposed of. SFAS 144 retains the requirements of SFAS No. 121
relating to the recognition and measurement of an impairment loss and resolves
certain implementation issues resulting from SFAS No. 121. The adoption of SFAS
No. 144 did not have a material impact on the consolidated financial position or
results of operations of ARI.
In April 2002, the FASB issued Statement 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Correction"
("SFAS No. 145"). Statement 4, "Reporting Gains and Losses from Extinguishment
of Debt" ("SFAS No. 4"), required that gains and losses from the extinguishment
of debt that were included in the determination of net income be aggregated and,
if material, classified as an extraordinary item. The provisions of SFAS No. 145
related to the rescission of SFAS No. 4 become effective in fiscal years
beginning after May 15, 2002. The adoption of SFAS No. 145 will not have a
material impact on the consolidated financial position or results of operations
of ARI.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force ("EITF") Issue No. 94-3. ARI will adopt
the provisions of SFAS No. 146 for restructuring activities initiated after
December 31, 2002. SFAS No. 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is incurred.
Under EITF No. 94-3, a liability for an exit cost was recognized at the date
9
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 1. BASIS OF PRESENTATION (Continued)
of a company's commitment to an exit plan. SFAS No. 146 also establishes that
the liability should initially be measured and recorded at fair value.
Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amount recognized.
NOTE 2. REAL ESTATE
In 2002, ARI purchased the following properties:
Units/ 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
Apartments
Pinecrest/(2)/ North Augusta, SC 120 Units 2,986 -- 1,423 /(3)/ 8.75% 03/03
Tiberon Trails/(2)/ Merrillville, IN 376 Units 12,000 -- 6,417 /(3)/ 9.00 07/06
Shopping Center
Alta Mesa/(2)/ Ft. Worth, TX 59,933 Sq.Ft. 4,000 -- 1,804 /(3)/ 10.43 10/04
Land
Pioneer Crossing Austin, TX 79.4 Acres 1,165 1,213 -- -- --
Willow Springs Beaumont, CA 20.7 Acres 140 146 -- -- --
----------------
(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.
(2) Property received from Basic Capital Management, Inc. ("BCM"), a related
party, for forgiveness of debt.
(3) Assumed debt of seller.
In 2001, ARI purchased the following properties:
Purchase Net Cash Debt Interest Maturity
Property Location Units/ 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 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
10
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
-------------- ----------- -------------- -------- ----------- ----------- -----------
First Quarter - Continued
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)/ --
Second Quarter
Apartments
Oak Hill Tallahassee, FL 92 Units 3,200 156 /(4)/ 2,550 527
Regency Tampa, FL 78 Units 3,200 851 1,710 ( 1,458)
Stonebridge Florissant, MO 100 Units 4,340 1,272 2,893 3,081
Office Building
Centura Dallas, TX 410,901 Sq.Ft. 50,000 -- 43,739 /(3)/ -- /(5)/
Land
Hollywood Casino Farmers Branch, TX 42.8 Acres 16,987 -- 6,222 /(3)/ -- /(5)/
Marine Creek Ft. Worth, TX 54.2 Acres 3,700 -- 1,500 /(3)/ -- /(5)/
Mason Goodrich Houston, TX 7.9 Acres 672 46 554 268
Mason Goodrich Houston, TX 10.3 Acres 1,444 93 1,225 895
Mason Goodrich Houston, TX 18.0 Acres 2,790 -- 2,690 /(3)/ -- /(5)/
Monterrey Riverside, CA 61.0 Acres 4,625 -- -- -- /(5)/
Nashville Nashville, TN 16.6 Acres 1,890 -- 955 /(3)/ -- /(5)/
Third Quarter
Apartments
Valley Hi Tallahassee, FL 54 Units 1,452 75 1,159 435
White Pines Tallahassee, FL 85 Units 764 10 593 ( 51)
Woodsong Smyrna, GA 190 Units 9,200 ( 45) 8,196 7,028
--------------
(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.
(4) Represents dividends on and redemption of Innovo Preferred Stock. See
NOTE 7. "NOTES PAYABLE."
(5) Sold to TCI, a related party. Gain deferred until sale to unrelated
party.
In 2001, 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
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
11
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
------------------------ ----------------- --------------- --------- ------------ ------------ -----------
First Quarter - Continued
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
Second Quarter
Apartments
Bent Tree Addison, TX 292 Units 12,050 2,480 8,867 7,081
Glenwood Addison, TX 168 Units 6,650 3,166 2,549 (581)
Kimberly Woods Tucson, AZ 279 Units 8,450 1,667 6,191 /(1)/ 6,053
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
Land
Katrina Palm Desert, CA 20.0 Acres 2,940 78 -- 616
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)
--------------------
(1) Debt assumed by purchaser.
(2) Gain deferred until 2002, when ARI-provided financing was collected.
NOTE 3. NOTES RECEIVABLE
In May 2002, ARI sold its leasehold interests in various oil and gas mineral
development properties for $1.3 million, receiving a note from the buyer for the
purchase price. The note bears interest at 10.0% per annum, matures in May 2004
and requires monthly payments of principal and accrued interest. See NOTE 4.
"OIL AND GAS OPERATIONS."
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.
12
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 was collected. In May 2002, $10,000
in principal and accrued interest was collected. In July 2002, the note was
collected in full, including accrued but unpaid interest.
Related Party. In June 2002, ARI converted $4.5 million of its receivable from
BCM, a related party, to a recourse note receivable. The note bears interest at
10.0% per annum, matures in March 2004 and requires quarterly payments of
principal and accrued interest. The first payment is due in December 2002.
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 were due at maturity in
February 2002. The line of credit is guaranteed by 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 line of credit was increased to $18.0 million, accrued but unpaid
interest of $217,000 was added to the principal and 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
13
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES RECEIVABLE (Continued)
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 and interest were due
at maturity. In February 2002, $275,000 of interest was received. In May 2002,
$33,000 of principal and $267,000 of interest was collected. At June 2002, the
loan, with a current principal balance of $1.7 million and $34,000 of accrued
interest, remained unpaid. At August 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 June 2002, the loan, and $576,000 of accrued interest,
remained unpaid. At August 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 June 2002, the loan, and $900,000 of accrued interest, remained
unpaid. At August 2002, settlement terms are being negotiated. Tara Group, Inc.,
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 were 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 bore no
interest, and matured in May 2002. Monthly principal payments of $25,000 were
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 bore no
interest, and matured in November 2001. One-half of the principal was paid in
August 2001. The remaining $4.0 million was
14
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. OIL AND GAS OPERATIONS (Continued)
paid by issuing 3,968.75 shares of ARI Series F Preferred Stock, which was
redeemable quarterly in an amount equal to 20% of net cash flow from the oil and
gas operations. The stock had a liquidation value of $1,000 per share, and paid
no dividends.
In May 2002, ARI sold the leasehold interests for $1.3 million, receiving a note
from the buyer for the purchase price. The note bears interest at 10.0% per
annum, matures in May 2004 and requires monthly payments of principal and
accrued interest. As part of the sale, the notes payable given by ARI for the
purchase of the Operator's Interest ($350,000) and the Working Interests
($250,000) were canceled. The 3,968.75 shares of ARI Series F Preferred Stock
were also returned to ARI and canceled.
NOTE 5. INVESTMENTS IN EQUITY INVESTEES
Real estate entities. ARI's investment in real estate entities at June 30, 2002,
included equity securities of two publicly traded real estate 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 June 30, 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 June 30, 2002 June 30, 2002 June 30, 2002 June 30, 2002
---------------------- ----------------- -------------- ---------------- -----------------
IORI ............................. 28.49% $ 7,981 $ 11,226 $ 7,379
TCI .............................. 49.99 66,329 106,727 80,335
-------- --------
74,310 $ 87,714
========
Other ............................ 6,860
--------
$ 81,170
========
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
15
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENTS IN EQUITY INVESTEES (Continued)
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 are summarized results of operations of equity investees for the
six months ended June 30, 2002:
Revenues ........................................... $ 66,079
Equity in loss of partnerships ..................... (2,644)
Property operating expenses ........................ 50,427
Depreciation ....................................... 10,766
Interest expense ................................... 20,173
Loss from discontinued operations .................. (1,842)
--------
Loss before gains on sale of real estate ........... (19,773)
Gain on sale of real estate ........................ 19,619
--------
Net loss ........................................... $ (154)
========
ARI's share of equity investees' loss before gains on the sale of real estate
was $9.2 million for the six months ended June 30, 2002, and its share of equity
investees' gains on sale of real estate was $8.3 million for the six months
ended June 30, 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.
Realty Advisors - Korea. In June 2002, ARI acquired Realty Advisors - Korea from
BCM, a related party, for $6.0 million. ARI's receivable from BCM was reduced by
$6.0 million, and no cash was paid by ARI.
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 accompanying Consolidated
Statements 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 six months of 2002, ARI did not purchase
or sell any such securities. At June 30, 2002, ARI recognized an unrealized
decrease in the market value of its trading portfolio securities of $7,000.
Unrealized and realized gains and losses on trading portfolio securities are
included in other income in the accompanying Consolidated Statements of
Operations.
16
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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
Land
Walker Dallas County, TX 90.6 Acres $ 8,500 $ 8,500 $( 1,411) 11.250% /(1)/ 01/03
Shopping Center
Plaza on Bachman
Creek Dallas, TX 80,278 Sq.Ft. 5,000 -- 4,444 6.625 /(1)/ 04/04
Second Quarter
Apartments
Lee Hills Tallahassee, FL 16 Units 1,750 /(2)/ 117 590 6.625 /(1)/ 06/05
Valley Hi Tallahassee, FL 54 Units -- /(2)/ 878 -- -- --
White Pines Tallahassee, FL 85 Units -- /(2)/ -- -- -- --
Office Buildings
Four Hickory Centre Farmers Branch, TX 221,000 Sq.Ft. 12,500 /(3)/ -- 3,399 13.000 05/03
Related Party Transactions. In each of the following transactions, except
those footnoted as (6), a related party has purchased an entity, which owns
the listed property asset, from ARI. ARI has guaranteed that the asset will
produce at least a 12% 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 the purchaser any shortfall. In addition, if the asset fails to
produce the 12% return for a calendar year, the purchaser may require ARI to
repurchase the entity for the purchase price. Management has classified these
related party transactions as notes payable.
Debt Debt Net Cash Interest Maturity
Property Location Units/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% 01/05 /(4)/
Two Hickory Centre Farmers Branch, TX 96,127 Sq.Ft. 4,448 -- 4,448 12.000 01/05 /(5)/
Second Quarter
Apartments
Bay Anchor Panama City, FL 12 Units 255 -- 203 5.000 05/03 /(6)/
Confederate Point Jacksonville, FL 206 Units 1,929 -- -- 12.000 04/05 /(7)/
Foxwood Memphis, TN 220 Units 1,093 -- -- 12.000 04/05 /(8)/
Governor Square Tallahassee, FL 168 Units 4,480 3,196 611 7.120 05/07 /(6)/
Grand Lagoon Panama City, FL 54 Units 2,083 1,209 655 5.000 05/03 /(6)/
Oak Hill Tallahassee, FL 92 Units 2,550 1,875 478 5.000 05/03 /(6)(10)/
Park Avenue Tallahassee, FL 121 Units 4,400 2,756 1,341 7.120 05/07 /(6)/
Seville Tallahassee, FL 62 Units 1,955 1,263 473 5.000 05/03 /(6)/
Westwood Mary Ester, FL 120 Units 3,382 2,327 1,023 7.570 05/12 /(6)/
Windsor Tower Ocala, FL 64 Units 1,989 1,128 702 5.000 05/03 /(6)/
Woodhollow San Antonio, TX 546 Units 8,160 5,349 2,775 7.120 05/07 /(6)/
Woodsong Smyrna, GA 190 Units 2,544 -- -- 12.000 04/05 /(9)/
Office Building
One Hickory Centre Farmers Branch, TX 102,615 Sq.Ft. 4,468 -- -- 12.000 04/05 /(11)/
___________
17
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. NOTES PAYABLE (Continued)
(1) Variable interest rate.
(2) Single note with all properties as collateral.
(3) $5.5 million funded at June 30, 2002.
(4) 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.
(5) 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.
(6) Properties sold to partnerships controlled by Metra Capital, LLC
("Metra"). 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 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 these shares is subject to the
above future events, management has elected to record no basis in the
Preferred Shares.
(7) 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.
(8) 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.
18
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. NOTES PAYABLE (Continued)
(9) 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. TCI sold the Woodsong Apartments in
July 2002.
(10) Sold to unrelated buyer in June 2002.
(11) 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.
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)/ 10/01
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 -- -- --
----------------------------
(1) Single note, with both 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.
In August 2002, the lender on one of ARI's hotel properties notified ARI that
ARI was in default under the provisions of the loan agreement regarding timely
payment and debt service coverage ratio. ARI is negotiating with the lender and
expects to resolve the issue.
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
19
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 8. MARGIN BORROWINGS (Continued)
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 $26.0 million at June 30, 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 Common Stock owned by ARI Common Stock 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 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 six months ended
June 30, 2002 or 2001.
20
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 loss of investees, equity in gains on
sale of real estate by investees, loss on sale of investments in equity
investees and other income which totaled $( 930,000) and $( 1.2) million for the
three and six months ended June 30, 2002 and $5.8 million and $5.8 million for
2001. Expenses that are not reflected in the segments are general and
administrative expenses, minority interest, incentive fees, advisory fees, net
income fees and discontinued operations, which totaled $4.9 million and $11.3
million for the three and six months ended June 30, 2002 and $9.8 million and
$18.0 million for 2001. Excluded from operating segment assets are assets of
$122.3 million in 2002 and $122.4 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.
Presented below are ARI's reportable segments operating income for the three and
six months ended June 30, 2002 and 2001, and segment assets at June 30, 2002 and
2001.
Inter-
Three Months Ended Commercial U.S. national Pizza Receivables/
June 30, 2002 Properties Apartments Hotels Hotels Land Parlors Other Total
------------------ ---------- ---------- ------- -------- -------------------- ----------- ---------
Operating revenue ....... $ 8,571 $ 9,326 $ 9,144 $ 1,465 $ (1) $ 9,736 $ 200 $ 38,441
Interest income ......... -- -- -- -- -- -- 785 785
Operating expenses ...... 5,932 5,866 6,190 748 1,706 7,794 39 28,275
-------- -------- ------ ------- -------- ------- ------- -------
Operating income
(loss) ............... $ 2,639 $ 3,460 $ 2,954 $ 717 $ (1,707) $ 1,942 $ 946 $ 10,951
======== ======== ====== ======= ======== ======= ======= =======
Depreciation .............. $ 2,046 $ 847 $ 640 $ 643 $ -- $ 283 $ 2 $ 4,461
Interest .................. 4,799 3,659 992 -- 5,228 216 3,174 18,068
Capital expenditures ...... 5,744 336 197 -- 2,271 848 -- 9,396
Assets .................... 136,639 102,407 66,832 24,091 195,881 21,360 33,145 580,355
Commercial
Property Sales: Properties Apartments Land Total
---------- ---------- --------- ---------
Sales price ............. $ 50,000 $ 10,740 $ 15,121 $ 75,861
Cost of sale ............ 50,000 8,590 13,957 72,547
-------- -------- -------- --------
Gain on sale ............ $ -- $ 2,150 $ 1,164 $ 3,314
======== ======== ======== ========
21
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 10. OPERATING SEGMENTS (Continued)
----------------------------
Inter-
Six Months Ended Commercial U.S. national Pizza Receivables/
June 30, 2002 Properties Apartments Hotels Hotels Land Parlors Other Total
----------------------------------- ---------- ---------- --------- --------- --------- --------- ------------ ---------
Operating revenue ............... $ 18,990 $ 19,178 $ 15,702 $ 2,468 $ 61 $ 18,276 $ 443 $ 75,118
Interest income ................. - - - - - - 1,397 1,397
Operating expenses .............. 11,390 11,465 11,419 1,323 4,080 14,747 123 54,547
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss) ......... $ 7,600 $ 7,713 $ 4,283 $ 1,145 $ (4,019) $ 3,529 $ 1,717 $ 21,968
========= ========= ========= ========= ========= ========= ========= =========
Depreciation .................... $ 3,614 $ 1,681 $ 1,163 $ 907 $ - $ 540 $ 4 $ 7,909
Interest ........................ 9,537 6,467 2,123 30 11,396 419 6,297 36,269
Capital expenditures ............ 7,033 548 358 - 2,664 1,239 - 11,842
Assets .......................... 136,639 102,407 66,832 24,091 195,881 21,360 33,145 580,355
Commercial
Property Sales: Properties Apartments Land Total
---------- ---------- --------- ---------
Sales price ................... $ 52,302 $ 22,697 $ 20,701 $ 95,700
Cost of sale .................. 52,302 14,932 17,338 84,572
--------- --------- --------- ---------
Gain on sale .................. $ - $ 7,765 $ 3,363 /(1)/ $ 11,128
========= ========= ========= =========
--------------------------------------
(1) Includes $830,000 gain recognized in 2002 upon collection of note
receivable for 2001 land sale.
Inter-
Three Months Ended Commercial U.S. national Pizza Receivables/
June 30, 2001 Properties Apartments Hotels Hotels Land Parlors Other Total
----------------------------------- ---------- ---------- --------- --------- --------- --------- ------------ ---------
Operating revenue ............... $ 7,479 $ 9,687 $ 8,937 $ 1,032 $ 42 $ 8,733 $ 96 $ 36,006
Interest income ................. - - - - - - 776 776
Operating expenses .............. 5,022 6,398 5,889 3,450 2,625 7,129 102 30,615
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss) ......... $ 2,457 $ 3,289 $ 3,048 $ ( 2,418) $ (2,583) $ 1,604 $ 770 $ 6,167
========= ========= ========= ========= ========= ========= ========= =========
Depreciation .................... $ 1,795 $ 835 $ 680 $ 650 $ - $ 257 $ 4 $ 4,221
Interest ........................ 4,017 2,489 1,006 97 8,078 (463) 867 16,091
Capital expenditures ............ 2,588 23 168 - 251 375 363 3,768
Assets .......................... 162,933 130,110 68,549 28,394 231,493 21,620 33,682 676,781
Property Sales: Apartments Land Total
---------- --------- ---------
Sales price ..................... $ 47,210 $ 13,087 $ 60,297
Cost of sale .................... 21,370 12,163 33,533
--------- --------- ---------
Gain on sale .................... $ 25,840 $ 924 $ 26,764
========= ========= =========
22
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 10. OPERATING SEGMENTS (Continued)
----------------------------
Inter-
Six Months Ended Commercial U.S. national Pizza Receivables/
June 30, 2001 Properties Apartments Hotels Hotels Land Parlors Other Total
----------------------------------- ---------- ---------- --------- --------- --------- --------- ------------ ---------
Operating revenue .............. $ 16,278 $ 19,491 $ 15,938 $ 1,726 $ 105 $ 16,559 $ 292 $ 70,389
Interest income ................ - - - - - - 1,160 1,160
Operating expenses ............. 10,053 11,945 11,939 3,984 4,544 13,551 78 56,094
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss) ........ $ 6,225 $ 7,546 $ 3,999 $ (2,258) $ (4,439) $ 3,008 $ 1,374 $ 15,455
========= ========= ========= ========= ========= ========= ========= =========
Depreciation .................... $ 3,527 $ 1,696 $ 1,309 $ 650 $ - $ 586 $ 5 $ 7,773
Interest ........................ 8,297 5,263 2,273 194 13,368 (191) 2,339 31,543
Capital expenditures ............ 4,806 23 320 1,000 316 713 363 7,541
Assets .......................... 162,933 130,110 68,549 28,394 231,493 21,620 33,682 676,781
Commercial
Property Sales: Properties Apartments Land Total
---------- ---------- --------- ---------
Sales price ................... $ 7,350 $ 65,890 $ 33,577 $ 106,817
Cost of sale .................. 5,058 25,916 28,864 59,838
--------- --------- --------- ---------
Gain on sale .................. $ 2,292 $ 39,974 $ 4,713 $ 46,979
========= ========= ========= =========
NOTE 11. DISCONTINUED OPERATIONS
---------------------------------
Effective January 1, 2002, ARI adopted Financial Accounting Standards Board
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, which established a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations. This statement
requires that the operations related to properties that have been sold or
properties that are intended to be sold be presented as discontinued operations
in the statement of operations for all periods presented, and properties
intended to be sold are to be designated as "held-for-sale" on the balance
sheet.
For the three and six months ended June 30, 2002 and 2001, income from
discontinued operations relates to seven properties that ARI sold during the
first six months of 2002 and 18 properties that ARI sold during 2001. The
following table summarizes revenue and expense information for these properties
sold and held-for-sale.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
Revenue 2002 2001 2002 2001
-------- -------- -------- --------
Rental .......................................... $ 344 $ 5,550 $ 1,558 $ 12,206
Property operations ............................. 162 2,157 735 6,551
-------- -------- -------- --------
182 3,393 823 5,655
Expenses
Interest ........................................ 97 3,020 687 5,638
Depreciation .................................... 71 379 178 906
-------- -------- -------- --------
168 3,399 865 6,544
-------- -------- -------- --------
Net income (loss) from discontinued operations .... 14 (6) (42) (889)
Gain of sale of real estate ..................... 2,150 25,840 7,765 42,266
Equity in gain on sale of real estate from
equity investees .............................. 4,149 9,938 8,280 11,380
-------- -------- -------- --------
Net income from discontinued operations ........... $ 6,313 $ 35,772 $ 16,003 $ 52,757
======== ======== ======== ========
23
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 11. DISCONTINUED OPERATIONS (Continued)
Discontinued operations have not been segregated in the consolidated statements
of cash flows. Therefore, amounts for certain captions will not agree with
respective consolidated statements of operations.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Liquidity. Management expects that 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.
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, two million units were
purchased in May 2001 and one million units were purchased in May 2002. The
remaining one million units were purchased in August 2002.
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.
NOTE 13. GOODWILL AND OTHER INTANGIBLES - ADOPTION OF SFAS 142
In June 2001, the Financial Accounting Standards Board finalized FASB Statement
No. 141, "Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that ARI recognize acquired intangible assets apart from goodwill
if the acquired intangible assets meet certain criteria. SFAS 141 applies to all
business combinations initiated after June 30, 2001. It also requires, upon
adoption of SFAS 142, that ARI reclassify the carrying amounts of intangible
assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that ARI identify reporting units in order to assess
potential future impairment of goodwill, reassess the useful lives of other
existing recognized intangible assets, and cease amortization of intangible
assets with an indefinite useful life. SFAS 142 requires that an intangible
asset with an indefinite useful life be tested for impairment in accordance with
specified guidelines. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS
24
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 13. GOODWILL AND OTHER INTANGIBLES - ADOPTION OF SFAS 142 (Continued)
142 required ARI to complete a transitional goodwill impairment test six months
from the date of adoption. ARI was also required to reassess the useful lives of
other intangible assets within the first interim quarter after adoption of SFAS
142.
The adoption of SFAS 141 did not have a material impact on ARI's results of
operations and financial position. ARI adopted SFAS 142 on January 1, 2002, and
accordingly ceased amortizing costs in excess of net assets acquired. In
connection with the adoption of SFAS 142, ARI completed the first step of the
goodwill impairment test during the quarter ended June 30, 2002. Based on the
results of this step, ARI believes that the fair value of its reporting unit
that carries goodwill exceeds its carrying amount. As the result of the first
step of the goodwill impairment test indicates that goodwill is not impaired,
the second step of the goodwill impairment test is not necessary.
Transitional Disclosures. Net income (loss) applicable to Common shares and
earnings per share, including the after-tax effect of amortization expense
related to costs in excess of net assets acquired for the three and six months
ended June 30, 2002 and 2001 and the years ended December 31, 2001, 2000 and
1999 are as follows:
Three Months Ended Six Months Ended Years Ended
June 30, June 30, December 31,
----------------------- ----------------------- ------------------------------------
2002 2001 2002 2001 2001 2000 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to
Common shares ....................... $ (15,227) $ 7,927 $ (24,775) $ 9,675 $ 12,584 $ 352 $ 8,017
Add back: Amortization of costs in
excess of net assets acquired ....... - 85 - 170 344 340 339
---------- ---------- ---------- ---------- ---------- ---------- ----------
Adjusted net income (loss)
applicable to Common shares ......... $ (15,227) $ 8,012 $ (24,775) $ 9,845 $ 12,928 $ 692 $ 8,356
========== ========== ========== ========== ========== ========== ==========
Earnings per share:
Net income (loss) applicable to
Common shares ....................... $ (1.34) $ .78 $ (2.18) $ .96 $ 1.07 $ .03 $ .75
Amortization of costs in excess of
net assets acquired ............... - .01 - .01 .03 .03 .03
---------- ---------- ---------- ---------- ---------- ---------- ----------
Adjusted net income (loss)
applicable to Common shares ....... $ (1.34) $ .79 $ (2.18) $ .97 $ 1.10 $ .06 $ .78
========== ========== ========== ========== ========== ========== ==========
Acquisitions. ARI made no acquisitions resulting in goodwill during the three
and six months ended June 30, 2002 and 2001 or the years ended December 2001,
2000 and 1999.
Intangible Assets not Subject to Amortization. The carrying value of ARI's costs
in excess of net assets acquired is as follows:
June 30, December 31,
2002 2001 2000 1999
------------ ------------ -------------- ------------
Costs in excess of net assets acquired, net of
accumulated amortization of $1,763 in 2002 and
2001, $1,420 in 2000 and $1,079 in 1999 ........... $ 11,858 $ 11,858 $ 12,201 $ 12,542
========== ========== ========== ==========
25
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 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. Earl D. Cecil, a Director of ARI, is also a
Director of TCI and IORI.
Critical Accounting Policies
Critical accounting policies are those that are both important to the
presentation of ARI's financial condition and results of operations and require
management's most difficult, complex or subjective judgements. ARI's critical
accounting policies relate to the evaluation of impairment of long-lived assets
and the evaluation of the collectibility of accounts and notes receivable.
If events or changes in circumstances indicate that the carrying value of a
rental property to be held and used or land held for development may be
impaired, management performs a recoverability analysis based on estimated
undiscounted cash flows to be generated from the property in the future. If the
analysis indicates that the carrying value is not recoverable from future cash
flows the property is written down to estimated fair value and an impairment
loss is recognized. If management decides to sell rental properties or land held
for
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Critical Accounting Policies (Continued)
development, management evaluates the recoverability of the carrying amounts of
the assets. If the evaluation indicates that the carrying value is not
recoverable from estimated net sales proceeds, the property is written down to
estimated fair value less costs to sell and an impairment loss is recognized
within income from continuing operations. ARI's estimates of cash flow and fair
values of the properties are based on current market conditions and consider
matters such as rental rates and occupancies for comparable properties, recent
sales data for comparable properties and, where applicable, contracts or the
results of negotiations with purchasers or prospective purchasers. ARI's
estimates are subject to revision as market conditions and ARI's assessments of
them change.
ARI's allowance for doubtful accounts receivable and notes receivable is
established based on analysis of the risk of loss on specific accounts. The
analysis places particular emphasis on past due accounts. Management considers
the information such as the nature and age of the receivable, the payment
history of the tenant or other debtor, the financial condition of the tenant or
other debtor, and ARI's assessment of its ability to meet its lease or interest
obligations. ARI's estimate of the required allowance, which is reviewed on a
quarterly basis, is subject to revision as these factors change and is sensitive
to the effects of economic and market conditions.
Liquidity and Capital Resources
General. Cash and cash equivalents at June 30, 2002, totaled $2.6 million,
compared with $709,000 at December 31, 2001. Although ARI anticipates that
during the remainder of 2002 it will generate 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 six months of 2002, ARI either extended, refinanced, paid down, paid off
or received commitments from lenders to extend or refinance $89.0 million of the
debt scheduled to mature in 2002.
Net cash used in operating activities decreased to $21.2 million in the six
months ended June 30, 2002, from $31.0 million in the six months ended June 30,
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 $18.6 million in the
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
six months ended June 30, 2002 from $9.1 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) increased to $3.2
million in the six months ended June 30, 2002, from $2.9 million in the six
months ended June 30, 2001. The increase is primarily attributable to the
opening of three new stores in 2001.
Interest collected increased to $966,000 in the six months ended June 30, 2002,
from $300,000 in 2001. The increase was primarily attributable to the collection
of $542,000 in past due interest.
Interest paid of $30.3 million in the six months ended June 30, 2002,
approximated the $31.2 million in 2001.
Advisory fees paid of $3.3 million in the six months ended June 30, 2002,
approximated the $3.5 million in 2001.
General and administrative expenses paid increased to $6.5 million in the six
months ended June 30, 2002 from $4.5 million in 2001. The increase is primarily
attributable to an increase in legal fees and 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 first six months of 2002 and 2001. 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 used in operating activities of $2.4 million in the six months ended
June 30, 2002, approximated the use of $2.5 million in 2001.
In the first six months of 2002, ARI received a total of $5.3 million on the
collection of two mortgage notes receivable and partial paydown of four mortgage
notes receivable.
In 2002, ARI purchased the following property:
Units/ 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 $ -- $ -- -- --
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Units/ Purchase Net Cash Debt Interest Maturity
Property Location Sq.Ft./Acres Price Paid Incurred Rate Date
--------------- --------- ------------- ------- -------- -------- -------- --------
Second Quarter
Apartments
Pinecrest/(2)/ North Augusta, SC 120 Units $ 2,986 $ -- $ 1,423/(3)/ 8.75% 03/03
Tiberon Trails/(2)/ Merrillville, IN 376 Units 12,000 -- 6,417/(3)/ 9.00 07/06
Shopping Center
Alta Mesa/(2)/ Ft. Worth, TX 59,933 Sq.Ft. 4,000 -- 1,804/(3)/ 10.43 10/04
Land
Pioneer Crossing Austin, TX 79.4 Acres 1,165 1,213 -- -- --
Willow Springs Beaumont, CA 20.7 Acres 140 146 -- -- --
-----------------------
(1) Exchanged with TCI, a related party, for the Oaktree Village Shopping
Center, Rasor land parcel and Lakeshore Villas land parcel.
(2) Property received from BCM, a related party, for forgiveness of debt.
(3) Assumed debt of seller.
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)/ --
Second Quarter
Apartments
Oak Hill Tallahassee, FL 92 Units 3,200 156 /(4)/ 2,550 527
Regency Tampa, FL 78 Units 3,200 851 1,710 (1,458)
Stonebridge Florissant, MO 100 Units 4,340 1,272 2,893 3,081
Office Building
Centura Dallas, TX 410,901 Sq.Ft. 50,000 -- 43,739 /(3)/ -- /(5)/
Land
Hollywood Casino Farmers Branch, TX 42.8 Acres 16,987 -- 6,222 /(3)/ -- /(5)/
Marine Creek Ft. Worth, TX 54.2 Acres 3,700 -- 1,500 /(3)/ -- /(5)/
Mason Goodrich Houston, TX 7.9 Acres 672 46 554 268
Mason Goodrich Houston, TX 10.3 Acres 1,444 93 1,225 895
Mason Goodrich Houston, TX 18.0 Acres 2,790 -- 2,690 /(3)/ -- /(5)/
Monterrey Riverside, CA 61.0 Acres 4,625 -- -- -- /(5)/
Nashville Nashville, TN 16.6 Acres 1,890 -- 955 /(3)/ -- /(5)/
29
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
-------------------- ---------------------- -------------------- ----------- -------------- ----------- -------------
Third Quarter
Apartments
Valley Hi Tallahassee, FL 54 Units $ 1,452 $ 75 $ 1,159 $ 435
White Pines Tallahassee, FL 85 Units 764 10 593 (51)
Woodsong Smyrna, GA 190 Units 9,200 (45) 8,196 7,028
----------------
(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.
(4) Represents dividends on and redemption of Innovo Preferred Stock. See NOTE
7. "NOTES PAYABLE."
(5) Sold to TCI, a related party. Gain deferred until sale to unrelated party.
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
Land
Walker Dallas County, TX 90.6 Acres $ 8,500 $ 8,500 $(1,411) 11.250% /(1)/ 01/03
Shopping Center
Plaza on Bachman
Creek Dallas, TX 80,278 Sq.Ft. 5,000 -- 4,444 6.625 /(1)/ 04/04
Second Quarter
Apartments
Lee Hills Tallahassee, FL 16 Units 1,750 /(2)/ 117 590 6.625 /(1)/ 06/05
Valley Hi Tallahassee, FL 54 Units -- /(2)/ 878 -- -- --
White Pines Tallahassee, FL 85 Units -- /(2)/ -- -- -- --
Office Buildings
Four Hickory Centre Farmers Branch, TX 221,000 Sq.Ft. 12,500 /(3)/ -- 3,399 13.000 05/03
Related Party Transactions. In each of the following transactions, except
those footnoted as (6), a related party has purchased an entity, which owns
the listed property asset, from ARI. ARI has guaranteed that the asset will
produce at least a 12% 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 the purchaser any shortfall. In addition, if the asset fails to
produce the 12% return for a calendar
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
year, the purchaser may require ARI to repurchase the entity for the purchase
price. Management has classified these related party transactions as notes
payable.
Debt Debt Net Cash Interest Maturity
Property Location Units/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% 01/05 /(4)/
Two Hickory Centre Farmers Branch, TX 96,127 Sq.Ft. 4,448 -- 4,448 12.000 01/05 /(5)/
Second Quarter
Apartments
Bay Anchor Panama City, FL 12 Units 255 -- 203 5.000 05/03 /(6)/
Confederate Point Jacksonville, FL 206 Units $ 1,929 $ -- $ -- 12.000% 04/05 /(7)/
Foxwood Memphis, TN 220 Units 1,093 -- -- 12.000 04/05 /(8)/
Governor Square Tallahassee, FL 168 Units 4,480 3,196 611 7.120 05/07 /(6)/
Grand Lagoon Panama City, FL 54 Units 2,083 1,209 655 5.000 05/03 /(6)/
Oak Hill Tallahassee, FL 92 Units 2,550 1,875 478 5.000 05/03 /(6)(10)/
Park Avenue Tallahassee, FL 121 Units 4,400 2,756 1,341 7.120 05/07 /(6)/
Seville Tallahassee, FL 62 Units 1,955 1,263 473 5.000 05/03 /(6)/
Westwood Mary Ester, FL 120 Units 3,382 2,327 1,023 7.570 05/12 /(6)/
Windsor Tower Ocala, FL 64 Units 1,989 1,128 702 5.000 05/03 /(6)/
Woodhollow San Antonio, TX 546 Units 8,160 5,349 2,775 7.120 05/07 /(6)/
Woodsong Smyrna, GA 190 Units 2,544 -- -- 12.000 04/05 /(9)/
Office Building
One Hickory Centre Farmers Branch, TX 102,615 Sq.Ft. 4,468 -- -- 12.000 04/05 /(11)/
------------------
(1) Variable interest rate.
(2) Single note with all properties as collateral.
(3) $5.5 million funded at June 30, 2002.
(4) 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.
(5) 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.
(6) Properties sold to partnerships controlled by Metra Capital, LLC ("Metra").
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
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
financial statements. 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 these shares is subject to the above
future events, management has elected to record no basis in the Preferred
Shares.
(7) 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.
(8) 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.
(9) 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. TCI sold the Woodsong Apartments in
July 2002.
(10) Sold to unrelated buyer in June 2002.
(11) 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 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 $26.0
million at June 30, 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
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
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, two million units were purchased in May 2001 and one
million units were purchased in May 2002. The remaining one million units were
purchased in August 2002.
Results of Operations
For the six months ended June 30, 2002, ARI reported a net loss of $23.6
million, compared to net income of $10.9 million for the six months ended June
30, 2001. The primary factors contributing to ARI's net loss are discussed in
the following paragraphs.
Rents increased to $28.7 million and $56.8 million in the three and six months
ended June 30, 2002, from $27.3 million and $53.8 million in 2001. Rents from
commercial properties increased to $19.0 million for the six months ended June
30, 2002, from $16.3 million in 2001, rent from hotels increased to $18.2
million in the six months ended June 30, 2002, from $17.7 million in 2001 and
rent from apartments of $19.2 million in the six months ended June 30, 2002
approximated the $19.4 million in 2001. The increase in commercial property
rents was primarily attributable to increased occupancy, and the increase in
hotel property rents was primarily attributable to the opening of the Hotel
Sofia in 2001. Rental income is expected to decrease in the remainder of 2002 as
a result of continued property sales.
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Property operations expense decreased to $20.5 million and $39.8 million in the
three and six months ended June 30, 2002, from $23.5 million and $42.5 million
in 2001. Property operations expense for commercial properties increased to
$11.4 million in the six months ended June 30, 2002, from $10.1 million in 2001.
For hotels, property operations expense decreased to $12.7 million in the six
months ended June 30, 2002, from $15.9 million in 2001. For land, property
operations expense of $4.1 million in the six months ended June 30, 2002
approximated the $4.5 million in 2001. For apartments, property operations
expense of $11.5 million in the six months ended June 30, 2002, approximated the
$11.9 million in 2001. The increase in commercial property operations expense
was primarily attributable to the acquisition of Plaza on Bachman Creek in 2002.
The decrease in hotel property operations expense was primarily due to the over
estimation of expenses at Hotel Sofia in 2001. Property operations expense is
expected to decrease in the remainder of 2002 as a result of continued property
sales.
Pizza parlor sales and cost of sales increased to $9.7 million and $7.8 million,
respectively, in the three months ended June 30, 2002 and $18.3 million and
$14.7 million for the six months ended June 30, 2002 from $8.7 million and $7.1
million, respectively, for the three months ended June 30, 2001 and $16.6
million and $13.6 million for the six months ended June 30, 2001. The increase
was primarily attributable to the opening of three new stores in 2001, plus an
increase of 10.4% in same- store sales.
Interest income from notes receivable of $785,000 and $1.4 million in the three
and six months ended June 30, 2002 approximated the $776,000 and $1.2 million in
2001.
Other income increased to $142,000 and $326,000 in the three and six months
ended June 30, 2002 from $44,000 and $77,000 in the three and six months ended
June 30, 2001. The increase was primarily due to service fee income and
dividends on and redemption of Innovo Preferred Stock. See NOTE 2. "REAL ESTATE"
and NOTE 7. "NOTES PAYABLE."
Interest expense increased to $18.0 million and $36.2 million in the three and
six months ended June 30, 2002 from $16.1 million and $31.5 million in 2001. The
increase was primarily attributable to higher balances payable on stock loans,
at higher interest rates.
Depreciation and amortization expense of $4.5 million and $7.9 million in the
three and six months ended June 30, 2002, approximated the $4.2 million and $7.8
million in 2001.
General and administrative expenses increased to $3.2 million and $6.5 million
in the three and six months ended June 30, 2002, from $1.6 million and $4.5
million in 2001. The increase is primarily attributable to increased legal fees
and increased cost reimbursements paid to the advisor.
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Advisory fees decreased to $1.5 million and $3.3 million in the three and six
months ended June 30, 2002 from $2.3 million and $3.5 million in 2001. The
decrease is due to the reduction in the total assets of ARI, which is the basis
for the fee.
There was no net income fee to affiliate in the three and six months ended June
30, 2002 compared to $1.8 million in the three and six months ended June 30,
2001. The income fee payable to ARI's advisor is 10% of the annualized net
income for the year, in excess of a 10% return on shareholders' equity. At June
30, 2002, ARI's annualized net income is below the 10% return threshold.
There was no incentive fee to affiliate in the three and six months ended June
30, 2002 compared to $4.3 million and $5.8 million in the three and six months
ended June 30, 2001. The incentive fee is only due if ARI is also subject to the
net income fee. At June 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.
Minority interest increased to $773,000 and $1.6 million in the three and six
months ended June 30, 2002, from $(95,000) and $1.5 million in 2001. The three
month increase is due to corrections made in the second quarter of 2001 that
effectively eliminated the expense for the quarter.
Equity in loss of investees decreased to $(5.2) million and $(9.2) million in
the three and six months ended June 30, 2002, from $(3.8) million and $(5.3)
million in 2001. The decrease was primarily attributable to increased net losses
for TCI and IORI in 2002.
Loss on the sale of investments in equity investees increased to $531,000 for
the six months ended June 30, 2002 from $387,000 in the three and six months
ended June 30, 2001. See NOTE 5. "INVESTMENTS IN EQUITY INVESTEES."
Equity in gain on sale of real estate by equity investees decreased to $4.1
million and $8.3 million in the three and six months ended June 30, 2002, from
$9.9 million and $11.4 million in 2001. The decrease is primarily attributable
to reduced profit margin on property sales by TCI and IORI.
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
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Environmental Matters (Continued)
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 June 30, 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 ................. $ 81,124 10.715% $ 811
========= =========
Total decrease in ARI's annual
net income .................... $ 811
=========
Per share ........................ $ .07
=========
36
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting was held on July 8, 2002, at which stockholders were asked to
consider and vote upon the election of Directors. At the meeting, stockholders
elected the following individuals as Directors:
Shares Voting
----------------------------
Withheld
Director For Authority
---------------------------------- ------------- -------------
Earl D. Cecil .................... 7,511,832 31,978
Collene C. Currie ................ 7,512,484 31,326
Richard W. Humphrey .............. 7,507,077 36,733
Joseph Mizrachi .................. 7,512,654 31,156
There were no abstentions or broker non-votes on the election of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
-------- ----------------------------------------------------------------------
3.0 Certificate of Withdrawal of Preferred Stock, Decreasing the Number of
Authorized Shares of and Eliminating Series F Redeemable Preferred
Stock, dated June 18, 2002 (incorporated by reference to Exhibit 3.0
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002).
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:
None.
37
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)
38
AMERICAN REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Quarter ended June 30, 2002
Exhibit Page
Number Description Number
--------- -------------------------------------------------------- ------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as 40
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. 41
39