Amendment No. 1 to Form 10-K
Table of Contents
Index to Financial Statements

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K/A

(Amendment No. 1)

x   ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Year Ended December 31, 2004

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO

Commission File Number 001-09240


Transcontinental Realty Investors, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Nevada   94-6565852
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer 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)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class   Name of each exchange on which registered

Common Stock, $.01 par value

  New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:

NONE

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 at least the past 90 days.    Yes x    No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes ¨    No x

The aggregate market value of the shares of voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the closing sales price of the Common Stock on the New York Stock Exchange as of June 30, 2004 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $21,917,192 based upon a total of 1,622,294 shares held as of June 30, 2004 by persons believed to be non-affiliates of the Registrant. The basis of the calculation does not constitute a determination by the Registrant as defined in Rule 405 of the Securities Act of 1933, as amended, such calculation, if made as of a date within sixty days of this filing would yield a different value. As of March 24, 2005, there were 7,900,869 shares of common stock outstanding.

Documents Incorporated by Reference:

Consolidated Financial Statements of Income Opportunity Realty Investors, Inc.

Commission File No. 001-14784

Consolidated Financial Statements of American Realty Investors, Inc.

Commission File No. 001-15663



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Index to Financial Statements

AMENDMENT #1 FOR ANNUAL REPORT ON 10-K FOR

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

The undersigned registrant hereby amends the following items, exhibits, or other portions of its Annual Report on Form 10-K for the fiscal year ended December 31, 2004 as set forth below and as reflected in the substituted pages attached hereto which replace the same numbered pages in the original filing:

 

    Page 18, under “Provision for Asset Impairments” removed “Acres” from the table header near the bottom of the page.

 

    Page 31, 3rd paragraph, 1st line, changed “translation”“ to “transaction.”

 

    Under the first table “The assets for 2004 include the following properties:” removed “Acres” from table header.

 

    Under the second table “The assets for 2003 include the following properties:” removed “Sq. Feet” from table header.

 

    Page 33, Under the first table, “The assets for 2003 include the following properties:” removed “Sq. Feet” from table header.

 

    Page 75, Note 20, under “Three Months Ended December 31, 2004,” changed Earnings Per Share for Net Income/(Loss) from continuing operations to $.64 instead of ($2.27) and changed Earnings Per Share for Discontinued operations to $3.69 instead of $6.60.

 

    Page 99, “Security Ownership of Management,” 1st paragraph, 2nd line, changed the date from “March 18, 2005” to “March 24, 2005.”

 

    Page 106, ITEM 15(a) 1, 1st line, “Report of Independent Certified Public Accountants” changed to “Reports of Independent Registered Public Accounting Firms.”

 

    Page 115, “Certification” added to top of document.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized.

 

        Transcontinental Realty Investors, Inc.
Dated: April 7, 2005       By:  

/S/    SCOTT T. LEWIS        


               

Scott T. Lewis

Executive Vice President and

Chief Financial Officer

(Principal Financial and Accounting

Officer and Acting Principal

Executive Officer)


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INDEX TO

ANNUAL REPORT ON FORM 10-K

 

          Page

PART I     

Item 1.

   Business    3

Item 2.

   Properties    10

Item 3.

   Legal Proceedings    23

Item 4.

   Submission of Matters to a Vote of Security Holders    25
PART II     

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchased Equity Securities    26

Item 6.

   Selected Financial Data    27

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    28

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk    36

Item 8.

   Financial Statements and Supplementary Data    38

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    88

Item 9A.

   Controls and Procedures    88

Item 9B.

   Other Information    88
PART III     

Item 10.

   Directors, Executive Officers and Advisor of the Registrant    89

Item 11.

   Executive Compensation    95

Item 12.

   Security Ownership of Certain Beneficial Owners and Management    98

Item 13.

   Certain Relationships and Related Transactions    99

Item 14.

   Principal Accountant Fees and Services    104
PART IV     

Item 15.

   Exhibits and Consolidated Financial Statements Schedules    106

Signature Page

   108

 

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FORWARD-LOOKING STATEMENTS

 

Certain Statements in the Form 10-K are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words “estimate,” “plan,” “intend,” “expect,” “anticipate,” “believe,” and similar expressions are intended to identify forward-looking statements. The forward-looking statements are found at various places throughout this Report and in the documents incorporated herein by reference. The Company disclaims any intention or obligations to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that our expectations are based upon reasonable assumptions, we can give no assurance that our goals will be achieved. Important factors that could cause our actual results to differ from estimates or projections contained in any forward-looking statements are described under “Risk Factors Related to our Business” beginning on page 6.

 

PART I

 

ITEM 1.    BUSINESS

 

Transcontinental Realty Investors, Inc. (“TCI” or the “Company” or “we” or “us”), a Nevada corporation, is the successor to a California business trust that was organized on September 6, 1983 and commenced operations on January 31, 1984. On November 30, 1999, TCI acquired all of the outstanding shares of beneficial interest of Continental Mortgage and Equity Trust (“CMET”), a real estate company, in a tax-free exchange of shares, issuing 1.181 shares of its Common Stock for each outstanding CMET share. Prior to January 1, 2000, TCI elected to be treated as a Real Estate Investment Trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). During the third quarter of 2000, due to a concentration of ownership TCI no longer met the requirement for tax treatment as a REIT. Under the Code, TCI cannot re-qualify for REIT tax status for at least five years after January 1, 2001.

 

TCI’s real estate at December 31, 2004, consisted of 111 properties held for investment, one partnership property, 11 construction properties and 6 properties held for sale. In 2004, TCI purchased 20 properties held for investment. TCI’s mortgage notes receivable portfolio at December 31, 2004, consisted of 23 mortgage loans. TCI’s real estate and mortgage notes receivable portfolios are more fully discussed in ITEM 2. “PROPERTIES.”

 

Effective March 31, 2003, TCI financial results were consolidated in the American Realty Investors, Inc. (“ARI”) Form 10-K and related consolidated financial statements. As of December 31, 2004, ARI owned 82.2% of the outstanding TCI common shares.

 

Business Plan and Investment Policy

 

TCI’s business is investing in real estate through direct equity ownership and partnerships and financing real estate and real estate related activities through investments in mortgage loans, including first, wraparound and junior mortgage loans. TCI’s real estate is located throughout the continental United States and one property is located in Poland. Information regarding TCI’s real estate and mortgage notes receivable portfolios is set forth in ITEM 2. “PROPERTIES”, and in Schedules III and IV to the Consolidated Financial Statements included in ITEM 8. “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.” TCI has four operating segments; apartments, commercial properties, hotels and land ownership.

 

TCI’s business is not seasonal. Management has determined to continue to pursue a balanced investment policy, seeking both current income and capital appreciation. With respect to new real estate investments, management’s plan of operation is to consider all types of real estate with an emphasis on properties generating current cash flow. Management expects to invest in and improve these properties to maximize both their immediate and long-term value. Management has also considered the development of apartment properties in selected markets primarily in Texas. Management also expects to consider property sales opportunities for

 

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properties in stabilized real estate markets where TCI’s properties have reached their potential. Management also expects to be an opportunistic seller of properties in markets that have become overheated, i.e., an abundance of buyers. Management’s operating strategy with regard to TCI’s properties is to maximize each property’s operating income by aggressive property management through closely monitoring expenses while at the same time making property renovations and/or improvements where appropriate. While such expenditures increase the amount of revenue required to cover operating expenses, management believes that such expenditures are necessary to maintain or enhance the value of the properties.

 

Management does not expect that TCI will seek to fund or acquire new mortgage loans in 2005. However, TCI may originate mortgage loans in conjunction with providing purchase money financing of a property sale. Management intends to service and hold for investment the mortgage notes in TCI’s portfolio. TCI may borrow against its mortgage notes, using the proceeds from such borrowings for property acquisitions or for general working capital needs. Management also intends to pursue TCI’s rights vigorously with respect to mortgage notes that are in default. TCI’s Articles of Incorporation impose no limitations on its investment policy with respect to mortgage loans and does not prohibit it from investing more than a specified percentage of its assets in any one mortgage loan.

 

Management of the Company

 

Although the Board of Directors is directly responsible for managing the affairs of TCI and for setting the policies which guide it, its day-to-day operations were performed until July 1, 2003 by Basic Capital Management, Inc. (“BCM”), a contractual advisor under the supervision of the Board. Effective July 1, 2003, BCM was replaced as contractual advisor to TCI by Prime Asset Management, Inc., (“PAMI”) under the same terms as BCM’s advisory agreement. PAMI is owned by Realty Advisors (80.0%) and Syntek West, Inc. (20.0%), related parties. Syntek West, Inc. is owned by Gene Phillips. Effective August 18, 2003, PAMI changed its name to Prime Income Asset Management, Inc., (“PIAMI”). On October 1, 2003, Prime Income Asset Management, LLC (“Prime”), which is owned 100% by PIAMI, replaced PIAMI as the advisor to TCI. The duties of Prime include, among other things, locating, investigating, evaluating and recommending real estate, mortgage note investment and sales opportunities, as well as financing and refinancing sources. Prime also serves as a consultant in connection with TCI’s business plan and investment decisions made by the Board.

 

Prime is indirectly owned by a trust for the children of Gene E. Phillips, and Syntek West, Inc. (which is owned by Mr. Phillips), owns 20% of Prime. Mr. Phillips is not an officer or director of Prime, but serves as a representative of the trust, is involved in daily consultation with the officers of Prime and has significant influence over the conduct of Prime’s business, including the rendering of advisory services and the making of investment decisions for itself and for TCI. Prime is more fully described in ITEM 10. “DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT—The Advisor.”

 

BCM had provided advisory services to TCI from March 28, 1989 until June 30, 2003, when Prime replaced BCM as the contractual advisor to TCI. Prime also serves as advisor to ARI. The directors of TCI are also directors of ARI. The officers of TCI also serve as officers of ARI, BCM and Prime. As of March 24, 2004, TCI owned approximately 24.0% of IORI’s outstanding shares of common stock. ARI owns approximately 82.2% of the outstanding shares of TCI’s common stock.

 

Since February 1, 1990, affiliates of BCM and Prime have provided property management services to TCI. Currently, Triad Realty Services, Ltd. (“Triad”) provides such property management services. Triad subcontracts with other entities for the provision of property-level management services to TCI. The general partner of Triad is BCM. The limited partner of Triad is Highland Realty Services, Inc. (“Highland”). Triad subcontracts the property-level management and leasing of 24 of TCI’s commercial properties (office buildings, shopping centers and industrial warehouses) to Regis Realty I, LLC (“Regis I”), which is owned by Highland. Regis I receives property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad. Regis I is also entitled to receive real estate brokerage

 

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commissions in accordance with the terms of a non-exclusive brokerage agreement. Since January 1, 2003, Regis Hotel I, LLC, has managed TCI’s four hotels. The sole member of Regis I and Regis Hotel I, LLC is Highland. See ITEM 10. “DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT—The Advisor.”

 

TCI has no employees. Employees of Prime render services to TCI.

 

Competition

 

The real estate business is highly competitive and TCI competes with numerous entities engaged in real estate activities (including certain entities described in ITEM 13. “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS—Related Party Transactions”), some of which have greater financial resources than those of TCI. Management believes that success against such competition is dependent upon the geographic location of the property, the performance of property-level managers in areas such as marketing, collections and control of operating expenses, the amount of new construction in the area and the maintenance and appearance of the property. Additional competitive factors with respect to commercial properties are the ease of access to the property, the adequacy of related facilities, such as parking, and sensitivity to market conditions in setting rent levels. With respect to apartments, competition is also based upon the design and mix of units and the ability to provide a community atmosphere for the tenants. Management believes that beyond general economic circumstances and trends, the rate at which properties are renovated or the rate new properties are developed in the vicinity of each of TCI’s properties also are competitive factors. See also “Risk Factors Related to our Business.”

 

To the extent that TCI seeks to sell any of its properties, the sales prices for such properties may be affected by competition from other real estate entities and financial institutions also attempting to sell their properties located in areas in which TCI’s properties are located, as well as by aggressive buyers attempting to penetrate or dominate a particular market.

 

As described above and in ITEM 13. “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS—Related Party Transactions,” the officers and directors of TCI also serve as officers or directors of certain other entities, also advised by Prime, and which have business objectives similar to those of TCI. TCI’s directors, officers and advisor owe fiduciary duties to such other entities as well as to TCI under applicable law. In determining to which entity a particular investment opportunity will be allocated, the officers, directors and advisor consider the respective investment objectives of each such entity and the appropriateness of a particular investment in light of each such entity’s existing real estate portfolio. To the extent that any particular investment opportunity is appropriate to more than one of the entities, the investment opportunity will be allocated to the entity which has had funds available for investment for the longest period of time or, if appropriate, the investment may be shared among all or some of the entities.

 

In addition, as also described in ITEM 13. “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS—Certain Business Relationships,” TCI also competes with other entities which are affiliates of Prime and which have investment objectives similar to TCI’s and that may compete with it in purchasing, selling, leasing and financing of real estate and real estate related investments. In resolving any potential conflicts of interest which may arise, Prime has informed management that it intends to continue to exercise its best judgment as to what is fair and reasonable under the circumstances in accordance with applicable law.

 

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Risk Factors Related to our Business

 

Adverse events concerning TCI’s existing tenants or negative market conditions that may affect TCI’s existing tenants could have an adverse impact on TCI’s ability to attract new tenants, release space, collect rent or renew leases, and thus could adversely affect cash flow from operations and inhibit growth. Cash flow from operations depends on the ability to lease space to tenants on economically favorable terms. TCI could be adversely affected by various facts and events over which there is limited control, such as:

 

    lack of demand for space in areas where the properties are located;

 

    inability to retain existing tenants and attract new tenants;

 

    oversupply of or reduced demand for space and changes in market rental rates;

 

    defaults by tenants or failure to pay rent on a timely basis;

 

    the need to periodically renovate and repair marketable space;

 

    physical damage to properties;

 

    economic or physical decline of the areas where properties are located;

 

    potential risk of functional obsolescence of properties over time.

 

At any time, any tenant may experience a downturn in its business that may weaken its financial condition. As a result, a tenant may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent or declare bankruptcy. Any tenant bankruptcy or insolvency, leasing delay or failure to make rental payments when due could result in the termination of the tenant’s lease and material losses to the Company.

 

If tenants do not renew their leases as they expire, TCI may not be able to rent the space. Furthermore, leases that are renewed, and some new leases for space that is relet, may have terms that are less economically favorable than current lease terms, or may require TCI to incur significant costs, such as for renovations, tenant improvements or lease transaction costs. Any of these events could adversely affect cash flow from operations and TCI’s ability to make expected distributions to shareholders and service indebtedness. A significant portion of the costs, such as real estate taxes, insurance costs, and debt service payments, generally are not reduced when circumstances cause a decrease in cash flow from the properties.

 

TCI may not be able to compete successfully with other entities that operate in our industry.    TCI experiences a great deal of competition in attracting tenants for the properties and in locating land to develop and properties to acquire.

 

In TCI’s effort to lease these properties, TCI competes for tenants with a broad spectrum of other landlords in each of the markets. These competitors include, among others, publicly-held REITs, privately-held entities, individual property owners and tenants who wish to sublease their space. Some of these competitors may be able to offer prospective tenants more attractive financial terms than TCI is able to offer.

 

If the availability of land or high quality properties in TCI’s markets diminishes, operating results could be adversely affected.

 

TCI may experience increased operating costs, which could adversely affect operations.    TCI’s properties are subject to increases in operating expenses such as insurance, cleaning, electricity, heating, ventilation and air conditioning, administrative costs and other costs associated with security, landscaping, repairs and maintenance of the properties. While current tenants generally are obligated to pay a significant portion of these costs, there is no assurance that these tenants will make such payments or agree to pay these costs upon renewal or that new tenants will agree to pay these costs. If operating expenses increase in TCI’s markets, TCI may not be able to

 

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increase rents or reimbursements in all of these markets to meet increased expenses, without at the same time decreasing occupancy rates. If this occurs, TCI’s ability to make distributions to shareholders and service indebtedness could be adversely affected.

 

TCI’s ability to achieve growth in operating income depends in part on the ability to develop properties which may suffer under certain circumstances.    TCI intends to continue to develop properties where warranted by market conditions. The decline in demand for real estate has reduced the amount of development TCI is undertaking. TCI has a number of ongoing development and land projects being readied for development.

 

Additionally, general construction and development activities includes the following risks:

 

    construction and leasing of a property may not be completed on schedule, which could result in increased expenses and construction costs, and would result in reduced profitability for that property;

 

    construction costs may exceed original estimates due to increases in interest rates and increased materials, labor or other costs, possibly making the property unprofitable because of inability to increase rents to compensate for the increase in construction costs;

 

    some developments may fail to achieve expectations, possibly making them unprofitable;

 

    TCI may be unable to obtain, or face delays in obtaining, required zoning, land-use, building, occupancy, and other governmental permits and authorizations, which could result in increased costs and could require TCI to abandon their activities entirely with respect to a project;

 

    TCI may abandon development opportunities after the initial exploration which may result in failure to recover costs already incurred. If TCI determines to alter or discontinue its development efforts, future costs of the investment may be expensed as incurred rather than capitalized and TCI may determine the investment is impaired resulting in a loss;

 

    TCI may expend funds on and devote management’s time to projects which will not be complete;

 

    occupancy rates and rents at newly-completed properties may fluctuate depending on a number of factors, including market and economic conditions, which may result in lower than projected rental rates and the investment is not profitable.

 

TCI faces risk associated with property acquisitions.    TCI acquires individual properties and portfolios of properties, and intends to continue to do so. The acquisition activities and their success are subject to the following risks:

 

    when TCI is able to locate a desired property, competition from other real estate investors may significantly increase the purchase price;

 

    acquired properties may fail to perform as expected;

 

    the actual costs of repositioning or redeveloping acquired properties may be higher than the estimates;

 

    acquired properties may be located in new markets where TCI faces risks associated with an incomplete knowledge or understanding of the local market, a limited number of established business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures;

 

    TCI may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into existing operations, and results of operations and financial condition could be adversely affected.

 

TCI may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were asserted against TCI based upon ownership of those properties, TCI might have to pay substantial sums to settle it, which could adversely affect cash flow.

 

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Many of TCI’s properties are concentrated in the Company’s primary markets, and, therefore may suffer economic harm as a result of adverse conditions in those markets.    TCI’s properties are located principally in specific geographic areas in the Southwestern, Southeastern and Midwestern United States. Due to the concentration of properties in these areas, performance is dependent on economic conditions. These areas have experienced periods of economic decline.

 

TCI is highly leveraged and may not be able to meet our debt service obligations.    TCI had total indebtedness at December 31, 2004 of approximately $644.1 million. Substantially all assets have been pledged to secure debt. These borrowings increase the risk of loss because they represent a prior claim on assets and require fixed payments regardless of profitability. TCI’s highly leveraged position makes it vulnerable to changes in economic conditions and may limit the ability to capitalize on significant business opportunities in the future.

 

TCI may not be able to access financial markets to obtain capital on a timely basis, or on acceptable terms.    TCI relies on proceeds from property dispositions and third party capital sources for a portion of its capital needs, including capital for acquisitions and development. The public debt and equity markets are among the sources relied on. There is no guarantee TCI will be able to access these markets, or any other source of capital. The ability to access the public debt and equity markets depends on a variety of factors, including:

 

    general economic conditions affecting these markets;

 

    TCI’s own financial structure and performance;

 

    the market’s opinion of REITs and real estate companies in general;

 

    the market’s opinion of REITs and real estate companies that own properties like TCI.

 

TCI may suffer adverse effects as a result of the terms of and covenants relating to our indebtedness.    Required payments on TCI’s indebtedness generally are not reduced if the economic performance of the portfolio declines. If the economic performance declines, net income, cash flow from operations and cash available for distribution to stockholders will be reduced. If payments on debt cannot be made, TCI could sustain a loss, or in the case of mortgages, suffer foreclosures by mortgagees or suffer judgments. Further, some obligations contain cross-default and/or cross-acceleration provisions, which means that a default on one obligation may constitute a default on other obligations.

 

TCI anticipates only a small portion of the principal of our debt will be repaid prior to maturity. Therefore, TCI is likely to need to refinance at least a portion of its outstanding debt as it matures. There is a risk that TCI may not be able to refinance existing debt or the terms of any refinancing will not be as favorable as the terms of the existing debt. If principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as the proceeds of sales of assets or new equity securities, cash flow will not be sufficient to repay all maturing debt in years when significant “balloon” payments come due.

 

TCI’s credit facilities and unsecured debt securities contain customary restrictions, requirements and other limitations on the ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios and minimum ratios of unencumbered assets to unsecured debt which we must maintain. Our continued ability to borrow is subject to compliance with financial and other covenants. In addition, failure to comply with such covenants could cause a default under credit facilities, and TCI may then be required to repay such debt with capital from other sources. Under those circumstances, other sources of capital may not be available, or be available only on unattractive terms.

 

TCI’s degree of leverage could limit the ability to obtain additional financing or affect the market price of our common stock.    The degree of leverage could affect TCI’s ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes. The degree of leverage could also make TCI more vulnerable to a downturn in business or the economy, in general.

 

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An increase in interest rates would increase TCI’s interest costs on variable rate debt and could adversely impact the ability to refinance existing debt.    TCI currently has, and may incur more, indebtedness that bears interest at variable rates. Accordingly, if interest rates increase, so will the interest costs, which would adversely affect cash flow and the ability to pay principal and interest on TCI’s debt and the ability to make distributions to shareholders. Further, rising interest rates could limit TCI’s ability to refinance existing debt when it matures.

 

Unbudgeted capital expenditures or cost overruns could adversely affect our business operations and cash flow.    If capital expenditures on ongoing or planned development projects, renovations or condominium conversions exceed our expectations, the additional cost of these expenditures could have an adverse effect on business operations and cash flow. In addition, TCI might not have access to funds on a timely basis to meet the unexpected expenditures.

 

Construction costs are funded in large part through construction financing, which the Company often guarantees, and the Company’s obligation to pay interest on this financing continues until the rental project is completed, leased up, and permanent financing is obtained, or the for sale project is sold out. Unexpected delays in completion of one or more ongoing projects could also have a significant adverse impact on business operations and cash flow.

 

TCI may need to sell properties from time-to time for cash flow purposes.    Because of the lack of liquidity of real estate investments generally, TCI’s ability to respond to changing circumstances may be impaired. Real estate investments generally cannot be sold quickly. In the event that TCI must sell assets to generate cash flow, TCI cannot predict whether there will be a market for those assets in the time period desired or need to sell them, or whether TCI will be able to sell them at a price that will allow the Company to fully recoup our investment. TCI may not be able to realize the full potential value of the assets, and may incur costs related to the early pay-off of the debt secured by such assets.

 

TCI intends to devote increasing resources to the development of new projects.    TCI plans to continue developing new projects as opportunities arise in the future. Development and construction activities entail a number of risks, including but not limited to the following:

 

    TCI may abandon a project after spending non-recoverable time and money determining its feasibility;

 

    Construction costs may materially exceed original estimates;

 

    The revenue from a new project may not be enough to make it profitable or generate a positive cash flow;

 

    TCI may not be able to obtain financing on favorable terms for development of a property, if at all;

 

    The Company may not complete construction and lease-ups on schedule, resulting in increased development or carrying costs;

 

    TCI may not be able to obtain, or may be delayed in obtaining, necessary governmental permits.

 

TCI’s overall business is subject to all of the risks associated with the real estate industry.    TCI is subject to all risks incident to investment in real estate, many of which relate to the general lack of liquidity of real estate investments, including, but not limited to:

 

    changes in general or local economic conditions because TCI’s real estate assets are concentrated in the Southwest, any deterioration in the general economic conditions in any of those states could have an adverse effect on business and assets in that state;

 

    changes in interest rates may make the ability to satisfy debt service requirements materially more burdensome;

 

    lack of availability of financing may render the purchase, sale or refinancing of a property more difficult or unattractive;

 

    changes in real estate and zoning laws;

 

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    increases in real estate taxes and insurance costs;

 

    federal or local economic or rent control, and

 

    floods, earthquakes and other similar natural disasters.

 

Available Information

 

TCI maintains an internet site at http://www.transconrealty-invest.com. TCI has available through their website free of charge Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed pursuant to Section 16 and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange Commission. In addition, the Company has posted the charters for our Audit Committee, Compensation Committee and Governance and Nominating Committee, as well as our Code of Business Conduct and Ethics, Corporate Governance Guidelines on Director Independence and other information on the website. These charters and principles are not incorporated in this Report by reference. TCI will also provide a copy of these documents free of charge to stockholders upon written request. The Company issues Annual Reports containing audited financial statements to its common stockholders.

 

ITEM 2.    PROPERTIES

 

TCI’s principal offices are located at 1800 Valley View Lane, Suite 300, Dallas, Texas 75234 and are, in the opinion of management, suitable and adequate for TCI’s present operations.

 

Details of TCI’s real estate and mortgage notes receivable portfolios at December 31, 2004, are set forth in Schedules III and IV to the Consolidated Financial Statements included at ITEM 8. “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.” The discussions set forth below under the headings “Real Estate” and “Mortgage Loans” provide certain summary information concerning TCI’s real estate and mortgage notes receivable portfolios.

 

TCI’s real estate portfolio consists of properties held for investment, properties held for sale, properties subject to sales contract, and investments in partnerships. The discussion set forth below under the heading “Real Estate” provides certain summary information concerning TCI’s real estate and further summary information with respect to its properties held for investment, properties held for sale and its investment in partnerships.

 

At December 31, 2004, none of TCI’s properties, mortgage notes receivable or investments in partnerships exceeded 10.0% of total assets. At December 31, 2004, 71.5% of TCI’s assets consisted of properties held for investment, 5.4% consisted of properties held for sale, 7.6% consisted of properties subject to sales contract, 6.2% consisted of mortgage notes and interest receivables and 1.9% consisted of investments in partnerships and equity investees. The remaining 7.4% of TCI’s assets were invested in cash, cash equivalents and other assets. The percentage of TCI’s assets invested in any one category is subject to change and no assurance can be given that the composition of TCI’s assets in the future will approximate the percentages listed above.

 

TCI’s real estate is geographically diverse. At December 31, 2004, TCI held investments in apartments and commercial properties in each of the geographic regions of the continental United States, although its apartments and commercial properties were concentrated in the Southeast and Southwest regions, as shown more specifically in the table under “Real Estate” below. At December 31, 2004, TCI held mortgage notes receivable secured by apartments and commercial properties in the Southwest and Southeast regions of the continental United States, as shown more specifically in the table under “Mortgage Loans” below.

 

10


Table of Contents
Index to Financial Statements

Geographic Regions

 

TCI has divided the continental United States into the following geographic regions.

 

LOGO

 

Excluded from the above is one hotel in Wroclaw, Poland and a partnership property, as described below.

 

Real Estate

 

At December 31, 2004, approximately 84.5% of TCI’s assets were invested in real estate. TCI invests primarily in real estate located throughout the continental United States, either on a leveraged or non-leveraged basis. TCI’s real estate portfolio consists of properties held for investment, investments in partnerships and properties held for sale.

 

Types of Real Estate Investments.    TCI’s real estate consists of commercial properties (office buildings, industrial warehouses and shopping centers), hotels and apartments having established income-producing capabilities. In selecting real estate for investment, the location, age and type of property, gross rents, lease terms, financial and business standing of tenants, operating expenses, fixed charges, land values and physical condition are among the factors considered. TCI may acquire properties subject to or assume existing debt and may mortgage, pledge or otherwise obtain financing for its properties. The Board of Directors may alter the types of criteria for selecting new real estate investments and for obtaining financing without a vote of stockholders.

 

TCI’s current real estate portfolio consists of 129 owned properties. Of the 129 properties, 12 apartments were sold to partnerships controlled by Metra Capital, LLC (“Metra”). See NOTE 8. “RELATED PARTY TRANSACTIONS.” Because the Metra sales transaction was accounted for as a finance transaction, TCI continues to account for the 12 properties as owned properties.

 

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Index to Financial Statements

TCI typically invests in developed real estate. However, TCI has recently invested in unimproved land and apartment development and construction. To the extent that TCI continues to invest in development and construction projects, it will be subject to business risks, such as cost overruns and construction delays, associated with higher risk projects.

 

At December 31, 2004, TCI had the following properties under construction:

 

Property


  

Location


   Units

   Amount
Expended


   Additional
Amount
to Expend


   Construction
Loan
Funding


Apartments

                              

Blue Lake Villas II

   Waxahachie, TX    76 Units    $ 4,454    $ 217    $ 4,234

Bluffs at Vista Ridge

   Lewisville, TX    272 Units      17,239      3,347      15,500

Bridges on Kinsey

   Tyler, TX    232 Units      11,572      4,509      14,477

Dakota Arms

   Lubbock, TX    208 Units      12,611      1,326      12,549

Kingsland Ranch

   Houston, TX    398 Units      24,573      1,081      23,000

Laguna Vista

   Farmers Branch, TX    206 Units      3,432      17,673      17,741

Lake Forest

   Houston, TX    240 Units      13,919      519      12,815

Parc at Maumelle

   Maumelle, AR    240 Units      4,502      14,196      16,829

Stonebridge at City Park (formerly
288 City Park)

   Houston, TX    240 Units      15,486      1,201      15,005

Vistas of Vance Jackson

   San Antonio, TX    240 Units      13,393      4,708      16,056

Wildflower Villas

   Temple, TX    220 Units      9,377      6,220      14,073

 

For the period ending December 31, 2004, TCI completed the 248 unit DeSoto Ranch Apartments in DeSoto, Texas, the 314 unit Verandas at Cityview Apartments in Fort Worth, Texas, the 216 unit Mariposa Villas (Echo Valley) in Dallas, Texas, the 176 unit Breakwater Bay Apartments in Beaumont, Texas, the 156 unit Capitol Hill Apartments in Little Rock, Arkansas and the 332 unit Vistas of Pinnacle Park Apartments in Dallas, Texas.

 

In 2003, TCI completed 186 unit Blue Lake Villas in Waxahachie, Texas, the 284 unit Falcon Lakes in Arlington, Texas, the 180 unit River Oaks Apartments in Wiley, Texas, the 384 unit Sendero Ridge Apartments in San Antonio, Texas, the 256 unit Spyglass Apartments in Mansfield, Texas and the 188 unit Windsong Apartments in Fort Worth, Texas.

 

In the opinion of management, the properties owned by TCI are adequately covered by insurance.

 

The following table sets forth the percentages, by property type and geographic region, of TCI’s real estate (other than four hotels in the Pacific and Midwest regions, one hotel in Poland and 38 parcels of unimproved land, as described below) at December 31, 2004.

 

Region


   Apartments

    Commercial
Properties


 

Pacific

   —   %   1.33 %

Midwest

   .61     14.54  

Mountain

   —       6.25  

Southwest

   98.15     63.88  

Southeast

   1.24     14.00  
    

 

     100.00 %   100.00 %
    

 

 

The foregoing table is based solely on the number of apartment units and amount of commercial square footage and does not reflect the value of TCI’s investment in each region. TCI owns 38 parcels of unimproved land, two parcels for a total of 21.23 acres in the Southeast region and 36 parcels for a total of 969.30 acres in the Southwest region. See Schedule III to the Consolidated Financial Statements included at ITEM 8. “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” for a detailed description of TCI’s real estate portfolio.

 

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Index to Financial Statements

During 2004, the activity in TCI’s owned real estate portfolio was:

 

Owned properties at January 1, 2004

   134  

Properties purchased (excluding additions to existing land parcels or land for construction)

   20  

Properties added from consolidation of partnerships

   1  

Properties sold (excluding partial sales)

   (26 )
    

Owned properties at December 31, 2004

   129  
    

 

Properties Held for Investment.    Set forth below are TCI’s properties held for investment and the monthly rental rate for apartments, the average annual rental rate for commercial properties and the average daily room rate and room revenue divided by total available rooms for hotels and occupancy at December 31, 2004, 2003 and 2002, for apartments and commercial properties and average occupancy during 2004, 2003 and 2002 for hotels:

 

           

Rent Per

Square Foot


  Occupancy %

Property


 

Location


 

Units/Square Footage


    2004  

    2003  

    2002  

    2004  

    2003  

    2002  

Apartments

                                     

4400

  Midland, TX   92 Units/94,472 Sq. Ft.   $ .51   $ .49   $ .49   97   86   86

Apple Lane

  Lawrence, KS   75 Units/30,000 Sq. Ft.     1.08     1.05     1.04   100   100   93

Arbor Point

  Odessa, TX   195 Units/178,920 Sq. Ft.     .47     .45     .43   90   95   87

Ashton Way

  Midland, TX   178 Units/138,964 Sq. Ft.     .45     .43     .43   95   87   82

Autumn Chase

  Midland, TX   64 Units/58,652 Sq. Ft.     .57     .55     .54   98   98   98

Blue Lake Villas

  Waxahachie, TX   186 Units/169,746 Sq. Ft.     .91     .91     **   90   92   **

Breakwater Bay

  Beaumont, TX   176 Units/145,688 Sq. Ft.     .93     **     **   87   **   **

By the Sea

  Corpus Christi, TX   153 Units/123,945 Sq. Ft.     .88     .88     .86   96   91   88

Capitol Hill

  Little Rock, AR   156 Units/151,116 Sq. Ft.     .88     **     **   70   **   **

Courtyard

  Midland, TX   133 Units/111,576 Sq. Ft.     .47     .46     .45   94   99   93

Coventry

  Midland, TX   120 Units/105,608 Sq. Ft.     .45     .44     .43   96   84   91

DeSoto Ranch

  DeSoto, TX   248 Units/240,718 Sq. Ft.     .95     .94     **   98   98   **

El Chapparal

  San Antonio, TX   190 Units/174,220 Sq. Ft.     .75     .73     .72   94   96   79

Fairway View Estates

  El Paso, TX   264 Units/204,000 Sq. Ft.     .65     .64     .63   90   96   92

Fairways

  Longview, TX   152 Units/134,176 Sq. Ft.     .59     .58     .56   96   93   92

Falcon Lakes

  Arlington, TX   284 Units/207,960 Sq. Ft.     .96     .96     .97   94   94   11

Fountain Lake

  Texas City, TX   166 Units/161,220 Sq. Ft.     .62     .62     .62   86   96   89

Fountains of Waterford

  Midland, TX   172 Units/129,200 Sq. Ft.     .55     .53     .53   96   99   85

Harper’s Ferry

  Lafayette, LA   122 Units/112,500 Sq. Ft.     .61     .60     .59   95   90   83

Heather Creek

  Mesquite, TX   200 Units/170,212 Sq. Ft.     .94     **     **   93   **   **

Hunters Glen

  Midland, TX   212 Units/174,180 Sq. Ft.     .42     .39     .38   93   94   81

Limestone Canyon

  Austin, TX   260 Units/216,000 Sq. Ft.     1.06     1.06     1.06   96   91   88

Limestone Ranch

  Lewisville, TX   252 Units/219,600 Sq. Ft.     .95     .94     .94   95   91   91

Mariposa Villas

  Dallas, TX   216 Units/200,928 Sq. Ft     .89     .89     **   95   97   **

Mountain Plaza

  El Paso, TX   188 Units/220,710 Sq. Ft.     .52     .52     .51   90   94   97

Oak Park IV

  Clute, TX   108 Units/78,708 Sq. Ft.     .56     .56     .56   93   91   95

Paramount Terrace

  Amarillo, TX   181 Units/123,840 Sq. Ft.     .61     .60     .59   91   93   91

Plantation

  Tulsa, OK   138 Units/103,500 Sq. Ft.     .61     .61     .61   90   92   90

Quail Oaks

  Balch Springs, TX   131 Units/72,848 Sq. Ft.     .83     .83     .83   95   95   85

River Oaks

  Wiley, TX   180 Units/164,604 Sq. Ft.     .86     .86     **   95   98   **

Sendero Ridge

  San Antonio, TX   384 Units/340,880 Sq. Ft.     1.02     1.01     **   94   80   **

Somerset

  Texas City, TX   200 Units/163,368 Sq. Ft.     .68     .68     .68   85   88   87

Southgate

  Odessa, TX   180 Units/151,656 Sq. Ft.     .46     .43     .43   98   93   90

Spy Glass

  Mansfield, TX   256 Units/ 239,264 Sq. Ft.     .96     .95     **   92   97   **

Sunchase

  Odessa, TX   300 Units/223,048 Sq. Ft.     .51     .49     .49   97   96   91

Terrace Hills

  El Paso, TX   310 Units/233,192 Sq. Ft.     .70     .70     .69   94   96   93

Tivoli

  Dallas, TX   190 Units/168,862 Sq. Ft.     .95     .95     .96   92   92   27

Timbers

  Tyler, TX   180 Units/101,666 Sq. Ft.     .60     .60     .59   96   92   93

Treehouse

  Irving, TX   160 Units/153,072 Sq. Ft.     .80     ***     .80   96   ***   94

Verandas at City View

  Fort Worth, TX   314 Units/295,170 Sq. Ft.     .92     .60     **   93   92   **

Vistas at Pinnacle Park

  Dallas, TX   332 Units/276,928 Sq. Ft.     .91     **     **   96   **   **

Westwood

  Odessa, TX   79 Units/49,001 Sq. Ft.     .46     .44     .49   91   100   80

Willow Creek

  El Paso, TX   112 Units/103,140 Sq. Ft.     .58     .57     .55   97   96   94

Willo-Wick Gardens

  Pensacola, FL   152 Units/153,360 Sq. Ft.     .55     .55     .54   95   91   84

Windsong

  Fort Worth, TX   188 Units/169,464 Sq. Ft.     .89     **     **   91   **   **

Woodview

  Odessa, TX   232 Units/165,840 Sq. Ft.     .53     .52     .51   93   94   85

 

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Table of Contents
Index to Financial Statements
              

Rent Per

Square Foot


   Occupancy %

Property


  

Location


  

Units/Square Footage


       2004  

     2003  

     2002  

     2004  

     2003  

     2002  

Office Buildings

                                       

1010 Common

   New Orleans, LA    494,579 Sq. Ft.    14.08    13.63    12.77    84    82    74

225 Baronne

   New Orleans, LA    416,834 Sq. Ft.    10.70    10.63    9.89    69    65    76

Amoco

   New Orleans, LA    378,244 Sq. Ft.    13.66    13.37    12.73    69    78    79

Bay Plaza

   Tampa, FL    75,780 Sq. Ft.    13.96    14.98    15.85    54    80    86

Bay Plaza II

   Tampa, FL    78,882 Sq. Ft.    12.79    13.23    13.01    77    78    72

Eton Square

   Tulsa, OK    222,654 Sq. Ft.    11.09    11.60    11.35    75    38    42

Executive Court

   Memphis, TN    41,840 Sq. Ft.    *    *    *    *    *    *

Forum

   Richmond, VA    79,791 Sq. Ft.    13.68    14.23    15.32    76    61    60

Lexington Center

   Colorado Springs, CO    74,603 Sq. Ft.    10.56    12.33    13.41    58    70    84

Parkway North

   Dallas, TX    71,041 Sq. Ft.    16.58    18.08    17.41    60    64    72

Signature

   Dallas, TX    56,532 Sq. Ft.    10.00    ****    ****    100    ****    ****

Westgrove Air Plaza

   Addison, TX    78,326 Sq. Ft.    12.68    13.26    13.96    74    94    66

Industrial Warehouses

                                       

5360 Tulane

   Atlanta, GA    30,000 Sq. Ft.    2.85    2.80    2.75    100    65    100

Addison Hanger

   Addison, TX    23,650 Sq. Ft.    7.54    7.94    8.12    67    100    98

Addison Hanger II

   Addison, TX    29,000 Sq. Ft.    9.24    9.64    9.33    92    92    97

Encon

   Fort Worth, TX    256,410 Sq. Ft.    3.12    3.17    3.17    100    100    100

Space Center

   San Antonio, TX    101,500 Sq. Ft.    3.41    3.43    3.46    61    84    84

Shopping Centers

                                       

Bridgeview Plaza

   LaCrosse, WI    116,008 Sq. Ft.    6.97    7.25    *    89    90    *

Cullman

   Cullman, AL    92,466 Sq. Ft.    3.55    3.53    *    27    95    *

Dunes Plaza

   Michigan City, IN    223,869 Sq. Ft.    5.91    5.51    5.83    64    61    69

Promenade

   Highland Ranch, CO    133,558 Sq. Ft.    10.45    10.94    12.41    85    79    81

 

               Average Room Rate

   Occupancy %

  

Total Room Revenues

Divided By

Total Available Rooms


Property


  

Location


   Rooms

   2004

   2003

   2002

   2004

   2003

   2002

   2004

   2003

   2002

Hotels

                                                                

Willows

   Chicago, IL    52 Rooms    $ 119.84    $ 121.24    $ 129.76    57    53    49    67.62    $ 69.54    $ 63.35

City Suites

   Chicago, IL    45 Rooms      126.29      120.16      131.46    58    58    56    71.60      76.78      73.38

Majestic Inn

   San Francisco, CA    57 Rooms      129.43      107.67      141.62    50    52    37    64.10      66.68      52.25

The Majestic

   Chicago, IL    55 Rooms      129.64      124.47      133.79    52    48    52    65.91      57.86      64.31

Akademia

   Wroclaw, Poland    161 Rooms      55.33      47.78      48.92    65    51    33    35.98      46.86      15.97

 

Property


  

Location


   Acres

Land

         

1013 Common

   New Orleans, LA    .413 Acres

2301 Valley Branch

   Farmers Branch, TX    23.763 Acres

Alamo Springs

   Dallas, TX    .678 Acres

Centura

   Farmers Branch, TX    8.753 Acres

Cooks Lane

   Fort Worth, TX    23.242 Acres

Denton-Coonrod

   Denton, TX    82.203 Acres

DeSoto

   DeSoto, TX    21.897 Acres

Dominion

   Farmers Branch, TX    14.39 Acres

Fiesta

   San Angelo, TX    .6657 Acres

Fruitland

   Fruitland Park, FL    4.66 Acres

Folsom

   Farmers Branch, TX    36.777 Acres

Granbury Station

   Fort Worth, TX    15.696 Acres

Hollywood Casino

   Farmers Branch, TX    42.815 Acres

Lacy Longhorn

   Farmers Branch, TX    17.115 Acres

Lakeshore Villas

   Humble, TX    1.36 Acres

Lamar/Palmer

   Austin, TX    17.07 Acres

Las Colinas

   Las Colinas, TX    4.7 Acres

LCLLP

   Las Colinas, TX    45.49 Acres

Lemmon Carlisle

   Dallas, TX    2.14 Acres

Limestone Canyon II

   Austin, TX    9.96 Acres

Lubbock

   Lubbock, TX    2.866 Acres

 

14


Table of Contents
Index to Financial Statements

Property


  

Location


   Acres

Manhattan

   Farmers Branch, TX    108.892 Acres

Marine Creek

   Ft. Worth, TX    43.43 Acres

Mason Park

   Houston, TX    18 Acres

McKinney 36

   Collin County, TX    34.58 Acres

Mira Lago

   Farmers Branch, TX    4.152 Acres

Nashville

   Nashville, TN    16.57 Acres

Pac Trust

   Farmers Branch, TX    7.07 Acres

Payne (TCI owns a 50% Tenant-In-Common interest)

   Las Colinas, TX    268.0 Acres

Pulaski

   Pulaski County, AR    21.9 Acres

Railroad

   Dallas, TX    .293 Acres

Rochelle I

   Las Colinas, TX    10.096 Acres

Rochelle II

   Las Colinas, TX    21.269 Acres

Rogers

   Rogers, AR    20.08 Acres

Round Mountain

   Austin, TX    18 Acres

Seminary West

   Ft. Worth, TX    5.36 Acres

Sheffield Village

   Grand Prairie, TX    13.9 Acres

Valley Ranch

   Irving, TX    29.9 Acres

West End

   Dallas, TX    6.96 Acres

*   Property was purchased in 2002, 2003 or 2004.
**   Property was under construction.
***   Property was sold in 2003 and purchased in 2004.
****   No applicable data for Signature Athletic Club. TCI sold the athletic club in November 2004 but retained the Signature office building.

 

Occupancy presented here and throughout this ITEM 2. is without reference to whether leases in effect are at, below or above market rates.

 

NOTE 2.    REAL ESTATE

 

In 2004, TCI purchased the following properties:

 

Property


   Location

   Units/
Sq. Ft./Acres


   Purchase
Price


  

Net

Cash
Paid/

(Received)


   

Debt

Incurred


   

Interest

Rate


   

Maturity

Date


 

Apartments

                                             

288 City Park(1)

   Houston, TX    240 Units    $ 3,056    $ 612     $ 2,444     5.95 %   04/45  

Blue Lake Villas II(1)

   Waxahachie, TX    70 Units      729      (164 )     729     5.80     04/45  

Bridges on Kinsey(1)

   Tyler, TX    232 Units      2,291      596       1,687     5.74     08/45  

Dakota Arms(1)

   Lubbock, TX    208 Units      2,472      681       1,791     5.85     06/45  

Laguna Vista(1)

   Farmers Branch, TX    206 Units      2,424      902       1,522     5.50     09/46  

Lake Forest(1)

   Houston, TX    240 Units      2,316      (470 )     2,316     5.60     03/45  

Parc at Maumelle(1)

   Maumelle, AR    240 Units      3,120      916       2,204     5.37     07/46  

Treehouse(2)

   Irving, TX    160 Units      7,519      (498 )     5,027 (3)   5.00     08/13  

Vistas of Vance Jackson(1)

   San Antonio, TX    240 Units      3,550      771       2,779     5.78     06/45  

Wildflower Villas(1)

   Temple, TX    220 Units      2,045      79       1,966     5.99     10/45  

Commercial

                                             

Executive Court(4)

   Memphis, TN    41,840 Sq. Ft.      1,970      —         —       —       —    

Land

                                             

Cooks Lane land

   Ft. Worth, TX    23.242 Acres      1,000      1,034       —       —       —    

Denton-Coonrod land

   Denton, TX    82.203 Acres      1,644      1,046       840     6.25     11/06  

DeSoto land

   DeSoto, TX    21.897 Acres      2,516      1,364       1,265     6.25     11/06  

Granbury Station land

   Ft. Worth, TX    15.696 Acres      923      236       738     7.00     09/07  

Lacy Longhorn land(5)

   Farmers Branch, TX    17.115 Acres      4,474      —         —       —       —    

Las Colinas land(6)

   Las Colinas, TX    239.2 Acres      39,145      —         10,006 (7)   —   (7)   —   (7)

Lubbock land

   Lubbock, TX    2.866 Acres      224      224       —       —       —    

Railroad land

   Dallas, TX    .293 Acres      708      704       —       —       —    

Rogers land

   Rogers, AR    20.08 Acres      1,390      619       1,130     10.50     04/05  

Vista Ridge land(8)

   Lewisville, TX    14.216 Acres      2,585      —         —       —       —    

West End land(9)

   Dallas, TX    .158 Acres      71      71       —       —       —    

 

15


Table of Contents
Index to Financial Statements

(1)   Initial construction loan funding to purchase land and begin apartment construction, does not represent actual units purchased.
(2)   Purchased from IORI, a related party, for assumption of debt and a note receivable, less $498,000 in cash received.
(3)   Assumed debt.
(4)   Property received from ARI, a related party, for payment of a note receivable. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”
(5)   Property received from ARI, a related party, for a decrease of $4.5 million to TCI’s affiliate receivable with Prime.
(6)   The following tracts of land were purchased from ARI, a related party, for a decrease of $29.1 million to TCI’s affiliate receivable from Prime: Payne, LCLLP, Rochelle I & II and Valley Ranch. TCI owns a 50% Tenant-in-Common interest in the 268 acre Payne tract.
(7)   Includes $3.1 million assumed debt on the LCLLP tract with an interest rate of 7.0% and a maturity date of 12/06 and $6.9 million assumed debt on the Rochelle I & II and Valley Ranch tracts with an interest rate of prime plus 3% (currently 8.75%) and a maturity date of 11/05.
(8)   Property received from ARI, a related party, for a decrease of $2.6 million to TCI’s affiliate receivable from Prime.
(9)   TCI purchased a 50% interest in this land tract.

 

In 2004, TCI sold the following properties:

 

Property


   Location

   Units/
Sq. Ft./Acres


   Sales
Price


  

Net

Cash
Received


    Debt
Discharged


    Gain/(Loss)
on Sale


 

Apartments

                                         

Cliffs of El Dorado(2)

   McKinney, TX    208 Units    $ 13,442    $ 10     $ 10,323 (1)   $ —   (3)

In The Pines

   Gainesville, FL    242 Units      11,300      3,547 (4)     5,201       5,136  

Sandstone

   Mesa, AZ    238 Units      8,650      2,687       5,531       1,136  

Waters Edge IV(5)

   Gulfport, MS    80 Units      5,000      —         —         —   (6)

Office Building

                                         

4135 Beltline

   Addison, TX    90,000 Sq. Ft.      4,900      2,472       2,009       345  

Atrium

   Palm Beach, FL    74,603 Sq. Ft.      5,775      1,667       3,772       328  

Ambulatory Surgery Center

   Sterling, VA    33,832 Sq. Ft.      8,675      5,448       2,856       202  

Brandeis(7)

   Omaha, NE    319,234 Sq. Ft.      —        —         8,750 (1)     (92 )

Centura Tower(8)

   Farmers Branch, TX    410,901 Sq. Ft.      84,075      36,350       49,878       31,550  

Corporate Pointe

   Chantilly, VA    65,918 Sq. Ft.      9,000      5,025       3,609       5,239  

Countryside Harmon

   Sterling, VA    72,062 Sq. Ft.      9,150      4,608       3,865       1,931  

Countryside Retail

   Sterling, VA    133,422 Sq. Ft.      27,100      3,408       22,800       6,236  

Countryside Mimado

   Sterling, VA    35,127 Sq. Ft.      4,000      102       941       72  

Durham Centre(9)

   Durham, NC    207,171 Sq. Ft.      21,300      6,703       —         —   (10)

One Steeplechase

   Sterling, VA    103,376 Sq. Ft.      11,900      3,743       7,654       6,184  

Venture Center

   Atlanta, GA    38,272 Sq. Ft.      4,000      997       2,550       1,167  

Industrial Warehouse

                                         

Kelly (Cash Road)

   Dallas, TX    97,150 Sq. Ft.      1,500      1,077       422       127  

Kelly (Pinewood)

   Dallas, TX    100,000 Sq. Ft.      1,650      65       1,376       153  

Ogden Industrial

   Ogden, UT    107,112 Sq. Ft.      2,600      668       1,775       1,374  

Texstar Warehouse(12)

   Arlington, TX    97,846 Sq. Ft.      2,400      —         1,148 (1)(17)     —   (13)

Other

                                         

Signature Athletic Club(11)

   Dallas, TX    N/A      120      (154 )     88       (47 )

Shopping Center

                                         

K-Mart(12)

   Cary, NC    92,033 Sq. Ft.      3,200      —         1,677 (1)(17)     —   (14)

Sadler Square

   Amelia Island, FL    70,295 Sq. Ft.      4,500      1,876       2,680       1,673  

Land

                                         

Allen

   Collin County, TX    492.531 Acres      19,962      7,956       4,088       7,056  

Marine Creek(15)

   Ft. Worth, TX    10.73 Acres      1,488      1,198       991       —   (16)

Rasor

   Plano, TX    24.5 Acres      2,600      2,600       1,260       53  

Red Cross

   Dallas, TX    2.89 Acres      8,500      2,842       4,450       —    

 

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Index to Financial Statements

(1)   Assumed debt.
(2)   Property initially sold to Unified Housing Foundation, Inc. (“UHF”), a related party, in 2003. See NOTE 8. “RELATED PARTY TRANSACTIONS.”
(3)   Excludes a $1.7 million deferred gain from a related party sale.
(4)   TCI provided $1.0 million of the purchase price as seller financing. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”
(5)   Property sold to ARI, a related party, for an increase of $5.0 million to the affiliate receivable balance from Prime.
(6)   Excludes a $494,000 deferred gain from a related party sale.
(7)   Brandeis was returned to lender via a deed in lieu of foreclosure process. See NOTE 7. “NOTES AND INTEREST PAYABLE.”
(8)   TCI sold a 95% limited partnership interest, retaining a 1% general partner and 4% limited partner interest.
(9)   Property sold to Edina Park Plaza Associates, L.P., of which the managing general partner is a subsidiary of ARI, a related party, for a wraparound note of $14.5 million and cash.
(10)   Excludes a $4.0 million deferred gain from a related party sale.
(11)   Signature Athletic Club was sold for the assumption of capital leases by purchaser. Net cash paid is from prepaid dues and unearned revenues due purchaser.
(12)   Property sold to Basic Capital Management (“BCM”), a related party, for assumption of debt and a note receivable. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”
(13)   Excludes a $1.0 million deferred gain from a related party sale.
(14)   Excludes $355,000 deferred gain from a related party sale.
(15)   Property sold to UHF, a related party, for cash and a note receivable. See NOTE 8. “RELATED PARTY TRANSACTIONS”
(16)   Excludes a $581,000 deferred gain from a related party sale.
(17)   Failure to notify and receive approval from the lender for this transaction may constitute an event of default under the terms of the debt.

 

In 2004, TCI financed/refinanced the following properties:

 

Property


   Location

  

Sq. Ft./

Units/Rooms/

Acres


   Debt
Incurred


   

Debt

Discharged


  

Net Cash

Received/

(Paid)


   

Interest

Rate


   

Maturity

Date


 

Apartments

                                             

Mountain Plaza

   El Paso, TX    188 Units    $ 5,184     $ 4,257    $ 370     5.16 %   12/34  

Paramount Terrace

   Amarillo, TX    181 Units      3,176       2,663      323     5.15     06/37  

Treehouse

   Irving, TX    160 Units      5,780       5,027      138     5.06     07/34  

Office Building

                                             

1010 Common

   New Orleans, LA    494,579 Sq. Ft.      16,250 (3)     8,000      7,829     4.03 (1)   07/07  

225 Baronne

   New Orleans, LA    416,834 Sq. Ft.      500 (4)     —        —       5.75 (1)   10/05  

Amoco

   New Orleans, LA    378,244 Sq. Ft.      1,500 (4)     —        —       5.75 (1)   10/05  

Centura Tower

   Farmers Branch, TX    410,901 Sq. Ft.      34,000 (5)     36,889      (4,588 )   5.50 (1)   04/04  

Centura Tower(2)

   Farmers Branch, TX    410,901 Sq. Ft.      3,800 (5)     —        3,737     5.75 (1)   04/06  

Centura Tower

   Farmers Branch, TX    410,901 Sq. Ft.      50,000       37,594      2,989     4.94     10/09  

Warehouse

                                             

Addison Hangers I & II(6)

   Addison, TX    52,650 Sq. Ft.      4,500       2,592      1,635     10.00     09/14  

Hotels

                                             

City Suites

   Chicago, IL    45 Rooms      3,640       —        3,548     6.75 (1)   09/09  

Majestic Inn

   San Francisco, CA    57 Rooms      2,000 (4)     5,138      (1,278 )   5.75 (1)   10/05  

Willows

   Chicago, IL    52 Rooms      3,500       —        3,411     6.75 (1)   09/09  

Land

                                             

Centura land

   Farmers Branch, TX    8.753 Acres      4,485       4,400      (183 )   7.00 (1)   02/05 (8)

Cooks Lane

   Ft. Worth, TX    23.242 Acres      550       —        527     6.25     11/06  

Hollywood, Dominion &
Mira Lago(7)

   Farmers Branch, TX    66.085 Acres      6,985       6,222      (67 )   7.00 (1)   02/05 (9)

Lacy Longhorn

   Farmers Branch, TX    17.115 Acres      1,965 (3)     —        78     4.03 (1)   07/07  

Marine Creek

   Ft. Worth, TX    28.437 Acres      1,785 (3)     —        1,746     4.03 (1)   07/07  

 

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Index to Financial Statements

(1)   Variable rate.
(2)   2nd lien advance on Centura Tower.
(3)   The 1010 Common office building, certain tracts of Marine Creek land and the Lacy Longhorn land are cross collateralized.
(4)   The Majestic Inn, 225 Baronne Office Building and Amoco Office Building are cross collateralized. The debt incurred on 225 Baronne and Amoco are 2nd lien loans.
(5)   Debt was paid off by September 2004 refinancing.
(6)   The Addison Hangers were sold in September 2004 to a third party and were leased back for 10 years on a triple net lease basis. This transaction has been recorded as a financing transaction for accounting purposes.
(7)   The Hollywood Casino, Dominion and Mira Lago tracts are cross collateralized.
(8)   Debt was paid off in February 2005.
(9)   Debt was extended to February 2006.

 

Properties Held for Sale.    Set forth below are TCI’s properties held for sale.

 

Property


  

Location


   Units

Apartments

         

Bay Walk

   Galveston, TX    192 Units

Island Bay

   Galveston, TX    458 Units

Marina Landing

   Galveston, TX    256 Units
          Square Feet

Office Buildings

         

9033 Wilshire

   Los Angeles, CA    44,253 Sq. Ft.

Institute Place

   Chicago, IL    144,915 Sq. Ft.

Industrial Warehouses

         

5700 Tulane

   Atlanta, GA    67,850 Sq. Ft.

 

Partnership Properties.    TCI accounts for partnership properties using the equity method. TCI had no property information for properties owned by partnerships.

 

TCI is a 30% general partner in Sacramento Nine (“SAC 9”), which owned the Prospect Park #29 Office Building. In December 2004, SAC 9 sold the Prospect Park #29 office building for $3.7 million, of which TCI received $1.1 million after closing costs and fees. TCI recognized a gain on the sale of investment in SAC 9 of $882,000 relating to this transaction.

 

In December 2004, TCI sold a 95% interest in Garden Centura, L.P. that owns the 410,901 sq. ft. Centura Tower office building located in Farmers Branch, Texas. TCI retained a non-controlling 1% general partner and 4% limited partner interest in Garden Centura, L.P. TCI will account for its investment in this partnership on the cost basis.

 

Provision for Asset Impairments.    TCI recorded asset impairments of $6.1 million in 2004, $4.7 million for 2003 and $2.6 million for 2002, representing the write down of certain operating properties to current estimated fair value. The assets for 2004 include the following properties:

 

Property


  

Location


   Sq. Feet

   Fair
Value


   Property
Basis


  

Costs to

Sell


   Impairment

Office Building

                                     

225 Baronne

   New Orleans, LA    319,234 Sq. Ft.    $ 8,500    $ 10,219    $ —      $ 1,720

Harmon

   Sterling, VA    72,062 Sq. Ft.      6,500      9,080      320      2,900

Mimado

   Sterling, VA    35,127 Sq. Ft.      4,000      5,367      210      1,577

 

The Harmon and Mimado buildings were sold and the contractual sales prices were used as fair value. The costs to sell were the estimated closing costs and commissions to be paid by TCI. It was determined that the fair value of 225 Baronne was less than the current book value due to the pending loss of the anchor tenant. It was determined that future leases on the vacated space will be below market rates and the projected future cash flows of 225 Baronne will not be sufficient to recover the current book value.

 

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Index to Financial Statements

The assets for 2003 include the following properties:

 

Property


  

Location


   Sq. Feet/
Acres


   Fair
Value


   Property
Basis


   Costs to
Sell


   Impairment

Office Building

                                     

Brandeis

   Omaha, NE    319,234 Sq. Ft.    $ 8,821    $ 13,630    $ —      $ 4,357

Land

                                     

Red Cross

   Dallas, TX    2.89 Acres      8,500      7,679      1,019      198

 

Brandeis was returned to the lien holder via a Deed in Lieu of Foreclosure on February 27, 2004 and the outstanding debt and accrued interest was used as the fair value. The gross impairment for Brandeis was $4.9 million but was reduced by $452,000 for the minority interest portion. The Red Cross land was sold on January 30, 2004 and the actual sales price less selling costs was used as the fair value.

 

The assets for 2002 include the following properties:

 

Property


  

Location


   Units/
Acres


   Fair
Value


   Property
Basis


   Costs to
Sell


   Impairment

Apartments

                                     

Apple Lane

   Lawrence, KS    75 Units    $ 1,580    $ 1,593    $ 238    $ 251

Fairway View

   El Paso, TX    264 Units      5,700      5,242      863      405

Fountains of Waterford

   Midland, TX    172 Units      1,900      2,006      285      391

Plantation

   Tulsa, OK    138 Units      2,545      3,100      145      700

Sunchase

   Odessa, TX    300 Units      4,100      3,479      746      125

Land

                                     

Red Cross

   Dallas, TX    2.89 Acres      8,400      8,348      758      707

 

The Red Cross land was under contract to sell in 2002 and the sales price was used as fair value. The fair value determined for the four apartments above were agreed upon purchase prices as part of the refinancing transaction with Metra Capital, LLC. The costs to sell were actual fees paid to refinance the properties. TCI refinanced the Plantation Apartments in May 2003, incurring a new note for $2.3 million and discharging debt of $1.9 million. See NOTE 7. “NOTES AND INTEREST PAYABLE.”

 

Mortgage Loans

 

In addition to investments in real estate, a portion of TCI’s assets are invested in mortgage notes receivable, principally secured by real estate. TCI may originate mortgage loans in conjunction with providing purchase money financing of property sales. Management intends to service and hold for investment the mortgage notes in TCI’s portfolio. TCI’s mortgage notes receivable consist of first, wraparound and junior mortgage loans.

 

Types of Mortgage Activity.    TCI has originated its own mortgage loans, as well as acquired existing mortgage notes either directly from builders, developers or property owners, or through mortgage banking firms, commercial banks or other qualified brokers. Premier Funding, a related party, services TCI’s mortgage notes. TCI’s investment policy is described in ITEM 1. “BUSINESS—Business Plan and Investment Policy.”

 

Types of Properties Securing Mortgage Notes.    The properties securing TCI’s mortgage notes receivable portfolio at December 31, 2004, consisted of three apartments, five office buildings, three parcels of unimproved land, various partnership and membership interests, and four unsecured loans. The Board of Directors may alter the types of properties securing or collateralizing mortgage loans in which TCI invests without a vote of stockholders. TCI’s Articles of Incorporation impose certain restrictions on transactions with related parties, as discussed in ITEM 13. “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.”

 

At December 31, 2004, TCI’s mortgage notes receivable portfolio included nine mortgage loans with an aggregate principal balance of $40.5 million secured by income-producing real estate located in the Southeast

 

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Index to Financial Statements

and Southwest regions of the continental United States, three mortgage loans with an aggregate principal balance of $3.3 million secured by unimproved land in the Southwest region of the continental United States, six loans with a principal balance of $6.3 million secured by partnership or membership interests and four unsecured loans with a principal balance of $3.9 million. At December 31, 2004, 6.2% of TCI’s assets were invested in notes and interest receivables.

 

The following table sets forth the percentages (based on the mortgage note principal balance) by property type and geographic region, of the income producing properties that serve as collateral for TCI’s mortgage notes receivable at December 31, 2004. Excluded are $13.5 million of mortgage notes that are secured by unimproved land or other security, or are unsecured. See Schedule IV to the Consolidated Financial Statements included at ITEM 8. “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” for further details of TCI’s mortgage notes receivable portfolio.

 

Region


   Apartments

    Commercial
Properties


    Total

 

Southwest

   2.2 %   49.7 %   51.9 %

Southeast

   4.1     44.0     48.1  
    

 

 

     6.3 %   93.7 %   100.0 %
    

 

 

 

A summary of the activity in TCI’s mortgage notes receivable portfolio during 2004 is as follows:

 

Mortgage notes receivable at January 1, 2004

   12  

Loans paid off

   (4 )

Loans funded

   15  
    

Mortgage notes receivable at December 31, 2004

   23  
    

 

During 2004, $7.2 million was collected in full payment of three mortgage notes and $1.6 million in principal payments were received on other mortgage notes. At December 31, 2004, 0.4% of TCI’s assets were invested in mortgage notes secured by non-income producing real estate, comprised of a second lien mortgage note secured by 33 acres of unimproved land in Travis County, Texas, a second lien note secured by 13 acres of unimproved land in Harris County, Texas and a second lien note secured by 22.3 acres of unimproved land in Collin County, Texas

 

First Mortgage Loans.    TCI invests in first mortgage notes with short, medium or long-term maturities. First mortgage loans generally provide for level periodic payments of principal and interest sufficient to substantially repay the loan prior to maturity, but may involve interest-only payments or moderate amortization of principal and a “balloon” principal payment at maturity. With respect to first mortgage loans, the borrower is required to provide a mortgagee’s title policy or an acceptable legal title opinion as to the validity and the priority of the mortgage lien over all other obligations, except liens arising from unpaid property taxes and other exceptions normally allowed by first mortgage lenders in the relevant area. TCI may grant participations in first mortgage loans it originates to other lenders.

 

The following discussion briefly describes first mortgage loans funded in 2004, as well as events during 2004 that affected previously funded first mortgage loans.

 

In March 2002, TCI sold the 174,513 Sq. Ft. Hartford Office Building in Dallas, Texas, for $4.0 million and provided the $4.0 million purchase price as seller financing and an additional $1.4 million line of credit for leasehold improvements in the form of a first lien mortgage note. The note bears interest at a variable interest rate, currently 7.5% per annum, requires monthly interest only payments and matures in March 2007. As of March 2005, TCI has funded $788,000 of the additional line of credit.

 

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Index to Financial Statements

Junior Mortgage Loans.    TCI may invest in junior mortgage loans, secured by mortgages that are subordinate to one or more prior liens either on the fee or a leasehold interest in real estate. Recourse on such loans ordinarily includes the real estate on which the loan is made, other collateral and personal guarantees by the borrower. The Board of Directors restricts investment in junior mortgage loans, excluding wraparound mortgage loans, to not more than 10.0% of TCI’s assets. At December 31, 2004, 4.2% of TCI’s assets were invested in junior and wraparound mortgage loans.

 

The following discussion briefly describes the junior mortgage loans that TCI originated in 2004 as well as events that affected previously funded junior mortgage loans during 2004.

 

In August 2001, TCI agreed to fund up to $5.6 million secured by a second lien on an office building in Dallas, Texas. The note receivable bears interest at a variable rate, currently 9.0% per annum, requires monthly interest only payments and matured in January 2003. As of March 2004, TCI has funded a total of $4.3 million. On January 22, 2003, TCI agreed to extend the maturity date until May 1, 2003. The collateral used to secure TCI’s second lien was seized by the first lien holder. On March 11, 2004, TCI agreed to accept an assignment of claims in litigation as additional security for the note. In December 2004, TCI agreed to a Modification Agreement with the borrower, which was effective November 1, 2003. As of the modified effective date, accrued interest of $582,000 was added to the principal balance of the note, the interest rate was set to a fixed rate of 9.0% per annum and all principal and interest is due October 2005. TCI also received Pledge and Security Agreements in various partnership interests belonging to the borrower and received various Assignments of Proceeds from sales in certain entities owned by the borrower. TCI also agreed to reduce accrued interest and principal by $1.5 million from the receipt of notes receivable assigned to TCI by borrower and by $605,000 from cash received. TCI also received $1.4 million in January 2005 that was applied to accrued interest and principal effective December 30, 2004. As a result of this modification, TCI has released $1.4 million of allowance for loan losses to expense. The following notes were assigned to TCI as payment on the note:

 

    $678,000 from a partnership that owns an apartment building. This note is unsecured, bears no interest and has no maturity date. Distributions made from the partnership operations will be used to pay the principal on the note.

 

    $264,000, including accrued interest, secured by a second lien on 13 acres of unimproved land. This note bears interest at 9.0% and matured in February 2003. TCI’s parent company, ARI, is in negotiations to take title to the collateral, therefore, this note is considered performing and no allowance has been established.

 

    $341,000 secured by a second lien on 23.3 acres of unimproved land. This note bears interest at 4.0% and is payable upon demand.

 

    $125,000 secured by a 100% interest in an affiliated company that owns an apartment building. This note bears interest at 12.0%, only requires payments if surplus cash is available and matures in April 2009.

 

In July 2002, TCI entered into an agreement to fund up to $300,000 under a revolving line of credit secured by 100% interest in a partnership of the borrower. The line of credit bears interest at 12.0% per annum, requires monthly interest only payments and matures in June 2005. As of March 2005, TCI has funded all $300,000 of the line of credit.

 

In June 2003, TCI sold the 104 unit Willow Wick Apartments in North Augusta, South Carolina, for $2.7 million and provided $42,000 of the purchaser’s closing costs as seller financing. The note bore interest at a fixed rate of 5.0% and requires all interest and principal payments be paid at maturity in December 2003. This loan was extended until February 2004 and $10,000 was received in March 2004. This note, including accrued but unpaid interest, was paid in June 2004. TCI agreed to discount the note $2,000 and recognized a loss of $2,000.

 

In March 2004, TCI sold 492.531 acres in Collin County, Texas to a third party for $20.0 million. TCI provided $7.2 million of the purchase price as seller financing for a portion of the land on a contingent basis. The

 

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Table of Contents
Index to Financial Statements

secured note bore interest at 7% and matured in September 2004. The buyer had the option to convey the contingent land back to TCI for cancellation of the note. The purchaser extended the note to December 2004 with a $1.1 million principal payment in September 2004. This note, including accrued but unpaid interest, was paid in December 2004.

 

In October 2004, TCI sold the In The Pines apartments to a third party and provided $1.0 million of the purchase price as seller financing in the form of two notes. The first note bears interest at 7.0% per annum, requires monthly interest payments and matured in January 2005. The Purchaser extended this note to March 2005 by paying 1.0% of the outstanding principal balance as an extension fee and then extended the note an additional 30 days to April 2005 by paying an extension fee of 0.5% of the outstanding principal balance. In the event of a default, the note is also secured by membership rights in the purchaser’s entity. The second note is unsecured, bears interest at 8.5% per annum, requires monthly interest payments and matured in January 2005. The Purchaser extended this note to March 2005 by paying 1.0% of the outstanding principal balance as an extension fee and then extended the note an additional 30 days to April 2005 by paying an extension fee of 0.5% of the outstanding principal balance.

 

Related Parties.    In January 2002, TCI purchased 100% of the outstanding common shares of ART Two Hickory Corporation (“Two Hickory”), a wholly-owned subsidiary of ARI, a related party, for $4.4 million cash. Two Hickory owns the 96,217 sq. ft. Two Hickory Centre Office Building in Farmers Branch, Texas. ARI has guaranteed that the asset shall produce at least a 12.0% annual return of the purchase price for a period of three years from the purchase date. If the asset fails to produce the 12.0% annual return, ARI shall pay TCI any shortfall. In addition, if the asset fails to produce the 12.0% return for a calendar year and ARI fails to pay the shortfall, TCI may require ARI to repurchase the shares of Two Hickory for the purchase price. Because ARI has guaranteed the 12.0% return and TCI has the option of requiring ARI to repurchase the entities, management has classified this related party transaction as a note receivable from ARI. In June 2002, the asset was refinanced. TCI received $1.3 million of the proceeds as a principal reduction on its note receivable from ARI. In January 2005, TCI completed the purchase of Two Hickory by recording the asset and the assumed debt, and removing the note receivable from ARI.

 

In April 2002, TCI purchased 100% of the following entities: ART One Hickory Corporation (“One Hickory”), Garden Confederate Point, LP (“Confederate Point”), Garden Foxwood, LP (“Foxwood”), and Garden Woodsong, LP (“Woodsong”), all wholly-owned subsidiaries of ARI, a related party, for $10.0 million. One Hickory owns the 120,615 sq. ft. One Hickory Centre Office Building in Farmers Branch, Texas. Confederate Point owns the 206 unit Confederate Apartments in Jacksonville, Florida. Foxwood owns the 220 unit Foxwood Apartments in Memphis, Tennessee. Woodsong owned the 190 unit Woodsong Apartments in Smyrna, Georgia. ARI has guaranteed these assets shall produce at least a 12.0% return annually of the purchase price for a period of three years from the purchase date. If the assets fail to produce the 12.0% return, ARI shall pay TCI any shortfall. In addition, if the assets fail to produce the 12.0% return for a calendar year and ARI fails to pay the shortfall, TCI may require ARI to repurchase the entities for the purchase price. Because ARI has guaranteed the 12.0% return and TCI has the option of requiring ARI to repurchase the entities, management has classified this related party transaction as a note receivable from ARI. In October 2003, TCI sold One Hickory to IORI for $12.2 million, less prorations, for a wraparound promissory note of $12.0 million. This note bears interest at 5.49% interest, requires monthly interest and principal payments and matures in June 2006. This transaction effectively discharged the note receivable TCI had from ARI for the financing of One Hickory. Also, in November 2003, Confederate Point sold the Confederate Apartments and paid $2.1 million to TCI to pay off the loan and accrued but unpaid interest.

 

In December 2003, TCI purchased a note receivable secured by 33 acres of raw land in Travis County, Texas from ARI for $2.4 million, which reduced ARI’s affiliate payable to Prime and TCI. The note bears interest at 10.0% per annum, requires interest only payments beginning in November 2007 and matures in October 2008. Outstanding accrued interest is added to the principal balance on an annual basis until 2007. During 2004, $240,000 of accrued interest was added to the principal balance of the note.

 

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In December 2003, TCI sold a tract of Marine Creek land to a subsidiary of United Housing Foundation, Inc. (“UHF”) for $1.5 million, receiving cash and a note receivable. This sale was not recognized due to UHF being a related party and TCI having continuing involvement and control. In February 2004, Marine Creek was refinanced by UHF, which paid off TCI’s note payable on the land. TCI recorded the sale of the land and received a note receivable of $270,000, which was the difference between the sales price and the amount of TCI’s note payable. The note bears interest at 6.0%, requires quarterly payments from available surplus cash and matures in December 2007. See Note 8. “RELATED PARTY TRANSACTIONS.”

 

In October 2004, TCI sold the Durham Centre in Durham, North Carolina to a partnership, of which the managing general partner is a subsidiary of ARI, for $21.3 million for cash and an all-inclusive wraparound note of $14.5 million. The note bears interest at a fixed rate of 7.63%, requires monthly interest payments and matures in September 2007. TCI also made a loan to the partnership for $3.3 million. The note bears interest at a fixed rate of 7.63%, requires monthly interest payments and matures in September 2017.

 

In October 2004, TCI contemplated the sale of the common stock of TCI Lexington Corporation, which owns the Lexington Center office building in Colorado Springs, Colorado, to One Realco Office Investors, Inc., a related party, for the assumption of debt of $4.9 million, which was subject to lender approval, and a seller note of $237,000. The assumption of debt by One Realco Office Investors, Inc. was not approved by the lender; therefore, TCI’s Board of Directors rescinded their approval of the transaction. TCI extended the loan on the Lexington Center with the lender in December 2004.

 

Other.    In July 2003, TCI advanced $2.3 million to the Class A Limited Partners of TCI Countryside, L.P. of which TCI is the general partner. This loan bears interest at 7.25% and matures in January 2007. TCI also agreed to advance $1.1 million to the Class A Limited Partners by advancing $105,000 in July 2003 and every year thereafter for ten years. This loan bears interest at 7.25% and matures in July 2012. Interest due to TCI will be deducted for the quarterly return owed by TCI to the Class A Limited Partners, eliminating the quarterly payments. After January 2007, TCI may retire the Class A Limited Partners interests in exchange for cancellation of both notes, subject to the $1.1 million advance being fully advanced by TCI.

 

In March 2004, TCI sold the Texstar Warehouse in Arlington, Texas to BCM for $2.4 million, including the assumption of debt. TCI also provided $1.3 million of the purchase price as seller financing. The unsecured note bears interest at the prime rate plus 2%, which is currently 7.75%, and matures in April 2005.

 

In March 2004, TCI sold a K-Mart in Cary, North Carolina to BCM for $3.2 million, including the assumption of debt. TCI also provided $1.5 million of the purchase price as seller financing. The unsecured note bears interest at the prime rate plus 2%, which is currently 7.75%, and matures in April 2005.

 

Partnership mortgage loans.    TCI owns a 60.0% general partner interest and IORI owns a 40.0% general partner interest in Nakash Income Associates (“NIA”), which owns a wraparound mortgage note receivable secured by a building occupied by a Wal-Mart in Maulden, Missouri.

 

ITEM 3.    LEGAL PROCEEDINGS

 

Innovo Realty, Inc.    On August 10, 2004, American Realty Investors, Inc. (“ARI”), TCI and Income Opportunity Realty Investors, Inc. (“IOT”) instituted an action in Texas State District Court as Cause No. 2004-60231-393 styled American Realty Investors, Inc., Transcontinental Realty Investors, Inc. and Income Opportunity Realty Investors, Inc., Plaintiffs v. Innovo Realty, Inc. and Innovo Group, Inc., Involuntary Plaintiffs v. Innovo Realty, Inc., Metra Capital LLC, Innovo Group, Inc., Joseph Mizrachi, Simon Mizrachi, Hubert Guez, Third Millennium Partners LLC, Third Millennium Partners, Inc., Third Millennium Group LLC and Sunridge Management Group, Inc., Defendants. Plaintiffs’ Complaint alleges that Joseph Mizrachi, a former director of ARI and others, offered a plan to the Plaintiffs to create one or more joint venture arrangements with one or more of the Plaintiffs to pursue alternative forms of financing or refinancing portions of Plaintiffs’ real

 

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estate portfolios, which entailed the creation of 22 separate limited partnerships to acquire 28 separate apartment complexes in three states (Texas, Florida and Louisiana), the general partners of which are affiliates of, or controlled by, Joseph Mizrachi. Plaintiffs’ Complaint alleges that the overall transaction required the establishment of a sinking fund by the Defendants and the 22 limited partnerships as a trust for the benefit of certain preferred shareholders of Innovo Group, Inc. and the payment of certain proceeds to the Plaintiffs. Plaintiffs assert that payments have not been made pursuant to the agreement of the parties. Plaintiffs allege that Defendants’ conduct constituted a common business enterprise, alleges breach of contract and derivative claims on behalf of Innovo Group, Inc. against Joseph Mizrachi and others, and requests declaratory relief involving the Plaintiffs’ rights in the partnerships, an accounting of proceeds, and the creation of a constructive trust. Plaintiffs’ Complaint also alleges that Joseph Mizrachi engaged in fraud, negligent misrepresentation and/or breach of fiduciary duty and seeks unspecified damages, attorneys’ fees, the establishment of a constructive trust and other relief.

 

Sunset Management, LLC.    On October 5, 2004, Sunset Management LLC (“Sunset”) filed a Complaint as a purported stockholder’s derivative action on behalf of Transcontinental Realty Investors, Inc. in the United States District Court for the Northern District of Texas, Dallas Division, against American Realty Investors, Inc., Basic Capital Management, Inc. (“BCM”), Prime Income Asset Management, Inc. (“PIAMI”), Prime Income Asset Management LLC (“Prime”), Income Opportunity Realty Investors, Inc., United Housing Foundation, Inc. (“United”), Regis Realty, Inc. (“Regis”), TCI, TCI’s current directors and officers and others. Sunset’s Complaint was instituted as Case No. 3:04-CV-02162-B styled Sunset Management LLC, Derivatively on Behalf of Transcontinental Realty Investors, Inc. v. American Realty Investors, Inc., et al. Sunset’s Complaint alleges (i) Sunset is the owner of 10 shares of Common Stock of TCI and Sunset is the pledgee and beneficial owner of 3,673,115 shares of Common Stock of TCI, (ii) Sunset is a single-member limited liability company, (iii) all of the Defendants have in their various capacities breached fiduciary duties to TCI, and (iv) unjust enrichment of the various Defendants. Sunset’s Complaint seeks an injunction prohibiting TCI from entering into any related-party transactions that are not fair to TCI and approved by disinterested directors and/or the stockholders of TCI with full knowledge of the common interest of the directors and/or officers, unspecified damages, attorneys’ fees and costs. Individual directors and officers of TCI do not believe their interests are adverse to TCI in this matter. All Defendants believe the action is not properly brought as a derivative action on behalf of TCI, as Sunset’s interests are adverse to the interests of TCI. The current action brought by Sunset contains many of the same allegations raised by Sunset in four other cases which, as rulings have occurred, have resulted in a denial of Sunset’s requested relief. The Defendants intend to vigorously defend the action, and on November 8, 2004, filed a Motion to Dismiss the case pursuant to Rules 12 and 23.1 of the Federal Rules of Civil Procedure on the basis that Sunset’s allegations are insufficient to evade the stringent demand requirement under the futility exception for stockholder derivative actions, and that Sunset cannot fairly and adequately represent the interests of other stockholders. On January 4, 2005, the Defendants also filed a Motion to Stay Discovery and for Protective Order based on the concept that the Motion to Dismiss should dispose of the matter. No hearing has been held or Order issued by the Court on either Motion through March 31, 2005. Separately, one of the individual Defendants filed on January 4, 2005, a Motion to Disqualify Sunset’s Counsel.

 

The current Sunset Complaint is the fifth in a continuing series of actions involving Sunset, certain subsidiaries of ARI and ARI resulting from a loan in September 2001 to BCM and three subsidiaries of ARI in the original amount of $30 million ($19.5 million of which bore interest at 24% per annum, while the remaining $10.5 million of which bore interest at 20%). In September 2002, $15 million in principal was repaid leaving a $15 million aggregate balance, which Sunset orally agreed to extend the maturity date and accept substitute collateral, an arrangement which Sunset did not honor, resulting in the original litigation filed in Texas State Court during October 2002 as Cause No. 02-09433-I in the 162nd Judicial District Court of Dallas County, Texas styled American Realty Trust, Inc., ART Williamsburg, Inc., Basic Capital Management, Inc. and EQK Holdings, Inc. v. Sunset Management LLC (the “Texas Litigation”). The Texas Litigation alleged breach of contract, misrepresentation, breach of duty of good faith and fair dealing and slander of title by Sunset and sought certain declaratory relief against Sunset, as well as temporary and permanent anti-suit injunction against Sunset.

 

During January 2003, without notice to the Plaintiffs in the Texas Litigation, Sunset instituted an action in Federal District Court in Las Vegas, Nevada against Commonwealth Land Title (“Commonwealth”) seeking

 

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Index to Financial Statements

disposition of certain shares of Common Stock of TCI held by Commonwealth as Pledge Holder. On January 31, 2003, after a Temporary Restraining Order was issued in the Texas Litigation against Sunset, Sunset instituted a separate lawsuit in Nevada State Court styled Sunset Management LLC v. American Realty Trust, Inc., et al., Cause No. A462587 pending in District Court of Clark County, Nevada (the “Nevada Litigation”). On February 12, 2003, the Nevada State Court held a hearing on Sunset’s request for emergency relief and denied all of Sunset’s requested relief and indicated that a stay of the Nevada Litigation may be appropriate, which stay of litigation (including claims against TCI) was granted on May 2, 2003. Notwithstanding the stay of the Nevada Litigation, Sunset has attempted to re-litigate the underlying issues already determined in the Texas Litigation and the Nevada Litigation through cross-claims and counterclaims in the Texas Litigation and renewed motions for injunctions and the appointment of a receiver in the Nevada Litigation. During September 2003, the Texas Litigation was removed to Bankruptcy Court for the Northern District of Texas and subsequently transferred to the Eastern District of Texas. Sunset and the Plaintiffs have filed cross-motions for partial summary judgment in the Bankruptcy Court which had been briefed but remain pending at this time. The parties have also filed an Agreed Motion to Withdraw the reference and have the case transferred to a United States District Judge for trial, which has been denied without prejudice pending resolution of pre-trial motions, including the motions for summary judgment.

 

On February 10, 2004, Sunset filed yet another lawsuit in Nevada styled Sunset Management LLC v. Transcontinental Realty Investors, Inc., Case No. CV04-00345 in the Superior Court of Washoe County, seeking to compel a new election of directors, alleging that Sunset was improperly denied voting rights with respect to certain pledged shares at the 2003 stockholders meeting of TCI. TCI responded to that action by informing the Nevada Court that the issue of the validity and effectiveness of proxies purportedly held by Sunset in connection with the loan was already pending before the Bankruptcy Court. On May 12, 2004, the Nevada District Court denied Sunset’s motion to compel an election of corporate directors because of the dispute pending in the Texas Bankruptcy Court concerning the status of the loan. Subsequently, the Nevada District Court denied two motions for reconsideration filed by Sunset. Sunset is currently appealing the rulings of the Washoe County District Court.

 

The ownership of property and provision of services to the public as tenants entails an inherent risk of liability. Although the Company and its subsidiaries are involved in various items of litigation incidental to and in the ordinary course of its business, in the opinion of management, the outcome of such litigation will not have a material adverse impact upon the Company’s financial condition, results of operations or liquidity.

 

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

The Annual Meeting of Stockholders was held on November 22, 2004, at which meeting stockholders were asked to consider and vote upon the election of Directors and the ratification of the selection of the independent public accountants for TCI for the fiscal year ending December 31, 2004. At the meeting, stockholders elected the following individuals as Directors:

 

     Shares Voting

Director


   For

   Abstained

Henry A. Butler

   7,322,494    9,553

Sharon Hunt

   7,320,059    11,988

Ted R. Munselle

   7,322,321    9,726

Ted P. Stokely

   7,320,465    11,582

Martin L. White

   7,320,598    11,449

 

There were no no votes or broker non-votes on the election of Directors. With respect to the ratification of the appointment of Farmer, Fuqua & Huff, P.C. as independent auditors of the Company for the fiscal year ending December 31, 2004, and any interim period, at least 7,320,494 votes were received in favor of such proposal, 8,335 votes were received against such proposal, and 3,218 votes abstained.

 

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PART II

 

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASED EQUITY SECURITIES

 

TCI’s Common Stock is traded on the New York Stock Exchange (“NYSE”) using the symbol “TCI”. The following table sets forth the high and low sales prices as reported in the consolidated reporting system of the NYSE.

 

Quarter Ended


   High

   Low

March 31, 2005 (through March 24, 2005)

   $ 20.10    $ 14.20

March 31, 2004

     17.33      14.42

June 30, 2004

     14.59      10.99

September 30, 2004

     13.75      12.40

December 31, 2004

     14.59      13.55

March 31, 2003

     18.55      16.43

June 30, 2003

     18.92      13.99

September 30, 2003

     16.70      11.79

December 31, 2003

     16.73      11.79

 

As of March 24, 2005, the closing price of TCI’s Common Stock as reported in the consolidated reporting system of the NYSE was $19.29 per share.

 

As of March 24, 2005, TCI’s Common Stock was held by 4,464 holders of record.

 

TCI paid no dividends in 2004, 2003 or 2002, and management believes no dividends will be paid in 2005. The payment of dividends, if any, will be determined by the Board of Directors in light of conditions then existing, including the Company’s financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board of Directors.

 

In December 1989, the Board of Directors approved a share repurchase program, authorizing the repurchase of a total of 687,000 shares of TCI’s Common Stock. In October 2000, the Board increased this authorization to 1,409,000 shares. Through December 31, 2004, a total of 1,189,910 shares have been repurchased at a cost of $15.9 million. No shares were repurchased in 2002 or 2003. In November 2004, the Board approved a private block purchase of 212,800 shares of Common Stock for a total cost of $3.1 million. The following table represents shares repurchased during each of the three months ended December 31, 2004:

 

Period


  

Total Number of

Shares Purchased


  

Average Price

Paid per Share


  

Total Number of

Shares Purchased as

Part of Publicly

Announced Program


  

Maximum Number of

Shares that May

Yet be Purchased

Under the Program(a)


Balance as of September 30, 2004

   —      $ —      —      431,890

October 1-31, 2004

   —        —      —      431,890

November 1-30, 2004

   212,800      14.50    212,800    219,090

December 1-31, 2004

   —        —      —      219,090
    
  

  
  

Total

   212,800    $ 14.50    212,800    219,090
    
  

  
  

(a)   On June 23, 2000, the TCI Board of Directors approved a share repurchase program for up to 1,409,000 shares of our common stock. This repurchase program has no termination date.

 

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ITEM 6.    SELECTED FINANCIAL DATA

 

     For the Years Ended December 31,

 
     2004

    2003

    2002

    2001

    2000

 
           As Restated                    
           (dollars in thousands, except per share)  

EARNINGS DATA

                                        

Rents

   $ 92,959     $ 77,801     $ 61,750     $ 58,909     $ 79,044  

Property expense

     59,177       55,762       45,911       36,356       48,689  
    


 


 


 


 


Operating income

     33,782       22,039       15,839       22,553       30,355  

Gain on land sales

     7,110       1,641       666       —         —    
    


 


 


 


 


Income from operations

     40,892       23,680       16,505       22,553       30,355  

Other income

     6,507       11,584       313       2,924       1,814  

Gain on real estate

     —         —         —         48,333       50,550  
    


 


 


 


 


Total other income

     6,507       11,584       313       73,810       82,719  

Other expense

     69,571       52,453       49,932       50,674       55,068  
    


 


 


 


 


Income (loss) from before tax

     (22,172 )     (17,189 )     (33,114 )     23,136       27,651  

Income tax benefit

     10,976       —         —         —         —    
    


 


 


 


 


Net income/(loss) from continuing operations

     (11,196 )     (17,189 )     (33,114 )     23,136       27,651  

Discontinued operations, net of taxes

     34,902       17,862       37,965       (3,325 )     2,131  
    


 


 


 


 


Net income (loss)

     23,706       673       4,851       19,811       29,782  

Preferred dividend requirement

     (210 )     (126 )     (190 )     (172 )     (22 )
    


 


 


 


 


Net income (loss) applicable to Common shares

   $ 23,496     $ 547     $ 4,661     $ 19,639     $ 29,760  
    


 


 


 


 


Basic and Diluted Earnings Per Share

                                        

Basic

   $ 2.90     $ .07     $ .58     $ 2.32     $ 3.45  

Diluted

   $ 2.90     $ .07     $ .58     $ 2.28     $ 3.45  

Dividends per Common share

   $ —       $ —       $ —       $ —       $ .54  

Weighted Average Common Shares Outstanding

                                        

Basic

     8,082,854       8,078,108       8,057,361       8,478,377       8,631,621  

Diluted

     8,082,854       8,078,108       8,057,361       8,615,465       8,637,290  
     For the Years Ended December 31,

 
     2004

    2003

    2002

    2001

    2000

 
           As Restated                    
     (dollars in thousands, except per share)  

BALANCE SHEET DATA

                                        

Real estate held for investment, net

   $ 658,300     $ 641,022     $ 736,977     $ 622,171     $ 639,040  

Real estate held for sale

     49,878       61,457       22,510       516       1,824  

Real estate subject to sales contract

     70,350       79,848       —         —         —    

Notes and interest receivable, net

     56,630       30,741       27,953       22,049       8,172  

Total assets

     920,311       882,784       858,489       709,152       731,885  

Notes and interest payable

     644,071       626,465       586,628       461,037       501,734  

Stockholders’ equity

     240,519       221,758       222,394       216,768       200,560  

Book value per share

   $ 30.44     $ 27.33     $ 27.55     $ 26.95     $ 23.22  

 

TCI purchased 20 properties for a total of $86.7 million in 2004, 10 properties for a total of $36.9 million in 2003, 16 properties for a total of $107.7 million in 2002, 17 properties for a total of $62.5 million in 2001, and

 

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18 properties for a total of $103.9 million in 2000. TCI sold 20 properties, the two remaining warehouses in the Kelly portfolio and four parcels of land for $276.7 million in 2004, 13 properties, two warehouses in the Kelly portfolio and 5 parcels of land for $86.6 million in 2003, 18 properties and a partial land parcel for a total of $117.6 million in 2002, 22 properties, one warehouse in the Kelly portfolio and three partial land parcels in 2001 for a total of $161.5 million, and 20 properties in 2000 for a total of $113.5 million. See ITEM 2. “PROPERTIES—Real Estate” and ITEM 8. “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.”

 

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Introduction

 

TCI invests in real estate through acquisitions, leases and partnerships and in mortgage loans on real estate, including first, wraparound and junior mortgage loans. TCI is the successor to a California business trust organized on September 6, 1983, which commenced operations on January 31, 1984. On November 30, 1999, TCI acquired all of the outstanding shares of beneficial interest of CMET, a real estate company, in a tax-free exchange of shares, issuing 1.181 shares of its Common Stock for each outstanding CMET share. TCI accounted for the merger as a purchase.

 

Prior to January 1, 2000, TCI elected to be treated as a Real Estate Investment Trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). During the third quarter of 2000, TCI no longer met the requirement for tax treatment as a REIT due to a concentration of ownership.

 

Critical Accounting Policies

 

Critical accounting policies are those that are both important to the presentation of TCI’s financial condition and results of operations and require management’s most difficult, complex or subjective judgments. TCI’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 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 development, management evaluates the recoverability of the carrying amounts of the assets. If the evaluation indicates 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. TCI’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. TCI’s estimates are subject to revision as market conditions and TCI’s assessments of them change. In the third quarter of 2004, TCI recognized $1.6 million and $2.9 million of impairment losses, and in the fourth quarter of 2004, recognized $1.7 million of impairment losses. In the fourth quarter of 2003, TCI recognized $4.4 million and $192,000 as impairment losses, and in the second and third quarter of 2002, TCI recognized $1.9 million and $700,000 as impairment losses.

 

TCI’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 such information 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 TCI’s assessment of its ability to meet its lease or interest obligations. TCI’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.

 

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TCI’s management periodically discusses criteria for estimates and disclosure of its estimates with the audit committee of TCI’s Board of Directors.

 

Obligations and Commitments

 

TCI has contractual obligations and commitments primarily with regards to the payment of mortgages.

 

The following table aggregates TCI’s expected contractual obligations and commitments subsequent to December 31, 2004.

 

     PAYMENTS DUE BY PERIOD

     Total

   Less than 1 Year

   1-3 Years

   3-5 Years

   More than 5 Years

     (Dollars in thousands)

Long-Term Debt(1)

   $ 640,011    $ 188,152    $ 117,535    $ 49,038    $ 285,286

Capital Lease Obligations

     —        —        —        —        —  

Operating Leases

     —        —        —        —        —  

Purchase Obligations

     —        —        —        —        —  

Other Long-Term Liabilities

     2,171      2,171      —        —        —  

(1)   TCI’s long-term debt may contain financial covenants that, if certain thresholds are not met, could allow the lender to accelerate principal payments or cause the note to become due immediately.

 

Other long-term liabilities represent TCI’s intentions to purchase the interests of general and limited partners formed to construct residential properties.

 

Liquidity and Capital Resources

 

Cash and cash equivalents were $21.8 million, $6.4 million, and $10.6 million at December 31, 2004, 2003 and 2002, respectively. The principal reasons for the change in cash are discussed in the paragraphs below.

 

TCI’s principal sources of cash have been and will continue to be from property operations, proceeds from property sales, and the collection of mortgage notes receivable, borrowings and to a lesser extent, distributions from partnerships. Management anticipates that TCI’s cash at December 31, 2004, along with cash that will be generated in 2005 from property operations, will not be sufficient to meet all of TCI’s cash requirements. Management intends to selectively sell income producing real estate, refinance or extend real estate debt and seek additional borrowings against real estate to meet its cash requirements. Historically, management has been successful at extending its current maturity obligations. Management also anticipates funding ongoing real estate construction projects and the acquisition of new real estate from cash generated by property sales, debt refinancings or extensions, and additional borrowings.

 

Net cash used in operations was $13.2 million in 2004 compared to net cash provided in operations of $3.7 million in 2003 and net cash used of $9.1 million in 2002. Cash flow from property operations is rents collected, less payment for property operating expenses or net rental income. Although operating income was higher in 2004 compared to 2003 due to increased income from residential properties, cash from operations was less in 2004 compared to 2003 due to higher spending on general and administrative expenses, advisory fees and net income fees and an increase in non-cash gains from property sales and foreign currency transactions in 2004 compared to 2003. The increase in operating cash from 2002 to 2003 was due to an increase in net rental income from new apartments that finished construction in 2002 and 2003, and an increase in commercial net rental income due to Centura Tower, which was purchased in June 2002. Cash also increased due to less spending on general and administrative expenses from 2002 to 2003. These gains were offset by the sales of real estate during 2002 and 2003 and from higher interest expense paid during 2003. Management believes that cash flow may decrease from property operations as a result of selling income producing properties.

 

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Management expects that funds from existing cash resources, selective sales of income producing properties, refinancing of real estate, and additional borrowings against real estate will be sufficient to meet TCI’s cash requirements associated with its current and anticipated level of operations, maturing debt obligations and existing commitments. To the extent that TCI’s liquidity permits or financing sources are available, management intends to make new real estate investments.

 

Net cash used in investing activities was $18.9 million in 2004 compared to $26.9 million in 2003 and $67.0 million in 2002. Cash from investing activities increased in 2004 compared to 2003 due to higher proceeds from the sales of real estate and collections on notes receivable, reduced by increased spending on real estate construction and improvements and real estate acquisitions, and an increase in payments to TCI’s advisor. Cash from investing activities increased in 2003 compared to 2002 due to TCI spending less on real estate construction and improvements and an increase in payments received from TCI’s advisor. These cash increases were offset by cash decreases due to less collected on notes receivable, less real estate sold, the purchase of marketable securities and increases in deposits on pending real estate purchases.

 

Net cash provided by financing activities was $47.6 million in 2004 compared to $19.0 million in 2003 and $76.3 million in 2002. Cash from financing activities increased in 2004 compared to 2003 due to higher proceeds from refinancing of notes payable, which was reduced by higher payments on notes payable and the repurchase of TCI’s common stock. Cash from financing activities decreased in 2003 compared to 2002 due to higher payments on notes payable and lower proceeds from notes payable refinancings.

 

Management reviews the carrying values of TCI’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. The 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.

 

Results of Operations

 

2004 Compared to 2003.    TCI had net income of $23.1 million in 2004, including gains on sale of real estate totaling $63.3 million and net income of $673,000 in 2003, including gains on sale of real estate totaling $21.7 million. Fluctuations in the components of revenues and expense between 2004 and 2003 are discussed below.

 

Rents were $93.0 million in 2004 compared to $77.8 million in 2003. The increase in rents from 2004 to 2003 is primarily due to new rental income from completed apartment projects since 2001 and a slight increase in hotel revenues.

 

Property operations expenses were $59.2 million in 2004 compared to $55.8 million in 2003. This increase is primarily due to additional operations expense from the completion of apartment projects since 2001, which is offset by decreases in hotel and land operations during 2004.

 

Interest and other income was $3.7 million in 2004 compared to $6.7 million in 2003. The higher other income in 2003 was due to a $3.8 million litigation settlement received by TCI.

 

Equity losses of investees was $1.5 million in 2004 compared to $4.3 million in 2003. The losses from equity investees are primarily attributed to operating losses for IORI and ARI. IORI and ARI had lower losses from continuing operations in 2004.

 

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Index to Financial Statements

Gain on settlement of debt was $4.4 million in 2003. The gain resulted from a favorable ruling in a lender dispute regarding the mortgage loans on three office buildings in New Orleans, Louisiana.

 

Gain on condemnation award was $4.8 million in 2003, resulting from the settlement of a dispute regarding a land parcel in Dallas, Texas.

 

Gain on foreign currency transaction was $3.8 million in 2004. Gain or loss on foreign currency transaction is the result of Hotel Akademia converting long-term debt, which is denominated in Euros, into the functional currency, the Polish Zloty. The Euro weakened against the Zloty during 2004, which has resulted in TCI recognizing this gain.

 

Interest expense was $32.4 million in 2004 compared to $23.7 million in 2003. Interest expense increased in 2004 primarily due to increased debt due to apartment construction projects being completed since 2001. Changes in other segments interest expense was nominal from 2004 to 2003.

 

Depreciation expense was $17.7 million in 2004 compared to $13.2 million in 2003. Depreciation expense increased in 2004 primarily due to apartment construction projects being completed since 2001.

 

TCI recorded asset impairments of $1.7 million in 2004 and $198,000 in 2003, representing the write-down of certain operating properties to current estimated fair value.

 

The assets for 2004 include the following properties:

 

Property


  

Location


   Sq. Feet

   Fair
Value


   Property
Basis


   Costs to
Sell


   Impairment

Office Building

                                     

225 Baronne

   New Orleans, LA    416,834 Sq. Ft.    $ 8,500    $ 10,219    $ —      $ 1,720

 

It was determined that the fair value of 225 Baronne was less than the current book value due to the pending loss of the anchor tenant. It was determined that future leases on the vacated space will be below market rates and the projected future cash flows of 225 Baronne will not be sufficient to recover the current book value.

 

The assets for 2003 include the following properties:

 

Property


  

Location


   Acres

   Fair
Value


   Property
Basis


   Costs to
Sell


   Impairment

Land

                             

Red Cross

   Dallas, TX    2.89 Acres    8,500    7,679    1,019    198

 

The Red Cross land was sold on January 30, 2004 and the actual sales price less selling costs was used as the fair value.

 

Advisory fee expense was $6.7 million in 2004 compared to $4.9 million in 2003. The increase in 2004 was due to higher average gross assets during the year. Also, TCI received an operating expense refund from Prime of $1.3 million in 2003. See NOTE 12. “ADVISORY AGREEMENT.”

 

Net income fee to affiliate was $1.9 million in 2004. The net income fee is payable to TCI’s advisor based on 7.5% of TCI’s net income. TCI had a net loss for 2003, so no net income fee was due.

 

General and administrative expenses were $9.3 million in 2004 compared to $9.1 million in 2003. The increase in 2004 was due to an increase in state income taxes and cost reimbursements to the Advisor, offset by lower legal cost and professional fees.

 

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Index to Financial Statements

Loss on foreign currency transaction was $3.3 million in 2003. Loss on foreign currency transaction is the result of Hotel Akademia converting long-term debt, which is denominated in Euros, into the functional currency, the Polish Zloty. The Euro strengthened against the Zloty during 2003, which has resulted in TCI recognizing this charge.

 

Income from discontinued operations was $58.4 million in 2004 compared to $17.9 million in 2003. Income from discontinued operations relates to 22 operating properties sold during 2004, three apartments, two office buildings and one industrial warehouse designated as held for sale and 15 operating properties TCI sold during 2003. The following table summarizes revenue and expense information for these properties sold and held-for-sale.

 

     2004

    2003

 

Revenue

                

Rental

   $ 26,697     $ 46,373  

Property operations

     15,887       23,556  
    


 


       10,810       22,817  

Expenses

                

Interest

     10,309       19,413  

Depreciation

     4,878       7,688  
    


 


       15,187       27,101  
    


 


Net income (loss) from discontinued operations before gains on sale of real estate

     (4,377 )     (4,284 )

Gain on sale of operations

     63,348       21,650  

Write-down of assets held for sale

     (4,477 )     (4,357 )

Equity in investees gain on sale of real estate

     3,884       4,853  
    


 


Income from discontinued operations

   $ 58,378     $ 17,862  
    


 


 

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.

 

In 2004 and 2003, gains on sale of real estate totaling $63.3 million and $21.7 million were recognized. See NOTE 2. “REAL ESTATE.”

 

2003 Compared to 2002.    TCI had net income of $673,000 in 2003, including gains on sale of real estate totaling $21.7 million and net income of $4.9 million in 2002, including gains on sale of real estate totaling $38.3 million. Fluctuations in the components of revenues and expense between 2003 and 2002 are discussed below.

 

Rents were $77.8 million in 2003 compared to $62.2 million in 2002. The increase in rents from 2003 to 2002 is due to new rental income from completed apartment projects and increases in commercial rents and hotel revenues.

 

Property operations expenses were $55.8 million in 2003 compared to $46.3 million in 2002. This increase is primarily due to additional operations expense from the completion of multiple apartment projects during 2001 and 2002.

 

Interest and other income was $6.7 million in 2003 compared to $4.1 million in 2002. The increase in 2003 was due to a $3.8 million litigation settlement received by TCI.

 

Equity losses of investees was $4.3 million in 2003 compared to $3.8 million in 2002. The losses from equity investees are primarily attributed to operating losses for IORI and ARI.

 

Gain on settlement of debt was $4.4 million in 2003. The gain resulted from a favorable ruling in a lender dispute regarding the mortgage loans on three office buildings in New Orleans, Louisiana.

 

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Index to Financial Statements

Gain on condemnation award was $4.8 million in 2003, resulting from the settlement of a dispute regarding a land parcel in Dallas, Texas.

 

Interest expense was $23.7 million in 2003 compared to $20.4 million in 2002. Interest expense increased in 2003 primarily due to increased debt due to apartment construction projects being completed in 2001 and 2002, offset by a decrease in commercial interest expense during 2003.

 

Depreciation expense was $13.2 million in 2003 compared to $11.7 million in 2002. Depreciation expense increased in 2003 primarily due to apartment construction projects being completed in 2001 and 2002.

 

TCI recorded asset impairments of $198,000 in 2003 and $2.6 million for 2002, representing the write-down of certain operating properties to current estimated fair value.

 

The assets for 2003 include the following properties:

 

Property


  

Location


   Acres

   Fair
Value


   Property
Basis


   Costs to
Sell


   Impairment

Land

                                     

Red Cross

   Dallas, TX    2.89 Acres    $ 8,500    $ 7,679    $ 1,019    $ 198

 

The Red Cross land was sold on January 30, 2004 and the actual sales price less selling costs was used as the fair value.

 

The assets for 2002 include the following properties:

 

Property


  

Location


   Units/Acres

   Fair
Value


   Property
Basis


   Costs to
Sell


   Impairment

Apartments

                                     

Apple Lane

   Lawrence, KS    75 Units    $ 1,580    $ 1,593    $ 238    $ 251

Fairway View

   El Paso, TX    264 Units      5,700      5,242      863      405

Fountains of Waterford

   Midland, TX    172 Units      1,900      2,006      285      391

Plantation

   Tulsa, OK    138 Units      2,545      3,100      145      700

Sunchase

   Odessa, TX    300 Units      4,100      3,479      746      125

Land

                                     

Red Cross

   Dallas, TX    2.89 Acres      8,400      8,348      758      707

 

The Red Cross land was under contract to sell in 2002 and the sales price was used as fair value. The fair value determined for four apartments above were agreed upon purchase prices as part of the refinancing transaction with Metra Capital, LLC. The costs to sell were actual fees paid to refinance the properties. TCI refinanced the Plantation Apartments in May 2003, incurring a new note for $2.3 million and discharging debt of $1.9 million. See NOTE 7. “NOTES AND INTEREST PAYABLE.”

 

Advisory fee expense was $4.9 million in 2003 compared to $4.5 million in 2002. The increase in 2003 was due to higher average gross assets during the year. TCI received operating expense refunds from BCM of $1.3 million in 2003 and $1.4 million in 2002. See NOTE 12. “ADVISORY AGREEMENT.”

 

Net income fee to affiliate was $374,000 in 2002. The net income fee is payable to TCI’s advisor based on 7.5% of TCI’s net income. TCI had a net loss for 2003, so no net income fee was due.

 

General and administrative expenses were $9.1 million in 2003 compared to $8.8 million in 2002. The increase in 2003 was due to an increase in legal fees and state income taxes, offset by lower real estate insurance premiums and cost reimbursements to the Advisor.

 

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Index to Financial Statements

Loss on foreign currency transaction was $3.3 million in 2003 compared to $2.5 million in 2002. Loss on foreign currency transaction is the result of Hotel Akademia converting long-term debt, which is denominated in Euros, into the functional currency, the Polish Zloty. The Euro has strengthened against the Zloty during 2002 and 2003, which has resulted in TCI recognizing this charge.

 

Income from discontinued operations was $17.9 million in 2003 compared to $37.9 million in 2002. Income from discontinued operations relates to 15 properties that TCI sold during 2003 and 18 properties that TCI sold during 2002. The following table summarizes revenue and expense information for these properties sold and held-for-sale.

 

     2003

    2002

 

Revenue

                

Rental

   $ 46,373     $ 60,558  

Property operations

     23,556       33,903  
    


 


       22,817       26,655  

Expenses

                

Interest

     19,413       23,085  

Depreciation

     7,688       8,975  
    


 


       27,101       32,060  
    


 


Net income (loss) from discontinued operations before gains on sale of real estate

     (4,284 )     (5,405 )

Gain on sale of operations

     21,650       38,279  

Write-down of assets held for sale

     (4,357 )     —    

Equity in investees gain on sale of real estate

     4,853       5,013  
    


 


Income from discontinued operations

   $ 17,862     $ 37,887  
    


 


 

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.

 

In 2003 and 2002, gains on sale of real estate totaling $21.7 million and $38.3 million were recognized. See NOTE 2. “REAL ESTATE.”

 

Related Party Transactions

 

Historically, TCI, ARI, IORI, and others have each engaged in and may continue to engage in business transactions, including real estate partnerships, with related parties. Management believes that all of the related party transactions represented the best investments available at the time and were at least as advantageous to TCI as could have been obtained from unrelated parties.

 

Operating Relationships

 

TCI received rents of $69,000 in 2004, $175,000 in 2003, and $88,000 in 2002 from BCM for BCM’s lease at Addison Hanger. BCM owns a corporate jet that is housed at the hanger and TCI has available space at the hanger.

 

Property Transactions

 

Activity in 2004 included:

 

In December 2003, TCI sold six properties to subsidiaries of United Housing Foundation, Inc. (“UHF”), a Texas Non-Profit 501(c)3 Corporation. TCI sold 10.72 acres of Marine Creek land for $1.5 million, Limestone at Vista Ridge apartments for $19.0 million, the Cliffs of El Dorado apartments for $13.4 million, the Limestone

 

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Index to Financial Statements

Canyon apartments for $18.0 million, the Sendero Ridge apartments for $29.4 million and the Tivoli apartments for $16.1 million. Ted Stokely, Chairman of the Board of TCI, is the General Manager of UHF. Richard Humphrey, who is employed by Regis I, an affiliate, is President of UHF. Due to UHF being considered a related party to TCI and TCI having continued involvement and control of these entities, these transactions have not been recorded as sales. Instead, these transactions will be accounted for on the deposit method and the properties and corresponding debt will continue to be consolidated by TCI. The loans on Limestone Canyon apartments and Limestone at Vista Ridge apartments were approved by their prospective lenders for transfer to the purchasing entities. TCI has guaranteed the loans on both of these transfers. Also, Marine Creek land and the Cliffs of El Dorado apartments were recognized as sales during 2004. Management is seeking lender approval on the transfer of the notes associated with the Tivoli apartments and Sendero Ridge apartments.

 

In January 2004, TCI purchased the Vista Ridge land tract from ARI for $2.6 million. This transaction decreased TCI’s affiliate receivable from Prime by $2.6 million.

 

In February 2004, TCI incurred a debt for $1.0 million used for the purchase of land by ARI. This transaction increased TCI’s affiliate receivable from Prime by $1.0 million.

 

In February 2004, TCI recorded the sale of a tract of Marine Creek land originally sold to a related party in December 2003. This transaction was not recorded as a sale for accounting purposes in December 2003 and was recorded as a TCI refinancing transaction in February 2004. TCI received $1.2 million in cash from the related party in February 2004 as payment on the land. TCI holds a note receivable balance of $270,000 remaining that bears interest at 12.00% and matures in April 2009. TCI recorded the sale of the Marine Creek land tract due to the payment received on the note receivable.

 

In May 2004, TCI purchased the Treehouse Apartments from an affiliate with a net purchase price of $7.5 million for the assumption of debt and a note receivable, less cash received of $498,000. The note receivable was from the sale of the Cliffs of El Dorado Apartments to a related party in 2003. At that time, the sale of the Cliffs of El Dorado Apartments was not recorded as a sale for accounting purposes. TCI recorded the sale of the Cliffs of El Dorado in May 2004 upon payment received for the Cliffs of El Dorado note receivable.

 

In January 2004, TCI purchased the Lacy Longhorn land tract from ARI for $4.5 million. This transaction decreased TCI’s affiliate receivable from Prime by $4.5 million.

 

In June 2004, TCI sold Waters Edge IV apartments to ARI for $5.0 million. This transaction increased TCI’s affiliate receivable from Prime by $5.0 million.

 

In June 2004, TCI refinanced the 1010 Common office building, Lacy Longhorn land and certain tracts of Marine Creek land. TCI paid-off an existing note payable for ARI for $1.9 million, increasing the affiliate receivable balance from Prime by $1.9 million.

 

In September 2004, TCI sold Limestone Canyon II land to a subsidiary of UHF for $720,000 in the form of a seller note receivable. Due to no cash received and common control, TCI has elected to continue consolidating this tract of land until the requirements for a sale have been met. No sale has recognized and no note receivable has been recorded.

 

In December 2004, TCI purchased five tracts of land from ARI, including the LCLLP tract (45.49 acres); the Payne tract (268 acres), of which TCI owns a 50% Tenant-In-Common interest; the Rochelle I tract (10.096 acres); the Rochelle II tract (21.269 acres); and the Valley Ranch tract (29.9 acres) for $39.1 million, including the assumption of debt. This transaction reduced TCI’s affiliate receivable from Prime by $29.1 million.

 

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Index to Financial Statements

Environmental Matters

 

Under various federal, state and local environmental laws, ordinances and regulations, TCI may be potentially liable for removal or remediation costs, as well as certain other potential costs, relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery for personal injury associated with such materials.

 

Management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on TCI’s business, assets or results of operations.

 

Inflation

 

The effects of inflation on TCI’s operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect sales values of properties and the ultimate gain to be realized from property sales. To the extent that inflation affects interest rates, TCI’s earnings from short-term investments, the cost of new financings as well as the cost of variable interest rate debt will be affected.

 

Tax Matters

 

Prior to the year 2000, TCI elected and in the opinion of management, qualified to be taxed as a REIT as defined under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. During the third quarter of 2000, due to a concentration in ownership, TCI no longer met the requirements for tax treatment as a REIT under the Code. Under the Code, TCI is prohibited from re-qualifying for REIT tax status for at least five years after January 1, 2001.

 

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK

 

TCI’s future operations, cash flow and fair values of financial instruments are partially dependent on the then existing market interest rates and market equity prices. Market risk is the changes in the market rates and prices, and the effect of the changes on future operations. Market risk is managed by matching a property’s anticipated net operating income to an appropriate financing.

 

TCI is exposed to interest rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. TCI does not hold financial instruments for trading or other speculative purposes, but rather issues these financial instruments to finance its portfolio of real estate assets. TCI’s interest rate sensitivity position is managed by TCI’s capital markets department. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. TCI’s earnings are affected as changes in short-term interest rates impact its cost of variable rate debt and maturing fixed rate debt. A large portion of TCI’s market risk is exposure to short-term interest rates from variable rate borrowings. The impact on TCI’s financial statements of refinancing fixed debt that matured during 2004 was not material. As permitted, management intends to convert a significant portion of those borrowings from variable rates to fixed rates in 2005. If market interest rates for variable rate debt average 100 basis points more in 2005 than they did during 2004, TCI’s interest expense would increase, and income would decrease by $1.5 million. This amount is determined by considering the impact of hypothetical interest rates on TCI’s borrowing cost. This analysis did not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in TCI’s financial structure.

 

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Table of Contents
Index to Financial Statements

The following table contains only those exposures that existed at December 31, 2004. Anticipation of exposures or risk on positions that could possibly arise was not considered. TCI’s ultimate interest rate risk and its effect on operations will depend on future capital market exposures, which cannot be anticipated with a probable assurance level. Dollars in thousands.

 

Assets

                                                     

Notes receivable

                                                     

Variable interest rate-fair value

                                                  $ 7,444
    2005

    2006

    2007

    2008

    2009

    Thereafter

    Total

Instrument’s maturities

  $ 2,776     $ —       $ 4,768     $ —       $ —       $ —       $ 7,544

Instrument’s amortization

    —         —         —         —         —         —         —  

Interest

    542       334       83       —         —         —         959

Average rate

    7.19 %     7.00 %     7.00 %     —   %     —   %     —   %      

Fixed interest rate-fair value

                                                  $ 45,802
    2005

    2006

    2007

    2008

    2009

    Thereafter

    Total

Instrument’s maturities

  $ 22,762     $ —       $ 20,403     $ 2,626     $ 125     $ 210     $ 46,126

Instrument’s amortization

    51       60       67       48       —         —         226

Interest

    3,212       1,860       1,430       295       272       2,019       9,088

Average rate

    8.66 %     7.98 %     8.13 %     7.96 %     7.69 %     7.62 %      

Liabilities

                                                     

Non-trading Instruments-Equity Price Risk

                                                     

Notes payable

                                                     

Variable interest rate-fair value

                                                  $ 77,300
    2005

    2006

    2007

    2008

    2009

    Thereafter

    Total

Instrument’s maturities

  $ 59,513     $ 20,020     $ 26,703     $ —       $ 6,637     $ 17,936     $ 130,809

Instrument’s amortization

    2,182       1,987       1,263       620       575       9,804       16,431

Interest

    6,214       4,913       3,081       2,080       1,739       14,046       32,073

Average rate

    5.7 %     5.4 %     5.5 %     5.8 %     5.5 %     5.4 %      

Fixed interest rate-fair value

                                                  $ 517,251
    2005

    2006

    2007

    2008

    2009

    Thereafter

    Total

Instrument’s maturities

  $ 121,534     $ 29,923     $ 29,932     $ 11,566     $ 23,536     $ 40,921     $ 257,412

Instrument’s amortization

    4,923       4,155       3,552       3,162       2,942       216,625       235,359

Interest

    25,234       24,039       21,087       19,822       18,773       326,028       434,983

Average rate

    6.9 %     6.9 %     6.9 %     6.9 %     6.8 %     6.7 %      

 

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Index to Financial Statements

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page

Financial Statements

    

Report of Independent Registered Public Accounting Firms

   39

Consolidated Balance Sheets—December 31, 2004 and 2003

   41

Consolidated Statements of Operations—Years Ended December 31, 2004, 2003 and 2002

   42

Consolidated Statements of Stockholders’ Equity—Years Ended December 31, 2004, 2003 and 2002

   44

Consolidated Statements of Cash Flows—Years Ended December 31, 2004, 2003 and 2002

   45

Notes to Consolidated Financial Statements

   47

Financial Statement Schedules

    

Schedule III—Real Estate and Accumulated Depreciation

   79

Schedule IV—Mortgage Loans on Real Estate

   85

 

All other schedules are omitted because they are not required, are not applicable or the information required is included in the Consolidated Financial Statements or the notes thereto.

 

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Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors of

Transcontinental Realty Investors, Inc.

Dallas, Texas

 

We have audited the accompanying consolidated balance sheet of Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31, 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

As described in Note 23, Transcontinental Realty Investors, Inc.’s management has indicated its intent to both sell income producing properties and refinance or extend debt secured by real estate to meet its liquidity needs.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Transcontinental Realty Investors, Inc. as of December 31, 2004, and the results of its operations and its cash flows for the year ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

 

Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. Schedules III and IV are presented for the purpose of complying with the Securities and Exchange Commission’s rules and is not a required part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the consolidated financial statements taken as a whole.

 

FARMER, FUQUA & HUFF, PC

 

Plano, Texas

March 31, 2005

 

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Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors of

Transcontinental Realty Investors, Inc.

Dallas, Texas

 

We have audited the accompanying consolidated balance sheets of Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31, 2003 and the related consolidated statements of operations, stockholders’ equity, other comprehensive income/(loss) and cash flows for each of the two years in the period ended December 31, 2003. We have also audited the schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits provide a reasonable basis for our opinion.

 

As described in Note 23, Transcontinental Realty Investors, Inc.’s management has indicated its intent to both sell income producing properties and refinance or extend debt secured by real estate, to meet its liquidity needs.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31, 2003 and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

 

Also, in our opinion, the schedules present fairly, in all material respects, the information set forth therein.

 

BDO SEIDMAN, LLP

 

Dallas, Texas

March 30, 2004 (except for Notes 19, 20 and 21 which are as of March 31, 2005.)

 

40


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Index to Financial Statements

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

CONSOLIDATED BALANCE SHEETS

 

     December 31,

 
     2004

    2003

 
           As Restated  
     (dollars in thousands,
except per share)
 
Assets                 

Real estate held for investment

   $ 730,584     $ 723,933  

Less—accumulated depreciation

     (72,284 )     (82,911 )
    


 


       658,300       641,022  

Real estate held for sale

     49,878       61,457  

Real estate subject to sales contract (See Note 8.)

     70,350       79,848  

Notes and interest receivable

                

Performing (including $40,496 in 2004 and $18,793 in 2003 from affiliates and related parties)

     56,630       27,894  

Non-performing, non-accruing

     —         4,303  
    


 


       56,630       32,197  

Less—allowance for estimated losses

     —         (1,456 )
    


 


       56,630       30,741  

Investment in real estate entities

     17,582       14,271  

Marketable equity securities, at market value

     6,580       5,000  

Cash and cash equivalents

     21,845       6,434  

Other assets (including $14,125 in 2004 and $4,819 in 2003 from affiliates and related parties)

     39,146       44,011  
    


 


     $ 920,311     $ 882,784  
    


 


Liabilities and Stockholders’ Equity                 

Liabilities:

                

Notes and interest payable

   $ 524,670     $ 540,768  

Liabilities related to assets held for sale

     59,424       18,225  

Liabilities subject to sales contract (See Note 8.)

     59,977       67,472  

Other liabilities (including $2,282 in 2004 and $607 in 2003 to affiliates and related parties)

     34,840       34,687  
    


 


       678,911       661,152  

Commitments and contingencies

                

Minority interest

     881       (126 )

Stockholders’ equity:

                

Preferred Stock

                

Series C; $.01 par value; authorized, issued and outstanding 30,000 shares; (liquidation preference $3,000)

     —         —    

Common Stock, $.01 par value; authorized, 10,000,000 shares; issued and outstanding 7,900,869 in 2004 and 8,113,669 shares in 2003

     81       81  

Paid-in capital

     256,704       256,914  

Treasury stock

     (3,086 )     —    

Accumulated deficit

     (10,915 )     (34,621 )

Accumulated other comprehensive income

     (2,265 )     (616 )
    


 


       240,519       221,758  
    


 


     $ 920,311     $ 882,784  
    


 


 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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TRANSCONTINENTAL REALTY INVESTORS, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     For the Years Ended December 31,

 
     2004

    2003

    2002

 
           As Restated        
     (dollars in thousands, except per share)  

Property revenue:

                        

Rents (including $69 in 2004 and $175 in 2003 from affiliates)

   $ 92,959     $ 77,801     $ 61,750  

Property operations (including $4,849 in 2004 and $4,546 in 2003 to affiliates)

     59,177       55,762       45,911  
    


 


 


Operating income

     33,782       22,039       15,839  

Land Operations:

                        

Sales

     32,550       11,807       3,600  

Cost of Sales

     24,859       8,450       2,934  

Deferred Gain on Sale

     581       1,716       —    
    


 


 


Gain on Sales

     7,110       1,641       666  

Other income:

                        

Interest and other income (including $2,069 in 2004 and $1,459 in 2003 from affiliates)

     3,683       6,683       4,131  

Equity in loss of equity investees

     (1,497 )     (4,291 )     (3,818 )

Gain on settlement of debt

     —         4,392       —    

Gain on condemnation award

     —         4,800       —    

Gain on foreign currency transaction

     3,766       —         —    

Dividends received

     555       —         —    
    


 


 


       6,507       11,584       313  

Other expense:

                        

Interest (including $379 in 2004 to affiliates)

     32,433       23,657       20,383  

Depreciation

     17,700       13,173       11,626  

Provision for asset impairment

     1,722       198       2,579  

Provision for losses

     (1,456 )     158       169  

Discount on sale of note receivables

     —         104       —    

Advisory fees

     6,733       4,935       4,465  

Net income fee

     1,933       —         374  

General and administrative (including $2,181 in 2004 and $1,630 in 2003 to affiliates)

     9,312       9,149       8,774  

Loss on foreign currency transactions

     —         3,309       2,455  

Minority interest

     1,194       (2,230 )     (893 )
    


 


 


Total Other expenses

     69,571       52,453       49,932  

Net loss from continuing operations before taxes

     (22,172 )     (17,189 )     (33,114 )

Income tax benefit

     10,976       —         —    
    


 


 


Net loss from continuing operations

     (11,196 )     (17,189 )     (33,114 )

Discontinued Operations (Note 19):

     58,378       17,862       37,965  

Less: Income tax expense

     (23,476 )     —         —    
    


 


 


Net income from discontinued operations

     34,902       17,862       37,965  

Net income

     23,706       673       4,851  

Preferred dividend requirement

     (210 )     (126 )     (190 )
    


 


 


Net income applicable to Common shares

   $ 23,496     $ 547     $ 4,661  
    


 


 


 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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TRANSCONTINENTAL REALTY INVESTORS, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS—(Continued)

 

     For the Years Ended December 31,

 
     2004

    2003

    2002

 
           As Restated        

Basic earnings per share:

                        

Net loss from continuing operations

   $ (1.41 )   $ (2.36 )   $ (4.12 )

Correction of accounting error in prior period (See Note 21.)

     —         .22       —    

Discontinued operations

     4.31       2.21       4.70  
    


 


 


Net income applicable to Common shares

   $ 2.90     $ .07     $ .58  
    


 


 


Diluted earnings:

                        

Net loss from continuing operations

   $ (1.41 )   $ (2.36 )   $ (4.12 )

Correction of accounting error in prior period (See Note 21.)

     —         .22       —    

Discontinued operations

     4.31       2.21       4.70  
    


 


 


Net income applicable to Common shares

   $ 2.90     $ .07     $ .58  
    


 


 


Weighted average Common shares used in computing earnings per share:

                        

Basic

     8,082,854       8,078,108       8,057,361  

Diluted

     8,082,854       8,078,108       8,057,361  

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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TRANSCONTINENTAL REALTY INVESTORS, INC.

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

    Common Stock

  Treasury
Stock


    Paid-in
Capital


   

Accumulated

Deficit


   

Accumulated

Other

Comprehensive

Income


    Stockholders’
Equity


 
    Shares

    Amount

         
    (dollars in thousands, except shares)  

Balance, January 1, 2002

  8,042,594     $ 80   $ —       $ 256,833     $ (40,145 )   $ —       $ 216,768  

Comprehensive income

                                                   

Unrealized (loss) on foreign currency translation

  —         —       —         —         —         567       567  

Net income

  —         —       —         —         4,851       —         4,851  
                                               


                                                  5,418  

Issuance of Common Stock upon exercise of stock options

  30,000       1     —         397       —         —         398  

Series A Preferred Stock cash dividends ($5.00 per share)

  —         —       —         (29 )     —         —         (29 )

Series C Preferred Stock cash dividends ($5.00 per share)

  —         —       —         (161 )     —         —         (161 )
   

 

 


 


 


 


 


Balance, December 31, 2002

  8,072,594       81     —         257,040       (35,294 )     567       222,394  

Comprehensive income

                                                   

Unrealized (loss) on foreign currency translation

  —         —       —         —         —         (1,183 )     (1,183 )

Net income (As Restated)

  —         —       —         —         673       —         673  
                                               


                                                  (510 )

Series A Preferred Stock cash dividends ($5.00 per share)

  —         —       —         (29 )     —         —         (29 )

Series C Preferred Stock cash dividends ($6.00 per share)

  —         —       —         (97 )     —         —         (97 )

Conversion of 5,829 Series A Preferred Stock into Common Stock

  41,075       —       —         —         —         —         —    
   

 

 


 


 


 


 


Balance, December 31, 2003 (As Restated)

  8,113,669       81     —         256,914       (34,621 )     (616 )     221,758  

Comprehensive income

                                                   

Unrealized loss on foreign currency translation

  —         —       —         —         —         (3,229 )     (3,229 )

Unrealized gain on marketable securities

  —         —       —         —         —         1,580       1,580  

Net income

  —         —       —         —         23,706       —         23,706  
                                               


                                                  22,057  

Repurchase of common stock

  (212,800 )     —       (3,086 )     —         —         —         (3,086 )

Series C Preferred Stock cash dividends ($7.00 per share)

  —         —       —         (210 )     —         —         (210 )
   

 

 


 


 


 


 


Balance, December 31, 2004

  7,900,869     $ 81   $ (3,086 )   $ 256,704     $ (10,915 )   $ (2,265 )   $ 240,519  
   

 

 


 


 


 


 


 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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TRANSCONTINENTAL REALTY INVESTORS, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For the Years Ended December 31,

 
     2004

    2003

    2002

 
           As Restated        
     (dollars in thousands)  

Cash Flows from Operating Activities:

                        

Reconciliation of net loss to net cash used by operating activities

                        

Net Income

   $ 23,706     $ 673     $ 4,851  

Adjustments to reconcile net loss to net cash provided by <used in> operating activities:

                        

Depreciation and amortization

     22,578       20,860       20,666  

Provision for loss

     (1,456 )     104       169  

Amortization of deferred borrowing costs

     3,900       3,134       3,253  

Gain on sale of real estate

     (74,342 )     (28,144 )     (43,958 )

Provision for asset impairment

     6,199       4,713       2,579  

Equity in loss of equity investees

     1,497       4,291       3,818  

Gain on settlement of debt

     —         (4,392 )     —    

Gain on condemnation award

     —         (4,800 )     —    

Loss on foreign currency transaction

     —         3,309       2,455  

Gain on foreign currency transaction

     (3,766 )     —         —    

<Gain>loss allocated to minority interest

     1,194       (2,230 )     (893 )

Increase in interest receivable

     (1,209 )     (683 )     (665 )

<Increase> decrease in other assets

     9,173       1,670       (4,940 )

Increase <decrease> in interest payable

     (889 )     311       1,397  

Increase in other liabilities

     195       4,954       2,156  
    


 


 


Net cash provided by <used in> operating activities

     (13,220 )     3,770       (9,112 )

Cash Flows from Investing Activities:

                        

Collections on notes receivable (including $718 in 2004 and $1,241 in 2003 from affiliates)

     8,851       4,651       16,193  

Funding of notes receivable (including $3,297 in 2004 from affiliates)

     (3,457 )     (736 )     (18,337 )

Acquisitions of real estate

     (40,140 )     (14,250 )     (12,688 )

Real estate improvements

     (9,328 )     (4,462 )     (7,001 )

Real estate construction (including $5,625 in 2004 and $4,050 in 2003 to affiliates)

     (152,684 )     (59,055 )     (104,235 )

Proceeds from sale of real estate

     221,497       56,635       106,085  

Payments made under interest rate swap agreement

     —         (87 )     (272 )

Purchase of marketable equity securities

     —         (5,000 )     —    

Deposits on pending purchase

     (4,825 )     (9,784 )     (716 )

Payments (to) from advisor

     (39,867 )     5,264       (39,739 )

Net advance to affiliates

     —         —         (6,232 )

Distributions <contributions> to equity investees

     1,007       (48 )     (15 )
    


 


 


Net cash used in investing activities

     (18,946 )     (26,872 )     (66,957 )

Cash Flows from Financing Activities:

                        

Payments on notes payable (including $226 in 2004 to affiliates)

     (276,137 )     (124,659 )     (95,731 )

Proceeds from notes payable

     330,988       146,072       176,069  

Payments to minority interests

     —         —         (704 )

Dividends paid

     —         —         (104 )

Dividends paid to preferred shareholders

     (263 )     (74 )     —    

Repurchase of Common Stock

     (3,086 )     —         —    

Deferred financing costs

     (3,925 )     (2,361 )     (3,647 )

Proceeds from exercise of stock options

     —         —         398  
    


 


 


Net cash provided by financing activities

     47,577       18,978       76,281  
    


 


 


Net increase (decrease) in cash and cash equivalents

     15,411       (4,124 )     212  

Cash and cash equivalents, beginning of year

     6,434       10,558       10,346  
    


 


 


Cash and cash equivalents, end of year

   $ 21,845     $ 6,434     $ 10,558  
    


 


 


 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

45


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TRANSCONTINENTAL REALTY INVESTORS, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

 

     For the Years Ended December 31,

     2004

   2003

   2002

     (dollars in thousands)

Supplemental Disclosures of Cash Flow Information:

                    

Cash paid for interest

   $ 39,210    $ 43,016    $ 41,379

Notes payable assumed on purchase of real estate

     15,033      2,650      63,555

Notes payable assumed by buyer on sale of real estate

     21,898      11,291      12,110

Funds collected by affiliate on sale of note receivable

     —        2,633      —  

Notes receivable received from sale of real estate

     21,608      4,760      6,700

Real estate refinancing proceeds received by affiliate

     —        1,226      —  

Real estate received on exchange with related party

     —        —        4,145

Real estate received from related party to satisfy debt

     36,198      10,700      46,200

Real estate sold to a related party to satisfy debt

     5,000      —        —  

Note payable proceeds used by affiliate for purchase of real estate

     1,000      —        —  

Note payable proceeds used by affiliate to satisfy debt

     1,260      —        —  

Note payable paid-off on behalf of affiliate

     1,851      —        —  

Notes receivable payments received by affiliate and added to affiliate receivable balance

     —        —        2,544

Asset impairment write-down

     6,199      —        —  

Issuance of note payable for which cash proceeds were received by the advisor

     —        6,239      4,000

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

46


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TRANSCONTINENTAL REALTY INVESTORS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The accompanying Consolidated Financial Statements of Transcontinental Realty Investors, Inc. and consolidated entities have been prepared in conformity with accounting principles generally accepted in the United States of America, the most significant of which are described in NOTE 1. “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.” The Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements. The data presented in the Notes to Consolidated Financial Statements are as of December 31 of each year and for the year then ended, unless otherwise indicated. Dollar amounts in tables are in thousands, except per share amounts.

 

Effective March 31, 2003, TCI financial results have been consolidated in the American Realty Investors, Inc. (“ARI”) Form 10-K and related consolidated financial statements. As of December 31, 2004, ARI owned 82.2% of the outstanding TCI common shares.

 

Certain balances for 2003 and 2002 have been reclassified to conform to the 2004 presentation.

 

NOTE 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and business.    Transcontinental Realty Investors, Inc. (“TCI”), a Nevada corporation, is successor to a California business trust which was organized on September 6, 1983, and commenced operations on January 31, 1984. TCI invests in real estate through direct ownership, leases and partnerships and it also invests in mortgage loans on real estate. In October 2001, TCI announced a preliminary agreement for the acquisition of TCI by American Realty Investors, Inc. (“ARI”). See NOTE 22. “COMMITMENTS AND CONTINGENCIES AND LIQUIDITY.”

 

Basis of consolidation.    The Consolidated Financial Statements include the accounts of TCI and controlled subsidiaries and partnerships. All significant intercompany transactions and balances have been eliminated.

 

Accounting estimates.    In the preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America, it is necessary for management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expense for the year ended. Actual results could differ from those estimates.

 

Interest recognition on notes receivable.    It is TCI’s policy to cease recognizing interest income on notes receivable that have been delinquent for 60 days or more. In addition, accrued but unpaid interest income is only recognized to the extent that the net realizable value of the underlying collateral exceeds the carrying value of the receivable.

 

Allowance for estimated losses.    Valuation allowances are provided for estimated losses on notes receivable considered to be impaired. Impairment is considered to exist when it is probable that all amounts due under the terms of the note will not be collected. Valuation allowances are provided for estimated losses on notes receivable to the extent that the Company’s investment in the note exceeds the estimated fair value of the collateral securing such note.

 

Recent Accounting pronouncements.    SFAS No. 151—In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) be recognized as current period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs

 

47


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Index to Financial Statements

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have a material impact on the consolidated financial position or results of operations of TCI.

 

SFAS No. 152—In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 152, “Accounting for Real Estate Time-Sharing Transactions” (“SFAS No. 152”). SFAS No. 152 amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position 04-2, Accounting for Real Estate Time-Sharing Transactions (“SOP 04-2”). This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2.

 

SFAS No. 152 is effective for financial statements for fiscal years beginning after June 15, 2005, and is to be reported as a cumulative effect of a change in accounting principle. The adoption of SFAS No. 145 is not expected to have a material impact on the consolidated financial position or results of operations of TCI.

 

SFAS No. 123—In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Share-Based Payment, revised (“SFAS No. 123R”). SFAS No. 123R addresses the accounting for share-based payments to employees, including grants of employee stock options. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of income. SFAS No. 123R will be effective for periods beginning after June 15, 2005 and allows, but does not require, companies to restate the full fiscal year of 2005 to reflect the impact of expensing share-based payments under SFAS No. 123R. The Company has not yet determined which fair-value method and transitional provision it will follow. The adoption of SFAS No. 123R is not expected to have a material impact on the Company’s consolidated financial position or results of operations. See Stock-Based Employee Compensation for the pro forma impact on net income and net income per share from calculating stock-based compensation costs under the fair value alternative of SFAS No. 123.

 

SFAS No. 153—In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153, Exchanges of Non-monetary Assets, An Amendment of APB Opinion No. 29 (“SFAS No. 153”). The guidance in APB Opinion No. 29, Accounting for Non-monetary Transactions, is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. The guidance in APB Opinion No. 29, however, included certain exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for non-monetary asset exchanges in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the consolidated financial position or results of operations of TCI.

 

Real estate held for investment and depreciation.    Real estate held for investment is carried at cost. Statement of Financial Accounting Standards No. 144 (“SFAS No. 144”) requires that a property be considered impaired, if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property. If impairment exists, an impairment loss is recognized, by a charge against earnings, equal to the amount by which the carrying amount of the property exceeds the fair value of the property. If impairment of a property is recognized, the carrying amount of the property is reduced by the amount

 

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TRANSCONTINENTAL REALTY INVESTORS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

of the impairment, and a new cost for the property is established. Such new cost is depreciated over the property’s remaining useful life. Depreciation is provided by the straight-line method over estimated useful lives, which range from five to 40 years.

 

Real estate held for sale.    Foreclosed real estate is initially recorded at new cost, defined as the lower of original cost or fair value minus estimated cost of sale. SFAS No. 144 also requires properties held for sale be reported at the lower of carrying amount or fair value less costs of sale. If a reduction in a held for sale property’s carrying amount to fair value less costs of sale is required, a provision for loss is recognized by a charge against earnings. Subsequent revisions, either upward or downward, to a held for sale property’s estimated fair value less costs of sale is recorded as an adjustment to the property’s carrying amount, but not in excess of the property’s carrying amount when originally classified as held for sale. A corresponding charge against or credit to earnings is recognized. Properties held for sale are not depreciated.

 

Foreign Currency Translation.    Foreign currency denominated assets and liabilities of subsidiaries with local functional currencies are translated to United States dollars at year-end exchange rates. The effects of translation are recorded in the accumulated other comprehensive income component of shareholders’ equity. Subsidiaries with a United States dollar functional currency remeasure monetary assets and liabilities at year-end exchange rates and non-monetary assets and liabilities at historical exchange rates. The effects of remeasurement are included in income. Exchange gains and losses arising from transactions denominated in foreign currencies are translated at average exchange rates. The effects of these exchange adjustments resulted in gains of $3.8 million in 2004 and losses of $3.3 million in 2003.

 

Revenue recognition on the sale of real estate.    Sales of real estate are recognized when and to the extent permitted by Statement of Financial Accounting Standards No. 66, “Accounting for Sales of Real Estate” (“SFAS No. 66”), as amended by SFAS No. 144. Until the requirements of SFAS No. 66 for full profit recognition have been met, transactions are accounted for using either the deposit, installment, cost recovery or the financing method, whichever is appropriate.

 

Investment in noncontrolled equity investees.    The equity method is used to account for investments in partnerships which TCI does not control but for which significant influence can be exerted, and for its investment in the shares of common stock of Income Opportunity Realty Investors, Inc., (“IORI”) and ARI. Under the equity method, an initial investment, recorded at cost, is increased by a proportionate share of the investee’s operating income and any additional advances and decreased by a proportionate share of the investee’s operating losses and distributions received.

 

Operating segments.    Management has determined reportable operating segments to be those that are used for internal reporting purposes, which disaggregates operations by type of real estate.

 

Fair value of financial instruments.    The following assumptions were used in estimating the fair value of notes receivable and notes payable. For performing notes receivable, the fair value was estimated by discounting future cash flows using current interest rates for similar loans. For non-performing notes receivable, the estimated fair value of TCI’s interest in the collateral property was used. For notes payable, the fair value was estimated using current rates for mortgages with similar terms and maturities.

 

Cash equivalents.    For purposes of the Consolidated Statements of Cash Flows, all highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents.

 

Earnings per share.    Income (loss) per share is presented in accordance with Statement of Financial Accounting Standards No. 128, “Earnings Per Share.” Income (loss) per share is computed based upon the

 

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TRANSCONTINENTAL REALTY INVESTORS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

weighted average number of shares of Common Stock outstanding during each year. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the year. Dilutive common equivalent shares consist of stock options and convertible preferred stock. The weighted average common shares used to calculate diluted earnings per share for the years ended December 31, 2004, 2003 and 2002 exclude 264,874, 266,686 and 223,784 shares relating to options and convertible preferred stock to purchase shares of common stock. These dilutive shares were excluded from the calculation of dilutive earnings per share because the effect of their inclusion would be antidilutive.

 

Stock-based employee compensation.    TCI accounts for stock-based compensation utilizing the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation expense is recognized for fixed option plans because the exercise prices of employee stock options equal or exceed the market prices of the underlying stock on the dates of grant.

 

The following table represents the effect on net income and earnings per share if TCI had applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation,” to stock-based employee compensation:

 

     2004

    2003

    2002

 
    

(dollars in thousands,

except per share amounts)

 

Net income (loss) applicable to common shares, as reported

   $ 23,496     $ 547     $ 4,661  

Deduct: Stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects

     (137 )     (109 )     (105 )
    


 


 


Proforma net income applicable to common shares

   $ 23,359     $ 438     $ 4,556  
    


 


 


Net income (loss) per share:

                        

Basic, as reported

   $ 2.90     $ .07     $ .58  

Basic, pro forma

   $ 2.88     $ .05     $ .57  

Diluted, as reported

   $ 2.90     $ .07     $ .58  

Diluted, pro forma

   $ 2.88     $ .05     $ .57  

 

The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

     2004

    2003

 

Dividend yield

   —       —    

Expected volatility

   35.10 %   33.45 %

Risk-free interest rate

   4.04 %   4.04 %

Expected lives (in years)

   9.0     9.0  

 

The weighted average fair value per share of options granted in 2004 and 2003 was $11.21 and $11.82, respectively.

 

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Index to Financial Statements

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 2.    REAL ESTATE

 

In 2004, TCI purchased the following properties:

 

Property


  

Location


   Units/
Sq. Ft./Acres


   Purchase
Price


  

Net

Cash Paid/

(Received)


    Debt
Incurred


    Interest
Rate


    Maturity
Date


 

Apartments

                                             

288 City Park(1)

   Houston, TX    240 Units    $ 3,056    $ 612     $ 2,444     5.95 %   04/45  

Blue Lake Villas II(1)

   Waxahachie, TX    70 Units      729      (164 )     729     5.80     04/45  

Bridges on Kinsey(1)

   Tyler, TX    232 Units      2,291      596       1,687     5.74     08/45  

Dakota Arms(1)

   Lubbock, TX    208 Units      2,472      681       1,791     5.85     06/45  

Laguna Vista(1)

   Farmers Branch, TX    206 Units      2,424      902       1,522     5.50     09/46  

Lake Forest(1)

   Houston, TX    240 Units      2,316      (470 )     2,316     5.60     03/45  

Parc at Maumelle(1)

   Maumelle, AR    240 Units      3,120      916       2,204     5.37     07/46  

Treehouse(2)

   Irving, TX    160 Units      7,519      (498 )     5,027 (3)   5.00     08/13  

Vistas of Vance Jackson(1)

   San Antonio, TX    240 Units      3,550      771       2,779     5.78     06/45  

Wildflower Villas(1)

   Temple, TX    220 Units      2,045      79       1,966     5.99     10/45  

Commercial

                                             

Executive Court(4)

   Memphis, TN    41,840 Sq. Ft.      1,970      —         —       —       —    

Land

                                             

Cooks Lane land

   Ft. Worth, TX    23.242 Acres      1,000      1,034       —       —       —    

Denton-Coonrod land

   Denton, TX    82.203 Acres      1,644      1,046       840     6.25     11/06  

DeSoto land

   DeSoto, TX    21.897 Acres      2,516      1,364       1,265     6.25     11/06  

Granbury Station land

   Ft. Worth, TX    15.696 Acres      923      236       738     7.00     09/07  

Lacy Longhorn land(5)

   Farmers Branch, TX    17.115 Acres      4,474      —         —       —       —    

Los Colinas land(6)

   Los Colinas, TX    239.2 Acres      39,145      —         10,006 (7)   —   (7)   —   (7)

Lubbock land

   Lubbock, TX    2.866 Acres      224      224       —       —       —    

Railroad land

   Dallas, TX    .293 Acres      708      704       —       —       —    

Rogers land

   Rogers, AR    20.08 Acres      1,390      619       1,130     10.50     04/05  

Vista Ridge land(8)

   Lewisville, TX    14.216 Acres      2,585      —         —       —       —    

West End land(9)

   Dallas, TX    .158 Acres      71      71       —       —       —    

(1)   Initial construction loan funding to purchase land and begin apartment construction. Does not represent actual units purchased.
(2)   Purchased from IORI, a related party, for assumption of debt and a note receivable, less $498,000 in cash received.
(3)   Assumed debt.
(4)   Property received from ARI, a related party, for payment of a note receivable. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”
(5)   Property received from ARI, a related party, for a decrease of $4.5 million to TCI’s affiliate receivable with Prime.
(6)   The following tracts of land were purchased from ARI, a related party, for a decrease of $29.1 million to TCI’s affiliate receivable from Prime: Payne, LCLLP, Rochelle I & II and Valley Ranch. TCI owns a 50% Tenant-in-Common interest in the 268 acre Payne tract.
(7)   Includes $3.1 million assumed debt on the LCLLP tract with an interest rate of 7.0% and a maturity date of 12/06 and $6.9 million assumed debt on the Rochelle I & II and Valley Ranch tracts with an interest rate of prime plus 3% (currently 8.75%) and a maturity date of 11/05.
(8)   Property received from ARI, a related party, for a decrease of $2.6 million to TCI’s affiliate receivable from Prime.
(9)   TCI purchased a 50% interest in this land tract.

 

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Index to Financial Statements

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In 2003, TCI purchased the following properties:

 

Property


   Location

  

Units/

Sq. Ft./Acres


   Purchase
Price


   Net
Cash Paid


   Debt
Incurred


    Interest
Rate


    Maturity
Date


 

Apartments

                                            

Breakwater Bay(1)

   Beaumont, TX    176 Units    $ 1,979    $ 383    $ 1,554     5.65 %   08/44  

Capitol Hill(1)

   Little Rock, AR    156 Units      1,904      615      1,289     5.65     10/44  

Heather Creek(1)

   Mesquite, TX    200 Units      2,523      449      2,074     5.90     06/44  

Kingsland Ranch(1)

   Houston, TX    398 Units      3,300      —        3,300     6.12     03/45  

Windsong

   Fort Worth, TX    188 Units      11,939      1,194      10,745     7.20     10/43  

Shopping Center

                                            

Bridgeview Plaza(2)

   LaCrosse, WI    116,008 Sq. Ft.      8,700      —        —       —       —    

Cullman(2)

   Cullman, AL    92,433 Sq. Ft.      2,000      —        2,650 (4)   16.75     3/03 (3)

Land

                                            

Maumelle

   Maumelle, AR    10.8 Acres      1,100      412      640     5.75     07/04  

Pulaski

   Pulaski County, AR    21.9 Acres      2,000      695      1,400     6.50     05/05  

Sheffield Village

   Grand Prairie, TX    13.899 Acres      1,500      464      975     5.50 (5)   09/04  

(1)   Initial construction loan funding to purchase land and begin apartment construction. Does not represent actual units purchased.
(2)   Property received from a related party for a reduction in TCI’s affiliate receivable.
(3)   Debt was paid off in April refinance. See NOTE 7. “NOTES AND INTEREST PAYABLE.”
(4)   Assumed debt.
(5)   Variable interest rate.

 

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TRANSCONTINENTAL REALTY INVESTORS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In 2004, TCI sold the following properties:

 

Property


  

Location


  

Units/

Sq. Ft./Acres


   Sales
Price


   Net Cash
Received


    Debt
Discharged


    Gain/
(Loss) on
Sale


 

Apartments

                                         

Cliffs of El Dorado(2)

   McKinney, TX    208 Units    $ 13,442    $ 10     $ 10,323 (1)   $ —   (3)

In The Pines

   Gainesville, FL    242 Units      11,300      3,547 (4)     5,201       5,136  

Sandstone

   Mesa, AZ    238 Units      8,650      2,687       5,531       1,136  

Waters Edge IV(5)

   Gulfport, MS    80 Units      5,000      —         —         —   (6)

Office Building

                                         

4135 Beltline

   Addison, TX    90,000 Sq. Ft.      4,900      2,472       2,009       345  

Atrium

   Palm Beach, FL    74,603 Sq. Ft.      5,775      1,667       3,772       328  

Ambulatory Surgery Center

   Sterling, VA    33,832 Sq. Ft.      8,675      5,448       2,856       202  

Brandeis(7)

   Omaha, NE    319,234 Sq. Ft.      —        —         8,750 (1)     (92 )

Centura Tower(8)

   Farmers Branch, TX    410,901 Sq. Ft.      84,075      36,350       49,878       31,550  

Corporate Pointe

   Chantilly, VA    69,918 Sq. Ft.      9,000      5,025       3,609       5,239  

Countryside Harmon

   Sterling, VA    72,062 Sq. Ft.      9,150      4,608       3,865       1,931  

Countryside Retail

   Sterling, VA    133,422 Sq. Ft.      27,100      3,408       22,800       6,236  

Countryside Mimado

   Sterling, VA    35,127 Sq. Ft.      4,000      102       941       72  

Durham Centre(9)

   Durham, NC    207,171 Sq. Ft.      21,300      6,703       —         —   (10)

One Steeplechase

   Sterling, VA    103,376 Sq. Ft.      11,900      3,743       7,654       6,184  

Venture Center

   Atlanta, GA    38,272 Sq. Ft.      4,000      997       2,550       1,167  

Industrial Warehouse

                                         

Kelly (Cash Road)

   Dallas, TX    97,150 Sq. Ft.      1,500      1,077       422       127  

Kelly (Pinewood)

   Dallas, TX    100,000 Sq. Ft.      1,650      65       1,376       153  

Ogden Industrial

   Ogden, UT    107,112 Sq. Ft.      2,600      668       1,775       1,374  

Texstar Warehouse(12)

   Arlington, TX    97,846 Sq. Ft.      2,400      —         1,148 (1)(17)     —   (13)

Other

                                         

Signature Athletic Club(11)

   Dallas, TX    N/A    $ 120    $ (154 )   $ 88     $ (47 )

Shopping Center

                                         

K-Mart(12)

   Cary, NC    92,033 Sq. Ft.      3,200      —         1,677 (1)(17)     —   (14)

Sadler Square

   Amelia Island, FL    70,295 Sq. Ft.      4,500      1,876       2,680       1,673  

Land

                                         

Allen

   Collin County, TX    492.531 Acres      19,962      7,956       4,088       7,056  

Marine Creek(15)

   Ft. Worth, TX    10.73 Acres      1,488      1,198       991       —   (16)

Rasor

   Plano, TX    24.5 Acres      2,600      2,600       —         53  

Red Cross

   Dallas, TX    2.89 Acres      8,500      2,842       4,450       —    

(1)   Assumed debt.
(2)   Property initially sold to Unified Housing Foundation, Inc. (“UHF”), a related party, in 2003. See NOTE 8. “RELATED PARTY TRANSACTIONS.”
(3)   Excludes a $1.7 million deferred gain from a related party sale.
(4)   TCI provided $1.0 million of the purchase price as seller financing. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”
(5)   Property sold to ARI, a related party, for an increase of $5.0 million to the affiliate receivable balance from Prime.
(6)   Excludes a $494,000 deferred gain from a related party sale.
(7)   Brandeis was returned to lender via a deed in lieu of foreclosure process. See NOTE 7. “NOTES AND INTEREST PAYABLE.”
(8)   TCI sold a 95% limited partnership interest, retaining a 1% general partner and 4% limited partner interest.
(9)   Property sold to Edina Park Plaza Associates, L.P., of which the managing general partner is a subsidiary of ARI, a related party, for a wraparound note of $14.5 million and cash.
(10)   Excludes a $4.0 million deferred gain from a related party sale.

 

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(11)   Signature Athletic Club was sold for the assumption of capital leases by purchaser. Net cash paid is from prepaid dues and unearned revenues due purchaser.
(12)   Property sold to Basic Capital Management (“BCM”), a related party, for assumption of debt and a note receivable. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”
(13)   Excludes a $1.0 million deferred gain from a related party sale.
(14)   Excludes $355,000 deferred gain from a related party sale.
(15)   Property sold to UHF, a related party, for cash and a note receivable. See NOTE 8. “RELATED PARTY TRANSACTIONS.”
(16)   Excludes a $581,000 deferred gain from a related party sale.
(17)   Failure to notify and receive approval from the lender for this transaction may constitute an event of default under the terms of the debt.

 

In 2003, TCI sold the following properties:

 

Property


   Location

  Units/
Sq. Ft./Acres


   Sales
Price


  

Net Cash

Received


  Debt
Discharged


  Gain/
(Loss) on
Sale


Apartments

                                  

Lincoln Court

   Dallas, TX   55 Units    $ 3,038    $ 1,834   $ 1,208(1)   $ 1,654

Quail Creek

   Lawrence, KS   96 Units      4,700      1,188     3,260     1,358

Stone Oak

   San Antonio, TX   252 Units      6,930      3,670     2,699     4,193

Summerfield

   Orlando, FL   224 Units      9,415      4,845     4,476     3,684

Treehouse(5)

   Irving, TX   160 Units      7,500      —       5,083(12)     —  (6)

Willow Wick

   North Augusta, NC   104 Units      2,707      255     1,943     999

Office Building

                                  

Bonita Plaza

   Bonita, CA   47,777 Sq. Ft.      8,034      1,647     5,944     2,139

Remington Tower

   Tulsa, OK   90,009 Sq. Ft.      3,360      (80)     3,360(1)     (1,056)

Industrial Warehouse

                                  

Kelly (301 Hilltop)

   Dallas, TX   76,946 Sq. Ft.      1,800      —       1,712     639

Kelly (108th Street)

   Dallas, TX   20,871 Sq. Ft.      675      —       634     357

McLeod

   Orlando, FL   110,914 Sq. Ft.      5,450      2,980     1,902     2,490

Tricon

   Atlanta, GA   570,877 Sq. Ft.      13,084      3,364     9,395     4,587

Shopping Center

                                  

K-Mart

   Sheboygan, WI   74,532 Sq. Ft.      1,225      669     569     12

Oak Tree Village

   Lubbock, TX   45,623 Sq. Ft.      3,366      —  (4)     1,328     590

Parkway Centre(7)

   Dallas, TX   28,374 Sq. Ft.      4,000      —       1,640(12)     —  (8)

Land

                                  

Eagle Crest(9)

   Dallas, TX   19.99 Acres      4,000      —       —       —  (10)

Palm Desert

   Palm Desert, CA   25.06 Acres      2,800      —  (3)     —       617

Sendero Ranch

   Fort Worth, TX   14 Acres      300      292     —       (770)

Solco-Valley Ranch

   Dallas, TX   6.0693 Acres      1,999      —  (2)     —       384

State Highway 121/Watters Road(11)

   Collin County, TX   37.08 Acres      2,188      1,197     912     1,410

(1)   Assumed debt.
(2)   Funds received by an affiliate increasing TCI’s affiliate receivable balance by $1,999.
(3)   Funds received by an affiliate increasing TCI’s affiliate receivable balance by $2,600.
(4)   Funds received by an affiliate increasing TCI’s affiliate receivable balance by $1,640.
(5)   Property sold to IORI, a related party, for assumption of debt and reduction of $2.4 million in affiliate receivables.
(6)   Excludes a $4.4 million deferred gain from seller financing. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”
(7)   Property sold to IORI, a related party, for assumption of debt and reduction of $2.3 million in affiliate receivables.

 

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(8)   Excludes a $2.3 million deferred gain from seller financing. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”
(9)   Property sold to IORI, a related party, for a reduction in TCI’s affiliate payable to IORI.
(10)   Excludes a $1.7 million deferred gain from a related party sale. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”
(11)   Approximately 20 acres of Watters Road and 17.08 acres of State Highway 121 were sold together in a single transaction.
(12)   Failure to notify and receive approval from the lender for this transaction may constitute an event of default under the terms of the debt.

 

At December 31, 2004, TCI had the following properties under construction:

 

Property


   Location

   Units

   Amount
Expended


   Additional
Amount
to Expend


   Construction
Loan
Funding


Apartments

                              

Blue Lake Villas II

   Waxahachie, TX    76 Units    $ 4,454    $ 217    $ 4,234

Bluffs at Vista Ridge

   Lewisville, TX    272 Units      17,239      3,347      15,500

Bridges on Kinsey

   Tyler, TX    232 Units      11,572      4,509      14,477

Dakota Arms

   Lubbock, TX    208 Units      12,611      1,326      12,549

Kingsland Ranch

   Houston, TX    398 Units      24,573      1,081      23,000

Laguna Vista

   Farmers Branch, TX    206 Units      3,432      17,673      17,741

Lake Forest

   Houston, TX    240 Units      13,919      519      12,815

Parc at Maumelle

   Maumelle, AR    240 Units      4,502      14,196      16,829

Stonebridge at City Park (formerly 288 City Park)

   Houston, TX    240 Units      15,486      1,201      15,005

Vistas of Vance Jackson

   San Antonio, TX    240 Units      13,393      4,708      16,056

Wildflower Villas

   Temple, TX    220 Units      9,377      6,220      14,073

 

For the period ending December 31, 2004, TCI completed the 248 unit DeSoto Ranch Apartments in DeSoto, Texas, the 314 unit Verandas at Cityview Apartments in Fort Worth, Texas, the 216 unit Mariposa Villas (Echo Valley) in Dallas, Texas, the 176 unit Breakwater Bay Apartments in Beaumont, Texas, the 156 unit Capitol Hill Apartments in Little Rock, Arkansas and the 332 unit Vistas of Pinnacle Park Apartments in Dallas, Texas.

 

In 2003, TCI completed 186 unit Blue Lake Villas in Waxahachie, Texas, the 284 unit Falcon Lakes in Arlington, Texas, the 180 unit River Oaks Apartments in Wiley, Texas, the 384 unit Sendero Ridge Apartments in San Antonio, Texas, the 256 unit Spyglass Apartments in Mansfield, Texas and the 188 unit Windsong Apartments in Fort Worth, Texas.

 

In November 2004, TCI agreed to swap 69,903 square feet of Centura land with 71,393 square feet of land TXU Electric Delivery Company (“TXU”) owns adjacent to Centura land for the relocation of electric transmission and distribution facilities. TCI has agreed to pay the actual costs of relocation, which is estimated at $453,000. ARI paid $216,361of this cost on TCI’s behalf in November 2004 and this amount was used to reduce TCI’s receivable from Prime. TCI will also pay an additional $36,000 to TXU for the difference in the size of the TCI property and the TXU property.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 3.    NOTES AND INTEREST RECEIVABLE

 

Notes and interest receivable consisted of the following:

 

     2004

   2003

     Estimated
Fair
Value


   Book
Value


   Estimated
Fair
Value


   Book
Value


Notes receivable

                           

Performing

   $ 53,246    $ 53,895    $ 25,850    $ 26,368

Non-performing, non-accruing

     —        —        4,303      4,303
    

  

  

  

     $ 53,246      53,895    $ 30,153      30,671
    

         

      

Interest receivable

            2,735             1,526
           

         

            $ 56,630           $ 32,197
           

         

 

Notes receivable at December 31, 2004, mature from 2005 through 2017 with interest rates ranging from 4.0% to 12.0% per annum, with a weighted average rate of 8.47%. Notes receivable are generally non-recourse and are generally collateralized by real estate. Scheduled principal maturities of $25.6 million are due in 2005.

 

Unless otherwise noted, all of TCI’s notes receivables are secured by real estate assets.

 

In October 2004, TCI sold the In The Pines apartments to a third party and provided $1.0 million of the purchase price as seller financing in the form of two notes. The first note bears interest at 7.0% per annum, requires monthly interest payments and matured in January 2005. The Purchaser extended this note to March 2005 by paying 1.0% of the outstanding principal balance as an extension fee and then extended the note an additional 30 days to April 2005 by paying an extension fee of 0.5% of the outstanding principal balance. In the event of a default, the note is also secured by membership rights in the purchaser’s entity. The second note is unsecured, bears interest at 8.5% per annum, requires monthly interest payments and matured in January 2005. The Purchaser extended this note to March 2005 by paying 1.0% of the outstanding principal balance as an extension fee and then extended the note an additional 30 days to April 2005 by paying an extension fee of 0.5% of the outstanding principal balance.

 

In July 2003, TCI advanced $2.3 million to the Class A Limited Partners of TCI Countryside, L.P. of which TCI is the general partner. This loan bears interest at 7.25% and matures in January 2007. TCI also agreed to advance $1.1 million to the Class A Limited Partners by advancing $105,000 in July 2003 and every year thereafter for ten years. This loan bears interest at 7.25% and matures in July 2012. Interest due to TCI will be deducted for the quarterly return owed by TCI to the Class A Limited Partners, eliminating the quarterly payments. After January 2007, TCI may retire the Class A Limited Partners interests in exchange for cancellation of both notes, subject to the $1.1 million advance being fully advanced by TCI.

 

In June 2003, TCI sold the 104 unit Willo-Wick Gardens Apartments in North Augusta, South Carolina, for $2.7 million and provided $42,000 of the purchaser’s closing costs as seller financing. The note bore interest at a fixed rate of 5.0% and required all interest and principal payments be paid at maturity on December 2003. This loan was extended until February 2004 and $10,000 was received in March 2004. This note, including accrued but unpaid interest, was paid in June 2004. TCI discounted the note $2,000 and recognized a loss of $2,000.

 

In March 2002, TCI sold the 174,513 sq. ft. Hartford Office Building in Dallas, Texas, for $4.0 million and provided the $4.0 million purchase price as seller financing and an additional $1.4 million line of credit for leasehold improvements in the form of a first lien mortgage note. The note bears interest at a variable interest

 

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rate, currently 7.5% per annum, requires monthly interest only payments and matures in March 2007. As of March 2005, TCI has funded $788,000 of the additional line of credit.

 

In July 2002, TCI entered into an agreement to fund up to $300,000 under a revolving line of credit secured by 100% interest in a partnership of the borrower. The line of credit bears interest at 12.0% per annum and requires monthly interest only payments, and matures in June 2005. As of March 2005, TCI has funded $300,000 of the line of credit.

 

In September 2002, TCI sold a 36 acre tract of the Palm Desert land parcel for $3.6 million and provided $2.7 million as seller financing in the form of a first lien mortgage note. The note bore interest at 8.0% per annum, required quarterly interest only payments of $54,000 and matured in September 2004. In March 2003, the note was sold to a financial institution for $2.6 million.

 

In August 2001, TCI agreed to fund up to $5.6 million secured by a second lien on an office building in Dallas, Texas. The note receivable bore interest at a variable rate (then 9.0% per annum), required monthly interest only payments and originally matured in January 2003. As of March 2004, TCI had funded a total of $4.3 million. On January 22, 2003, TCI agreed to extend the maturity date until May 1, 2003. The collateral used to secure TCI’s second lien was seized by the first lien holder. On March 11, 2004, TCI agreed to accept an assignment of claims in litigation as additional security for the note. In December 2004, TCI agreed to a Modification Agreement with the borrower, which was effective November 1, 2003. As of the modified effective date, accrued interest of $582,000 was added to the principal balance of the note, the interest rate fixed at 9.0% per annum and all principal and interest is due November 2005. TCI also received Pledge and Security Agreements in various partnership interests belonging to the borrower and received various Assignments of Proceeds from sales in certain entities owned by the borrower. TCI reduced accrued interest and principal by $1.5 million from the receipt of notes receivable assigned to TCI by borrower and by $605,000 from cash received. TCI also received $1.4 million in January 2005 that was applied to accrued interest and principal effective December 30, 2004. As a result of this modification, TCI has released $1.4 million of allowance for loan losses to expense. The following notes were assigned to TCI as payment on the note:

 

    $678,000 from a partnership that owns an apartment building. This note is unsecured, bears no interest and has no maturity date. Distributions made from the partnership operations will be used to pay the principal on the note.

 

    $264,000 secured by a second lien on 13 acres of unimproved land. This note bears interest at 9.0% and matured in February 2003. TCI’s parent company, ARI, is in negotiations to take title to the collateral, therefore, this note is considered performing and no allowance has been established.

 

    $466,000 secured by a second lien on 23.3 acres of unimproved land. This note bears interest at 4.0% and is payable upon demand.

 

    $125,000 secured by a 100% interest in an affiliated company that owns an apartment building. This note bears interest at 12.0%, only requires payments if surplus cash is available and matures in April 2009.

 

Related Party.    In October 2004, TCI contemplated the sale of the common stock of TCI Lexington Corporation, which owns the Lexington Center office building in Colorado Springs, Colorado, to One Realco Office Investors, Inc., a related party, for the assumption of debt of $4.9 million, which was subject to lender approval, and a seller note of $237,000. The assumption of debt by One Realco Office Investors, Inc. was not approved by the lender; therefore, TCI’s Board of Directors rescinded their approval of the transaction. TCI extended the loan on the Lexington Center with the lender in December 2004.

 

In October 2004, TCI sold the Durham Centre in Durham, North Carolina to a partnership, of which the managing general partner is a subsidiary of ARI, for $21.3 million for cash and an all-inclusive wraparound note of $14.5 million. The note bears interest at a fixed rate of 7.63%, requires monthly interest payments and matures

 

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in September 2007. TCI also made a loan to the partnership for $3.3 million. The note bears interest at a fixed rate of 7.63%, requires monthly interest payments and matures in September 2017.

 

In March 2004, TCI sold a K-Mart in Cary, North Carolina to BCM for $3.2 million, including the assumption of debt. TCI also provided $1.5 million of the purchase price as seller financing. The unsecured note bears interest at the prime rate plus 2% (which is currently 7.75%), and matures in April 2005.

 

In March 2004, TCI sold the Texstar Warehouse in Arlington, Texas to BCM for $2.4 million, including the assumption of debt. TCI also provided $1.3 million of the purchase price as seller financing. The unsecured note bears interest at the prime rate plus 2% (which is currently 7.75%), and matures in April 2005.

 

In December 2003, TCI sold a tract of Marine Creek land to a subsidiary of United Housing Foundation, Inc. (“UHF”) for $1.5 million, receiving cash and a note receivable. This sale was not recognized as a sale at that time because UHF is a related party and TCI has continuing involvement and control. In February 2004, Marine Creek was refinanced by UHF, which paid in full TCI’s note payable on the land. TCI recorded the sale of the land and received a note receivable of $270,000, which was the difference between the sales price and the amount of TCI’s note payable. The note bears interest at 6.0%, requires quarterly payments from available surplus cash and matures in December 2007. See Note 8. “RELATED PARTY TRANSACTIONS.”

 

In December 2003, TCI purchased a note receivable secured by a second lien on 33 acres of raw land in Travis County, Texas at par value from ARI for $2.4 million as a paydown on an affiliate loan balance. This note bears interest at 10.0%, requires interest only payments in November 2007 and matures in October 2008. Outstanding accrued interest is added to the principal balance on an annual basis until 2007. During 2004, $240,000 of accrued interest was added to the principal balance of the note.

 

In January 2002, TCI purchased 100% of the outstanding common shares of ART Two Hickory Corporation (“Two Hickory”), a wholly-owned subsidiary of ARI for $4.4 million cash. Two Hickory owns the 96,217 sq. ft. Two Hickory Centre Office Building in Farmers Branch, Texas. ARI guaranteed that the asset shall produce at least a 12.0% annual return of the purchase price for a period of three years from the purchase date. If the asset fails to produce the 12.0% annual return, ARI shall pay TCI any shortfall. In addition, if the asset fails to produce the 12.0% return for a calendar year and ARI fails to pay the shortfall, TCI may require ARI to repurchase the shares of Two Hickory for the purchase price. Because ARI guaranteed the 12.0% return and TCI has the option of requiring ARI to repurchase the entities, management has classified this related party transaction as a note receivable from ARI. In June 2002, the asset was refinanced. TCI received $1.3 million of the proceeds as a principal reduction on its note receivable from ARI. In January 2005, TCI completed the purchase of Two Hickory by recording the asset and removing the note receivable from ARI.

 

In April 2002, TCI purchased 100% of the following entities: ART One Hickory Corporation (“One Hickory”), Garden Confederate Point, LP (“Confederate Point”), Garden Foxwood, LP (“Foxwood”), and Garden Woodsong, LP (“Woodsong”), all previously wholly-owned subsidiaries of ARI for $10.0 million. One Hickory owns the 120,615 sq. ft. One Hickory Centre Office Building in Farmers Branch, Texas. Confederate Point owned the 206 unit Confederate Apartments in Jacksonville, Florida. Foxwood owns the 220 unit Foxwood Apartments in Memphis, Tennessee. Woodsong owned the 190 unit Woodsong Apartments in Smyrna, Georgia. ARI guaranteed that these assets shall produce at least a 12.0% return annually of the purchase price for a period of three years from the purchase date. If the assets collectively fail to produce the 12.0% return, ARI shall pay TCI any shortfall. In addition, if the assets fail to produce the 12.0% return for a calendar year and ARI fails to pay the shortfall, TCI may require ARI to repurchase the entities for the purchase price. Because ARI guaranteed the 12.0% return and TCI has the option of requiring ARI to repurchase the entities, management has classified this related party transaction as a note receivable from ARI. In July 2002, the Woodsong Apartments were sold. ARI received $2.8 million from the proceeds as payment of principal and accrued but unpaid interest on the note receivable. In October 2003, TCI sold One Hickory to IORI for $12.2 million, less prorations, for a wraparound

 

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promissory note of $12.0 million. This note bears interest at 5.49% interest, requires monthly interest and principal payments and matures in June 2006. This transaction effectively discharged the note receivable TCI had from ARI for the financing of One Hickory. Also, in November 2003, Confederate Point sold the Confederate Apartments and paid $2.1 million to TCI to pay off the loan and accrued but unpaid interest.

 

In December 2001, TCI purchased 100% of the outstanding common shares of National Melrose, Inc. (“NM”), a wholly-owned subsidiary of ARI, a related party, for $2.0 million cash. NM owns the 41,840 sq. ft. Executive Court Office Building in Memphis, Tennessee. ARI has guaranteed the asset will produce at least a 12.0% annual return of the purchase price for a period of three years from the purchase date. If the asset fails to produce the 12.0% annual return, ARI will pay TCI any shortfall. In addition, if the asset fails to produce 12.0% return for a calendar year, TCI may require ARI to repurchase the shares of NM for the purchase price. Management has classified this related party transaction as a note receivable from ARI. In December 2004, TCI recorded the purchase of the Executive Court Office Building by recording the asset and removing the note receivable from ARI. See Note 2. “REAL ESTATE.”

 

NOTE 4.    ALLOWANCE FOR ESTIMATED LOSSES

 

Activity in the allowance for estimated losses was as follows:

 

     2004

    2003

   2002

Balance January 1,

   $ 1,456     $ 1,337    $ 818

Provision for loss

     —         —        169

Fully reserved notes receivable

     —         119      350

Decrease in provision

     (1,456 )     —        —  
    


 

  

Balance December 31,

   $ —       $ 1,456    $ 1,337
    


 

  

 

NOTE 5.    INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES

 

Investment in equity method real estate entities consisted of the following:

 

     2004

   2003

 

American Realty Investors, Inc. (“ARI”)

   $ 9,870    $ 9,654  

Income Opportunity Realty Investors, Inc. (“IORI”)

     5,765      4,423  

Garden Centura, L.P.

     1,925      —    

Sacramento Nine (“SAC 9”)

     —        219  

Other

     22      (25 )
    

  


     $ 17,582    $ 14,271  
    

  


 

TCI owns an approximate 6.5% interest in ARI, a publicly held real estate company, having a market value of $108.9 million at December 31, 2004. At December 31, 2004, ARI had total assets of $498.1 million and owned 21 apartments, nine commercial properties, seven hotels and 37 parcels of unimproved land. In 2004, ARI sold four apartments, three commercial properties and 13 parcels of unimproved land for a total of $112.5 million, receiving net cash of $18.3 million after paying off or being relieved of $58.6 million in mortgage debt and the payment of various closing costs. ARI recognized gains of $25.5 million on the sales of which TCI’s equity share was $1.7 million. In 2003, ARI sold 12 apartments, five commercial properties, two hotels and 18 parcels of unimproved land for a total of $197.5 million, receiving net cash of $37.8 million after

 

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paying off $96.5 million in mortgage debt and the payment of various closing costs. ARI recognized gains of $63.0 million on the sales of which TCI’s equity share was $4.1 million.

 

Based on the ownership percentage of TCI’s investment in ARI and ARI’s market value, TCI’s investment in ARI has a market value of approximately $7.2 million at December 31, 2004. The carrying value of this investment is approximately $9.9 million at December 31, 2004. Management continues to believe the market value of ARI temporarily undervalues its assets and therefore, no impairment of TCI’s investment in ARI has been recorded.

 

TCI owns an approximate 24.0% interest in IORI, a publicly held real estate investment company. At December 31, 2004, IORI had total assets of $91.2 million and owned six apartments, one office building, one shopping center, one industrial warehouse, and one parcel of unimproved land, all within the State of Texas. In 2004, IORI sold two apartments, two office buildings and a parcel of unimproved land for a total of $24.5 million, receiving net cash of $4.8 million after paying off $15.8 million in mortgage debt and the payment of various closing costs. IORI recognized gains of $5.5 million on the sales of which TCI’s equity share was $1.3 million. In 2003, IORI sold three office buildings and a parcel of unimproved land for a total of $55.7 million, receiving net cash of $10.1 million after paying off $9.5 million in mortgage debt and the payment of various closing costs. IORI recognized gains of $3.0 million on the sales of which TCI’s equity share was $715,000.

 

Based on the ownership percentage of TCI’s investment in IORI and IORI’s market value, TCI’s investment in IORI has a market value of approximately $5.5 million at December 31, 2004. The carrying value of this investment is approximately $5.8 million at December 31, 2004. Management continues to believe the market value of ARI temporarily undervalues its assets and therefore, no impairment of TCI’s investment in IORI has been recorded.

 

In December 2004, TCI sold a 95% interest in Garden Centura, L.P. that owns the 410,901 sq. ft. Centura Tower office building located in Farmers Branch, Texas. TCI retained a non-controlling 1% general partner and 4% limited partner interest in Garden Centura, L.P. TCI will account for its investment in this partnership on the cost basis.

 

Prior to the first quarter of 2002, TCI accounted for its investments in Tri-City, Nakash and Jor-Trans on the equity method. TCI was a 63.7% limited partner and IORI was a 36.3% general partner in Tri-City, and TCI is a 60.0% general partner and IORI is a 40.0% limited partner in Nakash. TCI owns a 55% limited and general partnership interest in Jor-Trans. TCI makes all partnership operating and policy decisions of the partnerships and TCI has the right to approve the sale or refinancing of principal assets, or approve the acquisition of partnership assets. For Tri-City, IORI as general partner only had protective rights in the partnership. TCI and IORI share one of the same members of the Board of Directors. Consequently, because TCI has a greater than 50.0% ownership over the operations of Tri- City, Nakash and Jor-Trans, the operations of the partnership have been consolidated. In the first quarter of 2002, TCI began accounting for its investment in Tri-City, Nakash and Jor-Trans using a consolidated basis. The effect of these consolidations increased TCI’s assets, liabilities, and minority interest in 2002 by $5.4 million, $3.9 million and $1.5 million, respectively. In November 2002, Tri-City sold its only asset, a shopping center, for $4.2 million. Tri-City received net cash of $1.9 million after the payment of various closing costs. TCI received a distribution of $1.2 million of the net proceeds and recognized a gain of $431,000 on its investment in Tri-City. Also, in July 2003, TCI sold the Jor-Trans partnership, which owned the Lincoln Court Apartments, to the 45.0% limited partner in Jor-Trans for $1.8 million. TCI recognized a gain of $1.7 million on this transaction and has withdrawn from the partnership.

 

TCI is a non-controlling 30.0% general partner in SAC 9. In December 2004, SAC 9 sold the Prospect Park #29 office building for $3.7 million, of which TCI received $1.1 million after closing costs and fees. TCI recognized a gain on the sale of investment in SAC 9 of $882,000 relating to this transaction.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Set forth below are summarized financial data for the entities accounted for using the equity method:

 

     2004

    2003

 
     (dollars in thousands)  

Real estate, net of accumulated depreciation ($89,967 in 2004 and $97,270 in 2003)

   $ 338,181     $ 402,309  

Notes receivable

     95,189       91,992  

Other assets

     169,027       165,559  

Notes payable

     (383,342 )     (448,930 )

Other liabilities

     (101,288 )     (84,269 )
    


 


Shareholders/partners’ capital

   $ 117,767     $ 126,661  
    


 


 

     2004

    2003

    2002

 

Rents and interest and other income

   $ 142,324     $ 114,529     $ 90,779  

Depreciation

     (8,287 )     (9,308 )     (7,478 )

Operating expenses

     (118,854 )     (117,167 )     (108,788 )

Gain on land sales

     3,844       41,865       16,727  

Interest expense

     (39,020 )     (39,245 )     (49,524 )
    


 


 


Income (loss) from continuing operations

     (19,993 )     (9,326 )     (58,284 )

Income (loss) from discontinued operations

     (2,235 )     (15,010 )     (11,186 )

Gain from sale of discontinued operations

     31,028       26,546       62,927  
    


 


 


Net income (loss)

   $ 8,800     $ 2,210     $ (6,543 )
    


 


 


TCI’s equity share of:

                        

 

     2004

    2003

    2002

 

Income (loss) before gain on sale of real estate

   $ (1,497 )   $ (4,291 )   $ (3,818 )

Gain on sale of real estate

     3,884       4,853       5,013  
    


 


 


Net income (loss)

   $ 2,387     $ 562     $ 1,195  
    


 


 


 

NOTE 6.    MARKETABLE EQUITY SECURITIES

 

In March 2003, TCI obtained a loan in the amount of $5.0 million to acquire equity securities of Realty Korea CR-REIT Co., Ltd. No. 1 representing approximately a 9.2% ownership interest. As of May 2003, the loan was paid in full. This investment is considered an available-for-sale security. TCI has recognized unrealized gains of $1.6 million during 2004 due to an increase in market price since December 31, 2003.

 

NOTE 7.    NOTES AND INTEREST PAYABLE

 

Notes and interest payable consisted of the following:

 

     2004

   2003

     Estimated
Fair Value


   Book
Value


   Estimated
Fair Value


   Book Value

Notes payable

   $ 594,551    $ 640,011    $ 616,088    $ 621,516
    

         

      

Interest payable

            4,060             4,949
           

         

            $ 644,071           $ 626,465
           

         

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Scheduled principal payments are due as follows:

 

2005

   $ 188,152

2006

     56,085

2007

     61,450

2008

     15,348

2009

     33,690

Thereafter

     285,286
    

     $ 640,011
    

 

Notes payable at December 31, 2004, bore interest at rates ranging from 4.0% to 14.8% per annum, and mature between 2005 and 2044. The mortgages were collateralized by deeds of trust on real estate having a net carrying value of $743.1 million.

 

In February 2004, the Brandeis office building was returned to the lender via a Deed in Lieu of Foreclosure process. The outstanding debt and accrued interest was $8.8 million. TCI recorded a net impairment of $4.4 million in the fourth quarter of 2003 for this transaction.

 

In 2004, TCI financed/refinanced the following properties:

 

Property


   Location

  

Sq. Ft./

Units/Rooms/

Acres


   Debt
Incurred


    Debt
Discharged


  

Net Cash
Received/

(Paid)


    Interest
Rate


    Maturity
Date


 

Apartments

                                             

Mountain Plaza

   El Paso, TX    188 Units    $ 5,184     $ 4,257    $ 370     5.16 %   12/34  

Paramount Terrace

   Amarillo, TX    181 Units      3,176       2,663      323     5.15     06/37  

Treehouse

   Irving, TX    160 Units      5,780       5,027      138     5.06     07/34  

Office Building

                                             

1010 Common

   New Orleans, LA    494,579 Sq. Ft.      16,250 (3)     8,000      7,829     4.03 (1)   07/07  

225 Baronne

   New Orleans, LA    416,834 Sq. Ft.      500 (4)     —        —       5.75 (1)   10/05  

Amoco

   New Orleans, LA    378,244 Sq. Ft.      1,500 (4)     —        —       5.75 (1)   10/05  

Centura Tower

   Farmers Branch, TX    410,901 Sq. Ft.      34,000 (5)     36,889      (4,588 )   5.50 (1)   04/04  

Centura Tower(2)

   Farmers Branch, TX    410,901 Sq. Ft.      3,800 (5)     —        3,737     5.75 (1)   04/06  

Centura Tower

   Farmers Branch, TX    410,901 Sq. Ft.      50,000       37,594      2,989     4.94     10/09  

Warehouse

                                             

Addison Hangers I & II(6)

   Addison, TX    52,650 Sq. Ft.      4,500       2,592      1,635     10.00     09/14  

Hotels

                                             

City Suites

   Chicago, IL    45 Rooms    $ 3,640     $ —      $ 3,548     6.75 (1)   09/09  

Majestic Inn

   San Francisco, CA    57 Rooms      2,000 (4)     5,138      (1,278 )   5.75 (1)   10/05  

Willows

   Chicago, IL    52 Rooms      3,500       —        3,411     6.75 (1)   09/09  

Land

                                             

Centura land

   Farmers Branch, TX    8.753 Acres      4,485       4,400      (183 )   7.00 (1)   02/05 (8)

Cooks Lane

   Ft. Worth, TX    23.242 Acres      550       —        527     6.25     11/06  

Hollywood, Dominion &
Mira Lago(7)

   Farmers Branch, TX    66.085 Acres      6,985       6,222      (67 )   7.00 (1)   02/05 (9)

Lacy Longhorn

   Farmers Branch, TX    17.115 Acres      1,965 (3)     —        78     4.03 (1)   07/07  

Marine Creek

   Ft. Worth, TX    28.437 Acres      1,785 (3)     —        1,746     4.03 (1)   07/07  

(1)   Variable rate.
(2)   2nd lien advance on Centura Tower.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(3)   The 1010 Common office building, certain tracts of Marine Creek land and the Lacy Longhorn land are cross collateralized.
(4)   The Majestic Inn, 225 Baronne Office Building and Amoco Office Building are cross collateralized. The debt incurred on 225 Baronne and Amoco are 2nd lien loans.
(5)   Debt was paid off by September 2004 refinancing.
(6)   The Addison Hangers were sold in September 2004 to a third party but were then leased back for 10 years on a triple net lease basis. This transaction has been recorded as a financing transaction for accounting purposes.
(7)   The Hollywood Casino, Dominion and Mira Lago tracts are cross collateralized.
(8)   Debt was paid off in February 2005.
(9)   Debt was extended to February 2006,

 

In 2003, TCI financed/refinanced the following properties:

 

Property


  

Location


  Sq. Ft./
Units/Acres


  Debt
Incurred


 

Debt

Discharged


 

Net Cash
Received/

(Paid)


    Interest
Rate


    Maturity
Date


Apartments

                                      

Mountain Plaza

   El Paso, TX   188 Units   $ 4,350   $ 4,034   $ 15     6.63 %(1)   03/06

Plantation

   Tulsa, OK   138 Units     2,320     1,924     173     5.60     01/10

Stone Oak

   San Antonio, TX   252 Units     2,500           2,500     5.00     04/03

Tree House

   Irving, TX   160 Units     5,100     2,518     2,183     5.00 (1)   08/13

Office Building

                                      

1010 Common

   New Orleans, LA   494,579 Sq. Ft.     5,574     7,876     1,320     5.50 (1)   12/06

225 Baronne

   New Orleans, LA   416,834 Sq. Ft.     6,286     7,108     —       5.50 (1)   12/06

Ambulatory Surgery Center

   Sterling, VA   33,832 Sq. Ft.     3,425     6,269     —       5.25 (1)    

Amoco

   New Orleans, LA   378,244 Sq. Ft.     10,140     14,408     —       5.50 (1)   12/06

Bonita Plaza

   Bonita, CA   47,777 Sq. Ft.     6,000     4,824     1,134     5.25 (1)   01/10

Countryside Retail Center

   Sterling, VA   133,422 Sq. Ft.     17,342     16,102     101     5.25 (1)   12/06

Harmon

   Sterling, VA   72,062 Sq. Ft.     8,869     7,569     —       5.25 (1)    

Mimado

   Sterling, VA   35,127 Sq. Ft.     4,790     4,486     —       5.25 (1)    

Industrial Warehouse

                                      

Ogden Industrial

   Ogden, UT   107,112 Sq. Ft.     1,800     —       1,722     6.25 (1)   04/05

Shopping Center

                                      

Bridgeview

   LaCrosse, WI   116,008 Sq. Ft.     6,500     —       6,152     6.25 (1)   04/05

Cullman

   Cullman, AL   92,433 Sq. Ft.     1,700     2,650     1,048     6.25 (1)   04/05

Land

                                      

Rasor

   Plano, TX   24.5 Acres     1,260     —       —   (2)   7.00 (1)   11/04

(1)   Variable rate.
(2)   Funds received by an affiliate increasing the affiliate receivable balance by $1,226.

 

NOTE 8.    RELATED PARTY TRANSACTIONS

 

Throughout the period in which TCI qualified as a REIT for tax purposes, TCI charged rent to Regis Hotel Corporation, a related party, for TCI’s four hotel properties that were managed by Regis Hotel Corporation. As of December 31, 2000, when TCI no longer qualified as a REIT, the receivable from these rents totaled $2.1 million. During 2003 and 2004, this receivable was reduced by management fees earned by Regis Hotel Corporation. As of December 31, 2004 and 2003, the receivable from Regis Hotel Corporation was $1.4 million and $1.7 million, respectively.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

During 2003, ARI sold properties with fair value totaling $10.7 million to TCI. Each of these property sales was approved by TCI’s Board of Directors. TCI’s affiliate receivables from ARI and BCM were reduced by $8.1 million as a result of these transfers. See NOTE 2. “REAL ESTATE.”

 

In March 2003, TCI sold 4135 Beltline to a related party for $4.4 million, including the assumption of debt. Due to the sale to a related party to TCI and TCI having continued involvement and control of this entity, this transaction was not recorded as a sale at that time. This property and corresponding debt continued to be consolidated by TCI until 4135 Beltline was sold to a third party in June 2004. See NOTE 2. “REAL ESTATE.”

 

In March 2003, TCI sold a note receivable for $2.6 million to a third party. The proceeds of this sale were received by BCM. The funds increased TCI’s affiliate receivable from BCM by $2.6 million. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”

 

In May 2003, TCI sold a piece of raw land in Texas. The proceeds of the sale were received by BCM. The funds increased TCI’s affiliate receivable from BCM by $2.0 million. See NOTE 2. “REAL ESTATE.”

 

In June 2003, TCI received the proceeds from the refinancing of an ARI property. This transaction reduced TCI’s affiliate receivables from BCM by $757,000. See NOTE 7. “NOTES AND INTEREST PAYABLE.”

 

In July 2003, TCI paid $1.7 million to BCM for a pro-rata potion of prior year’s legal fees incurred by Gene Phillips. Mr. Phillips is a related party and advisor to TCI.

 

In August 2003, TCI sold three Chicago hotels to a related party for $13.5 million, including the assumption of debt. Due to the sale to a related party to TCI and TCI having continued involvement and control of this entity, this transaction was not recorded as a sale at that time. These hotels and corresponding debt continued to be consolidated by TCI. In September 2004, TCI purchased the three Chicago hotels from the related party for assumption of debt and cancellation of the seller notes.

 

In September 2003, TCI sold a shopping center to a third party. The proceeds of the sale were received by ARI. The funds increased TCI’s affiliate receivable from Prime by $1.6 million. See NOTE 2. “REAL ESTATE.”

 

In September 2003, TCI sold a piece of raw land in California. The proceeds of the sale were received by an affiliate. The funds increased TCI’s affiliate receivable from Prime by $2.6 million. See NOTE 2. “REAL ESTATE.”

 

In November 2003, TCI financed a raw piece of land in Texas. The proceeds of the financing were received by ARI. The funds increased TCI’s affiliate receivable from Prime by $1.2 million. See NOTE 7. “NOTES AND INTEREST PAYABLE.”

 

In November 2003, TCI received the proceeds of the sale of an ARI apartment complex. $2.1 million was used to pay off TCI’s note receivable from ARI and $1.1 million reduced TCI’s affiliate receivable from Prime. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”

 

In November 2003, ARI paid $6.3 million in principal, accrued interest and closing costs on behalf of TCI as payment of the notes payable on five tracts of land in Collin County, Texas. These funds were applied to the affiliate receivable from Prime.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In December 2003, TCI sold Treehouse Apartments and Parkway Centre to IORI for $11.5 million, including the assumption of debt. This transaction increased TCI’s affiliate receivable from Prime by $4.8 million. See NOTE 2. “REAL ESTATE.”

 

In December 2003, TCI sold Eagle Crest land to IORI for $4.0 million. This transaction reduced TCI’s intercompany payable to IORI by $4.0 million. See NOTE 2. “REAL ESTATE.”

 

In December 2003, TCI purchased a note receivable from ARI that is secured by a second lien on raw land for $2.4 million. This transaction was approved by TCI’s Board of Directors. TCI’s affiliate receivables from Prime was reduced by $2.4 million as a result of this transaction. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”

 

In December 2003, TCI’s Board of Directors approved the payment to Regis of a six percent (6.0%) construction management fee on all construction projects in progress at December 31, 2003, to be applied to all construction costs incurred during 2003 on each project. Construction management fees of $5.6 million for 2004 and $4.1 million for 2003 were treated as reductions in the affiliate receivable balance from Prime.

 

In December 2003, TCI sold six properties to subsidiaries of United Housing Foundation, Inc. (“UHF”), a Texas Non-Profit 501(c)3 Corporation. TCI sold 10.72 acres of Marine Creek land for $1.5 million, the Limestone at Vista Ridge apartments for $19.0 million, the Cliffs of El Dorado apartments for $13.4 million, the Limestone Canyon apartments for $18.0 million, the Sendero Ridge apartments for $29.4 million, and Tivoli apartments for $16.1 million. All of the transactions included the assumption of debt and notes receivable to TCI for the remainder of the purchase price. Ted Stokely, Chairman of the Board of TCI, is the General Manager of UHF. Richard Humphrey, who is employed by Regis Realty I, LLC, an affiliate, is President of UHF. Due to UHF being considered a related party to TCI and TCI having continued involvement and control of these entities, these transactions have not been recorded as sales. Instead, these transactions will be accounted for on the deposit method and the properties and corresponding debt will continue to be consolidated by TCI. All of these transactions were approved by TCI’s Board of Directors. Mr. Stokely abstained from voting on all of these transactions. The loans on Limestone Canyon apartments and Limestone at Vista Ridge apartments were approved by their prospective lenders for transfer to the purchasing entities. TCI has guaranteed the loans on both of these transfers. Also, Marine Creek land and the Cliffs of El Dorado apartments were recognized as sales during 2004. See NOTE 2. “REAL ESTATE.” Management is currently seeking lender approval on the transfer of the notes associated with the Tivoli apartments and Sendero Ridge apartments.

 

In December 2003, TCI sold 17.06 acres of land to an affiliate for a purchase price of $2.0 million for a note receivable. Due to no cash received and common control, TCI has elected to continue consolidating this tract of land until the requirements for a sale have been met. No sale was recognized and no note receivable has been recorded.

 

In January 2004, TCI purchased 14.216 acres of land from ARI with a net purchase price of $2.6 million, decreasing the affiliate receivable balance from Prime by $2.6 million.

 

In February 2004, TCI incurred a debt for $1.0 million used for the purchase of land by ARI, increasing the affiliate receivable balance from Prime by $1.0 million.

 

Also in February 2004, TCI recorded the sale of a tract of Marine Creek land originally sold to a related party in December 2003. This transaction was not recorded as a sale for accounting purposes in December 2003 and was recorded as a TCI refinancing transaction in February 2004. TCI received $1.2 million in cash from the related party in February 2004 as payment on the land. TCI has a note receivable balance of $270,000 remaining

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

that bears interest at 12.00% and matures in April 2009. TCI recorded the sale of the Marine Creek land tract due to the payment received on the note receivable. See Note 2. “REAL ESTATE.”

 

In May 2004, TCI purchased the Treehouse Apartments from an affiliate with a net purchase price of $7.5 million for the assumption of debt and a note receivable, less cash received of $498,000. The note receivable was from the sale of the Cliffs of El Dorado Apartments to a related party in 2003. At that time, the sale of the Cliffs of El Dorado Apartments was not recorded as a sale for accounting purposes. TCI recorded the sale of the Cliffs of El Dorado in May 2004 due to payment received for the Cliffs of El Dorado note receivable.

 

In June 2004, TCI purchased 17.115 acres of land from ARI with a net purchase price of $4.5 million, reducing the affiliate receivable balance from Prime by $4.5 million.

 

Also in June 2004, TCI sold apartments to ARI with a net purchase price of $5.0 million, increasing the affiliate receivable balance from Prime by $5.0 million.

 

Again in June 2004, TCI refinanced an office building and two parcels of land. TCI paid-off an existing note payable for ARI for $1.9 million, increasing the affiliate receivable balance from Prime by $1.9 million.

 

In September 2004, TCI sold 9.96 acres of land to an affiliate for a purchase price of $720,000 for a note receivable. Due to no cash received and common control, TCI has elected to continue consolidating this tract of land until the requirements for a sale have been met. No sale was recognized and no note receivable has been recorded.

 

In December 2004, TCI purchased five tracts of land from ARI, including the LCLLP tract (45.49 acres); the Payne tract (268 acres), of which TCI owns a 50% Tenant-In-Common interest; the Rochelle I tract (10.096 acres); the Rochelle II tract (21.269 acres); and the Valley Ranch tract (29.9 acres) for $39.1 million, including the assumption of debt and a reduction to the affiliate receivable balance from Prime of $29.1 million.

 

During 2002, TCI’s Board of Directors authorized the Chief Financial Officer of the Company to advance funds either to or from the Company, through BCM (then the advisor to the Company), in an amount up to $15.0 million, on the condition that such advances shall be repaid in cash or transfers of assets within 90 days. Several property transfers from BCM or Prime were made during 2004 and 2003 to reduce the affiliate balance. Each of these transactions was approved by TCI’s Board of Directors.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Affiliate receivable with Regis Hotel Corporation are included within Other Assets, and the affiliate payable to Prime and IORI is included within Other Liabilities in the accompanying consolidated balance sheet. Prime replaced BCM as the contractual advisor in July 2003 and assumed all of BCM’s affiliate balances and obligations from TCI. The following table reconciles the beginning and ending balances of affiliate receivables (payables) as of December 31, 2004.

 

     Prime

     ARI

     IORI

 

Balance, December 31, 2003

   $ 4,391      $ (347 )    $ (260 )

Cash transfers

     118,304        —          —    

Cash repayments

     (78,436 )      —          —    

Advance through property transfers

     5,000        —          —    

Repayments through property transfers

     (36,198 )      —          —    

Repayments through Advisor

     (509 )      509        —    

Fees payable to affiliates

     (5,625 )      —          —    

Advance through affiliate refinance

     1,851        —          —    

Repayment through affiliate refinance

     (1,260 )      —          —    

Advance through receipt of refinancing proceeds

     1,000        —          —    

Repayment for income tax reimbursement

     (12,500 )      —          —    

Payables clearing through Prime

     3,153        (162 )      —    
    


  


  


Balance, December 31, 2004

   $ (829 )    $ —        $ (260 )
    


  


  


 

In addition, Other Assets includes $1.4 million due from Regis Hotel Corporation, a related party.

 

Returns on Metra Properties.    In April 2002, TCI sold 12 apartment properties 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, then a Director of ARI, a related party, controlled approximately 11.67% of the outstanding common stock of Innovo. Management determined to treat the sales as financing transactions, and TCI continues to report the assets and the new debt incurred by Metra on its financial statements. The partnership agreements for each of these partnerships state that the Metra Partners, as defined, receive cash flow distributions at least quarterly in an amount sufficient to provide them with a 15% cumulative compounded annual rate of return on their invested capital, as well as a cumulative compounded annual amount of 0.50% of the average outstanding balance of the mortgage indebtedness secured by any of these properties. These distributions to the Metra Partners have priority over distributions to any other partners. At December 31, 2004, 12 of the properties remained on TCI’s balance sheet. As of December 2004, TCI and Metra were involved in a lawsuit concerning certain details of this transaction. See “ITEM 3. LEGAL PROCEEDINGS” under “Part I.” for more information.

 

NOTE 9.    PREFERRED STOCK

 

TCI’s Series A Cumulative Convertible Preferred Stock consists of a maximum of 6,000 shares with a par value of $.01 per share and a liquidation preference of $100.00 per share. Dividends are payable at the rate of $5.00 per year or $1.25 per quarter to stockholders of record on the 15th day of each March, June, September and December when and as declared by the Board of Directors. The Series A Preferred Stock may be converted after November 1, 2003, into Common Stock at the daily average closing price of the Common Stock for the prior five trading days. At December 31, 2002 and 2001, 5,829 shares of Series A Preferred Stock were issued and outstanding. On November 13, 2003, the 5,829 shares of Series A Preferred Stock outstanding were converted into 41,075 share of TCI common stock. The Series A Preferred Stock was eliminated on November 21, 2003.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In conjunction with the purchase of the Baywalk, Island Bay and Marina Landing Apartments, TCI issued 30,000 shares of Series C Preferred Stock. TCI’s Series C Cumulative Convertible Preferred Stock consists of a maximum of 30,000 shares with a liquidation preference of $100.00 per share. Dividends are payable at the annual rate of $5.00 per share or $1.25 per quarter through September 2002, then $6.00 per share annually or $1.50 per quarter through September 2003, then $7.00 per share annually or $1.75 per quarter thereafter. After September 30, 2006, the Series C Preferred Stock may be converted into Common Stock at 90.0% of the daily average closing price of the Common Stock for the prior five trading days. The Series C Preferred Stock is redeemable for cash at any time at the option of TCI. At December 31, 2004, 30,000 shares of Series C Preferred Stock were issued and outstanding.

 

NOTE 10.    DIVIDENDS

 

TCI paid no dividends in 2004, 2003 or 2002, and management believes no dividends will be paid in 2005. The payment of dividends, if any, will be determined by the Board of Directors in light of conditions then existing, including the Company’s financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board of Directors.

 

NOTE 11.    STOCK OPTIONS

 

In October 2000, TCI’s stockholders approved the 2000 Stock Option Plan (“2000 Plan”). The 2000 Plan is administered by the Stock Option Committee, which currently consists of two Independent Directors of TCI. The exercise price per share of an option will not be less than 100% of the fair market value per share on the date of grant thereof. As of December 31, 2004, TCI had 300,000 shares of Common Stock reserved for issuance under the 2000 Plan. No options have been granted under the 2000 Plan.

 

In October 2000, TCI’s stockholders approved the Director’s Stock Option Plan (the “Director’s Plan”) which provides for options to purchase up to 140,000 shares of TCI’s Common Stock. Options granted pursuant to the Director’s Plan are immediately exercisable and expire on the earlier of the first anniversary of the date on which a Director ceases to be a Director or 10 years from the date of grant. Each Independent Director was granted an option to purchase 5,000 Common shares at an exercise price of $14.875 per share on October 10, 2000, the date stockholders approved the plan. On January 1, 2002, 2003 and 2004, each Independent Director was granted an option to purchase 5,000 Common shares. The exercise price was $16.73, $17.64 and $16.05 per Common shares for 2004, 2003 and 2002, respectively. Each Independent Director will be awarded an option to purchase an additional 5,000 shares on January 1 of each year.

 

     2004

   2003

     Number
of Shares


   Exercise
Price


   Number
of Shares


   Exercise
Price


Outstanding at January 1,

   15,000    $ 17.640    —      $ —  

Granted

   15,000      16.730    15,000      17.640

Exercised

   —        —      —        —  

Canceled

   —        —      —        —  
    
         
      

Outstanding at December 31,

   30,000           15,000       
    
         
      

 

NOTE 12.    ADVISORY AGREEMENT

 

Basic Capital Management, Inc. served as advisor to TCI from March 28, 1989 to June 30, 2003. Effective July 1, 2003, BCM was replaced as contractual advisor to TCI by Prime Asset Management, Inc., (“PAMI”). PAMI is owned by Realty Advisors (80.0%) and Syntek West (20.0%), related parties. Syntek West is owned by

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Gene Phillips. Effective August 18, 2003, PAMI changed its name to Prime Income Asset Management, Inc., (“PIAMI”). On October 1, 2003, Prime Income Asset Management, LLC (“Prime”), which is owned 100% by PIAMI, replaced PIAMI as the advisor to TCI. Realty Advisors, Inc. is owned by a trust for the children of Gene E. Phillips. Mr. Phillips is not an officer or director of BCM or PIAMI or Prime, but serves as a representative of the trust, is involved in daily consultation with the officers of Prime and has significant influence over the conduct of Prime’s business, including the rendering of advisory services and the making of investment decisions for itself and for TCI.

 

Under the Advisory Agreement, Prime is required to annually formulate and submit for Board approval a budget and business plan containing a twelve-month forecast of operations and cash flow, a general plan for asset sales and purchases, lending, foreclosure and borrowing activity and other investments. Prime is required to report quarterly to the Board on TCI’s performance against the business plan. In addition, all transactions require prior Board approval unless they are explicitly provided for in the approved business plan or are made pursuant to authority expressly delegated to Prime by the Board.

 

The Advisory Agreement also requires prior Board approval for the retention of all consultants and third party professionals, other than legal counsel. The Advisory Agreement provides that Prime shall be deemed to be in a fiduciary relationship to the stockholders and contains a broad standard governing Prime’s liability for losses incurred by TCI.

 

The Advisory Agreement provides for Prime to be responsible for the day-to-day operations and to receive an advisory fee comprised of a gross asset fee of .0625% per month (.75% per annum) of the average of the gross asset value (total assets less allowance for amortization, depreciation or depletion and valuation reserves), and an annual net income fee equal to 7.5% of net income.

 

The Advisory Agreement also provides for Prime to receive an annual incentive sales fee. Prime or an affiliate of Prime is to receive an acquisition commission for supervising the purchase or long-term lease of real estate. Prime or an affiliate of Prime is also to receive a mortgage brokerage and equity refinancing fee for obtaining loans to or refinancing of TCI’s properties. In addition, Prime receives reimbursement of certain expenses incurred by it, in the performance of advisory services for TCI.

 

The Advisory Agreement requires Prime or any affiliate of Prime to pay to TCI one-half of any compensation received from third parties with respect to the origination, placement or brokerage of any loan made by TCI.

 

Under the Advisory Agreement, all or a portion of the annual advisory fee must be refunded if the Operating Expenses of TCI (as defined in the Advisory Agreement) exceed certain limits specified in the Advisory Agreement. In 2003 and 2002, Prime and BCM, respectively, were required to refund to TCI $1.3 and $1.4 million of Prime and BCM’s respective advisory fees. Prime was not required to refund any of its 2004 advisory fee.

 

Additionally, if management were to request that Prime render services other than those required by the Advisory Agreement, Prime or an affiliate of Prime would be separately compensated for such additional services on terms to be agreed upon from time to time. As discussed in NOTE 13. “PROPERTY MANAGEMENT,” Triad Realty Services, Ltd. (“Triad”), an affiliate of Prime, provides property management services and as discussed in NOTE 14. “REAL ESTATE BROKERAGE.” Since January 1, 2003, Regis Realty I, LLC (“Regis I”), a related party, provided, on a non-exclusive basis, brokerage services.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 13.    PROPERTY MANAGEMENT

 

Triad provides property management services for a fee of 6.0% or less of the monthly gross rents collected on residential properties and 3.0% or less of the monthly gross rents collected on commercial properties under its management. Triad subcontracts with other entities for property-level management services at various rates. The general partner of Triad is BCM. The limited partner of Triad is Highland Realty Services, Inc. (“Highland”), a related party. Triad subcontracts the property-level management and leasing of 24 of TCI’s commercial properties (office buildings, shopping centers and industrial warehouses) and four of its hotels to Regis I. Regis I receives property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad. Since January 1, 2003, Regis Hotel I, LLC has managed TCI’s four hotels. The sole member of Regis I and Regis Hotel I, LLC is Highland.

 

During 2003 and 2004, Regis I provided construction management services for TCI’s properties under construction. Regis I charged fees of 6.0% of certain construction costs. Those fees totaled $4.1 million and $5.6 million for 2003 and 2004, respectively.

 

NOTE 14.    REAL ESTATE BROKERAGE

 

Regis I also provides brokerage services on a non-exclusive basis and is entitled to receive a commission for property purchases and sales, in accordance with a sliding scale of total brokerage fees to be paid by TCI.

 

NOTE 15.    ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.

 

Revenue, fees and cost reimbursements to BCM or Prime and their affiliates:

 

     2004

   2003

   2002

Fees:

                    

Advisory fee

   $ 6,733    $ 4,935    $ 4,465

Net income fee

     1,933      —        374

Property acquisition

     94      26      185

Mortgage brokerage and equity refinancing

     1,361      845      806
    

  

  

     $ 10,121    $ 5,806    $ 5,830
    

  

  

Cost reimbursements

   $ 2,181    $ 1,630    $ 1,974
    

  

  

Rent revenue

   $ 69    $ 175    $ 88
    

  

  

 

Cost reimbursements incurred by BCM and Prime related to TCI and ARI are allocated based on the relative market values of each company’s assets.

 

Fees paid to Triad, an affiliate, Regis I and related parties:

 

     2004

   2003

   2002

Fees:

                    

Property acquisition

   $ 328    $ 91    $ 472

Real estate brokerage

     6,320      1,451      3,049

Construction supervision

     5,625      4,050      4,678

Property and construction management and leasing commissions

     2,293      2,122      2,333
    

  

  

     $ 14,566    $ 7,714    $ 10,532
    

  

  

 

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Index to Financial Statements

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 16.    INCOME TAXES

 

The company formerly qualified for tax treatment as a Real Estate Investment Trust (REIT), as defined by Sections 856 through 860 of the Internal Revenue Code of 1986, as Amended (the “Code”). Effective during the third quarter of 2000, TCI no longer met theses requirements due to a concentration of ownership. Under the “Code”, TCI is prohibited from re-qualifying for REIT status for at least 5 years.

 

Effective January 1, 2004, the company was eligible to file a consolidated return with ARI. Income tax expense for 2004, in the accompanying financial statement, has been calculated under an agreement, whereby TCI has agreed to reimburse ARI for the tax effect of TCI’s net income on the consolidated net income of ARI. Since in 2004, TCI had net income and ARI had net losses, TCI recorded a current tax liability in the amount of $12,500,000 based on the amount of ARI losses absorbed by TCI’s taxable income multiplied by the maximum statutory tax rate of 35%.

 

Current income tax expense is attributable to:

 

     2004

 

Income from Continuing Operations

   $ (10,976 )

Income from Discontinued Operations

     23,476  
    


     $ 12,500  
    


 

There was no deferred tax expense <benefit> recorded for the period as a result of the uncertainty of the future use of the deferred tax asset.

 

The Federal income tax expense differs from the amount computed by the applying the corporate tax rate of 35% to the income before income taxes as follows:

 

     2004

 

Computed “expected” income tax <benefit> expense

   $ 12,200  

Book to tax differences from partnerships not consolidated for tax purposes.

     4,300  

Book to tax differences of depreciation and amortization

     (4,000 )

Book to tax differences in gains on sale of property

     1,900  

Use of Net Operating Loss carryforward

     (1,200 )

Other

     (700 )
    


     $ 12,500  
    


 

The tax effect of temporary differences that give rise to the deferred tax asset are as follows:

 

     2004

 

Net Operating Losses

   $ 14,852  

Basis difference of:

        

Real Estate Holdings

     (7,285 )

Notes Receivable

     2,721  

Investments

     (2,720 )

Notes Payable

     27,866  

Deferred Gains

     6,387  
    


Total

     41,821  

Deferred Tax Valuation Allowance

     (41,821 )
    


Net Deferred Tax Asset

   $ —    
    


 

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Index to Financial Statements

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

TCI has prior tax net operating losses of approximately $39 million expiring through the year 2019.

 

TCI had net income for federal income tax purposes before the application of operating loss carryforwards in 2003 and 2002; therefore, TCI recorded no provision for income taxes. TCI’s tax basis in its net assets differs from the amount at which its net assets are reported for financial statement purposes, principally due to the accounting for gains and losses on property sales, depreciation on owned properties and investments in joint venture partnerships. At December 31, 2003, TCI’s tax basis in its net assets was exceeded by their net basis for financial statement purposes by approximately $87.4 million and TCI’s tax basis in its net liabilities was exceeded by their net basis for financial statement purposes by approximately $91.9 million. As a result, aggregate future income for income tax purposes will be less than such amount for financial statement purposes by approximately $4.5 million. TCI’s state income tax expense is included in general and administrative expenses on the Income Statement.

 

NOTE 17.    RENTS UNDER OPERATING LEASES

 

Operations include the leasing of commercial properties (office buildings, industrial warehouses and shopping centers). The leases thereon expire at various dates through 2020. The following is a schedule of minimum future rents on non-cancelable operating leases at December 31, 2004:

 

2005

   $ 17,842

2006

     14,477

2007

     11,310

2008

     8,171

2009

     5,498

Thereafter

     18,113
    

     $ 75,411
    

 

NOTE 18.    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 general and administrative expenses. Management evaluates the performance of the operating segments and allocates resources to each of them based on their operating income and cash flow. Items of income that are not reflected in the segments are interest, other income, gain on debt extinguishment, gain on condemnation award, equity in partnerships, and equity gains on sale of real estate totaling $10.4 million, $16.4 million and $5.3 million for 2004, 2003 and 2002, respectively. Expenses that are not reflected in the segments are provision for losses, advisory, net income and incentive fees, general and administrative, realized loss on investments, minority interests, foreign currency transaction loss and discontinued operations totaling $22.1 million, $19.7 million and $20.7 million for 2004, 2003 and 2002, respectively. Excluded from operating segment assets are assets of $141.8 million at December 31, 2004 and $100.5 million at December 31, 2003, which are not identifiable with an operating segment. There are no intersegment revenues and expenses. See “NOTE 2. “REAL ESTATE” and NOTE 3. “NOTES AND INTEREST RECEIVABLE.”

 

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Index to Financial Statements

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Presented below is the operating income of each operating segment and each segments’ assets for the years 2004, 2003 and 2002.

 

     Land

    Commercial
Properties


    Apartments

    Hotels

   Total

 

2004

                                       

Rents

   $ 564     $ 28,761     $ 54,636     $ 8,998    $ 92,959  

Property operating expenses

     1,548       17,837       34,301       5,491      59,177  
    


 


 


 

  


Segment operating income (loss)

   $ (984 )   $ 10,924     $ 20,335     $ 3,507    $ 33,782  
    


 


 


 

  


Depreciation

   $ 46     $ 8,283     $ 7,516     $ 1,855    $ 17,700  

Interest

     3,736       6,954       19,772       1,971      32,433  

Real estate improvements and construction

     410       4,875       152,637       4,090      162,012  

Provision for asset impairment

     —         6,197       —         —        6,197  

Assets

     134,575       127,528       480,492       35,933      778,528  

Property Sales

                                       

Sales price

   $ 32,550     $ 205,725     $ 38,392            $ 276,667  

Cost of sales

     (24,859 )     (143,826 )     (29,316 )            (198,001 )

Deferred gain on sale

     (581 )     (5,455 )     (2,172 )            (8,208 )
    


 


 


        


Gain on sale

   $ 7,110     $ 56,444     $ 6,904            $ 70,458  
    


 


 


        


     Land

    Commercial
Properties


    Apartments

    Hotels

   Total

 

2003 (As Restated)

                                       

Rents

   $ 761     $ 28,104     $ 40,816     $ 8,120    $ 77,801  

Property operating expenses

     2,167       17,979       29,400       6,216      55,762  
    


 


 


 

  


Segment operating income (loss)

   $ (1,406 )   $ 10,125     $ 11,416     $ 1,904    $ 22,039  
    


 


 


 

  


Depreciation

   $ 45     $ 7,955     $ 3,396     $ 1,777    $ 13,173  

Interest

     3,696       6,677       11,199       2,085      23,657  

Real estate improvements and construction

     322       4,436       79,286       2,939      86,983  

Provision for asset impairment

     198       4,357       —         —        4,555  

Assets

     144,098       252,319       351,699       34,211      782,327  

Property Sales

                                       

Sales price

   $ 11,807     $ 40,994     $ 34,290            $ 87,091  

Cost of sales

     (8,450 )     (31,232 )     (22,402 )            (62,084 )

Deferred gain on sale

     (1,716 )     —         —                (1,716 )
    


 


 


        


Gain on sale

   $ 1,641     $ 9,762     $ 11,888            $ 23,291  
    


 


 


        


     Land

    Commercial
Properties


    Apartments

    Hotels

   Total

 

2002

                                       

Rents

   $ 590     $ 26,848     $ 28,046     $ 6,266    $ 61,750  

Property operating expenses

     2,364       17,620       20,159       5,768      45,911  
    


 


 


 

  


Segment operating income (loss)

   $ (1,774 )   $ 9,228     $ 7,887     $ 498    $ 15,839  
    


 


 


 

  


Depreciation

   $ 30     $ 6,799     $ 3,169     $ 1,628    $ 11,626  

Interest

     2,239       8,662       7,264       2,218      20,383  

Real estate improvements and construction

     1,605       4,620       100,974       5,467      112,666  

Provision for asset impairment

     707       —         1,872       —        2,579  

Assets

     109,427       314,834       300,332       34,894      759,487  

Property Sales

                                       

Sales price

   $ 3,600     $ 60,207     $ 54,388            $ 118,195  

Cost of sales

     (2,934 )     (43,539 )     (32,777 )            (79,250 )
    


 


 


        


Gain on sale

   $ 666     $ 16,668     $ 21,611            $ 38,945  
    


 


 


        


 

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Index to Financial Statements

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 19.    DISCONTINUED OPERATIONS

 

Effective January 1, 2002, TCI adopted Statement of Financial Accounting Standard 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 2004, 2003 and 2002, income (loss) from discontinued operations relates to 22 properties sold in 2004, 13 properties sold during 2003 and 18 properties sold during 2002. The following table summarizes revenue and expense information for these properties sold.

 

     2004

    2003

    2002

 

Revenue

                        

Rental

   $ 26,697     $ 46,373     $ 60,558  

Property operations

     15,887       23,556       33,903  
    


 


 


       10,810       22,817       26,655  

Expenses

                        

Interest

     10,309       19,413       23,085  

Depreciation

     4,878       7,688       8,975  
    


 


 


       15,187       27,101       32,060  

Net loss from discontinued operations

     (4,377 )     (4,284 )     (5,405 )

Gain on sale of real estate

     63,348       21,650       38,279  

Write-down of assets held for sale

     (4,477 )     (4,357 )     —    

Equity in gain on sale of real estate by equity investees

     3,884       4,853       5,013  
    


 


 


Income from discontinued operations

   $ 58,378     $ 17,862     $ 37,887  
    


 


 


 

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TRANSCONTINENTAL REALTY INVESTORS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 20.    QUARTERLY RESULTS OF OPERATIONS

 

The following is a tabulation of TCI’s quarterly results of operations for the years 2004 and 2003 (unaudited):

 

     Three Months Ended

 
     March 31,

    June 30,

    September 30,

    December 31,

 

2004

                                

Rents

   $ 21,781     $ 22,712     $ 24,115     $ 24,351  

Property expense

     14,130       14,445       15,755       14,847  
    


 


 


 


Operating income

     7,651       8,267       8,360       9,504  

Interest income

     398       1,156       626       1,503  

Other income

     —         1,248       543       2,530  

Gain on land sales

     2,106       —         747       4,257  

Income (loss) in equity partnerships

     (570 )     (940 )     (197 )     210  
    


 


 


 


       1,934       1,464       1,719       8,500  

Other expense

     16,534       14,315       14,989       23,733  

Income tax benefit

     —         —         —         10,976  
    


 


 


 


Net loss from continuing operations

     (6,949 )     (4,584 )     (4,910 )     5,247  

Discontinued operations, net of income tax

     9,013       1,595       (5,668 )     29,962  
    


 


 


 


Net income (loss)

     2,064       (2,989 )     (10,578 )     35,209  

Preferred dividend requirement

     (53 )     (52 )     (53 )     (52 )
    


 


 


 


Net income (loss) attributable to Common shares

   $ 2,011     $ (3,041 )   $ (10,631 )   $ 35,157  
    


 


 


 


Earnings (Loss) Per Share

                                

Net income (loss) from continuing operations

   $ (.87 )   $ (.57 )   $ (.61 )   $ .64  

Discontinued operations

     1.12       .20       (.70 )     3.69  
    


 


 


 


Net income (loss) applicable to Common shares

   $ .25     $ (.37 )   $ (1.31 )   $ 4.33  
    


 


 


 


2003 (As Restated)

                                

Rents

   $ 16,105     $ 17,625     $ 20,585     $ 23,486  

Property expense

     12,235       14,419       12,906       16,202  
    


 


 


 


Operating income

     3,870       3,206       7,679       7,284  

Interest income

     848       660       486       862  

Other income

     —         —         —         13,019  

Gain on land sales

     —         384       617       640  

Income (loss) in equity partnerships

     (1,296 )     (296 )     (1,174 )     (1,525 )
    


 


 


 


       (448 )     748       (71 )     12,996  

Other expense

     11,174       8,981       18,208       14,090  
    


 


 


 


Net loss from continuing operations

     (7,752 )     (5,027 )     (10,600 )     6,190  

Discontinued operations

     526       7,132       9,792       412  
    


 


 


 


Net income (loss)

     (7,226 )     2,105       (808 )     6,602  

Preferred dividend requirement

     (45 )     (14 )     (7 )     (60 )
    


 


 


 


Net income (loss) attributable to Common shares

   $ (7,271 )   $ 2,091     $ (815 )   $ 6,542  
    


 


 


 


Earnings (Loss) Per Share

                                

Net income (loss) from continuing operations

   $ (.97 )   $ (.62 )   $ (1.32 )   $ .77  

Discontinued operations

     .07       .88       1.21       .05  
    


 


 


 


Net income (loss) attributable to Common shares

   $ (.90 )   $ .26     $ (.11 )   $ .82  
    


 


 


 


 

Quarterly results presented differ from those previously reported in TCI’s Form 10-Q due to the reclassification of the operations of properties sold or held for sale to discontinued operations in accordance with SFAS 144.

 

75


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Index to Financial Statements

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 21.    CORRECTION OF ACCOUNTING ERROR IN PRIOR PERIOD

 

Subsequent to March 31, 2004, but prior to filing the Form 10-Q for the quarter ended June 30, 2004, TCI discovered an error in the depreciation calculation for a shopping center TCI had purchased in March 2003 for $8.7 million. The amount subject to depreciation was $7.8 million and was to be depreciated straight-line over 40 years or 480 months. Instead, the property was depreciated over 40 months instead of 480 months, resulting in depreciation expense being overstated by $1.8 million for 2003. The Consolidated Balance Sheet as of December 31, 2003 has been revised to reflect the correction of the error through a decrease in accumulated depreciation of $1.8 million and an increase in retained earnings and total stockholders’ equity of $1.8 million. The Consolidated Statements of Operations for the year ending December 31, 2003, reflects the correction of the impact of this error on depreciation expense of $1.8 million. The Consolidated Statement of Stockholders’ Equity for December 31, 2003 has been revised to reflect the correction of the error through a decrease in the December 31, 2003 balance of accumulated deficit and total stockholders’ equity of $1.8 million. All 2003 schedules in this Form 10-K reflect the prior period adjustment discussed in this note. TCI does not intend to restate any previously issued Form 10-Q or Form 10-K for previous periods because, in the opinion of management, the effect is not material to the results of operations for any period previously reported on.

 

NOTE 22.    DERIVATIVE FINANCIAL INSTRUMENTS

 

During the first quarter of 2002, TCI entered into an interest rate swap agreement with a bank. This agreement contains a notional amount of $12.8 million and requires TCI to pay the bank a fixed rate of 4.3%, and requires the bank to pay to TCI based on the 30 day LIBOR rate. This agreement was entered in order to effectively fix the rate on TCI’s debt associated with the Limestone Canyon property. In December 2003, TCI sold the Limestone Canyon apartments to UHF, a related party. The swap agreement expired on December 9, 2004.

 

TCI has not designated the interest rate swap agreement as a hedge, as defined within Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and as such, changes in the fair value of the swap agreement are recognized in earnings during the period of change and reflected in the statement of operations as interest expense.

 

The fair value of the swap agreement at December 31, 2003 represented a liability to TCI of $370,000 and is included within other liabilities in the accompanying balance sheet. Amounts paid or received under the swap agreement are settled monthly and are reflected as a reduction in the liability when paid. Interest expense for December 31, 2003, was decreased by $191,000 representing both amounts paid to the bank under the agreement and decreases in the fair value of the related liability.

 

NOTE 23.    COMMITMENTS AND CONTINGENCIES AND LIQUIDITY

 

In February 1990, TCI, together with National Income Realty Trust, CMET and IORI, three real estate entities which, at the time, had the same officers, directors or trustees and advisor as TCI, entered into a settlement (the “Settlement”) of a class and derivative action entitled Olive et al. v. National Income Realty Trust et al. (the “Olive Litigation”), relating to the operation and management of each of the entities. On April 23, 1990, the Court granted final approval of the terms of the Settlement. The Settlement was modified in 1994 (the “Modification”), which was amended on January 27, 1997, by Amendment to the Modification, effective January 9, 1994 (the “First Amendment”).

 

In October 2000, plaintiffs’ counsel asserted that loans made by TCI to BCM and American Realty Trust, Inc. breached the Modification. The Board believes that the provisions of the Settlement, Modification and the First Amendment terminated on April 28, 1999. However, the Court ruled that certain provisions continue to be effective after the termination date. This ruling was appealed by TCI and IORI.

 

76


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Index to Financial Statements

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

On October 23, 2001, TCI, IORI and ARI jointly announced a preliminary agreement with the plaintiff’s legal counsel for complete settlement of all disputes in the lawsuit. In February 2002, the court granted final approval of the proposed settlement (the “Second Amendment”). Under the Second Amendment, the appeal was dismissed with prejudice and ARI agreed to either (i) acquire all of the outstanding shares of IORI and TCI not currently owned by ARI for a cash payment or shares of ARI preferred stock or (ii) make a tender offer for all of the outstanding common shares of IORI and TCI not currently owned by ARI. At that time, TCI had the same advisor as ARI and IORI. One of the directors of IORI also serves as a director for ARI and TCI.

 

On November 15, 2002, ARI commenced, through subsidiaries, a tender offer for shares of common stock of TCI and IORI. The price per share was $17.50 for TCI shares and $19.00 for IORI shares. The tender offers were completed on March 19, 2003. ARI acquired 265,036 IORI shares and 1,213,226 TCI shares. The completion of the tender offer fulfilled the obligations under the Second Amendment and the Olive Litigation was dismissed with prejudice.

 

Partnership Buyouts.    TCI is the limited partner in 12 partnerships that are currently constructing residential properties. As permitted in the respective partnership agreements, TCI intends to purchase the interests of the general and any other limited partners in these partnerships subsequent to the completion of these projects. The amounts paid to buyout the nonaffiliated partners are limited to development fees earned by the non-affiliated partners, and are set forth in the respective partnership agreements. The total amount of the expected buyouts as of December 31, 2004 is approximately $2.2 million.

 

Liquidity.    Although management anticipates that TCI will generate excess cash from property operations in 2005, such excess, however, will not be sufficient to discharge all of TCI’s debt obligations as they become due. Management intends to selectively sell income producing real estate, refinance real estate and incur additional borrowings against real estate to meet its cash requirements.

 

Guarantees.    In February 2004, various subsidiaries of TCI guaranteed a $10 million line of credit for its parent, ARI. The subsidiaries of TCI also pledged and assigned assets, in the form of securities and partnership interests in construction properties, as additional collateral for this line of credit.

 

In April 2004, TCI guaranteed a $7.5 million note payable for a subsidiary of its parent, ARI. TCI pledged certain tracts of land as collateral and has guaranteed the payment of 50% of the note balance, all interest accrued and payable, all other costs and fees associated with the note and any future collection expenses.

 

In November 2004, TCI guaranteed the $13.0 million note payable on the Limestone Ranch Apartments purchased from TCI by a subsidiary of United Housing Foundation, Inc. (“UHF”) in December 2003. TCI has guaranteed the payment obligations of the note balance, all interest accrued and payable, all other costs and fees associated with the note and any future collection expenses. The lender approved the transfer of the note to UHF’s subsidiary as part of this transaction.

 

Other Litigation.    TCI is also involved in various other lawsuits arising in the ordinary course of business. Management is of the opinion that the outcome of these lawsuits will have no material impact on TCI’s financial condition, results of operations or liquidity.

 

In January 2001, TCI exercised its option under the loan documents to extend the maturity date of three loans with a principal balance of $30.0 million secured by three office buildings in New Orleans, Louisiana. The lender has disputed TCI’s right to extend the loans. This dispute was the subject of litigation pending in the United States District Court for the Eastern District of Louisiana. On September 11, 2003, TCI settled with the lender. On September 18, 2003, TCI paid $5.0 million to the lender, which gave TCI the right to retire the remaining

 

77


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Index to Financial Statements

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

debt outstanding on the three office buildings on or before December 10, 2003 for $20.0 million. TCI paid the remaining $20.0 million on December 10, 2003, which resulted in a $4.4 million gain on extinguishment of debt. BCM also agreed to enter into a time sharing agreement with the lender for use of BCM’s airplane for 200 hours. BCM requested that TCI reimburse BCM for these costs at the rate of $2,750 per hour, which was approved by TCI’s Board of Directors. TCI has accrued $550,000 in general and administrative expenses for this reimbursement to BCM.

 

NOTE 24.    SUBSEQUENT EVENTS

 

Activities   subsequent to December 31, 2004 not already reflected elsewhere in this 10-K are disclosed below.

 

In 2005, TCI purchased the following property:

 

Property


  

Location


   Sq. Feet/Acres

   Purchase
Price


   Net Cash
Paid


   Debt
Incurred


    Interest
Rate


    Maturity
Date


Office Building

                                          

Two Hickory

   Farmers Branch, TX    96,127 Sq. Ft.    $ 10,115    $ —      $ 7,430 (1)   4.9 %(2)   05/06

Land

                                          

Mandahl Bay

   US Virgin Islands    50.8 Acres      7,000      4,101      3,500     7.0     07/05

Mandahl Bay (Gilmore)

   US Virgin Islands    1.02 Acres      96      99      —       —       —  

(1)   Assumed debt.
(2)   Variable interest rate.

 

In 2005, TCI sold the following property:

 

Property


   Location

  

Units/

Sq. Feet


   Sales
Price


   Net Cash
Received


   Debt
Discharged


  

Gain/(Loss)

on Sale


Office Building

                                     

Institute Place

   Chicago, IL    144,915 Sq. Ft.    $ 14,460    $ 4,843    $ 7,792    $ 10,061

Industrial Warehouse

                                     

5700 Tulane

   Atlanta, GA    67,850 Sq. Ft.      816      738      —        294

 

In 2005, TCI refinanced or financed the following property:

 

Property


   Location

   Sq. Ft./Units

   Debt
Incurred


  

Debt

Discharged


  

Net Cash

Received/
(Paid)


   Interest
Rate


    Maturity
Date


Shopping Centers

                                         

Dunes Plaza

   Michigan City, IN    223,869 Sq. Ft.    $ 3,750    $ 2,685    $ 658    7.5 %(1)   01/10

(1)   Variable rate.

 

Also in 2005, TCI received a loan in the amount of $4,975,000 that is guaranteed by BCM and Prime. The note bears interest at 8.0% per annum, requires semiannual interest payments and matures in July 2006. The loan is collateralized by partnership interests in various apartments owned by TCI. At maturity, the lender has the option to convert the outstanding loan balance into general and limited partnership units in each of the partnerships, subject to HUD approval.

 

78


Table of Contents
Index to Financial Statements

SCHEDULE III

 

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

 

Property/Location


  Encumbrances

  Initial Cost

 

Cost Capitalized

Subsequent to

Acquisition


   

Gross Amounts of Which

Carried at End of Year


 

Accumulated

Depreciation


 

Date of

Construction


    Date
Acquired


 

Life on

Which

Depreciation

In Latest

Statement

of Operation
is Computed


    Land

 

Building &

Improvements


  Improvements

  Other

    Land

 

Building &

Improvements


  (1) Total

       
    (dollars in thousands)

Held for Investment:

                                                                     

Apartments

                                                                     

4400, Midland, TX

  $ 999   $ 349   $ 1,396   $ —     $ —       $ 349   $ 1,396   $ 1,745   $ 233   1981     04/98   40 years

Apple Lane, Lawrence, KS

    1,387     168     1,259     —       —         168     1,259     1,427     163   1989     01/00   40 years

Arbor Point, Odessa, TX

    1,994     321     1,285     525     —         321     1,810     2,131     764   1975     08/96   5-40 years

Ashton Way, Midland, TX

    999     384     1,536     52     —         384     1,588     1,972     330   1978     04/98   5-40 years

Autumn Chase, Midland, TX

    805     141     1,265     —       —         141     1,265     1,406     150   1985     04/00   40 years

Blue Lake Villas, Waxahachie, TX

    10,664     762     —       10,519     —         762     10,519     11,281     499   2002     01/02   40 years

Blue Lake Villas II, Waxahachie, TX

    3,939     287     —       4,166     —         287     4,166     4,453     —     —   (9)   01/04   —  

Bluffs At Vista Ridge, Lewisville, TX

    11,701     2,585     —       14,632     —         2,585     14,632     17,217     —     —   (9)   08/03   —  

Breakwater Bay, Beaumont, TX

    9,331     740     —       10,032     —         740     10,032     10,772     —     2003     05/03   —  

Bridges on Kinsey, Tyler, TX

    9,691     862     —       10,716     —         862     10,716     11,578     —     —   (9)   02/04   —  

By the Sea, Corpus Christi, TX

    5,324     644     5,797     —       —         644     5,797     6,441     497   1973     08/01   40 years

Capitol Hill, Little Rock, AR

    9,489     932     973     7,954     —         932     8,927     9,859     99   2003     03/03   40 years

Courtyard, Midland, TX

    972     151     1,359     —       —         151     1,359     1,510     125   1976     05/01   40 years

Coventry, Midland, TX

    1,180     236     369     173     —         236     542     778     250   1977     08/96   5-40 years

Dakota Arms, Lubbock, TX

    11,438     921     —       11,776     —         921     11,776     12,697     —     —   (9)   01/04   40 years

DeSoto Ranch, DeSoto, TX

    16,201     1,472     —       17,854     —         1,472     17,854     19,326     425   2002     05/02   40 years

Echo Valley, Dallas, TX

    12,312     788     —       13,130     —         788     13,130     13,918     356   2002     01/02   40 years

El Chapparal, San Antonio, TX

    4,082     279     2,821     —       (402 )(2)     279     2,419     2,698     1,073   1963     01/88   5-40 years

Fairway View Estates, El Paso, TX

    4,921     548     4,530     261     —         548     4,791     5,339     853   1977     03/99   40 years

Fairways, Longview, TX

    3,412     657     1,532     119     (266 )(2)     657     1,385     2,042     519   1980     03/93   5-40 years

Falcon Lakes, Arlington, TX

    13,578     1,437     —       15,375     —         1,437     15,375     16,812     743   2001     10/01   40 years

Fountain Lake, Texas City, TX

    3,199     861     2,585     19     (254 )(2)     861     2,350     3,211     667   1975     12/94   5-40 years

Fountains of Waterford, Midland, TX

    1,667     311     852     1,538     —         311     2,390     2,701     1,441   1977     05/98   5-40 years

Harper’s Ferry, Lafayette, LA

    3,276     349     1,398     223     —         429     1,541     1,970     613   1972     02/92   5-40 years

Heather Creek, Mesquite, TX

    12,008     1,100     —       12,237     —         1,326     12,011     13,337     200   2003     03/03   40 years

Hunters Glen, Midland, TX

    1,825     519     2,075     321     —         519     2,396     2,915     684   1982     01/98   5-40 years

Kingsland Ranch, Houston, TX

    21,893     1,188     —       23,384     —         1,188     23,384     24,572     —     —   (9)   03/03   —  

Laguna Vista, Farmers Branch, TX

    1,522     288     —       1,736     —         288     1,736     2,024     —     —   (9)   12/04   —  

Lake Forest, Houston, TX

    12,067     334     —       12,918     —         334     12,918     13,252     —     —   (9)   01/04   —  

Limestone Canyon, Austin, TX

    12,405     1,998     —       12,246     1,895 (4)     1,998     14,141     16,139     1,624   1997     07/98   40 years

Limestone Ranch, Lewisville, TX

    12,735     1,620     —       13,057     —         1,620     13,057     14,677     860   2001     05/01   40 years

 

79


Table of Contents
Index to Financial Statements

SCHEDULE III

(Continued)

 

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

 

Property/Location


  Encumbrances

  Initial Cost

 

Cost Capitalized

Subsequent to

Acquisition


   

Gross Amounts of Which

Carried at End of Year


 

Accumulated

Depreciation


 

Date of

Construction


    Date
Acquired


 

Life on

Which

Depreciation

In Latest

Statement

of Operation
is Computed


    Land

 

Building &

Improvements


  Improvements

  Other

    Land

 

Building &

Improvements


 

(1)

Total


       
    (dollars in thousands)

Mountain Plaza, El Paso, TX

  $ 5,184   $ 837   $ 3,347   $ 139   $ —       $ 837   $ 3,486   $ 4,323   $ 724   1972     01/98   5-40 years

Oak Park IV, Clute, TX

    960     224     674     27     (95 )(2)     224     606     830     186   1981     06/94   5-40 years

Paramount Terrace, Amarillo, TX

    3,157     340     3,061     —       —         340     3,061     3,401     460   1983     05/00   40 years

Parc at Maumelle, Maumelle, AR

    2,204     1,153     —       1,543     —         1,153     1,543     2,696     —     —   (9)   12/04   —  

Plantation, Tulsa, OK

    2,258     344     2,396     —       —         344     2,396     2,740     415   1968     12/99   40 years

Quail Oaks, Balch Springs, TX

    2,761     90     2,160     152     (187 )(2)     125     2,090     2,215     1,129   1982     02/87   5-40 years

River Oaks, Wiley, TX

    9,761     590     —       11,767     —         590     11,767     12,357     762   2001     10/01   40 years

Sendero Ridge, San Antonio, TX

    24,304     2,635     —       26,721     —         2,635     26,721     29,356     656   2001     11/01   40 years

Somerset, Texas City, TX

    2,800     936     2,811     179     (452 )(2)     936     2,538     3,474     873   1985     12/93   5-40 years

Southgate, Odessa, TX

    1,719     335     1,338     318     —         335     1,656     1,991     597   1976     08/96   5-40 years

Spy Glass, Mansfield, TX

    15,929     1,376     —       15,961     —         1,290     16,047     17,337     611   2002     03/02   40 years

Stonebridge @ City Park, Houston, TX

    13,905     1,545     —       13,957     —         1,545     13,957     15,502     —     —   (9)   01/04   —  

Sunchase, Odessa, TX

    3,432     742     2,842     458     —         753     3,288     4,042     911   1981     10/97   5-40 years

Terrace Hills, El Paso, TX

    5,973     1,286     5,145     167     —         1,310     5,287     6,598     1,074   1985     03/97   5-40 years

Timbers, Tyler, TX

    2,406     497     1,988     —       —         497     1,988     2,485     334   1973     12/97   40 years

Tivoli, Dallas, TX

    9,915     1,355     —       12,590     —         1,355     12,590     13,945     635   2001     12/01   40 years

Treehouse, Irving, TX

    5,754     312     2,807     —       —         312     2,807     3,119     —     1974     05/04   5-40 years

Verandas at City View, Fort Worth, TX

    19,325     2,545     —       20,596     —         2,545     20,596     23,141     513   2001     09/01   40 years

Vistas at Pinnacle Park, Dallas, TX

    19,101     1,750     2,236     17,431     —         1,750     19,667     21,417     251   2002     10/02   40 years

Vistas at Vance Jackson,
San Antonio, TX

    11,917     1,265     —       12,187     —         1,265     12,187     13,452     —     —   (9)   01/04   —  

Westwood, Odessa, TX

    —       85     341     91     —         85     432     517     168   1977     08/96   5-40 years

Wildflower Villas, Temple, TX

    7,527     1,119     —       8,257     —         1,119     8,257     9,376     —     —   (9)   04/04   —  

Willow Creek, El Paso, TX

    2,349     608     1,832     76     (156 )(2)     608     1,752     2,360     516   1972     05/94   5-40 years

Willo-Wick, Pensacola, FL

    2,924     747     2,990     174     (281 )(2)     747     2,883     3,630     851   1974     05/95   5-40 years

Windsong, Fort Worth, TX

    10,688     790     —       11,524     —         790     11,524     12,314     268   2003     07/03   40 years

Woodview, Odessa, TX

    1,942     716     2,864     102     —         716     2,966     3,682     579   1974     05/98   5-40 years

Office Buildings

                                                                     

1010 Commons, New Orleans, LA

    16,381     2,113     15,010     19,701     (1,218 )(2)     2,127     33,479     35,606     11,084   1971     03/98   5-40 years

225 Baronne, New Orleans, LA

    5,189     1,162     10,457     6,149     (3,013 )(2)(3)     1,162     13,593     14,755     6,257   1960     03/98   5-40 years

AMOCO, New Orleans, LA

    8,365     894     3,582     7,078     (1,149 )(2)     1,233     9,172     10,405     5,314   1974     06/97   5-40 years

 

80


Table of Contents
Index to Financial Statements

SCHEDULE III

(Continued)

 

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

 

Property/Location


  Encumbrances

  Initial Cost

 

Cost Capitalized

Subsequent to

Acquisition


   

Gross Amounts of Which

Carried at End of Year


 

Accumulated

Depreciation


 

Date of

Construction


  Date
Acquired


 

Life on

Which

Depreciation

In Latest

Statement

of Operation
is Computed


    Land

 

Building &

Improvements


  Improvements

  Other

    Land

 

Building &

Improvements


 

(1)

Total


       
    (dollars in thousands)

Bay Plaza, Tampa, FL

  $ 1,049   $ 895   $ 3,582   $ 557   $ (384 )(2)   $ 895   $ 3,755   $ 4,650   $ 1,091   1988   07/97   5-40 years

Bay Plaza II, Tampa, FL

    3,315     506     4,550     178     —         506     4,728     5,234     589   1985   06/00   40 years

Eton Square, Tulsa, OK

    10,045     1,469     13,217     1,941     —         1,469     15,158     16,627     2,146   1985   09/99   5-40 years

Executive Court, Memphis, TN

    —       197     1,773     —       —         197     1,773     1,970     —     1980   12/04   5-40 years

Forum, Richmond, VA

    4,882     1,360     5,439     1,047     —         1,360     6,486     7,846     2,221   1987   10/92   2-40 years

Lexington Center, Colorado Springs, CO

    3,887     1,103     4,413     711     —         1,103     5,124     6,227     1,300   1986   12/97   3-40 years

Parkway North, Dallas, TX

    3,487     1,173     4,692     1,021     —         1,173     5,712     6,886     1,575   1980   02/98   2-40 years

Signature, Dallas, TX

    2,360     1,075     2,921     1,384     (1,272 )(2)     1,075     3,033     4,108     695   1985   02/99   5-40 years

Westgrove Air Plaza, Addison, TX

    3,092     211     1,898     291             211     2,189     2,400     519   1982   10/97   5-40 years

Industrial Warehouses

                                                                   

5360 Tulane, Atlanta, GA

    358     95     514     49     (44 )(2)     127     488     615     338   1970   11/97   5-40 years

Addison Hangar, Addison, TX

    4,308     928     1,481     33     —         1,616     826     2,442     221   1992   12/99   5-40 years

Addison Hanger II, Addison, TX

    —       —       1,150     248     —         —       1,398     1,398     620   2000   12/99   5-40 years

Encon, Fort Worth, TX

    3,373     984     3,934     67     —         984     4,001     4,985     729   1958   10/97   5-40 years

Space Center, San Antonio, TX

    1,043     247     1,332     112     (131 )(2)     329     1,231     1,560     849   1970   11/97   5-40 years

Shopping Centers

                                                                   

Bridgeview Plaza, LaCrosse, WI

    6,319     870     7,830     —       —         870     7,830     8,700     359   1979   03/03   5-40 years

Cullman SC, Cullman, AL

    1,653     200     1,800     —       —         200     1,800     2,000     990   1979   03/03   5-40 years

Dunes Plaza, Michigan City, IN

    2,705     1,230     5,430     1,897     (482 )(5)     1,529     6,546     8,075     2,620   1978   03/92   5-40 years

Fiesta, San Angelo, TX

    —       44     —       —       —         44     —       44     —     —     12/91   —  

Promenade, Highlands Ranch, CO

    6,822     1,749     6,995     282     (679 )(2)     1,749     6,598     8,347     1,708   1985   07/96   5-40 years

Hotels

                                                                   

Akademia, Wroclaw, Poland

    24,061     2,184     —       19,544     —         2,184     19,544     21,728     2,012   2001   02/01   40 years

The Majestic, Chicago, IL

    —       572     2,287     1,600     —         572     3,887     4,459     1,224   1995   12/98   5-40 years

City Suites, Chicago, IL

    3,629     950     3,847     1,104     —         950     4,951     5,901     1,504   1995   12/98   5-40 years

Majestic Inn, San Francisco, CA

    3,988     1,139     4,555     985     —         1,139     5,540     6,679     2,479   1902   12/90   5-40 years

Willows, Chicago, IL

    3,490     945     3,779     1,490     —         945     5,269     6,214     1,831   1995   12/98   5-40 years

 

81


Table of Contents
Index to Financial Statements

SCHEDULE III

(Continued)

 

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

 

Property/Location


  Encumbrances

  Initial Cost

 

Cost Capitalized

Subsequent to

Acquisition


   

Gross Amounts of Which

Carried at End of Year


 

Accumulated

Depreciation


 

Date of

Construction


  Date
Acquired


 

Life on

Which

Depreciation

In Latest

Statement

of Operation
is Computed


    Land

 

Building &

Improvements


  Improvements

  Other

    Land

 

Building &

Improvements


  (1) Total

       
    (dollars in thousands)

Land

                                                                   

1013 Commons, New Orleans, LA

  $ —     $ 615   $ —     $ 565   $ (36 )(2)   $ 579   $ 565   $ 1,144   $ 84   —     08/98   —  

2301 Valley Branch, Farmers Branch, TX

    2,923     4,169     —       84     —         4,253     —       4,253     —     —     09/02   —  

Alamo Springs, Dallas, TX

    —       1,385     —       —       —         1,385     —       1,385     —     —     09/99   —  

Centura, Farmers Branch, TX

    4,535     13,300     —       485     30       13,591     224     13,815     —     —     12/02   —  

Cooks Lane, Ft. Worth, TX

    550     1,046     —       —       —         1,046     —       1,046     —     —     06/04   —  

Denton Coonrod, Denton, TX

    840     1,886     —       —       —         1,886     —       1,886     —     —     10/04   —  

DeSoto, DeSoto, TX

    1,265     2,651     —       —       —         2,651     —       2,651     —     —     10/04   —  

Dominion, Dallas, TX

    1,275     3,931     —       —       —         3,931     —       3,931     —     —     03/99   —  

Folsom, Farmers Branch, TX

    —       1,781     —       450     —         2,231     —       2,231     —     —     10/00   —  

Fruitland, Fruitland Park, FL

    —       253     —       —       (100 )(6)     153     —       153     —     —     05/92   —  

Granbury Station, Ft. Worth, TX

    738     993     —       —       —         993     —       993     —     —     09/04   —  

Hollywood Casino, Farmers Branch, TX

    4,710     16,987     —       2     —         16,989     —       16,989     —     —     06/02   —  

Lacy Longhorn, Farmers Branch, TX

    1,954     4,474     —       —       —         4,474     —       4,474     —     —     06/04   —  

Lakeshore Villas, Harris County, TX

    —       84     —       —       —         84     —       84     —     —     03/02   —  

Lamar Parmer/Limestone II, Austin, TX

    —       1,999     —       564     —         1,999     564     2,563     —     —     01/00   —  

Las Colinas, Las Colinas, TX

    —       995     —       5     —         1,000     —       1,000     —     —     01/96   —  

LCLLP, Los Colinas, TX

    3,121     4,950     —       —       —         4,950     —       4,950     —     —     12/04   —  

Lemon Carlisle, Dallas, TX

    1,744     3,576     —       30     —         3,606     —       3,606     —     —     02/98   —  

Lubbock, Lubbock, TX

    —       224     —       —       —         224     —       224     —     —     01/04   —  

Manhattan, Farmers Branch, TX

    —       11,186     —       971     —         12,136     20     12,156     38   —     02/00   —  

Marine Creek, Ft. Worth, TX

    1,775     2,923     —       19     —         2,923     19     2,942     —     —     06/02   —  

Mason Park, Houston, TX

    —       2,790     —       326     (1,188 )(8)     1,602     326     1,928     —     —     06/02   —  

McKinney 36, Collin County, TX

    1,751     2,203     —       —       (230 )(2)     1,973     —       1,973     —     —     01/98   —  

Mira Lago, Farmers Branch, TX

    —       253     —       —       —         253     —       253     —     —     05/01   —  

Nakash

    10     113     —       —       —         113     —       113     —     —         —  

Nashville, Nashville, TN

    —       1,890     —       34     —         1,890     34     1,924     —     —     06/02   —  

 

82


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Index to Financial Statements

SCHEDULE III

(Continued)

 

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

 

Property/Location


  Encumbrances

  Initial Cost

 

Cost Capitalized

Subsequent to

Acquisition


   

Gross Amounts of Which

Carried at End of Year


 

Accumulated

Depreciation


 

Date of

Construction


  Date
Acquired


 

Life on

Which

Depreciation

In Latest

Statement

of Operation
is Computed


    Land

 

Building &

Improvements


  Improvements

  Other

    Land

 

Building &

Improvements


 

(1)

Total


       
    (dollars in thousands)

Pac-Trust, Dallas, TX

  $ —     $ 1,232   $ —     $ —     $ —       $ 1,232   $ —     $ 1,232   $ —     —     10/01   —  

Payne, Las Colinas, TX

    —       17,500     —       —       —         17,500     —       17,500     —     —     12/04   —  

Pulaski, Pulaski County, AR

    1,400     2,095     —       —       —         2,095     —       2,095     —     —     06/03   —  

Railroad, Dallas, TX

    —       782     —       —       —         782     —       782     —     —     03/04   —  

Rochelle I, Las Colinas, TX

    2,547     3,750     —       —       —         3,750     —       3,750     —     —     12/04   —  

Rochelle II, Las Colinas, TX

    4,338     6,445     —       —       —         6,445     —       6,445     —     —     12/04   —  

Rogers, Rogers, AR

    1,130     1,749     —       —       —         1,749     —       1,749     —     —     04/04   —  

Round Mt, Austin, TX

    —       5,740     —       —       (5,421 )(2)(3)     319     —       319     —     —     12/86   —  

Seminary West, Fort Worth, TX

    —       234     —       —       —         234     —       234     —     —     07/01   —  

Sheffield Village, Grand Prairie, TX

    975     1,643     —       —       —         1,643     —       1,643     —     —     09/03   —  

Valley Ranch, Irving, TX

    —       6,500     —       —       —         6,500     —       6,500     —     —     12/04   —  

West End, Dallas, TX

    1,061     11,405     —       77     (4,013 )(7)     7,392     77     7,469     —     —     08/97   —  
   

 

 

 

 


 

 

 

 

           

Investment Properties

    567,654     217,481     186,332     420,460     (19,528 )     210,049     594,693     804,746     76,078            
   

 

 

 

 


 

 

 

 

           

Properties Held for Sale

                                                                   

5700 Tulane, Atlanta, GA

    —       —       —       720     (100 )(2)     —       620     620     172   1998   11/97   40 years

9033 Wilshire Blvd., Los Angeles, CA

    6,539     956     8,609     583     —         956     9,191     10,148     1,250   1957   04/00   5-40 years

Baywalk, Galveston, TX

    5,304     679     6,106     —       —         679     6,106     6,785     522   1979   09/01   5-40 years

Institute Place, Chicago, IL

    7,734     665     7,057     446     —         665     7,504     8,168     4,625   1910   01/93   2-40 years

Island Bay, Galveston, TX

    14,912     2,095     18,852     —       —         2,095     18,852     20,947     1,612   1973   09/01   40 years

Marina Landing, Galveston, TX

    12,773     1,240     11,161     —       —         1,240     11,161     12,401     929   1985   09/01   40 years
   

 

 

 

 


 

 

 

 

           

Properties Held for Sale

    47,262     5,635     51,785     1,749     (100 )     5,635     53,434     59,069     9,110            
   

 

 

 

 


 

 

 

 

           
    $ 614,916   $ 223,116   $ 238,117   $ 422,209   $ (19,628 )   $ 215,684   $ 648,127   $ 863,815   $ 85,188            
   

 

 

 

 


 

 

 

 

           

(1)   The aggregate cost for federal income tax purposes is $762.1 million.
(2)   Purchase accounting basis adjustment.
(3)   Write-down of property to estimated net realizable value.
(4)   Construction period interest and taxes.
(5)   Forgiveness of debt and cash received deducted from the basis of the property, offset by land acquired in 1992.
(6)   Cash received for easement deducted from the basis of the property.
(7)   Cash received for condemnation of part of property.
(8)   Sale or contribution of portion of property.
(9)   Property under construction.

 

83


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Index to Financial Statements

SCHEDULE III

(Continued)

 

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

REAL ESTATE AND ACCUMULATED DEPRECIATION

 

     2004

    2003

    2002

 
     (dollars in thousands)  

Reconciliation of Real Estate

                        

Balance at January 1,

   $ 873,619     $ 841,146     $ 713,348  

Additions

                        

Purchases, improvements and construction

     222,789       113,561       220,164  

Real estate added from consolidation of partnerships

     —         —         4,257  

Deductions

                        

Sale of real estate

     (226,396 )     (76,081 )     (88,680 )

Asset impairments

     (6,197 )     (5,007 )     (2,579 )

Asset retirements

     —         —         (5,364 )

Sale of foreclosed properties

     —         —         —    
    


 


 


Balance at December 31,

   $ 863,815     $ 873,619     $ 841,146  
    


 


 


Reconciliation of Accumulated Depreciation

                        

Balance at January 1,

   $ 91,291     $ 81,659     $ 90,661  

Additions

                        

Depreciation

     22,578       20,860       20,445  

Real estate added from consolidation of partnerships

     —         —         817  

Deductions

                        

Sale of real estate

     (28,582 )     (11,228 )     (24,900 )

Asset retirements

     —         —         (5,364 )
    


 


 


Balance at December 31,

   $ 85,287     $ 91,291     $ 81,659  
    


 


 


 

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SCHEDULE IV

 

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

MORTGAGE LOANS ON REAL ESTATE

December 31, 2004

 

Description


  Interest Rate

   

Final

Maturity

Date


 

Periodic Payment Terms


 

Prior

Liens


  Face
Amount of
Mortgage


 

Carrying

Amounts of
Mortgage (1)


 

Principal
Amount of

Loans
Subject to

Delinquent
Principal
or Interest


                      (dollars in thousands)    

FIRST MORTGAGE LOANS

                                     

400 St. Paul

Secured by an office building in Dallas, TX. Includes LOC of $250,000.

  7.0 %   03/07   Monthly interest only payments.   $ —     $ 5,400   $ 4,768   $ —  

WRAPAROUND MORTGAGE LOANS

                                     

Pinemont

Secured by an office building in Houston, TX.

  10.40 %   07/08   Monthly principal and interest payments of $6,281.     204     467     225     —  

Nakash

Secured by a shopping Center in Malden, MO.

            Monthly interest only payments of $13,000.     10     902     902     —  

Durham Centre

Secured by an office building in Durham, NC.

  7.63 %   09/07   Monthly interest only payments.     12,026     14,536     14,536     —  

JUNIOR MORTGAGE LOANS

                                     

Dallas Fund XVII

Secured by an assignment of partnership interests and litigation proceeds.

  9.0 %   10/05   Principal and interest due at maturity.     —       4,303     3,161     —  

Pioneer Development

Secured by 33.33 acres of unimproved land in Travis County, TX.

  10.0 %   10/08   Interest only payments start in November 2007.     12,000     2,386     2,626     —  

Foxwood

Secured by an apartment building in Memphis, TN.

  12.0 %   04/05   Excess property cash flow payments.     5,719     1,092     1,092     —  

One Hickory

Secured by an office building in Farmers Branch, TX.

  5.49 %   06/06   Excess property cash flow payments.     7,080     11,974     11,974     —  

Durham Centre

2nd lien on office building in Durham, NC.

  7.63 %   09/17   Monthly interest only payments.     12,026     3,297     3,297     —  

Two Hickory

Secured by an office building in Farmers Branch, TX.

  12.0 %   01/05   Excess property cash flow payments.     7,430     4,448     3,115     —  

NAP Mason Park

2nd lien on 13 acres of land in Harris County, TX.

  9.0 %   02/03   Principal and interest due at maturity.     —       200     200     —  

 

85


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Index to Financial Statements

SCHEDULE IV

(Continued)

 

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

MORTGAGE LOANS ON REAL ESTATE

December 31, 2004

 

Description


  Interest Rate

   

Final

Maturity

Date


 

Periodic Payment Terms


 

Prior

Liens


  Face
Amount of
Mortgage


 

Carrying

Amounts of
Mortgage (1)


 

Principal
Amount of

Loans
Subject to

Delinquent
Principal
or Interest


                      (dollars in thousands)    

United Housing of
Chase Oaks

2nd lien on 22 acres of land in Collin County, TX.

  4.0 %   Demand   Excess property cash flow payments.     —       341     341     —  

In The Pines, LLC

2nd lien on apartment building in Gainesville, FL.

  7.0 %   04/05   Principal and interest due at maturity.     —       575     575     —  

OTHER

                                     

BCM—K-Mart Cary

Unsecured.

  7.5 %   04/05   Monthly interest payments.     —       1,523     1,523     —  

BCM—Texstar
Warehouse

Unsecured.

  7.5 %   04/05   Monthly interest payments.     —       1,252     1,252     —  

Countryside, L.P.

Secured by Class A partnership units in TCI Countryside, LP.

  7.25 %   01/07   Quarterly interest payments.     —       2,300     2,300     —  

Countryside, L.P.

Secured by Class A partnership units in TCI Countryside, LP.

  7.25 %   07/12   Quarterly interest payments.     —       1,050     210     —  

Commercial Ventures

Unsecured.

  8.5 %   04/05   Monthly interest payments.     —       425     425     —  

UHF Kensington

100% interest in UH of Kensington, LLC.

  12.0 %   04/09   Excess property cash flow payments.     —       125     125     —  

Blue Lake at Marine
Creek

Guaranteed by Unified Housing Foundation.

  6.0 %   12/07   Excess property cash flow payments.     —       1,468     270     —  

Today Forest Park Investments

Unsecured.

  0.0 %   None   Partnership distributions as available.     —       678     678     —  

Apartment Development Services

Secured by 100% interest in partnership.

  12.0 %   06/05   Principal and interest at maturity.     —       300     300     —  
                 

 

 

 

                  $ 56,495   $ 59,042     53,895   $ —  
                 

 

       

Interest

                              2,735      

Allowance for estimated
losses

                              —        
                             

     
                              $ 56,630      
                             

     

(1) The aggregate cost for federal income tax purposes is $56.6 million.

 

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SCHEDULE IV

(Continued)

 

TRANSCONTINENTAL REALTY INVESTORS, INC.

 

MORTGAGE LOANS ON REAL ESTATE

 

     2004

    2003

    2002

 
     (dollars in thousands)  

Balance at January 1,

   $ 30,671     $ 28,447     $ 22,689  

Additions

                        

New mortgage loans

     58,543       14,692       25,037  

Mortgages added from consolidation of partnerships

     —         —         902  

Deductions

                        

Collections of principal

     (11,563 )     (12,364 )     (18,737 )

Mortgages eliminated from consolidation of partnerships

     (23,754 )     —         (1,369 )

Discount on sale of note receivable

     (2 )     (104 )     —    

Write-off of principal due to discount for early payoff

     —         —         (75 )
    


 


 


Balance at December 31,

   $ 53,895     $ 30,671     $ 28,447  
    


 


 


 

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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Effective June 1, 2004, the Audit Committee of the Board of Directors of TCI engaged the Plano, Texas firm of Farmer, Fuqua & Huff, P.C. as the independent accountants to audit TCI’s financial statements. During the Registrant’s two most recent fiscal years and any subsequent interim period, TCI did not consult with Farmer, Fuqua & Huff, P.C. or any of its members about the application of accounting principles to any specified transaction or any other matter. The decision to change accountants was approved by the Audit Committee of the Board of Directors of TCI consisting of Ted R. Munselle (Chairman), Martin L. White and Sharon Hunt.

 

The engagement effective June 1, 2004 of Farmer, Fuqua & Huff, P.C. as the new independent accountant for TCI necessarily results in the termination or dismissal of the principal accountant which audited TCI’s financial statements for the past two fiscal years ended December 31, 2002 and 2003, BDO Seidman, LLP. BDO Seidman, LLP’s anticipated fee proposal estimate to TCI for the balance of 2004 after the first quarter ended was expected to be greater than the fee proposal of Farmer, Fuqua & Huff, P.C. for the same work. During the Registrant’s two most recent fiscal years and the subsequent interim period through June 1, 2004, there were no disagreements between the Registrant and BDO Seidman, LLP concerning any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which disagreements, if not resolved to BDO Seidman, LLP’s satisfaction would have caused them to make reference to the subject matter of the disagreement in connection with their report; there were no reportable events as described in Item 304(a)(1)(v) of Regulation S-K.

 

BDO Seidman, LLP’s reports dated March 21, 2003 and March 30, 2004 on TCI’s financial statements for the years ended December 31, 2002 and 2003 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. Each report did contain an “emphasis” paragraph highlighting that management has indicated its intent to sell income-producing properties and refinance or extend debt secured by real estate to meets its liquidity needs.

 

ITEM 9A.    CONTROLS AND PROCEDURES

 

As required by rule 13a-15(b), TCI’s management, including the Acting Principal Executive Officer and Principal Accounting Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of TCI’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the chief executive officer and the chief financial officer concluded that TCI’s disclosure controls and procedures were effective as of the end of the period covered by this report. As required by rule 13a-15(d), TCI’s management, including the Acting Principal Executive Officer and Principal Accounting Officer, also conducted an evaluation of TCI’s internal controls over financial reporting to determine whether any changes occurred during the fourth fiscal quarter have materially affected, or are reasonably likely to materially affect, TCI’s internal control over financial reporting. Based on that evaluation, there has been no such change during the fourth fiscal quarter.

 

It should be noted that any system of controls, however well designed and operated, can only provide reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part on certain assumptions about the likelihood of future events.

 

ITEM 9B.    OTHER INFORMATION

 

Not Applicable

 

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PART III

 

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT

 

Directors

 

The affairs of Transcontinental Realty Investors, Inc. (“TCI”) are managed by a Board of Directors. The Directors are elected at the annual meeting of stockholders or appointed by the incumbent Board and serve until the next annual meeting of stockholders or until a successor has been elected or approved.

 

After December 31, 2003, a number of changes occurred in the composition of the Board of Directors of TCI, the creation of certain Board committees, the adoption of Committee charters, the adoption of a Code of Ethics for Senior Financial Officers, and the adoption of Guidelines for Director Independence. Also, the composition of the members of the Board of Directors changed with the resignation of Earl D. Cecil (on February 29, 2004) as well as the election of independent directors, Ted R. Munselle and Sharon Hunt on February 20, 2004.

 

It is the Board’s objective that a majority of the Board consist of independent directors. For a director to be considered independent, the Board must determine that the director does not have any direct or indirect material relationship with TCI. The Board has established guidelines to assist it in determining director independence which conform to, or are more exacting than, the independence requirements in the New York Stock Exchange listing rules. The independence guidelines are set forth in TCI’s “Corporate Governance Guidelines.” The text of this document has been posted on TCI’s internet website at http://www.transconrealty-invest.com and is available in print to any shareholder who requests it. In addition to applying these guidelines, the Board will consider all relevant facts and circumstances in making an independent determination.

 

TCI has adopted a code of conduct that applies to all Directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Stockholders may find our code of conduct on our website by going to our website address at http://www.transconrealty-invest.com. We will post any amendments to the code of conduct, as well as any waivers that are required to be disclosed by the rules of the SEC or the New York Stock Exchange on our website.

 

Our Board of Directors has adopted charters for our Audit, Compensation and Governance and Nominating Committees of the Board of Directors. Stockholders may find these documents on our website by going to the website address at http://www.transconrealty-invest.com. You may also obtain a printed copy of the materials referred to by contacting us at the following address:

 

Transcontinental Realty Investors, Inc.

Attn: Investor Relations

1800 Valley View Lane, Suite 300

Dallas, Texas 75234

Telephone: 469-522-4200

 

All members of the Audit Committee and Nominating and Corporate Governance Committees must be independent directors. Members of the Audit Committee must also satisfy additional independence requirements, which provide (i) that they may not accept, directly or indirectly, any consulting, advisory, or compensatory fee from TCI or any of its subsidiaries other than their director’s compensation (other than in their capacity as a member of the Audit Committee, the Board of Directors, or any other committee of the Board), and (ii) no member of the Audit Committee may be an “affiliated person” of TCI or any of its subsidiaries, as defined by the Securities and Exchange Commission.

 

The current directors of TCI are listed below, together with their ages, terms of service, all positions and offices with TCI or its former advisor, BCM or Prime, which took over as contractual advisor for BCM on July 1, 2003, their principal occupations, business experience and directorships with other companies during the last five

 

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years or more. The designation “Affiliated”, when used below with respect to a director, means that the director is an officer, director or employee of BCM, Prime or an officer of TCI or an officer or director of an affiliate of TCI. The designation “Independent”, when used below with respect to a director, means that the director is neither an officer of TCI nor a director, officer or employee of BCM or Prime, although TCI may have certain business or professional relationships with such director as discussed in ITEM 13. “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS—Certain Business Relationships.”

 

TED P. STOKELY:    Age 71, Director (Affiliated) (since April 1990) and Chairman of the Board (since January 1995).

 

General Manager (since January 1995) of ECF Senior Housing Corporation, a nonprofit corporation; General Manager (since January 1993) of Housing Assistance Foundation, Inc., a nonprofit corporation; Part-time unpaid consultant (since January 1993) and paid consultant (April 1992 to December 1992) of Eldercare Housing Foundation (“Eldercare”), a nonprofit corporation; General Manager (since April 2002) of Unified Housing Foundation, Inc., a nonprofit corporation; Director and Chairman of the Board of ARI (since November 2002); and Director (since April 1990) and Chairman of the Board (since January 1995) of IORI.

 

HENRY BUTLER:    Age 54, Director (Affiliated) (since December 2001).

 

Broker—Land Sales (since 1992) of BCM; Owner/Operator (1989 to 1991) of Butler Interests, Inc.; Director (since July 2003) of ARI; and Director (December 2001 to July 2003) of IORI.

 

MARTIN L. WHITE:    Age 65, Director (Independent) (since January 1995).

 

Chief Executive Officer (since 1995) of Builders Emporium, Inc.; Chairman and Chief Executive Officer (since 1993) of North American Trading Company Ltd.; President and Chief Operating Officer (since 1992) of Community Based Developers, Inc.; Director (Since July 2003) of ARI; and Director (January 1995 to March 2004) of IORI.

 

TED R. MUNSELLE:    Age 49, Director (Independent) (since February 2004).

 

Vice President and Chief Financial Officer of Landmark Nurseries, Inc.; Employed in the accounting industry from 1997 until October 1998; Certified Public Accountant in the State of Texas; and Director (since February 2004) of ARI.

 

SHARON HUNT:    Age 62, Director (Independent) (since February 2004).

 

Licensed Realtor in Dallas, Texas with Cook Realtors; President and Owner of Sharon’s Pretzels, Inc.; Director (since 1991) of a 501(c)(3) non-profit corporation involved in the acquisition, renovation and operation of real estate; and Director (since February 2004) of ARI.

 

Board Committees

 

The Board of Directors held 13 meetings during 2004. For such year, no incumbent director attended fewer than 75.0% of the aggregate of (1) the total number of meetings held by the Board during the period for which he had been a director and (2) the total number of meetings held by all committees of the Board on which he served during the period that he served.

 

The Board of Directors has standing Audit, Compensation and Governance and Nominating Committees. The Audit Committee was formed on February 19, 2003, and its function is to review TCI’s operating and accounting procedures. A Charter of the Audit Committee has also been adopted by the Board. The Audit Committee is an “audit committee” for purposes of Section 3(a)(58) of the Securities Exchange Act of 1934. The current members of the Audit Committee, all of whom are independent within the meaning of the SEC Regulations, the listing standards of the New York Stock Exchange, Inc. and TCI’s Corporate Governance Guidelines, are Messrs. White and Munselle (Chairman) and Ms. Hunt. Mr. Ted R. Munselle, a member of the

 

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Committee is qualified as an Audit Committee financial expert within the meaning of SEC Regulations, and the Board has determined that he has accounting and related financial management expertise within the meaning of the listing standards of the New York Stock Exchange, Inc. All of the members of the Audit Committee meet the experience requirements of the listing standards of the New York Stock Exchange. The predecessor Audit Committee met nine times during 2003.

 

The Governance and Nominating Committee is responsible for developing and implementing policies and practices relating to corporate governance, including reviewing and monitoring implementation of TCI’s Corporate Governance Guidelines. In addition, the Committee develops and reviews background information on candidates for the Board and makes recommendations to the Board regarding such candidates. The Committee also prepares and supervises the Board’s annual review of director independence and the Board’s performance self-evaluation. The Charter of the Governance and Nominating Committee was adopted on March 22, 2004. The members of the Committee are Messrs. Munselle (Chairman) and White and Ms. Hunt.

 

The Board has also formed a Compensation Committee of the Board of Directors, adopted a Charter for the Compensation Committee on March 22, 2004, and selected Ms. Hunt (Chairman) and Messrs. Munselle and White as the members of such Committee.

 

The members of the Board of Directors on the date of this Report and the Committees of the Board on which they serve are identified below:

 

     Audit Committee

   Governance and
Nominating Committee


   Compensation Committee

Ted P. Stokely

              

Ted R. Munselle

   ü    ü    ü

Sharon Hunt

   ü    ü    ü

Martin L. White

   ü    ü    ü

Henry A. Butler

              

 

During February 2004, the Board adopted its Corporate Governance Guidelines. The Guidelines adopted by the Board meet or exceed the new listing standards adopted during the year by the New York Stock Exchange, Inc. Pursuant to the Guidelines, the Board undertook its annual review of director independence, and during this review, the Board considered transactions and relationships between each director or any member of his or her immediate family and TCI and its subsidiaries and affiliates, including those reported under Certain Relationships and Related Transactions below. The Board also examined transactions and relationship between directors or their affiliates and members of TCI’s senior management or their affiliates. As provided in the Guidelines, the purpose of such review was to determine whether such relationships or transactions were inconsistent with the determination that the director is independent.

 

Executive Officers

 

Executive officers of the Company are Mark W. Branigan, Executive Vice President—Multi-Family Construction, Louis J. Corna, Executive Vice President—Tax, General Counsel/Tax Counsel and Secretary, and Scott T. Lewis, Executive Vice President and Chief Financial Officer, all of whom are employed by Prime. None of the executive officers receive any direct remuneration from the Company nor do any hold any options granted by the Company. Their positions with the Company are not subject to a vote of stockholders. The ages, terms of service and all positions and offices with the Company, Prime, BCM, other affiliated entities, other principal occupations, business experience and directorships with other publicly-held companies during the last five years or more are set forth below.

 

Mark W. Branigan, 50

 

Executive Vice President—Multi-Family Construction (since September 2004); Executive Vice President—Residential (June 2001 to September 2004), Director (September 2000 to June 2001) and Executive

 

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Vice President and Chief Financial Officer (August 2000 to June 2001) of the Company, ARI, IOT and BCM; Executive Vice President—Multi-Family Construction (since September 2004); Executive Vice President—Residential (July 2003 to September 2004) of Prime and PIAMI; Vice President—Director of Construction (August 1999 to August 2000) and Executive Vice President—Residential Asset Management (January 1992 to October 1997) of BCM, ARI and IOT; Vice President—Director of Construction (August 1999 to August 2000) and Executive Vice President—Residential Asset Management (January 1992 to October 1997) of American Realty Trust, Inc. (“ART”); Real Estate Consultant (November 1997 to July 1999).

 

Louis J. Corna, 57

 

Executive Vice President—General Counsel/Tax Counsel and Secretary (since February 2004), Executive Vice President—Tax (October 2001 to February 2004), Executive Vice President—Tax and Chief Financial Officer (June 2001 to October 2001) and Senior Vice President—Tax (December 2000 to June 2001) of the Company, ARI, IOT and BCM; Executive Vice President, General Counsel/Tax Counsel and Secretary (since February 2004), Executive Vice President—Tax (July 2003 to February 2004) of Prime and PIAMI; Private Attorney (January 2000 to December 2000); Vice President—Taxes and Assistant Treasurer (March 1998 to January 2000) of IMC Global, Inc.; Vice President—Taxes (July 1991 to February 1998) of Whitman Corporation.

 

Scott T. Lewis, 44

 

Executive Vice President and Chief Financial Officer (since December 1, 2004), Vice President and Principal Accounting Officer (July 2004 to November 2004) of the Company, ARI and Prime. For more than seven years prior to July 2004, Mr. Lewis was employed in various accounting capacities by Insignia/ESG, a publicly-held real estate company, directing finance and operations for the Central/Southeast region in his last position from 2002 through February 2004; Certified Public Accountant (since 1990).

 

In addition to the foregoing executive officers, the Company has several vice presidents and assistant secretaries who are not listed herein.

 

Officers

 

In addition to the foregoing officers, TCI has several vice presidents and assistant secretaries who are not listed herein.

 

Code of Ethics

 

TCI has adopted a code of ethics entitled “Code of Business Conduct and Ethics” that applies to all directors, officers, and employees (including those of the contractual Advisor to TCI). In addition, TCI has adopted a code of ethics entitled “Code of Ethics for Senior Financial Officers” that applies to the principal executive officer, president, principal financial officer, chief financial officer, principal accounting officer, and controller.

 

The text of these documents has been posted on TCI’s internet website at http://www.transconrealty-invest.com and are available in print to any stockholder who requests them.

 

Compliance with Section 16(a) of the Securities Exchange Act of 1934

 

Under the securities laws of the United States, the directors, executive officers, and any persons holding more than ten percent of TCI’s shares of Common Stock are required to report their share ownership and any changes in that ownership to the Securities and Exchange Commission (the “Commission”). Specific due dates for these reports have been established and TCI is required to report any failure to file by these dates during 2004. All of these filing requirements were satisfied by TCI’s directors, executive officers, and ten percent holders. In making these statements, TCI has relied on the written representations of its incumbent directors and executive officers and its ten percent holders and copies of the reports they have filed with the Commission.

 

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The Advisor

 

Although the Board of Directors is directly responsible for managing the affairs of TCI and for setting the policies which guide it, TCI’s day-to-day operations are performed by Prime under the supervision of the Board. The duties of Prime include, among other things, locating, investigating, evaluating and recommending real estate and mortgage note investment and sales opportunities as well as financing and refinancing sources. Prime also serves as a consultant to the Board in connection with the business plan and investment decisions made by the Board.

 

BCM served as TCI’s advisor from March 1989 to June 30, 2003. Effective July 1, 2003, BCM was replaced as contractual advisor to TCI by PAMI under the same terms as BCM’s advisory agreement. PIAMI is owned by Realty Advisors (80.0%) and Syntek West, Inc. (20.0%), related parties. Syntek West, Inc. is owned by Gene Phillips. Effective August 18, 2003, PAMI changed its name to Prime Income Asset Management, Inc., (“PIAMI”). On October 1, 2003, Prime, which is owned 100% by PIAMI, replaced PIAMI as the advisor to TCI. The duties of Prime include, among other things, locating, investigating, evaluating and recommending real estate and mortgage note investment and sales opportunities, as well as financing and refinancing sources. Prime also serves as a consultant in connection with TCI’s business plan and investment decisions made by the Board.

 

Prime is a company of which Messrs. Branigan, Corna, and Lewis serve as executive officers. Prime is indirectly owned by a trust for the children of Gene E. Phillips. Mr. Phillips is not an officer or director of Prime, but serves as a representative of the trust, is involved in daily consultation with the officers of Prime and has significant influence over the conduct of Prime’s business, including the rendering of advisory services and the making of investment decisions for itself and for TCI.

 

Under the Advisory Agreement, Prime is required to annually formulate and submit, for Board approval, a budget and business plan containing a twelve-month forecast of operations and cash flow, a general plan for asset sales and purchases, lending, foreclosure and borrowing activity, and other investments, and Prime is required to report quarterly to the Board on TCI’s performance against the business plan. In addition, all transactions require prior Board approval, unless they are explicitly provided for in the approved business plan or are made pursuant to authority expressly delegated to Prime by the Board.

 

The Advisory Agreement also requires prior Board approval for the retention of all consultants and third party professionals, other than legal counsel. The Advisory Agreement provides that Prime shall be deemed to be in a fiduciary relationship to the stockholders; contains a broad standard governing Prime’s liability for losses by TCI; and contains guidelines for Prime’s allocation of investment opportunities as among itself, TCI and other entities it advises.

 

The Advisory Agreement provides for Prime to be responsible for the day-to-day operations of TCI and to receive an advisory fee comprised of a gross asset fee of .0625% per month (.75% per annum) of the average of the gross asset value (total assets less allowance for amortization, depreciation or depletion and valuation reserves) and an annual net income fee equal to 7.5% of TCI’s net income.

 

The Advisory Agreement also provides for Prime to receive an annual incentive sales fee equal to 10.0% of the amount, if any, by which the aggregate sales consideration for all real estate sold by TCI during such fiscal year exceeds the sum of: (1) the cost of each such property as originally recorded in TCI’s books for tax purposes (without deduction for depreciation, amortization or reserve for losses), (2) capital improvements made to such assets during the period owned, and (3) all closing costs, (including real estate commissions) incurred in the sale of such real estate; provided, however, no incentive fee shall be paid unless (a) such real estate sold in such fiscal year, in the aggregate, has produced an 8.0% simple annual return on the net investment including capital improvements, calculated over the holding period before depreciation and inclusive of operating income and sales consideration and (b) the aggregate net operating income from all real estate owned for each of the prior and current fiscal years shall be at least 5.0% higher in the current fiscal year than in the prior fiscal year.

 

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Additionally, pursuant to the Advisory Agreement Prime or an affiliate of Prime is to receive an acquisition commission for supervising the acquisition, purchase or long-term lease of real estate equal to the lesser of (1) up to 1.0% of the cost of acquisition, inclusive of commissions, if any, paid to non-affiliated brokers or (2) the compensation customarily charged in arm’s-length transactions by others rendering similar property acquisition services as an ongoing public activity in the same geographical location and for comparable property, provided that the aggregate purchase price of each property (including acquisition fees and real estate brokerage commissions) may not exceed such property’s appraised value at acquisition. Prime does not receive such a commission on acquisitions from an affiliated or related party.

 

The Advisory Agreement requires Prime or any affiliate of Prime to pay to TCI, one-half of any compensation received from third parties with respect to the origination, placement or brokerage of any loan made by TCI; provided, however, that the compensation retained by Prime or any affiliate of Prime shall not exceed the lesser of (1) 2.0% of the amount of the loan commitment or (2) a loan brokerage and commitment fee which is reasonable and fair under the circumstances.

 

The Advisory Agreement also provides that Prime or an affiliate of Prime is to receive a mortgage or loan acquisition fee with respect to the acquisition or purchase of any existing mortgage loan by TCI equal to the lesser of (1) 1.0% of the amount of the loan purchased or (2) a brokerage or commitment fee which is reasonable and fair under the circumstances. Such fee will not be paid in connection with the origination or funding of any mortgage loan by TCI.

 

Under the Advisory Agreement, Prime or an affiliate of Prime also is to receive a mortgage brokerage and equity refinancing fee for obtaining loans or refinancing on properties equal to the lesser of (1) 1.0% of the amount of the loan or the amount refinanced or (2) a brokerage or refinancing fee which is reasonable and fair under the circumstances; provided, however, that no such fee shall be paid on loans from Prime or an affiliate of Prime without the approval of TCI’s Board of Directors. No fee shall be paid on loan extensions.

 

Under the Advisory Agreement, Prime receives reimbursement of certain expenses incurred by it in the performance of advisory services.

 

Under the Advisory Agreement, all or a portion of the annual advisory fee must be refunded by the Advisor if the Operating Expenses of TCI (as defined in the Advisory Agreement) exceed certain limits specified in the Advisory Agreement based on the book value, net asset value and net income of TCI during the fiscal year. BCM, as advisor at the time, was required to refund $1.4 million of the 2002 advisory fee under this provision and Prime was required to refund $1.3 million of the 2003 advisory fee under this provision. Prime was not required to refund any of the 2004 advisory fee to TCI.

 

Additionally, if management were to request that Prime render services to TCI other than those required by the Advisory Agreement, Prime or an affiliate of Prime separately would be compensated for such additional services on terms to be agreed upon from time to time. As discussed below, under “Property Management”, TCI has hired Triad Realty Services, Ltd. (“Triad”), an affiliate of BCM, to provide property management services for TCI’s properties. Also as discussed below, under “Real Estate Brokerage” TCI had engaged, on a non-exclusive basis, Regis Realty, Inc. (“Regis”), a related party, to perform brokerage services for TCI until December 2002. Beginning January 1, 2003, Regis Realty I LLC performs brokerage services for TCI.

 

Prime may assign the Advisory Agreement only with the prior consent of TCI.

 

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The directors and principal officers of Prime are set forth below.

 

Mickey N. Phillips:

  

Director

Ryan T. Phillips:

  

Director

Mark W. Branigan:

  

Executive Vice President— Residential

Louis J. Corna:

  

Executive Vice President—General Counsel, Executive Vice President—Tax, Secretary

Scott T. Lewis:

  

Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer

Dan S. Allred:

  

Senior Vice President—Land Development

 

Mickey N. Phillips is Gene E. Phillips’ brother and Ryan T. Phillips is Gene E. Phillips’ son. Gene E. Phillips serves as a representative of the trust established for the benefit of his children, which indirectly owns Prime and, in such capacity, has substantial contact with the management of Prime and input with respect to its performance of advisory services to TCI.

 

Property Management

 

Since February 1, 1990, affiliates of BCM have provided property management services to TCI. Currently, Triad provides such property management services. Triad subcontracts with other entities for the provision of property-level management services to TCI. The general partner of Triad is BCM. The limited partner of Triad is Highland Realty Services, Inc. Triad subcontracts the property-level management and leasing of 24 of TCI’s commercial properties to Regis I, which is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad. Regis I also receives real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. Regis Hotel I, LLC, a related party, manages TCI’s four hotels. The sole member of Regis I and Regis Hotel I, LLC is Highland.

 

Real Estate Brokerage

 

Regis I also provides real estate brokerage services to TCI (on a non-exclusive basis), and is entitled to receive a real estate commission for property purchases and sales in accordance with the following sliding scale of total fees to be paid: (1) maximum fee of 4.5% on the first $2.0 million of any purchase or sale transaction of which no more than 3.5% is to be paid to Regis I or affiliates; (2) maximum fee of 3.5% on transaction amounts between $2.0 million-$5.0 million of which no more than 3.0% is to be paid to Regis I or affiliates; (3) maximum fee of 2.5% on transaction amounts between $5.0 million-$10.0 million of which no more than 2.0% is to be paid to Regis I or affiliates; and (4) maximum fee of 2.0% on transaction amounts in excess of $10.0 million of which no more than 1.5% is to be paid to Regis I or affiliates.

 

ITEM 11.    EXECUTIVE COMPENSATION

 

TCI has no employees, payroll or benefit plans and pays no compensation to its executive officers. The executive officers of TCI, who are also officers or employees of Prime, TCI’s advisor, are compensated by Prime. Such executive officers perform a variety of services for Prime and the amount of their compensation is determined solely by Prime. Prime does not allocate the cash compensation of its officers among the various entities for which it serves as advisor. See ITEM 10. “DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT—The Advisor” for a more detailed discussion of the compensation payable to Prime.

 

The only remuneration paid by TCI is to the directors who are not officers or directors of Prime or its affiliated companies. The Independent Directors (1) review the business plan of TCI to determine that it is in the best interest of stockholders, (2) review the advisory contract, (3) supervise the performance of the advisor and review the reasonableness of the compensation paid to the advisor in terms of the nature and quality of services

 

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performed, (4) review the reasonableness of the total fees and expenses of TCI and (5) select, when necessary, a qualified independent real estate appraiser to appraise properties acquired.

 

Each Independent Director receives compensation in the amount of $30,000 per year, plus reimbursement for expenses. The Chairman of the Board receives an additional fee of $3,000 per year. In addition, each Independent Director receives an additional fee of $1,000 per day for any special services rendered by him to TCI outside of his ordinary duties as director, plus reimbursement of expenses.

 

During 2004, $201,729 was paid to the Independent Directors in total directors’ fees for all services, including the annual fee for service during the period January 1, 2004 through December 31, 2004, and 2004 special service fees as follows: Earl D. Cecil, $15,250; Sharon Hunt, $43,880; Ted R. Munselle, $43,880; Ted P. Stokely, $50,131; and Martin L. White, $48,588.

 

Director’s Stock Option Plan

 

TCI has established a Director’s Stock Option Plan (“Director’s Plan”) for the purpose of attracting and retaining Directors who are not officers or employees of TCI or Prime or BCM. The Director’s Plan provides for the grant of options that are exercisable at fair market value of TCI’s Common Stock on the date of grant. The Director’s Plan was approved by stockholders at their annual meeting on October 10, 2000, following which each then-serving Independent Director was granted options to purchase 5,000 shares of Common Stock of TCI. On January 1 of each year, each Independent Director receives options to purchase 5,000 shares of Common Stock. The options are immediately exercisable and expire on the earlier of the first anniversary of the date on which a Director ceases to be a Director or 10 years from the date of grant.

 

As of March 1, 2005, TCI had 140,000 shares of Common Stock reserved for issuance under the Director’s Stock Option Plan of which 40,000 options were outstanding.

 

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Performance Graph

 

The following performance graph compares the cumulative total stockholder return on TCI’s shares of Common Stock with the Dow Jones US Total Market Index (“DJ Total Market Index”) and the Dow Jones Real Estate Investment Index (“DJ Real Estate Index”). The comparison assumes that $100 was invested on December 31, 1998, in TCI’s shares of Common Stock and in each of the indices and further assumes the reinvestment of all distributions. Past performance is not necessarily an indicator of future performance.

 

COMPARISON OF FIVE YEARS CUMULATIVE TOTAL RETURN

 

LOGO

 

     1999

   2000

   2001

   2002

   2003

   2004

TCI

   100.00    73.44    132.82    145.98    138.45    117.92

DJ Real Estate Index

   100.00    127.51    142.56    147.75    202.25    265.38

DJ Total U.S. Market Index

   100.00    90.87    80.04    62.37    81.54    91.45

 

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ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table provides information as of December 31, 2004 regarding compensation plans (including individual compensation arrangements) under which equity securities of TCI are authorized for issuance.

 

Plan Category


  

Number of Securities to

be Issued Upon Exercise

of Outstanding Options,

Warrants and Rights
(a)


   Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)


  

Number of Securities
Remaining Available for
Future Issuance Under Equity

Compensation Plans
(Excluding Securities
Reflected in Column (a))

(c)


2000 Stock Option Plan approved by stockholders

   —        —      300,000

Directors Stock Option Plan approved by stockholders

   30,000    $ 17.19    50,000
    
  

  

Total

   30,000    $ 17.19    350,000
    
  

  

 

Security Ownership of Certain Beneficial Owners

 

The following table sets forth the ownership of TCI’s Common Stock, both beneficially and of record, both individually and in the aggregate, for those persons or entities known to be beneficial owners of more than 5.0% of the outstanding shares of Common Stock as of the close of business on March 24, 2005.

 

Name and Address of Beneficial Owner


  

Amount and

Nature

of Beneficial
Ownership


   Approximate
Percent of
Class(1)


 

EQK Holdings, Inc.(2)

1800 Valley View Lane

Suite 300

Dallas, Texas 75234

   5,278,149    66.8 %

Transcontinental Realty Acquisition Corporation(3)

1800 Valley View Lane

Suite 100

Dallas, Texas 75234

   1,213,226    15.4 %

(1)   Percentage is based upon 7,900,869 shares of Common Stock outstanding at March 24, 2005.
(2)   EQK Holdings, Inc. (“EQK”) is a wholly-owned subsidiary of ART, which is a wholly-owned subsidiary of ARI.
(3)   Transcontinental Realty Acquisition Corporation (“TRAC”) is a wholly-owned subsidiary of ARI.

 

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Security Ownership of Management.

 

The following table sets forth the ownership of TCI’s Common Stock, both beneficially and of record, both individually and in the aggregate, for the directors and executive officers of TCI as of the close of business on March 24, 2005.

 

Name of Beneficial Owner


  Amount and
Nature of
Beneficial
Ownership


    Approximate
Percent of
Class(1)


 

Mark W. Branigan

  6,491,375 (2)   82.2 %

Henry A. Butler

  6,491,375 (3)   82.2 %

Louis J. Corna

  6,491,375 (2)   82.2 %

Scott T. Lewis

  6,491,375 (2)   82.2 %

Ted P. Stokely

  6,506,375 (3)(4)   82.4 %

Martin L. White

  6,506,375 (3)(5)   82.4 %

Sharon Hunt

  6,496,375 (3)(6)   82.2 %

Ted Munselle

  6,496,375 (3)(7)   82.2 %

All Directors and Executive Officers as a group (8 individuals)

  6,506,375 (2)(3)(4)(5)(6)(7)   82.4 %

(1)   Percentage is based upon 7,900,869 shares of Common Stock outstanding at March 24, 2005 and 20,000 shares which may be issued under existing Director Stock Options.
(2)   Includes 5,278,149 shares owned by EQK and 1,213,226 shares owned by TRAC. Each of the executive officers of ARI may be deemed to be beneficial owners of such shares by virtue of their positions as executive officers of ARI and its subsidiaries, EQK and TRAC. The executive officers of TCI disclaim such beneficial ownership.
(3)   Includes 5,278,149 shares owned by EQK and 1,213,226 shares owned by TRAC. Messrs. Butler, Stokely and Munselle and Ms. Hunt may be deemed to be beneficial owners of such shares by virtue of their positions as directors of ARI. Messrs. Butler, Stokely and Munselle and Ms. Hunt disclaim such beneficial ownership.
(4)   Includes 15,000 shares which may be acquired by Mr. Stokely pursuant to the Director Stock Option Plan.
(5)   Includes 15,000 shares which may be acquired by Mr. White pursuant to the Director Stock Option Plan.
(6)   Includes 5,000 shares which may be acquired by Ms. Hunt pursuant to the Director Stock Option Plan.
(7)   Includes 5,000 shares which may be acquired by Mr. Munselle pursuant to the Director Stock Option Plan.

 

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Certain Business Relationships

 

In February 1989, the Board of Directors voted to retain BCM as TCI’s advisor. See ITEM 10. “DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR TO THE REGISTRANT—The Advisor.” Effective July 1, 2004, Prime replaced BCM as the contractual advisor to TCI. Prime is indirectly owned by a trust for the children of Gene E. Phillips. Mr. Phillips is not an officer or director of Prime, but serves as a representative of the trust, is involved in daily consultation with the officers of Prime and has significant influence over the conduct of Prime’s business, including the rendering of advisory services and the making of investment decisions for itself and for TCI.

 

Since February 1, 1991, affiliates of BCM have provided property management services to TCI. Currently, Triad provides such property management services. Triad subcontracts the property-level management and leasing of 24 of TCI’s commercial properties to Regis I and its four hotels to Regis Hotel I, LLC.

 

Regis I also provides real estate brokerage services for TCI, on a non-exclusive basis, and receives brokerage commissions in accordance with the brokerage agreement.

 

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One of TCI’s Directors (Ted Stokely) also serves as a director of IORI. The Director owes fiduciary duties to IORI as well as to TCI under applicable law. At December 31, 2004, TCI owned approximately 24.0% of the outstanding common shares of IORI. Prime also serves as advisor to ARI. All of TCI’s directors also serve as Directors of ARI. Messrs. Branigan, Corna, and Lewis serve as executive officers of ARI and Prime and Messrs. Branigan and Corna serve as executive officers of IORI.

 

Related Party Transactions

 

Historically, TCI has engaged in and may continue to engage in business transactions, including real estate partnerships, with related parties. Management believes that all of the related party transactions represented the best investments available at the time and were at least as advantageous to TCI as could have been obtained from unrelated third parties.

 

Operating Relationships

 

In the year ended December 31, 2004, TCI received $69,000 in rent from BCM for BCM’s lease at Addison Hanger. BCM owns a corporate jet that is housed at the hanger and TCI has available space at the hanger.

 

Property Transactions

 

In January 2002, TCI purchased 100% of the outstanding common shares of ART Two Hickory Corporation from ARI, for $4.4 million. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.” The purchase price was determined based upon the market value of the property exchanged, using a market rate multiple of net operating income (“cap rate”) of 7.0%. The business purpose of the transaction was for TCI to make an equity investment in Two Hickory anticipating a profitable return.

 

In February 2002, TCI sold a $2.0 million senior participation interest in a loan to IORI. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.” Management determined that TCI could benefit from the increase in cash and decrease its notes receivable outstanding portfolio.

 

In February 2002, a short term working capital loan to BCM for a total of $2.5 million was assumed by TCI. The loan is secured by the Stone Oak Apartments in San Antonio, Texas, and requires all principal and interest due and payable on April 28, 2003. TCI sold Stone Oak Apartments in July 2003 and paid the principal and accrued interest in full.

 

In March 2002, TCI paid cash of $600,000 and received from ARI two parcels of land, a 24.5 acre tract of Rasor land, a 16.89 acre tract of Lakeshore Villas land, and the 45,623 sq. ft. Oaktree Village Shopping Center in exchange for the 80,278 sq. ft. Plaza on Bachman Creek Shopping Center. The exchange value prices for the shopping centers were determined based on a cap rate of 10.5% and the value for the Rasor and Lakeshore Villas land was determined on appraised rates of $3.36 and $1.29, respectively, per square foot. The business purpose of the transaction was for TCI to construct apartments on the Rasor and Lakeshore Villas land and to give ample value for the property TCI exchanged, the Oaktree Shopping Center was added to the transaction.

 

In April 2002, TCI purchased 100% of the following entities from ARI: Garden Confederate Point, L.P., Garden Foxwood, L.P., Garden Woodsong, L.P. and ART One Hickory Corporation for $10.0 million. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.” The purchase price for these entities was determined based on a cap rate of 8.41% for the partnerships and 7.0% for ART One Hickory Corporation. The business purpose of the transaction was for TCI to make an equity investment in the entities anticipating a profitable return.

 

In June 2002, TCI purchased Centura Tower, Ltd. partnership, which owns the Centura Tower Office Building from ARI for $50.0 million. The purchase price for the Centura Tower was determined based on appraised value and replacement cost. The business purpose of the transaction was for TCI to acquire a Class A office building with significant upside potential anticipating a profitable return.

 

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Also in June 2002, TCI purchased five parcels of unimproved land from ARI: the Hollywood Casino, Marine Creek, Mason Park, Nashville and Palm Desert land parcels. The purchase price of the Hollywood Casino land was determined based on an appraised rate of $9.10 per square foot. The business purpose of the transaction was for TCI to consolidate its holdings within the Mercer Crossing development and to develop apartments on these four tracts of land. The purchase price for the Marine Creek, Mason Park, Nashville and Palm Desert land parcels was determined based on appraised rates of $2.00, $3.56, $4.00 and $1.48 per square foot, respectively.

 

In October 2002, a short term working capital loan to BCM for a total of $4.0 million was assumed by TCI. The loan is secured by the Red Cross land, requires quarterly payments and was due in October 2002. This loan was extended to and paid in full in September 2003.

 

In December 2002, TCI purchased the NLP/CH, Ltd. partnership, which owns the Centura land parcel, from ARI. The purchase price was determined based on an appraised rate of $34.89 per square foot. The business purpose of the transaction was for TCI to construct apartments on the land.

 

During 2002, TCI’s Board of Directors authorized the Chief Financial Officer of the Company to advance funds either to or from the Company, through BCM, in an amount up to $15.0 million, on the condition that such advances shall be repaid in cash or transfers of assets within 90 days. Several property transfers from BCM or Prime were made during 2004 and 2003 to reduce the affiliate balance. Each of these transactions was approved by TCI’s Board of Directors.

 

In March 2003, TCI purchased the Bridgeview Plaza and Cullman shopping centers from ARI for $8.7 million and $2.0 million, respectively, to satisfy debt. The purchase price was determined using a market rate multiple of net operation income. TCI assumed debt of $2.7 million on Cullman. TCI received $5.1 million in cash on the subsequent financing of the shopping center. See NOTE 2. “REAL ESTATE.”

 

In March 2003, TCI sold a note receivable for $2.6 million to a third party. The proceeds of this sale were received by BCM. The funds increased TCI’s affiliate receivable from BCM. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”

 

In May 2003, TCI sold its Solco-Valley Ranch land parcel. The proceeds of the sale were received by BCM. The funds increased TCI’s affiliate receivable from BCM $2.0 million. See NOTE 2. “REAL ESTATE.”

 

In June 2003, TCI received the proceeds from the refinancing of an ARI property. This transaction reduced TCI’s affiliate receivables from BCM by $757,000. See NOTE 7. “NOTES AND INTEREST PAYABLE.”

 

In July 2003, TCI paid $1.7 million to BCM for a pro-rata share of prior year’s legal fees in the defense of Gene Phillips. Mr. Phillips is a related party and advisor to TCI.

 

In September 2003, TCI sold the Oak Tree Village shopping center to a third party. The proceeds of the sale were received by ARI. The funds were used to increase TCI’s affiliate receivable from Prime by $1.6 million. See NOTE 2. “REAL ESTATE.”

 

In September 2003, TCI sold Palm Desert land parcel. The proceeds of the sale were received by ARI. The funds increased TCI’s affiliate receivable from Prime by $2.6 million. See NOTE 2. “REAL ESTATE.”

 

In November 2003, TCI financed the Rasor land parcel. The proceeds of the financing were received by ARI. The funds increased TCI’s affiliate receivable from Prime by $1.2 million. See NOTE 7. “NOTES AND INTEREST PAYABLE.”

 

In November 2003, ARI paid $6.3 million in principal, accrued interest and closing costs on behalf of TCI as payment of the notes payable on TCI’s Allen land parcels. These funds decreased TCI’s affiliate receivable from Prime.

 

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In November 2003, TCI received ARI’s sales proceeds on the sale of the Confederate Point apartments. $2.1 million was used to pay off TCI’s note receivable from ARI and $1.1 million reduced TCI’s affiliate receivable from Prime. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”

 

In December 2003, TCI sold Treehouse Apartments and Parkway Centre to IORI for $11.5 million, including the assumption of debt. This transaction increased TCI’s affiliate receivable from Prime by $4.8 million. See NOTE 2. “REAL ESTATE.”

 

In December 2003, TCI sold Eagle Crest land to IORI for $4.0 million. This transaction decreased TCI’s intercompany payable to IORI. See NOTE 2. “REAL ESTATE.”

 

In December 2003, TCI purchased a note receivable from ARI that is secured by a second lien on raw land for $2.4 million. This transaction was approved by TCI’s Board of Directors. TCI’s affiliate receivables from ARI and Prime were reduced by $2.4 million as a result of this transaction. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”

 

In December 2003, TCI sold six properties to subsidiaries of United Housing Foundation, Inc. (“UHF”), a Texas Non-Profit 501(c)3 Corporation. TCI sold 10.72 acres of Marine Creek land for $1.5 million, the Limestone at Vista Ridge apartments for $19.0 million, the Cliffs of El Dorado apartments for $13.4 million, the Limestone Canyon apartments for $18.0 million, the Sendero Ridge apartments for $29.4 million, and Tivoli apartments for $16.1 million. All of the transactions include the assumption of debt and notes receivable to TCI for the remainder of the purchase price. Ted Stokely, Chairman of the Board of TCI, is the General Manager of UHF. Richard Humphrey, who is employed by Regis Realty I, LLC, an affiliate, is President of UHF. Due to UHF being considered a related party to TCI and TCI having continued involvement and control of these entities, these transactions will not be recorded as sales. Instead, these transactions will be accounted for on the deposit method and the properties and corresponding debt will continue to be consolidated by TCI. All of these transactions were approved by TCI’s Board of Directors. Mr. Stokely abstained from voting on all of these transactions. The loans on Limestone Canyon apartments and Limestone at Vista Ridge apartments were approved by their prospective lenders for transfer to the purchasing entities. TCI has guaranteed the loans on both of these transfers. Also, Marine Creek land and the Cliffs of El Dorado apartments were recognized as sales during 2004. See NOTE 2. “REAL ESTATE.” Management is currently seeking lender approval on the transfer of the notes associated with the Tivoli apartments and Sendero Ridge apartments.

 

In December 2003, TCI sold the Lamar/Palmer land parcel to a subsidiary of UHF for $2.0 million in the form of a seller note receivable. Due to no cash received and common control, TCI has elected to continue consolidating this tract of land until the requirements for a sale have been met. No sale has recognized and no note receivable has been recorded.

 

In January 2004, TCI purchased the Vista Ridge land tract from ARI for $2.6 million. This transaction decreased TCI’s affiliate receivable with Prime by $2.6 million. See NOTE 2. “REAL ESTATE.”

 

In February 2004, TCI incurred a debt for $1.0 million used for the purchase of land by ARI. This transaction increased TCI’s affiliate receivable with Prime by $2.6 million.

 

In February 2004, TCI recorded the sale of a tract of Marine Creek land originally sold to a related party in December 2003. This transaction was not recorded as a sale for accounting purposes in December 2003 and was recorded as a TCI refinancing transaction in February 2004. TCI received $1.2 million in cash from the related party in February 2004 as payment on the land. TCI has a note receivable balance of $270,000 remaining that bears interest at 12.00% and matures in April 2009. TCI recorded the sale of the Marine Creek land tract due to the payment received on the note receivable. See NOTE 2. “REAL ESTATE.”

 

In May 2004, TCI purchased the Treehouse Apartments from an affiliate with a net purchase price of $7.5 million for the assumption of debt and a note receivable, less cash received of $498,000. The note receivable

 

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was from the sale of the Cliffs of El Dorado Apartments to a related party in 2003. At that time, the sale of the Cliffs of El Dorado Apartments was not recorded as a sale for accounting purposes. TCI recorded the sale of the Cliffs of El Dorado in May 2004 due to payment received for the Cliffs of El Dorado note receivable. See NOTE 2. “REAL ESTATE.”

 

In January 2004, TCI purchased the Lacy Longhorn land tract from ARI for $4.5 million. This transaction decreased TCI’s affiliate receivable with Prime by $4.5 million. See NOTE 2. “REAL ESTATE.”

 

In June 2004, TCI sold Waters Edge IV apartments to ARI for $5.0 million. This transaction increased TCI’s affiliate receivable with Prime by $5.0 million. See NOTE 2. “REAL ESTATE.”

 

In June 2004, TCI refinanced the 1010 Common office building, Lacy Longhorn land and certain tracts of Marine Creek land. TCI paid-off an existing note payable for ARI for $1.9 million, increasing the affiliate receivable balance by $1.9 million.

 

In September 2004, TCI sold Limestone Canyon II land to a subsidiary of UHF for $720,000 in the form of a seller note receivable. Due to no cash received and common control, TCI has elected to continue consolidating this tract of land until the requirements for a sale have been met. No sale was recognized and no note receivable has been recorded.

 

In December 2003, TCI’s Board of Directors approved the payment to Regis I of a six percent (6%) construction management fee on all construction projects in progress at December 31, 2003, to be applied to all costs incurred during 2003 on each project. Construction management fees of $5.6 million for 2004 and $4.1 million for 2003 were treated as reductions in the affiliate receivable balance from Prime.

 

As more fully described in ITEM 2. “PROPERTIES-Real Estate,” TCI is a partner with IORI in Nakash Income Associates. TCI owns 345,728 shares of IORI’s Common Stock, an approximate 24.0% interest. At December 31, 2004, the market value of the IORI common shares was $5.5 million.

 

At December 31, 2004, TCI owned 746,972 shares of ARI common stock which were primarily purchased in open market transactions in 1990 and 1991 at a total cost of $1.6 million. The officers of TCI also serve as officers of ARI. Prime also serves as advisor to ARI and at March 24, 2005, ARI owned approximately 82.2% of TCI’s outstanding Common Stock. At December 31, 2004, the market value of the ARI common shares owned by TCI was $7.2 million.

 

In 2004, TCI paid Prime, its affiliates and related parties $8.7 million in advisory, incentive and net income fees, $1.4 million in mortgage brokerage and equity refinancing fees, $422,000 in property acquisition fees, $6.3 million in real estate brokerage commissions, $5.6 million in construction supervision fees and $2.3 million in property and construction management fees and leasing commissions, net of property management fees paid to subcontractors, other than affiliates of Prime. In addition, as provided in the Advisory Agreement, Prime received cost reimbursements of $2.2 million.

 

In addition, from time-to-time, TCI and its affiliates have made advances to each other, which generally have not had specific repayment terms and have been reflected in TCI’s financial statements as other assets or other liabilities. At December 31, 2004, TCI had receivables of $1.4 million from Regis Hotel Corporation. Also at December 31, 2004, TCI owed $829,000, $1.6 million and $260,000 to Prime, Regis I and IORI, respectively.

 

Restrictions on Related Party Transactions

 

Article FOURTEENTH of TCI’s Articles of Incorporation provides that TCI shall not, directly or indirectly, contract or engage in any transaction with (1) any director, officer or employee of TCI, (2) any director, officer or employee of the advisor, (3) the advisor or (4) any affiliate or associate (as such terms are defined in

 

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Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of any of the aforementioned persons, unless (a) the material facts as to the relationship among or financial interest of the relevant individuals or persons and as to the contract or transaction are disclosed to or are known by the Board of Directors or the appropriate committee thereof and (b) the Board of Directors or committee thereof determines that such contract or transaction is fair to TCI and simultaneously authorizes or ratifies such contract or transaction by the affirmative vote of a majority of independent directors of TCI entitled to vote thereon. Article FOURTEENTH defines an “Independent Director” as one who is neither an officer or employee of TCI nor a director, officer or employee of TCI’s advisor.

 

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The following table sets for the aggregate fees for professional services rendered to or for TCI by Farmer, Fuqua and Huff, L.P. and BDO Seidman, LLP for 2004 and 2003:

 

     2004

   2003

Type of Fee


   Farmer, Fuqua
& Huff


   BDO Seidman

  

Audit Fees

   $ 86,148    $ 102,184    $ 219,524

Audit Related Fees

     —        —        —  

Tax Fees

     9,550      50,021      61,093

All Other Fees

     —        —        —  
    

  

  

Total

   $ 95,698    $ 152,205    $ 280,617
    

  

  

 

The audit fees for 2004 and 2003, respectively, were for professional services rendered for the audits and reviews of the consolidated financial statements of TCI. Tax fees for 2004 and 2003, respectively, were for services related to federal and state tax compliance and advice. All of TCI’s 2003 accounting fees were paid to BDO Seidman, LLP.

 

All services rendered by the principal auditors are permissible under applicable laws and regulations and were pre-approved by either the Board of Directors or the Audit Committee, as required by law. The fees paid the principal auditors for services as described in the above table fall under the categories listed below:

 

Audit Fees.    These are fees for professional services performed by the principal auditor for the audit of the Company’s annual financial statements and review of financial statements included in the Company’s 10-Q filings and services that are normally provided in connection with statutory and regulatory filing or engagements.

 

Audit-Related Fees.    These are fees for assurance and related services performed by the principal auditor that are reasonably related to the performance of the audit or review of the Company’s financial statements. These services include attestations by the principal auditor that are not required by statute or regulation and consulting on financial accounting/reporting standards.

 

Tax Fees.    These are fees for professional services performed by the principal auditor with respect to tax compliance, tax planning, tax consultation, returns preparation and review of returns. The review of tax returns includes the Company and its consolidated subsidiaries.

 

All Other Fees.    These are fees for other permissible work performed by the principal auditor that do not meet the above category descriptions.

 

These services are actively monitored (as to both spending level and work content) by the Audit Committee to maintain the appropriate objectivity and independence in the principal auditor’s core work, which is the audit of the Company’s consolidated financial statements.

 

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The Audit Committee has established policies and procedures for the approval and pre-approval of audit services and permitted non-audit services. The Audit Committee has the responsibility to engage and terminate TCI’s independent auditors, to pre-approve their performance of audit services and permitted non-audit services, to approve all audit and non-audit fees, and to set guidelines for permitted non-audit services and fees. All fees for 2004 and 2003 were pre-approved by the Audit Committee or were within the pre-approved guidelines for permitted non-audit services and fees established by the Audit Committee, and there were no instances of waiver of approved requirements or guidelines during the same periods.

 

Under the Sarbanes-Oxley Act of 2002 (the “SO Act”), and the rules of the Securities and Exchange Commission (the “SEC”), the Audit Committee of the Board of Directors is responsible for the appointment, compensation and oversight of the work of the independent auditor. The purpose of the provisions of the SO Act and the SEC rules for the Audit Committee role in retaining the independent auditor is two-fold. First, the authority and responsibility for the appointment, compensation and oversight of the auditors should be with directors who are independent of management. Second, any non-audit work performed by the auditors should be reviewed and approved by these same independent directors to ensure that any non-audit services performed by the auditor do not impair the independence of the independent auditor. To implement the provisions of the SO Act, the SEC issued rules specifying the types of services that an independent may not provide to its audit client, and governing the Audit Committee’s administration of the engagement of the independent auditor. As part of this responsibility, the Audit Committee is required to preapprove the audit and non-audit services performed by the independent auditor in order to assure that they do not impair the auditor’s independence. Accordingly, the Audit Committee has adopted a preapproval policy of audit and non-audit services (the “Policy”), which sets forth the procedures and conditions pursuant to which services to be performed by the independent auditor are to be preapproved. Consistent with the SEC rules establishing two different approaches to preapproving non-prohibited services, the Policy of the Audit Committee covers Preapproval of audit services, audit-related services, international administration tax services, non-U.S. income tax compliance services, pension and benefit plan consulting and compliance services, and U.S. tax compliance and planning. At the beginning of each fiscal year, the Audit Committee will evaluate other known potential engagements of the independent auditor, including the scope of work proposed to be performed and the proposed fees, and the approve or reject each service, taking into account whether services are permissible under applicable law and the possible impact of each non-audit service on the independent auditor’s independence from management. Typically, in addition to the generally preapproved services, other services would include due diligence for an acquisition that may or may not have been known at the beginning of the year. The Audit Committee has also delegated to any member of the Audit Committee designated by the Board or the financial expert member of the Audit Committee responsibilities to preapprove services to be performed by the independent auditor not exceeding $25,000 in value or cost per engagement of audit and non-audit services, and such authority may only be exercised when the Audit Committee is not in session.

 

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PART IV

 

ITEM 15.    EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENTS SCHEDULES

 

  (a)   The following documents are filed as part of this Report:

 

  1.   Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firms

 

Consolidated Balance Sheets—December 31, 2004 and 2003

 

Consolidated Statements of Operations—Years Ended December 31, 2004, 2003 and 2002

 

Consolidated Statements of Stockholders’ Equity—Years Ended December 31, 2004, 2003 and 2002

 

Consolidated Statements of Cash Flows—Years Ended December 31, 2004, 2003 and 2002

 

Notes to Consolidated Financial Statements

 

  2.   Financial Statement Schedules

 

Schedule III—Real Estate and Accumulated Depreciation

 

Schedule IV—Mortgage Loans on Real Estate

 

All other schedules are omitted because they are not applicable or because the required information is shown in the Consolidated Financial Statements or the Notes thereto.

 

  3.   Incorporated Financial Statements

 

Consolidated Financial Statements of Income Opportunity Realty Investors, Inc. (incorporated by reference to Item 8 of Income Opportunity Realty Investors, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004).

 

Consolidated Financial Statements of American Realty Investors, Inc. (incorporated by reference to Item 8 of American Realty Investors, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004).

 

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  (c)   Exhibits

 

The following documents are filed as Exhibits to this Report:

 

Exhibit
Number


 

Description of Exhibit


  3.0   Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to Exhibit No. 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).
  3.1  

Certificate of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc.,

(incorporated by reference to the Registrant’s Current Report on Form 8-K, dated June 3, 1996).

  3.2   Certificate of Amendment of Articles of Incorporation of Transcontinental Realty Investors, Inc., dated October 10, 2000 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
  3.3   Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., setting forth the Certificate of Designations, Preferences and Rights of Series A Cumulative Convertible Preferred Stock, dated October 20, 1998 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
  3.4   Certificate of Designation of Transcontinental Realty Investors, Inc., setting for the Voting Powers, Designations, References, Limitations, Restriction and Relative Rights of Series B Cumulative Convertible Preferred Stock, dated October 23, 2000 (incorporation by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
  3.5   Certificate of Designation of Transcontinental Realty Investors, Inc., Setting for the Voting Powers, Designating, Preferences, Limitations, Restrictions and Relative Rights of Series C Cumulative Convertible Preferred Stock, dated September 28, 2001 (incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
  3.6   Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc. Decreasing the Number of Authorized Shares of and Eliminating Series B Preferred Stock dated December 14, 2001 (incorporated by reference to Exhibit 3.7 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001).
  3.7   By-Laws of Transcontinental Realty Investors, Inc. (incorporated by reference to Exhibit No. 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).
10.0   Advisory Agreement dated as of October 1, 2003, between Transcontinental Realty Investors, Inc. and Prime Income Asset Management LLC (incorporated by reference to Exhibit 10.0 to the Registrant’s Current Report on Form 8-K for event occurring October 1, 2003).
14.0*   Code of Ethics for Senior Financial Officers.
21.0*   Subsidiaries of the Registrant.
31.0*   Rule 13a-14(a) Certification by Acting Principal Executive Officer and Chief Financial Officer.
32.0*   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*   Filed herewith.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

       

TRANSCONTINENTAL REALTY INVESTORS, INC.

Dated: March 31, 2005

  By:  

/s/    SCOTT T. LEWIS        


       

Scott T. Lewis

Executive Vice President and

Chief Financial Officer

(Principal Financial and Accounting Officer

and Acting Principal Executive Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

 

Signature


  

Title


 

Date


/s/    TED P. STOKELY        


Ted P. Stokely

  

Chairman of the Board and Director

  March 31, 2005

/s/    HENRY A. BUTLER        


Henry A. Butler

  

Director

  March 31, 2005

/s/    MARTIN L. WHITE        


Martin L. White

  

Director

  March 31, 2005

/s/    TED R. MUNSELLE        


Ted R. Munselle

  

Director

  March 31, 2005

/s/    SHARON HUNT        


Sharon Hunt

  

Director

  March 31, 2005

/s/    SCOTT T. LEWIS        


Scott T. Lewis

  

Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Acting Principal Executive Officer)

  March 31, 2005

 

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ANNUAL REPORT ON FORM 10-K

 

EXHIBIT INDEX

 

For the Year Ended December 31, 2004

 

Exhibit

Number


    

Description of Exhibit


  3.0      Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to Exhibit No. 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).
  3.1     

Certificate of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc.,

(incorporated by reference to the Registrant’s Current Report on Form 8-K, dated June 3, 1996).

  3.2      Certificate of Amendment of Articles of Incorporation of Transcontinental Realty Investors, Inc., dated October 10, 2000 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
  3.3      Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., setting forth the Certificate of Designations, Preferences and Rights of Series A Cumulative Convertible Preferred Stock, dated October 20, 1998 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
  3.4      Certificate of Designation of Transcontinental Realty Investors, Inc., setting for the Voting Powers, Designations, References, Limitations, Restriction and Relative Rights of Series B Cumulative Convertible Preferred Stock, dated October 23, 2000 (incorporation by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
  3.5      Certificate of Designation of Transcontinental Realty Investors, Inc., Setting for the Voting Powers, Designating, Preferences, Limitations, Restrictions and Relative Rights of Series C Cumulative Convertible Preferred Stock, dated September 28, 2001 (incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
  3.6      Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc. Decreasing the Number of Authorized Shares of and Eliminating Series B Preferred Stock dated December 14, 2001 (incorporated by reference to Exhibit 3.7 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001).
  3.7      By-Laws of Transcontinental Realty Investors, Inc. (incorporated by reference to Exhibit No. 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).
10.0      Advisory Agreement dated as of October 1, 2003, between Transcontinental Realty Investors, Inc. and Prime Income Asset Management LLC (incorporated by reference to Exhibit 10.0 to the Registrant’s Current Report on Form 8-K for event occurring October 1, 2003).
14.0 *    Code of Ethics for Senior Financial Officers.
21.0 *    Subsidiaries of the Registrant.
31.0 *    Rule 13a-14(a) Certification by Acting Principal Executive Officer and Chief Financial Officer.
32.0 *    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*   Filed herewith.

 

109