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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM................TO..................
COMMISSION FILE NUMBER 0-8003
-------
TARRAGON REALTY INVESTORS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 94-2432628
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 MONTICELLO, SUITE 200, DALLAS, TX 75205
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 599-2200
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
9% SERIES A SUBORDINATED DEBENTURES DUE JUNE 30, 2003
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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. [ ]
As of March 9, 1998, the Registrant had 1,286,897 shares of common stock
outstanding. Of the total shares outstanding, 898,894 were held by other than
those who may be deemed to be affiliated, for an aggregate value of $8,651,855
based on the last trade as reported by the National Association of Securities
Dealers Automated Quotations System on March 9, 1998. The basis of this
calculation does not constitute a determination by the Registrant that all of
such persons or entities are affiliates of the Registrant as defined in rule 405
of the Securities Act of 1933, as amended.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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INDEX TO
ANNUAL REPORT ON FORM 10-K
Page
----
PART I
Item 1. Business........................................................... 3
Item 2. Properties......................................................... 6
Item 3. Legal Proceedings.................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders................ 9
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters................................... 10
Item 6. Selected Financial Data............................................ 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......... 20
Item 8. Financial Statements and Supplementary Data........................ 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures............................. 45
PART III
Item 10. Directors, Executive Officers, and Advisor of the Registrant....... 45
Item 11. Executive Compensation............................................. 53
Item 12. Security Ownership of Certain Beneficial Owners and
Management....................................................... 54
Item 13. Certain Relationships and Related Transactions..................... 56
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.............................................. 58
Signature Page............................................................... 60
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3
PART I
ITEM 1. BUSINESS
General
Tarragon Realty Investors, Inc., (the "Company") is a Nevada corporation
incorporated April 2, 1997, and the ultimate successor in interest to Vinland
Property Trust (the "Trust"), a California business trust which was established
July 18, 1973, and commenced operations April 2, 1974. On July 10, 1997, the
shareholders of the Trust approved the conversion of the Trust into a Nevada
corporation, which was accomplished by incorporating the Trust as a California
corporation and merging it into the Company, a wholly-owned subsidiary of the
Trust, with the Company as the surviving entity. The effective date of the
merger of the Trust and the Company was July 25, 1997. References to the
Company, its Board of Directors, its stockholders, and its shares of common
stock in relation to dates prior to July 25, 1997, refer to the Trust, its Board
of Trustees, its shareholders, and its shares of beneficial interest. While the
Trust had a November 30 fiscal year end, the Company has a December 31 fiscal
year end. Accordingly, the Consolidated Financial Statements presented in ITEM
8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" include Statements of
Operations, Stockholders' Equity, and Cash Flows for the one month period ended
December 31, 1996, which represents the transition period related to the change
in fiscal year end. In certain instances throughout this report, matters at
December 31, 1997, (the fiscal year end of the Company) may be compared to
November 30, 1996, (the fiscal year end of the Trust). The Company has elected
to be treated as a Real Estate Investment Trust ("REIT"), as defined under
Sections 856 through 860 of the Internal Revenue Code of 1986 (the "Code"), and,
in the opinion of the Company's management, the Company and its predecessor have
continuously qualified for federal taxation as such.
The Company's principal offices are located at 3100 Monticello, Suite 200,
Dallas, Texas 75205. The telephone number is (214) 599-2200 and fax number is
(214) 599-2220. In the opinion of the Company's management, the Company's
offices are adequate for its present operations.
Business Description and Investment Objectives
The Company was established to provide investors with a professionally managed,
diversified portfolio of real estate investments selected to produce current
income and capital appreciation. The Company's primary business and only
industry segment is investing in income-producing real estate. At December 31,
1997, the Company's real estate portfolio, concentrated in Texas, Oklahoma,
California, and Florida, consisted of nine multifamily properties, a shopping
center, a combination office building and shopping center, a combination
office/retail/medical facility, an office park, and a farm and luxury residence.
The Company's principal objectives are to increase funds from operations, as
defined by the National Association of Real Estate Investment Trusts, and
maximize the value of its existing real estate through aggressive management and
consistent capital improvements. The Company intends to use the proceeds from
property sales and mortgage refinancings to expand its portfolio through
opportunistic purchases of income-producing properties, predominantly in markets
where the Company presently operates. Future investments will be focused on
older, mismanaged, or under-performing properties, both multifamily and
commercial, and will be selected based on initial rates of return and the
potential for appreciation through revenue-enhancing capital improvements and
proper management. Investments may take the form of joint ventures, new
construction, mortgage participations, and investments in partnerships as well
as outright purchases.
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ITEM 1. BUSINESS (Continued)
Possible Consolidation with National Income Realty Trust and Acquisition of
Advisor
On February 19, 1998, the Company and National Income Realty Trust ("NIRT")
jointly announced the agreement of their respective boards to form a single
consolidated entity with the Company, for convenience, as the survivor. The
surviving consolidated entity is intended to operate as a self-administered
REIT. The consolidation transaction will be submitted to shareholders of each of
the Company and NIRT for approval at special meetings to be held during 1998.
Under the proposed agreement, each shareholder of NIRT will receive 1.97 shares
of the Company's common stock for each share of beneficial interest of NIRT
held. NIRT, also a REIT, has a similar opportunistic approach to real estate
investment and had total consolidated assets of approximately $266 million as of
December 31, 1997. Upon the approval and consummation of the consolidation
transaction by the respective shareholders of each entity, the Company will
acquire Tarragon Realty Advisors, Inc. ("TRA" or the "Advisor"), the Company's
advisor since March 1, 1994, and NIRT's advisor since April 1, 1994, for 100,000
shares of the Company's common stock and options to acquire additional shares of
the Company's common stock at prices ranging between $13 and $16 per share. The
resulting consolidated entity with the Company as the survivor will emerge from
these transactions as an integrated, self-administered, self-managed REIT
controlling approximately 14,000 apartment units and 2.1 million square feet of
retail and office space, primarily in California, Florida, and Texas. The
consolidation transaction will be accounted for as a reverse acquisition of the
Company by NIRT.
William S. Friedman, President, Chief Executive Officer, and Director of the
Company, also serves as Director and Chief Executive Officer of TRA and as
Trustee, President, and Chief Executive Officer of NIRT. TRA is owned by Mr.
Friedman and his wife, Lucy N. Friedman. The Friedman family also owns
approximately 30% of the outstanding shares of common stock of the Company and
approximately 33% of the outstanding shares of beneficial interest of NIRT.
Management of the Company
The Board of Directors (the "Board"), elected annually by the stockholders of
the Company or appointed by the incumbent Board until the next annual meeting of
stockholders, manages the affairs of the Company. There are currently four
members on the Board, three of whom are unaffiliated with the Company. The
day-to-day operations of the Company and the implementation of Company policies,
as defined by the Board, are managed by TRA which operates under the supervision
of the Board pursuant to a written advisory agreement approved by stockholders.
TRA's duties include, among other things, locating, investigating, evaluating,
and recommending real estate investment and sale opportunities and financing and
refinancing sources for the Company. The Advisor also serves as a consultant in
connection with the business plan and investment policy decisions made by the
Board.
A majority of the officers of the Company are also officers of TRA. The Company
has no employees. Employees of TRA provide executive and administrative services
to the Company.
TRA also serves as the advisor to NIRT. All of the officers of the Company are
also officers of NIRT. TRA and the Company officers owe fiduciary duties to NIRT
as well as to the Company. Historically, in determining to which entity to
allocate a particular investment opportunity, TRA and the Company officers have
considered the respective investment objectives of each entity and the
appropriateness of a particular investment in light of each entity's existing
real estate portfolio. To the extent that any particular investment opportunity
is appropriate for both entities, such investment opportunity has been allocated
to the entity which had uninvested funds for the longer period of time or, if
appropriate, the investment has been shared between the entities. TRA
periodically informs the Board of real estate investments made by any of its
affiliates, and the Board periodically reviews the performance of such
investments.
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5
ITEM 1. BUSINESS (Continued)
Property Management
TRA and its wholly-owned subsidiary, Tarragon Management, Inc. ("TMI"), provide
property management services to the Company's properties for a fee of 4.5% of
the monthly gross rents collected. Until April 1996, TRA subcontracted with
other entities for the provision of the property-level management services. TMI
currently provides such services to the Company's multifamily properties, while
the property-level management services are provided by third party
subcontractors for the Company's commercial properties.
Competition
The Company's plans are to continue to improve the quality of its properties
through consistent capital improvements and, to the extent surplus funds and
attractive investments are available, to acquire additional multifamily and
commercial properties, primarily in locations where the Company presently
operates. Management believes that ownership of the type of properties in which
the Company invests is highly fragmented among individuals, partnerships, public
and private corporations, and other REITs and that no dominant entities exist in
the market for such properties. The Company competes with numerous entities and
individuals engaged in real estate activities, many of which may have greater
financial resources than the Company. However, the Company has not experienced
difficulty in locating investment opportunities.
Management believes that success in real estate investment is primarily
dependent upon general market conditions determined by such factors as job
formation and income growth; geographic location; and the performance of asset
and property managers in marketing, collections, tenant services, capital
improvements, control of operating expenses, and the maintenance and appearance
of the property more than on the activities of competitors. 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 in setting rental rates. With respect to multifamily properties,
management believes that there is and will continue to be a strong demand for
well-maintained, affordable housing in the markets in which it operates.
However, since the success of any real estate investment is impacted by other
factors outside the control of the Company, including general demand for
apartment housing, interest rates, operating costs, and the ability to attract
and retain qualified property managers, there can be no assurances that the
Company will be successful.
Certain Factors Associated with Real Estate and Related Investments
The Company is subject to the risks associated with the ownership, operation,
and financing of real estate. These risks include, but are not limited to,
liability for environmental hazards; changes in general or local economic
conditions; changes in interest rates and availability of permanent mortgage
financing which may render the acquisition, sale, or refinancing of a property
difficult or unattractive and which may make debt service burdensome; changes in
real estate and zoning laws; changes in income or real estate taxes and federal
or local economic or rent controls; floods, earthquakes, and other acts of God;
and other factors beyond the control of the Company or TRA. The illiquidity of
real estate investments generally may impair the ability of the Company to
respond promptly to changing circumstances. The Company's management believes
that some of these risks are compounded by the concentration of the Company's
properties in Texas, Oklahoma, California, and Florida and the Company's
intention to acquire older, mismanaged, or under-performing properties.
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ITEM 2. PROPERTIES
Details of the Company's real estate portfolio at December 31, 1997, are set
forth in Schedule III to the Consolidated Financial Statements and NOTE 2. "REAL
ESTATE AND DEPRECIATION" of the Notes to Consolidated Financial Statements, both
included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." The
discussion set forth below provides summary information regarding the portfolio.
The Company acquired two properties in 1997, three properties in 1996 (including
one property acquired in December 1996, the transition period related to the
change in fiscal year end), and three properties in 1995 and sold two properties
during 1996. At December 31, 1997, the Company owned fourteen properties,
consisting of nine apartment complexes with 1,293 units, one shopping center,
one combination office building and shopping center, one combination
office/retail/medical facility, one office park, and one farm and luxury
residence. The carrying value of one of the Company's properties (One Turtle
Creek Office Complex) exceeded 10% of the Company's total consolidated assets at
December 31, 1997. All properties except three are pledged separately to secure
mortgage debt totaling $25.3 million at December 31, 1997.
To continue to qualify for federal taxation as a REIT under the Code, the
Company is required, among other things, to hold at least 75% of the value of
its assets in real estate assets, government securities, and cash and cash
equivalents at the close of each quarter of each taxable year. At December 31,
1997, 74% of the Company's assets consisted of real estate held for investment,
11% consisted of real estate held for sale, 5% consisted of investments in and
advances to partnerships that own real estate or mortgage loans secured by real
estate, and 3% consisted of cash and cash equivalents. The remaining 7% of the
Company's assets consisted of restricted cash and other assets. The percentage
of the Company's assets invested in any one category at any particular time is
subject to change, and no assurance can be given that the composition of the
Company's assets in the future will approximate the percentages stated above.
The following tables present certain information relating to the Company's
current real estate portfolio and mortgage loans secured by the Company's real
estate at December 31, 1997:
[This space intentionally left blank.]
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TARRAGON REALTY INVESTORS, INC.
REAL ESTATE SUMMARY
DECEMBER 31, 1997
(Unaudited)
Average Rent Per Sq. Ft.(a) Economic Occupancy (b)
For the Years Ended For the Years Ended
------------------------ -----------------------
Number Dec 31, November 30, Dec 31, November 30,
of Square -------- ------------- ------- ---------------
Property Location Units Footage 1997 1996 1995 1997 1996 1995
- -------- -------- ----- ------- ---- ---- ---- ---- ---- ----
PROPERTIES ACQUIRED PRIOR TO NOVEMBER 30, 1995:
Multifamily:
Aspentree Dallas, TX 296 212,864 $ 7.50 $ 7.39 $ 7.02 93% 96% 96%
Collegewood Tallahassee, FL 162 83,700 8.04 7.57 7.57 93% 91% 92%
French Villa Tulsa, OK 101 104,720 6.09 6.26 5.70 93% 97% 91%
Phoenix Tulsa, OK 254 208,726 4.91 4.63 4.03 90% 91% 90%
Riverside Austin, TX 145 110,868 8.49 8.76 8.20 92% 92% 94%
Southern Elms Tulsa, OK 78 65,159 6.66 6.62 6.26 91% 93% 88%
------ --------- ------- ------ ------ --- --- ---
SUBTOTAL OR WEIGHTED AVERAGE (f) 1,036 786,037 6.75 6.66 6.21 92% 93% 93%
------ --------- ------- ------ ------ --- --- ---
Commercial:
Briarwest Houston, TX -- 25,323 11.14 10.66 10.47 85% 87% 92%
One Turtle Creek Dallas, TX -- 102,811 9.33 10.30 10.15 74% 89% 90%
------ --------- ------- ------ ------ --- --- ---
SUBTOTAL OR WEIGHTED AVERAGE (f) -- 128,134 9.69 10.37 10.21 76% 88% 91%
------ --------- ------- ------ ------ --- --- ---
PROPERTIES ACQUIRED IN 1996:
Multifamily:
Holly House North Miami, FL 57 45,417 7.84 6.75 -- 89% 84% --
Mission Trace Tallahassee, FL 96 104,400 4.59 4.58 -- 73% 71% --
------ --------- ------- ------ ------ --- --- ---
SUBTOTAL OR WEIGHTED AVERAGE (f) 153 149,817 5.58 5.24 -- 78% 75% --
------ --------- ------- ------ ------ --- --- ---
PROPERTIES ACQUIRED IN 1997:
Multifamily:
The Brooks Addison, TX 104 94,176 6.84 -- -- 89% -- --
Commercial:
Tarzana Plaza (g) Tarzana, CA -- 37,208 16.27 -- -- 87% -- --
Park 20 West Tallahassee, FL -- 69,066 14.82 -- -- 96% -- --
------ --------- ------- ------ ------ --- --- ---
SUBTOTAL OR WEIGHTED AVERAGE (f) 104 200,450 11.34 -- -- 91% -- --
------ --------- ------- ------ ------ --- --- ---
GRAND TOTAL OR WEIGHTED AVERAGE (f) 1,293 1,264,438 $ 7.64 $ 6.90 $ 6.77 88% 90% 92%
====== ========= ======= ====== ====== === === ===
Gross Potential Current
Physical Rent Per Sq Ft Market
Occupancy Year Ended Rent Per Sq
Property Location Dec. 31, 1997(c) Dec 31,1997(d) Foot(e)
- -------- -------- ---------------- -------------- -------
PROPERTIES ACQUIRED PRIOR TO NOVEMBER 30, 1995:
Multifamily:
Aspentree Dallas, TX 95% $ 8.19 $ 8.77
Collegewood Tallahassee, FL 92% 9.07 10.12
French Villa Tulsa, OK 91% 6.68 7.04
Phoenix Tulsa, OK 90% 5.60 5.93
Riverside Austin, TX 96% 9.51 10.01
Southern Elms Tulsa, OK 90% 7.34 7.90
--- ------ ------
SUBTOTAL OR WEIGHTED AVERAGE (f) 93% 7.51 8.03
--- ------ ------
Commercial:
Briarwest Houston, TX 82% 13.24 14.00
One Turtle Creek Dallas, TX 69% 13.32 17.50
--- ------ ------
SUBTOTAL OR WEIGHTED AVERAGE (f) 71% 13.31 16.81
--- ------ ------
PROPERTIES ACQUIRED IN 1996:
Multifamily:
Holly House North Miami, FL 88% 9.03 9.43
Mission Trace Tallahassee, FL 90% 6.66 7.08
--- ------ ------
SUBTOTAL OR WEIGHTED AVERAGE (f) 89% 7.38 7.79
--- ------ ------
PROPERTIES ACQUIRED IN 1997:
Multifamily:
The Brooks Addison, TX 89% 7.85 7.48
Commercial:
Tarzana Plaza (g) Tarzana, CA 80% 19.78 19.64
Park 20 West Tallahassee, FL 97% 14.19 14.03
--- ------ ------
SUBTOTAL OR WEIGHTED AVERAGE (f) 90% 12.25 11.99
--- ------ ------
GRAND TOTAL OR WEIGHTED AVERAGE (f) 90% $ 8.83 $ 9.52
=== ====== ======
(a) Amounts represent average rental revenue per square foot on an annual
basis. Rental revenue is equal to gross potential rent after giving effect
to all rental losses including bad debts, vacancies, and discounts and
concessions. Gross potential rent equals average lease rates on leased
units and market rates on vacant units.
(b) Computed as follows: [(Annual gross potential rent less annual vacancy
losses) divided by annual gross potential rent].
(c) Represents actual physical occupancy as of the end of the last week of the
year ended December 31, 1997.
(d) Represents annualized gross potential rent for all months owned during the
period divided by square footage.
(e) Represents annualized market rate per square foot at December 31, 1997,
based upon scheduled rents at such time.
(f) The weighted average rent per square foot and economic occupancy are based
on the square footage in each property.
(g) Acquired December 1, 1996. For purposes of this schedule, this property is
classified as a 1997 acquisition.
The Company also owns Cochonour Horse Farm, a 188 acre horse farm with a 5,000
square foot luxury residential home in Carrollton, Missouri.
Management believes that its properties are adequately covered by liability and
casualty insurance, consistent with industry standards
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TARRAGON REALTY INVESTORS, INC.
MORTGAGE LOANS SECURED BY OWNED PROPERTIES
DECEMBER 31, 1997
(Dollars in thousands)
(Unaudited)
Stated Balance
Original Balance Interest Maturity Due at
Name of Property Amount Dec 31, 1997 Rate(A) Date Maturity
- ---------------- ------ ------------ --------- -------- --------
Multifamily
Aspentree............................ $ 3,966 $ 3,881 8.33% 11/01/05 $ 3,390
The Brooks........................... 1,324 1,306 9.63% 09/01/04 1,074
Collegewood.......................... 2,050 2,042 9.00% 08/01/99 2,002
French Villa......................... 1,970 1,901 8.53% 11/01/00 1,836
Mission Trace........................ 2,220 1,978 8.25% 05/01/06 27
Mission Trace........................ 290 259 8.50% 05/01/06 4
Riverside............................ 4,200 4,200 7.16% 12/01/07 3,617
Southern Elms........................ 1,370 1,327 9.68% 02/01/02 1,242
----------- ------------- ---- ----------
17,390 16,894 8.34% (B) 13,192
----------- ------------- ---- ----------
Commercial
Briarwest............................ 1,700 1,698 8.38% 11/01/04 1,507
One Turtle Creek..................... 2,000 1,854 9.00% 02/01/05 1,504
Park 20 West......................... 1,944 1,926 8.68% 03/01/06 1,429
Tarzana Towne Plaza.................. 2,971 2,947 9.81% 11/01/06 2,613
----------- ------------- ---- ----------
8,615 8,425 9.09% (B) 7,053
----------- ------------- ---- ----------
Total................................... $ 26,005 $ 25,319 8.59% (B) $ 20,245
=========== ============= ==== ==========
- --------------------------
(A) For loans with variable interest rates, the rate in effect for the month of
December 1997 is presented.
(B) Represents weighted average interest rate at December 31, 1997.
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ITEM 2. PROPERTIES (Continued)
In addition to real estate owned directly, the Company holds an interest in
Larchmont West Apartments ("Larchmont") through its 57% interest in Larchmont
Associates Limited Partnership. This property collateralizes mortgage debt of
$5.3 million. The following table summarizes certain information relating to
this property.
Average Rent Per Economic
Square Foot (a) Occupancy (b)
------------------ -----------------
Years Ended Years Ended
------------------ -----------------
Dec 31 Nov 30 Dec 31 Nov 30
Property Number Square ------ ------ ------ -------
Partnership Location of Units Footage 1997 1996 1997 1996
----------- -------- -------- ------- ------ ------ ------ -------
Larchmont Toledo, OH 504 339,654 $4.94 $5.03 86% 91%
As of December 31, 1997, annual market rent per square foot for Larchmont was
$6.48, and physical occupancy was 88%.
- --------------------------
(a) Amounts represent average rental revenue per square foot on an annual
basis. Rental revenue is equal to gross potential rent after giving effect
to all rental losses including bad debts, vacancies, and discounts and
concessions. Gross potential rent equals average lease rates on leased
units and market rates on vacant units.
(b) Computed as follows: [(Annual gross potential rent less annual vacancy
losses) divided by annual gross potential rent].
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various claims and routine litigation arising in the
ordinary course of business. Management of the Company does not believe that the
results of these claims and litigation, individually or in the aggregate, will
have a material adverse effect on its business, financial position, or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders.
[This space intentionally left blank.]
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the over-the-counter market of the
National Association of Securities Dealers Automated Quotation ("NASDAQ") System
under the symbol "VIPT." The Trust's shares of beneficial interest were also
traded on the over-the-counter market of the NASDAQ System under the symbol
"VIPTS."
The following table sets forth the high and low bid quotations of the Company's
common stock and the Trust's shares of beneficial interest as reported by the
NASDAQ System for the periods indicated which consist of the last two fiscal
years and the quarter ending for which this report is filed (over-the-counter
market quotations reflect Inter Dealer prices, without retail mark up, mark
down, or commissions, and may not necessarily represent actual transactions).
The quotations noted below for the second quarter ended May 31, 1997, and prior
periods represent those of the shares of the predecessor. Those subsequent to
July 25, 1997, the effective date of the merger between the Company and the
Trust, represent those of the Company's common stock.
High Low
---------- ------------
First quarter ended February 29, 1996 $ 6 1/2 $ 5
Second quarter ended May 31, 1996 6 1/2 5
Third quarter ended August 31, 1996 7 7/8 5
Fourth quarter ended November 30 , 1996 7 1/2 7
First quarter ended February 28, 1997 7 7
Second quarter ended May 31, 1997 9 8
Third quarter ended September 30, 1997 10 3/4 9
Fourth quarter ended December 31, 1997 10 10
First quarter ending March 31, 1998
(through March 9, 1998) 10 3/8 9 5/8
For the first quarter of 1998 through March 9, 1998, the Company's common stock
traded as high as $10 7/16, and the closing bid quotation reported by the NASDAQ
System was $9 5/8. According to the transfer agent's records, such shares were
held by approximately 4,500 holders, including beneficial holders.
Dividends
Cash dividends of $.10 per share were declared in December 1997 and paid in
January 1998 to stockholders of record on December 26, 1997. For federal income
tax purposes, the Company's 1997 fiscal year ended November 30, 1997, and the
cash dividend declared in December 1997 had no impact on the 1997 tax year. No
cash dividends were paid in 1996.
Future dividends to stockholders will be dependent upon the Company's realized
income, financial condition, capital requirements, and other factors deemed
relevant by the Board of Directors (the "Board"). In general, the Board intends
to make cash dividends to stockholders only to the minimum extent required to
maintain the Company's qualification as a real estate investment trust ("REIT").
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ITEM 6. SELECTED FINANCIAL DATA
The following information should be read in conjunction with all of the
financial statements and notes thereto and with the discussion set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K. Dollar amounts are in
thousands, except per share amounts.
While the Trust had a November 30 fiscal year end, the Company has a December 31
fiscal year end. Accordingly, the Consolidated Financial Statements presented at
ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" include Statements of
Operations, Stockholders' Equity, and Cash Flows for the one month period ended
December 31, 1996, which represents the transition period related to the change
in fiscal year end. The following information includes certain financial data
for the transition period and compares certain data as of November 30, 1996, to
December 31, 1997.
For the Year For the Month
Ended Dec 31, Ended Dec 31, For the Years Ended November 30,
----------- ----------- -------------------------------------------------------
1997 1996 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- -----------
OPERATING DATA
Income .................................. $ 9,711 $ 697 $ 9,464 $ 8,437 $ 6,846 $ 6,042
Expense ................................. 9,415 716 9,537 8,410 7,275 6,649
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before net gain on
sale of real estate and
extraordinary gain .................. 296 (19) (73) 27 (429) (607)
Net gain on sale of real estate ......... -- -- 673 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations .......................... 296 (19) 600 27 (429) (607)
Extraordinary gain ...................... -- -- 253 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) ....................... $ 296 $ (19) $ 853 $ 27 $ (429) $ (607)
=========== =========== =========== =========== =========== ===========
PER SHARE DATA (1)
Earnings per share - basic and diluted
Income (loss) from continuing
operations .......................... $ .22 $ (.01) $ .44 $ .02 $ (.31) $ (.51)
Extraordinary gain ...................... -- -- .19 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) ....................... $ .22 $ (.01) $ .63 $ .02 $ (.31) $ (.51)
=========== =========== =========== =========== =========== ===========
Weighted average shares (2) ............. 1,331,314 1,344,576 1,354,415 1,392,006 1,368,527 1,193,572
Weighted average shares -
assuming dilution (3) ............... 1,343,583 1,350,122 1,356,520 1,392,006 1,368,527 1,193,572
Cash dividends (4) ...................... $ .10 $ -- $ -- $ -- $ -- $ 1.25
- ----------------
(1) All share and per share data for the year ended November 30, 1995, and
earlier periods have been restated to give effect to the one-for-five
reverse stock split effective December 1, 1995.
(2) Represents the weighted average shares of common stock used in the
computation of earnings per share.
(3) Represents the weighted average shares of common stock used in the
computation of earnings per share - assuming dilution.
(4) The 1997 dividend was declared subsequent to the end of the Company's 1997
tax year and, therefore, had no tax effect to stockholders in fiscal 1997.
The 1993 dividend was taxable to stockholders.
11
12
ITEM 6. SELECTED FINANCIAL DATA (Continued)
Dec 31, November 30,
---------- -------------------------------------------
1997 1996 1995 1994 1993
---------- ------- ------- ------- -------
BALANCE SHEET DATA
Real estate ....................... $ 31,873 $22,248 $31,686 $20,362 $20,438
Total assets ...................... 37,477 28,757 36,978 22,738 23,478
Notes, debentures, and interest
payable ....................... 26,416 17,516 26,491 12,442 13,058
Stockholders' equity .............. 9,770 9,869 9,256 9,229 8,932
Book value per share .............. $ 7.41 $ 7.34 $ 6.65 $ 6.63 $ 7.42
For the Year For the Month
Ended Dec 31, Ended Dec 31, For the Years Ended November 30,
------------- -------------- ----------------------------------------------
1997 1996 1996 1995 1994 1993
------- ------- ------- ------- ------- -------
OTHER DATA
Cash flows provided by (used in):
Operating activities ................... $ 696 $ (20) $ 1,366 $ 811 $ 575 $ (384)
Investing activities ................... (5,022) 549 (979) (807) (333) (1,107)
Financing activities ................... 2,175 (51) (550) 2,634 (167) 1,499
Calculation of funds from operations (1)
Net income (loss) (2) .................. $ 296 $ (19) $ 853 $ 27 $ (429) $ (607)
Extraordinary gain ..................... -- -- (253) -- -- --
Net gain on sale of real estate ........ -- -- (673) -- -- --
Depreciation and amortization of
real estate assets ................... 908 83 914 991 898 841
Depreciation and amortization of
real estate assets of partnerships ... 16 10 108 -- -- --
------- ------- ------- ------- ------- -------
Funds from operations ....................... $ 1,220 $ 74 $ 949 $ 1,018 $ 469 $ 234
======= ======= ======= ======= ======= =======
- ----------------------------
(1) The Company generally considers funds from operations ("FFO") to be an
appropriate measure of the performance of an equity REIT. FFO, as defined
by the National Association of Real Estate Investment Trusts ("NAREIT"),
equals net income (loss), computed in accordance with generally accepted
accounting principles ("GAAP"), excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization of
real estate assets, and after adjustments for unconsolidated partnerships
and joint ventures. Adjustments for unconsolidated partnerships and joint
ventures are calculated to reflect FFO on the same basis. The amortization
of deferred financing costs is not added back to net income (loss) in the
Company's calculation. This treatment is consistent with the Company's
historical calculation of FFO. The Company believes that FFO is useful to
investors as a measure of the performance of an equity REIT because, along
with cash flows from operating activities, investing activities, and
financing activities, it provides investors an understanding of the ability
of the Company to incur and service debt and to make capital expenditures.
The Company believes that in order to facilitate a clear understanding of
its operating results, FFO should be examined in conjunction with net
income (loss) as presented in the financial statements included elsewhere
in this report. FFO does not represent cash generated from operating
activities in accordance with GAAP and therefore should not be considered
an alternative to net income as an indication of the Company's operating
performance or to cash flow as a measure of liquidity and is not
necessarily indicative of cash available to fund cash needs and dividends.
The Company's calculation of FFO may differ from the methodology for
calculating FFO utilized by other REITs and, accordingly, may not be
comparable to such REITs.
Effective December 1, 1996, the Company modified its calculation of FFO to
include the add back of amortization of leasing commissions associated
with its commercial properties. The Company believes that this treatment
is consistent with a majority of other REITs. If the Company had
calculated FFO in the same manner for each of the years ended November 30,
1996, 1995, 1994, and 1993, FFO would have been higher by $46,000,
$95,000, $31,000, and $28,000, respectively.
(2) Net income for the fiscal year ended November 30, 1995, included a
provision for losses credit of $190,000. See NOTE 3. "ALLOWANCE FOR
ESTIMATED LOSSES AND PROVISIONS FOR LOSSES" in the Notes to Consolidated
Financial Statements for a description of the provision for losses.
12
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the accompanying Notes thereto.
Introduction
Tarragon Realty Investors, Inc., (the "Company") is a Nevada corporation
incorporated April 2, 1997, and the ultimate successor in interest to Vinland
Property Trust (the "Trust"), a California business trust which was established
July 18, 1973, and commenced operations April 2, 1974. The Trust was formed to
invest in real estate, including commercial and multifamily properties. On July
10, 1997, the shareholders of the Trust approved the conversion of the Trust
into a Nevada corporation, which was accomplished by incorporating the Trust as
a California corporation and merging it into the Company, a wholly-owned
subsidiary of the Trust, with the Company as the surviving entity. The effective
date of the merger of the Trust and the Company was July 25, 1997. References to
the Company, its Board of Directors, its stockholders, and its shares of common
stock in relation to dates prior to July 25, 1997, refer to the Trust, its Board
of Trustees, its shareholders, and its shares of beneficial interest. While the
Trust had a November 30 fiscal year end, the Company has a December 31 fiscal
year end. Accordingly, the Consolidated Financial Statements presented in ITEM
8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" include Statements of
Operations, Stockholders' Equity, and Cash Flows for the one month ended
December 31, 1996, which represents the transition period related to the change
in fiscal year end. The following discussion compares the fiscal year ended
December 31, 1997, to the fiscal year ended November 30, 1996, and the fiscal
year ended November 30, 1996, to the fiscal year ended November 30, 1995.
At December 31, 1997, the Company's real estate consisted of fourteen
properties, including nine apartment complexes, one shopping center, one
combination office building and shopping center, one combination
office/retail/medical facility, one office park, and one farm and luxury
residence. All of the Company's real estate except three properties is
encumbered by mortgages.
The Company's management continues to focus on the capital appreciation of the
Company's existing portfolio and the search for additional investments.
Management's first priority is to invest surplus funds in needed improvements to
the current real estate portfolio. The Company intends to use additional funds
generated from property operations, sales, and refinancings to make selective
acquisitions, both multifamily and commercial, with a preference for properties
in markets where the Company currently operates. However, because of various
real estate industry conditions, including competing entities and individuals
and the overall volatility of the real estate market, there is no assurance that
the Company will be able to continue to increase the size of its portfolio.
Liquidity and Capital Resources
The Company's principal sources of cash have been property operations,
collections of mortgages receivable, proceeds from the sale of real estate, and
refinancing proceeds. The Company does not anticipate making additional mortgage
loans except in connection with the sale of property. Therefore, as existing
mortgages receivable are paid off, this source of cash has declined and is
expected to continue to decline. The Company believes that cash on hand along
with funds provided by property operations and anticipated external sources,
such as property sales and refinancings, is sufficient to fund any needed
property maintenance and capital improvements as well as meet the Company's debt
service obligations.
Cash and cash equivalents totaled $1 million at December 31, 1997, compared to
$2.7 million at November 30, 1996. The underlying components of the change in
cash and cash equivalents are discussed below.
13
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Operating Activities
The Company's net cash flow from property operations (rentals collected less
payments for property operations) increased from $2.8 million in fiscal 1995 to
$3.7 million in fiscal 1996 and increased slightly to $3.8 million in 1997. The
improvement between 1995 and 1996 resulted primarily from the operations of 1995
and 1996 acquisitions. In October 1996, the Company sold Polynesia Village
Apartments ("Polynesia"), the operations of which accounted for an increase in
cash flow from property operations in fiscal 1996 of $530,000. See NOTE 2. "REAL
ESTATE AND DEPRECIATION" in the Notes to Consolidated Financial Statements for a
discussion of the sale. Net cash flow from property operations increased only
slightly in 1997 compared with 1996 in spite of the sale of Polynesia due to the
properties acquired in 1996 and 1997. Along with the benefit derived from the
operations of these acquired properties, the Company incurred higher interest
payments due to the associated mortgage debt secured by certain of these
properties.
Investing Activities
During 1997, the Company purchased The Brooks Apartments, a 104-unit property in
Addison, Texas, and Park 20 West, a 69,066 square foot office park in
Tallahassee, Florida, for an aggregate purchase price of $5.8 million, the cash
portion of which was $2.6 million. The remainder of the purchase price was
financed through taking each property subject to existing mortgages.
In December 1996, the Company acquired Tarzana Towne Plaza, a 37,208 square foot
combination office/retail/medical facility in Tarzana, California, through the
acquisition of a controlling interest in 18607 Ventura Associates, Ltd., the
partnership which owns the property. During the fourth fiscal quarter of 1996,
the Company advanced $572,000 to the partnership. The interest-bearing advances
were converted to a 60% interest in the partnership in December 1996. Under the
partnership agreement, the Company's advances with interest at 15% per annum are
to be repaid in full before any cash distributions may be made to the partners.
At December 31, 1997, unrecovered advances plus interest totaled $708,000.
During fiscal 1996, the Company purchased Mission Trace Apartments, a 96-unit
property in Tallahassee, Florida, and Holly House Apartments, a 57-unit property
in North Miami, Florida, for an aggregate purchase price of $4.2 million, the
cash portion of which was $1.8 million. The remainder of the purchase price was
financed through a $2.5 million mortgage on Mission Trace Apartments.
During fiscal 1996, the Company sold two multifamily properties for an aggregate
sale price of $14.9 million. The Company received net cash proceeds of $3.1
million in connection with these sales.
In December 1995, the Company acquired a 20% general partner interest and an
effective 37% limited partner interest in Larchmont Associates Limited
Partnership ("Larchmont") and an effective 25% nonmanaging member interest in
Kearny Wrap LLC ("Kearny"), both accounted for using the equity method, for cash
investments of $418,000 and $395,000, respectively. In January 1998, Kearny sold
its primary asset, a wraparound mortgage secured by a 1 million square foot
distribution facility net leased to the United States Postal Service located in
Kearny, New Jersey. The Company received approximately $700,000 as its
proportionate share of the net sales proceeds.
During fiscal 1995, the Company purchased Collegewood Apartments ("Collegewood")
in Tallahassee, Florida, consummated the tax-free exchange for Riverside
Apartments ("Riverside") in Austin, Texas, and recorded the in-substance
foreclosure of
14
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Investing Activities (Continued)
Polynesia. Under the terms of these three separate transactions, the portion of
the acquisition price paid in cash totaled $258,000. The remainder of the
acquisition price was satisfied through the assumption of first mortgage debt
totaling $11.1 million and, in the case of Riverside, the conveyance of the
exchanged property, Westover Valley Apartments in Fort Worth, Texas.
In December 1996, the Company received $600,000 as payment in full of the Swiss
Village note receivable which had matured in November 1996. The Company expects
note receivable collections to decline as existing mortgage loans are paid off
and does not anticipate funding additional loans in the future, except in
connection with property sales. However, during 1995 and pursuant to the
restructured terms of the mortgage loan secured by a second lien on Polynesia,
the Company funded an additional $196,000 to the borrower for renovations which
the Company supervised. In August 1995, the Company and the borrower agreed to a
settlement of litigation involving the mortgage loan whereby the Company gained
control of the property and as a result recorded an in-substance foreclosure, as
noted above.
The Company invested $1.3 million in capital improvements during 1997, compared
to $822,000 during fiscal 1996 and $534,000 during fiscal 1995. During 1998, the
Company anticipates investing approximately $2.1 million in capital improvements
to properties currently owned.
In addition to capital improvements noted above, payments for property
operations in 1997, fiscal 1996, and fiscal 1995 include property replacements
of $481,000, $450,000, and $552,000, respectively. Property replacements
include, but are not limited to, such items as carpet; appliances; plumbing and
heating, ventilation, and air conditioning replacements; exterior painting; and
parking lot improvements.
Since November 30, 1996, the Company has advanced $846,000 to Larchmont, largely
to fund capital improvements of Larchmont West Apartments, the partnership's
sole property. The Company expects such advances to continue during the first
half of 1998. Advances are subject to repayment with simple interest at 18%
prior to any other distributions to the partners.
In December 1997, the Company advanced $380,000 to National Omni Associates,
L.P. ("Omni"), in exchange for a 25% interest in this partnership. In January
and February 1998, the Company advanced an additional $1 million to Omni, which
purchased 5600 Collins Avenue, a 289-unit high rise apartment property in Miami
Beach, Florida, in February 1998.
Financing Activities
During 1997, the Company obtained first mortgage financing totaling $8 million
on three properties, receiving net cash proceeds of $2.3 million after the
payoff of $4.8 million in existing debt, funding escrows, and paying the
associated closing costs. Additionally, the Company made other mortgage
principal payments totaling $454,000 during 1997. During fiscal 1996, the
Company made mortgage principal payments totaling $371,000. During fiscal 1995,
the Company obtained first mortgage financing totaling $5.3 million on two
properties, receiving net cash proceeds of $3.6 million after the payoff of $1.4
million in existing debt, funding escrows, and paying the associated closing
costs. Additionally, the Company made other mortgage principal payments totaling
$901,000 during fiscal 1995. Mortgage principal payments totaling $493,000 are
due in 1998, and the Company intends to make the payments when due.
15
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Financing Activities (Continued)
The Board of Trustees of the Trust approved a one-for-five reverse split of the
Trust's shares of beneficial interest which was effective at the close of
business on December 1, 1995, on the basis of one new share (a "Post-Split
Share") for each five shares then outstanding (each an "Old Share").
Following the one-for-five reverse share split, on December 1, 1995, the Trust
offered to purchase all shares of each shareholder holding 99 or fewer
Post-Split Shares (or less than 500 Old Shares) either of record or beneficially
on December 1, 1995. Under such offer (the "Odd-Lot Offer"), the Trust agreed to
purchase all Post-Split Shares duly tendered prior to February 29, 1996, at a
price equal to the next closing price of the Post-Split Shares on the day the
Trust received the tendered shares. Additionally, in December 1995, the Board of
Trustees authorized the Company to repurchase up to 139,200 of its shares in
open market and negotiated transactions. During fiscal 1996, the Trust
repurchased 47,430 shares, including 43,696 shares related to the Odd-Lot Offer,
323 shares representing fractional shares related to the December 1995 reverse
share split, and 3,411 shares representing purchases in open market
transactions, at a total cost of $240,000 or an average of $5.06 per share.
During 1997, 26,764 shares were repurchased in open market transactions at a
total cost of $245,000 or an average of $9.15 per share.
In October 1993, the Trust paid to shareholders a taxable distribution of $1.25
per share, totaling $1.5 million, in the form of either 9% Series A Convertible
Subordinated Debentures ("Debentures") or Uncertificated Convertible
Subordinated Obligations ("Obligations"). On December 30, 1994, the Trust
redeemed all the outstanding Obligations. See NOTE 5. "NOTES, DEBENTURES, AND
INTEREST PAYABLE" in the Notes to Consolidated Financial Statements.
Results of Operations
1997 COMPARED TO 1996. The Company reported net income for the year ended
December 31, 1997, of $296,000 compared to net income of $853,000 for the fiscal
year ended November 30, 1996. The major component of the change in results of
operations was the $844,000 gain on sale of Polynesia in October 1996. Other
components of this change are discussed in the following paragraphs.
Net rental income (rental revenue less property operating expenses) increased
from $3.3 million in fiscal 1996 to $3.8 million in 1997. An increase of $1
million is attributable to the operations of the properties added to the
Company's portfolio during 1996 and 1997, while a decrease of $683,000 resulted
from the sale of Polynesia. Properties held in both years reported an overall
increase of $173,000 in net rental income, primarily due to higher rental rates
at certain properties. Overall economic occupancy levels for properties held in
both years fell slightly, primarily due to decreased physical occupancy at One
Turtle Creek Office Complex from 85% at November 30, 1996, to 69% at December
31, 1997.
Interest expense increased from $1.9 million in fiscal 1996 to $2.1 million in
1997. Of this increase, $545,000 resulted from interest expense associated with
loans obtained or assumed in connection with the 1996 and 1997 property
acquisitions. Properties held in both years reported an overall increase of
$49,000 mainly due to the refinancing of the mortgage debt secured by
Collegewood, Riverside, and Briarwest Shopping Center, which increased mortgage
debt by a total of $3.1 million. Due to the timing of these refinancings during
1997, the Company expects a greater impact on interest expense from these
refinancings in 1998. These increases were partially offset by a decrease of
$390,000 due to the sale of the Polynesia.
16
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
Upon reclassifying One Turtle Creek Office Complex to real estate held for sale
in March 1997, the Company ceased depreciation of this property, resulting in a
decrease in depreciation expense of $318,000 for the year ended December 31,
1997, compared to the year ended November 30, 1996. A $196,000 increase in
depreciation expense is associated with the 1996 and 1997 acquisitions.
Advisory fees to Tarragon Realty Advisors, Inc., ("TRA") totaled $181,000 in
fiscal 1996 and $232,000 in 1997. Since March 1, 1994, TRA has provided advisory
services to the Company pursuant to an advisory agreement. William S. Friedman,
President, Chief Executive Officer, and Director of the Company, serves as a
Director and Chief Executive Officer of TRA. TRA is owned by Mr. Friedman and
Lucy N. Friedman, his wife. The Friedman family owns approximately 30% of the
outstanding common stock of the Company. A majority of the officers of the
Company are also officers of TRA. Under the advisory agreement with TRA, the
Company pays an incentive advisory fee equal to 16% per annum of adjusted funds
from operations, as defined in the advisory agreement. Funds from operations
("FFO") increased from $949,000 for the year ended November 30, 1996, to $1.2
million for the year ended December 31, 1997. See ITEM 6. "SELECTED FINANCIAL
DATA" for the calculation and definition of FFO. For a more detailed discussion
of advisory and other fees and services, see ITEM 10. "DIRECTORS, EXECUTIVE
OFFICERS, AND ADVISOR OF THE REGISTRANT - The Advisor."
In addition to the $844,000 gain on sale of Polynesia, during fiscal 1996, the
Company recorded a loss on the sale of real estate of $171,000 and an
extraordinary gain of $253,000 both related to the sale of Villas at Central
Park Apartments in January 1996.
1996 COMPARED TO 1995. The Company reported net income of $853,000 for fiscal
1996 compared to net income of $27,000 for fiscal 1995. The primary reason for
this improvement was the $844,000 gain on sale of Polynesia. Other underlying
components of this improvement in operating results are discussed in the
following paragraphs.
Net rental income increased from $2.6 million in fiscal 1995 to $3.3 million in
fiscal 1996. An increase of $729,000 was attributable to the operations of the
properties added to the Company's multifamily portfolio during 1995 and 1996,
while a decrease of $334,000 resulted from the sale of Villas at Central Park
Apartments in 1996. $494,000 of the 1996 increase in net rental income was
attributable to Polynesia which was sold in October 1996. Properties held in
both 1995 and 1996 reported an overall increase of $275,000 in net rental
income. Higher rental rates at certain properties and a reduction in leasing
expenses contributed to this improvement. Overall occupancy levels for
multifamily properties held in both years increased slightly, while those for
commercial properties held in both years fell slightly.
Interest expense increased from $1.4 million in fiscal 1995 to $1.9 million in
fiscal 1996. Of this increase, $498,000 resulted from interest expense
associated with loans obtained or assumed in connection with the 1995 and 1996
property acquisitions. Properties held in both years reported an overall
increase of $381,000 mainly due to the refinancing of the mortgage debt secured
by Southern Elms Apartments and Aspentree Apartments during 1995, which
increased mortgage debt by a total of $3.9 million. These increases were
partially offset by a decrease of $391,000 due to the sale of Villas at Central
Park Apartments in 1996.
Advisory fees to TRA totaled $146,000 in fiscal 1995 and $181,000 in fiscal
1996. Under the current advisory agreement with TRA, effective since April 1,
1995, the Company pays an incentive advisory fee equal to 16% per annum of
adjusted funds from operations, as defined in the advisory agreement. Prior to
April 1, 1995, the Company also paid an annual base advisory
17
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
fee of $50,000. FFO was $949,000 for the year ended November 30, 1996, compared
to $1 million for the year ended November 30, 1995. See ITEM 6. "SELECTED
FINANCIAL DATA" for the calculation and definition of FFO.
General and administrative expenses increased from $356,000 in fiscal 1995 to
$466,000 in fiscal 1996, primarily due to increases in advisor expense
reimbursements and professional fees related to administration of the
one-for-five reverse share split in December 1995 and the Odd-Lot Offer in the
first quarter of 1996.
The Company recorded a provision for loss credit of $190,000 in August 1995 as a
result of a reversal of an allowance for estimated losses of $1 million recorded
in previous years against the Company's note receivable secured by a second lien
mortgage on Polynesia and a $1.4 million provision for loss due to permanent
impairment of Villas at Central Park Apartments recorded in August 1995. Also,
the Company determined that the remaining $802,000 balance of the allowance for
estimated losses was no longer required against the Company's mortgage note
receivable portfolio, while a $241,000 allowance for estimated losses was needed
against the carrying value of one of its properties held for sale. As such, the
Company recorded a reversal of $561,000 in August 1995.
Allowance for Estimated Losses and Provision for Losses
The Company's management periodically evaluates the carrying values of the
Company's properties held for sale. Generally accepted accounting principles
require that the carrying value of a property held for sale cannot exceed the
lower of its cost or its estimated fair value less estimated costs to sell. In
those instances in which estimates of fair value less estimated selling costs of
the Company's properties held for sale are less than the carrying values thereof
at the time of evaluation, an allowance for loss is provided by a charge against
operations. The evaluation generally includes selective site inspections, a
review of the property's current rents compared to market rents, a review of the
property's expenses, a review of maintenance requirements, discussions with the
manager of the property, and a review of the surrounding area. Future
evaluations could cause the Company's management to adjust current estimates of
fair value.
The Company's management also evaluates the Company's properties held for
investment for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. This review
generally consists of a review of the property's cash flow and current and
projected market conditions, as well as any changes in general and local
economic conditions. If an impairment loss exists based on the results of this
review, a loss is recognized by a charge against current earnings and a
corresponding reduction in the respective asset's carrying value. The amount of
this impairment loss is equal to the amount by which the carrying value of the
property exceeds its estimated fair value.
Environmental Matters
Under various federal, state, and local environmental laws, ordinances, and
regulations, the Company may be potentially liable for removal or remediation
costs, as well as certain other potential costs (including governmental fines
and injuries to persons and property) relating to hazardous or toxic substances
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 from the Company for personal injury
associated with such materials.
18
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Environmental Matters (Continued)
The Company's management is not aware of any environmental liability relating to
the above matters that would have a material adverse effect on the Company's
business, assets, or results of operations.
Tax Matters
For the 1997, 1996, and 1995 tax years, the Company elected and, in the opinion
of the Company's management, qualified to be treated as a real estate investment
trust ("REIT") as defined under Sections 856 through 860 of the Internal Revenue
Code of 1986 (the "Code"). The Code requires a REIT to distribute at least 95%
of its REIT taxable income plus 95% of its net income from foreclosure property,
as defined in Section 857 of the Code, to stockholders. The conversion to a
corporation and the change in fiscal year end described above under
"Introduction" had no effect on the Company's status as a REIT.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has initiated an assessment to determine the extent to which the
Company is vulnerable to Year 2000 Issues. Management does not anticipate a
material impact on the Company's business, financial position, or results of
operations from the Year 2000 Issue.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130 - "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997.
Comprehensive income is defined as "the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners." The
Company will adopt this statement, as required, on January 1, 1998, and expects
the only effect of adoption to be reporting of comprehensive income in the
Consolidated Statements of Operations.
Also in June 1997, the FASB issued SFAS No. 131 - "Disclosures About Segments of
an Enterprise and Related Information," which supersedes SFAS No. 14 "Financial
Reporting for Segments of a Business Enterprise," SFAS No. 18 "Financial
Reporting for Segments of a Business Enterprise - Interim Financial Statements,"
SFAS No. 24 - "Reporting Segment Information in Financial Statements that are
Presented in Another Enterprise's Financial Report," and SFAS No. 30 -
"Disclosure of Information About Major Customers." This statement is effective
for financial statements for periods beginning after December 15, 1997. The
Company's management has not fully evaluated the effects of implementing this
statement but expects the Company's current financial statement disclosures will
not be affected.
19
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Possible Consolidation with National Income Realty Trust and Acquisition of
Advisor
On February 19, 1998, the Company and National Income Realty Trust ("NIRT")
jointly announced the agreement of their respective boards to form a single
consolidated entity with the Company, for convenience, as the survivor. The
surviving consolidated entity is intended to operate as a self-administered
REIT. The consolidation transaction will be submitted to shareholders of each of
the Company and NIRT for approval at special meetings to be held during 1998.
Under the proposed agreement, each shareholder of NIRT will receive 1.97 shares
of the Company's common stock for each share of beneficial interest of NIRT
held. NIRT, also a REIT, has a similar opportunistic approach to real estate
investment and had total consolidated assets of approximately $266 million as of
December 31, 1997. Upon the approval and consummation of the consolidation
transaction by the respective shareholders of each entity, the Company will
acquire TRA, the Company's advisor since March 1, 1994, and NIRT's advisor since
April 1, 1994, for 100,000 shares of the Company's common stock and options to
acquire additional shares of the Company's common stock at prices ranging
between $13 and $16 per share. The resulting consolidated entity with the
Company as the survivor will emerge from these transactions as an integrated,
self-administered, self-managed REIT controlling approximately 14,000 apartment
units and 2.1 million square feet of retail and office space, primarily in
California, Florida, and Texas. The consolidated transaction will be accounted
for as a reverse acquisition of the Company by NIRT.
William S. Friedman, President, Chief Executive Officer, and Director of the
Company, also serves as Director and Chief Executive Officer of TRA and as
Trustee, President, and Chief Executive Officer of NIRT. TRA is owned by Mr.
Friedman and his wife, Lucy N. Friedman. The Friedman family also owns
approximately 30% of the outstanding shares of common stock of the Company and
approximately 33% of the outstanding shares of beneficial interest of NIRT.
Risks Associated with Forward-Looking Statements Included in this Form 10-K
This Form 10-K contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are intended to be covered by the safe harbors
created thereby. These statements include the plans and objectives of management
for future operations, including plans and objectives relating to capital
expenditures on Company properties. The forward-looking statements included
herein are based on current expectations that involve numerous risks and
uncertainties. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive, and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate, and, therefore, there can be no assurance that the forward-looking
statements included in this Form 10-K will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not applicable to the Company at this time.
20
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants ............................... 22
Consolidated Balance Sheets -
December 31, 1997, and November 30, 1996 ......................... 23
Consolidated Statements of Operations -
Year Ended December 31, 1997
Month Ended December 31, 1996
Years Ended November 30, 1996 and 1995............................. 24
Consolidated Statements of Stockholders' Equity -
Year Ended December 31, 1997
Month Ended December 31, 1996
Years Ended November 30, 1996 and 1995............................ 25
Consolidated Statements of Cash Flows -
Year Ended December 31, 1997
Month Ended December 31, 1996
Years Ended November 30, 1996 and 1995............................. 26
Notes to Consolidated Financial Statements.............................. 28
Schedule III - Real Estate and Accumulated Depreciation................. 43
All other schedules are omitted because they are not required or are not
applicable or the information required is included in the Consolidated Financial
Statements or the notes thereto.
21
22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Tarragon Realty Investors, Inc.
We have audited the accompanying consolidated balance sheets of Tarragon Realty
Investors, Inc., (effective July 25, 1997, ultimate successor in interest to
Vinland Property Trust) and subsidiaries as of December 31, 1997, and November
30, 1996, and the related statements of operations, stockholders' equity, and
cash flows for the year ended December 31, 1997, the month ended December 31,
1996, and each of the two years in the period ended November 30, 1996. 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 generally accepted auditing
standards. 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tarragon Realty Investors,
Inc., and subsidiaries as of December 31, 1997, and November 30, 1996, and the
results of their operations and their cash flows for the year ended December 31,
1997, the month ended December 31, 1996, and each of the two years in the period
ended November 30, 1996, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Supplemental Schedule III is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic 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 basic financial statements taken as a whole.
Arthur Andersen LLP
Dallas, Texas
March 20, 1998
22
23
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, November 30,
------------ ------------
1997 1996
------------ ------------
(dollars in thousands)
Assets
Real estate held for sale (net of accumulated depreciation
of $1,484 in 1997) ........................................................ $ 4,319 $ 241
Less - allowance for estimated losses ........................................ (241) (241)
-------- --------
4,078 --
Real estate held for investment (net of accumulated depreciation
of $4,986 in 1997 and $5,575 in 1996) ...................................... 27,795 22,248
Investments in and advances to partnerships .................................. 1,991 1,365
Cash and cash equivalents .................................................... 1,011 2,684
Restricted cash .............................................................. 737 479
Other assets, net ............................................................ 1,865 1,981
-------- --------
$ 37,477 $ 28,757
======== ========
Liabilities and Stockholders' Equity
Liabilities
Notes, debentures, and interest payable ...................................... $ 26,416 $ 17,516
Other liabilities ............................................................ 1,291 1,372
-------- --------
27,707 18,888
Commitments and contingencies ................................................
Stockholders' equity
Common stock, $.01 par value; authorized shares, 20,000,000;
shares issued and outstanding, 1,317,812 in 1997 and
1,344,576 in 1996 (after deducting 30,175 in 1997
and 3,411 in 1996 held in treasury) ........................................ 13 2,239
Paid-in capital .............................................................. 45,696 43,715
Accumulated dividends in excess of
accumulated earnings ....................................................... (35,939) (36,085)
-------- --------
9,770 9,869
-------- --------
$ 37,477 $ 28,757
======== ========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
23
24
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year For the Month
Ended Dec 31, Ended Dec 31, For the Years Ended Nov 30,
------------ ----------- ----------------------------
1997 1996 1996 1995
------------ ----------- ----------- -----------
Income
Rentals .............................................. $ 9,525 $ 708 $ 9,357 $ 8,306
Interest ............................................. 147 16 127 131
Equity in income (loss) of partnerships .............. 39 (27) (20) --
----------- ----------- ----------- -----------
9,711 697 9,464 8,437
Expense
Property operations (including $339 in 1997,
$26 in December 1996, $235 in fiscal
1996, and $83 in fiscal 1995 to affiliates) ....... 5,747 427 6,047 5,666
Interest ............................................. 2,135 157 1,929 1,441
Depreciation ......................................... 816 79 914 991
Advisory fee to affiliate ............................ 232 13 181 146
General and administrative (including $236 in
1997, $32 in December 1996, $232 in fiscal
1996, and $165 in fiscal 1995 to affiliates) ..... 485 40 466 356
Provision for losses ................................. -- -- -- (190)
----------- ----------- ----------- -----------
9,415 716 9,537 8,410
----------- ----------- ----------- -----------
Income (loss) before net gain on sale of real estate
and extraordinary gain ............................... 296 (19) (73) 27
Net gain on sale of real estate ......................... -- -- 673 --
----------- ----------- ----------- -----------
Income (loss) from continuing operations ................ 296 (19) 600 27
Extraordinary gain ...................................... -- -- 253 --
----------- ----------- ----------- -----------
Net income (loss) ....................................... $ 296 $ (19) $ 853 $ 27
=========== =========== =========== ===========
Earnings per share - basic and diluted
Income (loss) from continuing operations ................ $ .22 $ (.01) $ .44 $ .02
Extraordinary gain ...................................... -- -- .19 --
----------- ----------- ----------- -----------
Net income (loss)....................................... $ .22 $ (.01) $ .63 $ .02
=========== =========== =========== ===========
Weighted average shares of common stock used in
computing earnings per share ......................... 1,331,314 1,344,576 1,354,415 1,392,006
=========== =========== =========== ===========
Weighted average shares of common stock used in
computing earnings per share - assuming dilution ..... 1,343,583 1,350,122 1,356,520 1,392,006
=========== =========== =========== ===========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
24
25
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Dividends
Common Stock in Excess of
-------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Earnings Equity
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
Balance, November 30, 1994 ........ 1,392,006 $ 2,318 $ 43,876 $ (36,965) $ 9,229
Net income ........................ -- -- -- 27 27
---------- ---------- ---------- ---------- ----------
Balance, November 30, 1995 ........ 1,392,006 2,318 43,876 (36,938) 9,256
Share repurchases ................. (47,430) (79) (161) -- (240)
Net income ........................ -- -- -- 853 853
---------- ---------- ---------- ---------- ----------
Balance, November 30, 1996 ........ 1,344,576 2,239 43,715 (36,085) 9,869
Net (loss) ........................ -- -- -- (19) (19)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 ........ 1,344,576 2,239 43,715 (36,104) 9,850
Adjustment for change
in par value .................. -- (2,198) 2,198 -- --
Share repurchases ................. (26,764) (28) (217) -- (245)
Cash dividend to stockholders
($.10 per share) .............. -- -- -- (131) (131)
Net income ........................ -- -- -- 296 296
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 ........ 1,317,812 $ 13 $ 45,696 $ (35,939) $ 9,770
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
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26
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year For the Month
Ended Dec 31, Ended Dec 31, For the Years Ended Nov 30,
------------- ------------- ----------------------------
1997 1996 1996 1995
----------- ----------- ----------- -----------
(dollars in thousands)
Cash Flows from Operating Activities
Rentals collected .......................................... $ 9,520 $ 709 $ 9,377 $ 8,320
Interest collected ......................................... 124 19 129 128
Interest paid .............................................. (2,007) (186) (1,752) (1,383)
Payments for property operations (including $339 in 1997,
$26 in December 1996, $235 in fiscal 1996,
and $83 in fiscal 1995 to affiliates) .................. (5,722) (528) (5,723) (5,532)
General and administrative expenses paid (including
$236 in 1997, $32 in December 1996, $232 in
fiscal 1996, and $165 in fiscal 1995 to affiliates) ..... (571) (31) (421) (427)
Advisory fee paid to affiliate ............................. (231) -- (238) (138)
Advisory fee received from prior advisor ................... -- -- -- 115
Organizational costs paid .................................. (127) -- -- --
Deferred financing costs paid .............................. (290) (3) (6) (272)
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities ...... 696 (20) 1,366 811
----------- ----------- ----------- -----------
Cash Flows from Investing Activities
Acquisition of real estate ................................. (2,641) -- (1,863) (258)
Proceeds from the sale of real estate ...................... -- -- 3,088 --
Real estate improvements ................................... (1,332) (96) (822) (534)
Collections of notes receivable ............................ 68 685 3 181
Funding of note receivable ................................. -- -- -- (196)
Distributions from partnerships ............................ 69 -- -- --
Acquisition of partnership interests ....................... -- -- (813) --
Advances to partnerships ................................... (1,186) (40) (572) --
----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities ..... (5,022) 549 (979) (807)
----------- ----------- ----------- -----------
Cash Flows from Financing Activities
Proceeds from borrowings ................................... 7,950 -- -- 5,336
Payments of notes payable .................................. (5,286) (34) (371) (2,343)
Redemption of uncertificated obligations ................... -- -- -- (91)
Replacement escrow (deposits) receipts, net ................ (244) (17) 61 (268)
Share repurchases .......................................... (245) -- (240) --
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities ...... 2,175 (51) (550) 2,634
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ........ (2,151) 478 (163) 2,638
Cash and cash equivalents, beginning of period ............... 3,162 2,684 2,847 209
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period ..................... $ 1,011 $ 3,162 $ 2,684 $ 2,847
=========== =========== =========== ===========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
26
27
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Year For the Month
Ended Dec 31, Ended Dec 31, For the Years Ended Nov 30,
----------- ----------- ----------------------------
1997 1996 1996 1995
----------- ----------- ----------- -----------
(dollars in thousands)
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Net income (loss) ............................................ $ 296 $ (19) $ 853 $ 27
Extraordinary gain ........................................... -- -- (253) --
Net gain on sale of real estate .............................. -- -- (673) --
Depreciation and amortization ............................... 1,021 89 1,033 1,137
Provision for losses ......................................... -- -- -- (190)
Equity in (income) loss of partnerships ...................... (39) 27 20 --
Changes in other assets and liabilities, net of effects
of noncash investing and financing activities
(Increase) in other assets ................................ (566) (30) (117) (65)
Increase (decrease) in other liabilities................... (51) (57) 396 (104)
Decrease in interest receivable............................ -- 5 -- --
Increase (decrease) in interest payable.................... 35 (35) 107 6
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities ............ $ 696 $ (20) $ 1,366 $ 811
=========== =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection with the
purchase, foreclosure, or exchange of real estate
Real estate ................................................ $ 5,776 $ 3,973 $ 4,344 $ 13,393
Advances to partnership .................................... -- (572) -- --
Notes and interest receivable .............................. -- -- -- (1,935)
Other assets ............................................... 171 (17) 39 194
Notes and interest payable ................................. (3,275) (2,995) (2,510) (11,142)
Other liabilities .......................................... (31) (389) (10) (252)
----------- ----------- ----------- -----------
Cash paid ................................................ $ 2,641 $ -- $ 1,863 $ 258
=========== =========== =========== ===========
Assets disposed of and liabilities released in connection
with the sale of real estate
Real estate ................................................ $ -- $ -- $ 13,732 $ --
Other assets ............................................... -- -- (91) --
Notes and interest payable ................................. -- -- (11,160) --
Other liabilities .......................................... -- -- (319) --
Net gain on sale ........................................... -- -- 673 --
Extraordinary gain ......................................... -- -- 253 --
----------- ----------- ----------- -----------
Cash received ............................................ $ -- $ -- $ 3,088 $ --
=========== =========== =========== ===========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
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TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of Tarragon Realty Investors,
Inc., subsidiaries, and consolidated partnerships (the "Company") have been
prepared in conformity with generally accepted accounting principles ("GAAP"),
the most significant of which are described in NOTE 1. "SIGNIFICANT ACCOUNTING
POLICIES." The preparation of financial statements in conformity with GAAP
requires 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 financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. These, along with the remainder of 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, 1997, and for the year then ended, unless
otherwise indicated. Dollar amounts in tables are in thousands, except per share
amounts.
Certain balances for 1995 and 1996 have been reclassified to conform to the 1997
presentation.
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Company business. Tarragon Realty Investors, Inc., ("TRI" or
the "Company") is a Nevada corporation incorporated April 2, 1997, and the
ultimate successor in interest to Vinland Property Trust (the "Trust"), a
California business trust which was established July 18, 1973, and commenced
operations April 2, 1974. The Trust was formed to invest in real estate,
including commercial and multifamily properties. On July 10, 1997, the
shareholders of the Trust approved the conversion of the Trust into a Nevada
corporation, which was accomplished by incorporating the Trust as a California
corporation and merging it into the Company, a wholly-owned subsidiary of the
Trust, with the Company as the surviving entity. The effective date of the
merger of the Trust and the Company was July 25, 1997. References to the
Company, its Board of Directors, its stockholders, and its shares of common
stock ($.01 par value)in relation to dates prior to July 25, 1997, refer to the
Trust, its Board of Trustees, its shareholders, and its shares of beneficial
interest (no par value). While the Trust had a November 30 fiscal year end, the
Company has a December 31 fiscal year end. Accordingly, the accompanying
Consolidated Financial Statements include Statements of Operations,
Stockholder's Equity, and Cash Flows for the one month period ended December 31,
1996, which represents the transition period related to the change in fiscal
year end.
Basis of consolidation. The Consolidated Financial Statements include the
accounts of the Company, its subsidiaries, and partnerships which it controls.
All significant intercompany transactions and balances have been eliminated.
Real estate and depreciation. Real estate held for sale is carried at the lower
of cost or estimated fair value less estimated costs to sell. Real estate held
for investment is carried at cost unless an impairment is determined to exist,
as discussed below. Impaired properties are written down to their estimated fair
values. The Company capitalizes property improvements and major rehabilitation
projects which increase the value of the respective property and have useful
lives greater than one year, except for individual expenditures less than
$10,000 which are not part of a planned renovation project. Under this policy,
during 1997, expenditures of $1.3 million were capitalized and property
replacements of $432,000 were expensed. Property replacements include, but are
not limited to, such items as carpet; appliances; plumbing and heating,
ventilation, and air conditioning replacements; exterior painting; and parking
lot improvements. Depreciation is provided against real estate held for
investment by the straight-line method over the estimated useful lives of the
assets, which range from five to 40 years.
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29
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company's management evaluates the Company's properties held for investment
for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. This evaluation generally
consists of a review of the property's cash flow and current and projected
market conditions, as well as any changes in general and local economic
conditions. If an impairment loss exists based on the results of this review, a
loss is recognized by a charge against current earnings and a corresponding
reduction in the respective asset's carrying value. The amount of this
impairment loss is equal to the amount by which the carrying value of the
property exceeds its estimated fair value.
At least annually, all properties held for sale are reviewed by the Company's
management, and a determination is made if the held for sale classification
remains appropriate. The following are among the factors considered in
determining that a change in classification to held for investment is
appropriate: (i) the property has been held for at least one year; (ii)
management has no intent to dispose of the property within the next twelve
months; (iii) the property is a "qualifying asset" as defined in the Internal
Revenue Code of 1986, as amended (the "Code"); (iv) property improvements have
been funded; and (v) the Company's financial resources are such that the
property can be held long-term.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121
- - "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" on December 1, 1995. There was no cumulative effect nor any
impact on the Company's financial position as a result of the adoption. Pursuant
to the adoption, the Company ceased depreciation of its properties held for
sale.
Allowance for estimated losses. Valuation allowances are provided for estimated
losses on properties held for sale to the extent that the investment in the
properties exceeds the Company's estimate of fair value less estimated selling
costs. The provisions for losses are based on estimates, and actual losses may
vary from current estimates. Such estimates are reviewed periodically. Any
additional provision determined to be necessary or the reversal of any existing
allowance no longer required is recorded by a charge or credit to current
earnings.
Cash equivalents. The Company considers all highly liquid debt instruments
purchased with maturities of three months or less to be cash equivalents.
Restricted cash. Restricted cash represents escrow accounts, generally held by
the lenders of certain of the Company's mortgage notes payable, for taxes,
insurance, and property repairs.
Other assets. Other assets consist primarily of tenant accounts receivable,
notes and interest receivable, prepaid leasing commissions, and deferred
borrowing costs. Prepaid leasing commissions are amortized to leasing commission
expense, included in property operating expenses, on the straight-line method
over the related lease terms. Deferred borrowing costs are amortized on the
straight-line method (which approximates the effective interest method) over the
related loan terms, and such amortization is included in interest expense.
Revenue recognition on the sale of real estate. Gains on sales of real estate
are recognized when and to the extent permitted by SFAS No. 66 - "Accounting for
Sales of Real Estate." Until the requirements of SFAS No. 66 for full profit
recognition have been met, transactions are accounted for using the deposit,
installment, cost recovery, or financing methods, whichever is appropriate.
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TA