SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE TO/A
(RULE 14D-100)
TENDER OFFER STATEMENT UNDER SECTION 14(d)(1) OR 13(e)(1)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Amendment No. 2)
TRANSCONTINENTAL REALTY INVESTORS, INC. (Issuer)
(Name of Subject Company)
TRANSCONTINENTAL REALTY ACQUISITION CORPORATION (Offeror)
(Name of Filing Person)
AMERICAN REALTY INVESTORS, INC. (Offeror)
(Name of Filing Person)
BASIC CAPITAL MANAGEMENT, INC. (Other Person)
(Name of Filing Person)
GENE E. PHILLIPS (Other Person)
(Names of Filing Person)
INCOME OPPORTUNITY ACQUISITION CORPORATION (Other Person)
(Names of Filing Person)
INCOME OPPORTUNITY REALTY INVESTORS, INC. (Other Person)
(Name of Filing Person)
COMMON STOCK, PAR VALUE .01 PER SHARE
(Title of Class of Securities)
893617-20-9
(CUSIP Number of Class of Securities)
ROBERT A. WALDMAN
1800 VALLEY VIEW LANE, SUITE 300
DALLAS, TEXAS 75234
(469) 522-4200
(469) 522-4360 (FAX)
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With copies to:
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STEVEN C. METZGER, ESQ. JEFFREY M. SONE, ESQ.
PRAGER METZGER & KROEMER, PLLC JACKSON WALKER L.L.P.
2626 COLE AVENUE, SUITE 900 901 MAIN STREET, SUITE 6000
DALLAS, TEXAS 75204 DALLAS, TEXAS 75202
(214) 969-7600 (214) 953-6000
(214) 523-3838 (FAX) (214) 953-5822 (FAX)
(Name, Address, and Telephone Numbers of Person Authorized to Receive
Notices and Communications on Behalf of the Persons Filing Statement)
Calculation of Filing Fee
Transaction valuation* Amount of filing fee
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$71,370,128.00 $6,567.00**
* For purposes of calculating the fee only. This amount assumes the
purchase of 4,078,293 shares of Transcontinental Realty Investors, Inc. for
$17.50 per share. The amount of the filing fee, calculated in accordance with
Section 14(g)(1)(B)(3) and Rule 0-11.
** Filing fee was paid with the Schedule TO filed November 15, 2002.
[ ] Check the box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee was previously
paid. Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
Amount Previously Paid:
Filing Parties:
Form or Registration No.:
Date Filed:
[ ] Check the box if the filing relates solely to preliminary
communications made before the commencement of a tender offer.
Check the appropriate boxes below to designate any transactions to
which the statement relates
[X] third-party tender offer subject to Rule 14d-1.
[ ] issuer tender offer subject to Rule 13e-4.
[X] going private transaction subject to Rule 13e-3.
[ ] amendment to Schedule 13D under Rule 13d-2.
Check the following box if the filing is a final amendment reporting
the results of the tender offer: [ ]
RULE 14D-1 TENDER OFFER STATEMENT
Introduction
This Amendment No. 2 amends and supplements the Tender Offer Statement
on Schedule TO originally filed on November 15, 2002, as amended (the "Schedule
TO") by American Realty Investors, Inc. ("ARL"), Basic Capital Management, Inc.
("BCM"), Mr. Gene E. Phillips ("Mr. Phillips"), Transcontinental Realty
Acquisition Corporation, a wholly-owned subsidiary of ARL ("TCI Acquisition
Sub"), Income Opportunity Acquisition Corporation ("IOT Acquisition Sub") and
Income Opportunity Realty Investors, Inc ("IOT"). This Schedule TO includes the
Schedule 13E-3 Transaction Statement of ARL, BCM, Mr. Phillips, TCI Acquisition
Sub, IOT Acquisition Sub, and IOT.
This Tender Offer Statement relates to the offer by TCI Acquisition Sub
to purchase any and all of the issued and outstanding shares of common stock of
Transcontinental Realty Investors, Inc., ("TCI") for $17.50 net per share in
cash upon the terms and subject to the conditions set forth in the Offer to
Purchase, dated November 15, 2002 and filed as Exhibit (a)(1) to the Schedule
TO, as amended. The information set forth in the Offer to Purchase and the
Letter of Transmittal (filed as Exhibit (a)(2) to the Schedule TO), including
all schedules, exhibits and annexes thereto, is hereby expressly incorporated
herein by reference in response to all items of information required to be
included in, or covered by, this Tender Offer Statement on Schedule TO and all
items of information required to be included in, or covered by, the Schedule
13E-3 Transaction Statement. The responses to each item in this Tender Offer
Statement are qualified in their entirety by the information contained in the
Offer to Purchase and the exhibits, as amended, hereto.
ITEM 4. TERMS OF THE TRANSACTION.
Item 4 of the Schedule TO is hereby amended as follows:
The phrase "may, subject to certain conditions" in the first sentence
of the first full paragraph on page 40 of the Offer to Purchase is
deleted and the phrase "expressly reserve the right to" is inserted.
The phrase "after the date of the offer and before the time of
acceptance of such shares for payment pursuant to the offer" in the
first sentence of the first full paragraph on page 53 of the Offer to
Purchase is deleted and the phrase "before the Expiration Date any
condition" is inserted.
ITEM 5. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS.
Item 5 of the Schedule TO is hereby amended as follows:
The following is added as a new section on page 7 of the Offer to
Purchase before the section entitled "Legal Proceedings Involving BCM
and Mr. Phillips":
FEES THAT MAY BE PAID TO BCM RELATING TO THE OFFER
BCM is entitled to receive fees in connection with
the sale of property that may be sold and loans that may be
obtained to finance the purchase of shares in the offer. Those
fees are currently estimated to be a maximum of $1,939,000,
however, the actual amount will depend on how many properties,
if any, are sold and if any loans are entered into. For a
detailed description of ARL's relationship with BCM
and the Advisory Agreement that provides for the fees to be
paid to BCM see "The Advisor - BCM" and "Certain Relationships
and Related Transactions of BCM, ARL, TCI and IOT."
The following paragraph is inserted after the fourth full paragraph on
page 16 of the Offer to Purchase:
"On February 22, 2002 ARL filed a registration statement on
Form S-4 to register the shares of ARL preferred stock to be
offered to TCI and IOT stockholders as part of the merger
consideration and to seek stockholder approval from the ARL,
TCI and IOT stockholders for the TCI and IOT mergers, as
applicable. Between February 22, 2002 and November 14, 2002,
ARL responded to comments made by the staff of the Securities
and Exchange Commission and pursued financing for the mergers.
ARL has not been able to satisfy all of the staff's comments
to date, and thus has been unwilling to request effectiveness
of the registration statement."
The first and second sentences of the second paragraph on page 18 of
the Offer to Purchase are deleted and replaced with the following:
"On November 7, 2002, the ARL board of directors met in person
and telephonically to consider the fairness of the tender
offer to the unaffiliated TCI and IOT stockholders. Present at
the meeting telephonically was Earl Cecil and in person were
Richard Humphrey and Joseph Mizrachi. Colleen Currie did not
attend the meeting and subsequently resigned as a member of
the ARL board on November 11, 2002*."
The following sentence is inserted as the fifth sentence of the second
paragraph on page 18 of the Offer to Purchase:
"ARL provided each member of the board with current and
historical information regarding the stock prices of ARL, TCI
and IOT, information concerning the book values per share of
ARL, TCI and IOT, both historically and as of September 30,
2002, drafts of information proposed to be provided to
stockholders of TCI and IOT in connection with the proposed
tender offers, information concerning ARL's plans to raise the
funds necessary to consummate the tender offers and
information regarding the status of discussions with
settlement counsel for the unaffiliated stockholders of TCI
and IOT in the Olive litigation."
The first sentence of the footnote on page 18 of the Offer to Purchase
is deleted.
ITEM 8. INTEREST IN SECURITIES OF THE SUBJECT COMPANY.
Item 8 of the Schedule TO Amendment No. 1 is hereby amended as follows:
Mr. Stokely beneficially owns 7,410,216 shares of ARL common stock,
which includes 746,972 shares owned by TCI of which the executive
officers of ARL may be deemed to beneficially own by virtue of their
positions as executive officers of TCI and 6,663,244 shares owned by
BCM of which the executive officers of ARL may be deemed to
beneficially own by virtue of their positions as executive officers of
BCM. Mr. Stokely's beneficial ownership is based on the number of
shares owned as of October 25, 2002 and totals 65.1% of the ownership
of ARL, based upon 11,375,127 shares of ARL common stock outstanding at
October 25, 2002. Mr. Stokely is not a record owner of any shares of
ARL
common stock. More information on Mr. Stokely is set forth in Schedule
I "Directors and Executive Officers of BCM, ARL, TCI and IOT" in the
Offer to Purchase and is incorporated herein by reference.
ITEM 10. FINANCIAL INFORMATION OF ARL.
Item 10 of the Schedule TO is hereby amended by replacing the reference
to the Offer to Purchase with the following:
The information is set forth in Section 11 "Financial Information of
ARL", Schedule II and Schedule III in the Offer to Purchase, and is
incorporated herein by reference.
ITEM 12. EXHIBITS
Item 12 of the Schedule TO is hereby amended as follows:
Exhibit Number Description
(a)(1) Offer to Purchase, dated November 15,
2002(1)
(a)(2) Letter of Transmittal, dated November 15,
2002(1)
(a)(3) Notice of Guaranteed Delivery(1)
(a)(4) Letter to Brokers, Dealers, Commercial
Banks, Trust Companies and other Nominees,
dated November 15, 2002(1)
(a)(5) Form of Letter to Clients for Use by
Brokers, Dealers, Commercial Banks, Trust
Companies and other Nominees(1)
(a)(6) Guidelines for Certification of Taxpayer
Identification Number on Substitute Form
W-9(1)
(a)(7) Summary Advertisement, dated November
15,2002(1)
(a)(8) Press Release issued by American Realty
Advisors on November 8, 2002(2)
(a)(9) Press Release issued by American Realty
Investors, Inc. on November 21, 2002(3)
(b) Not applicable
(c) Not Applicable
(d) Not Applicable
(f) Not Applicable
(g) Not Applicable
(h) Not Applicable
99.1 ARL/IORI/TCI Merger: Board Presentation --
Executive Summary, January 31, 2002,
prepared by Houlihan Lokey Howard & Zukin(4)
99.2 ARL/IORI/TCI Merger: Exhibits to Board
Presentation, January 2002, prepared by
Houlihan Lokey Howard & Zukin(4)
99.3 Discounted Cash Flow Analysis - Detail
prepared by Houlihan Lokey Howard & Zukin(4)
99.4 Opinion of Houlihan Lokey Howard & Zukin
(TCI)(5)
99.5 Opinion of Houlihan Lokey Howard & Zukin
(IOT)(6)
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(1) Previously filed as an exhibit to the Schedule TO on November 15,
2002 by the filing persons named in this Schedule TO and is
incorporated herein by reference.
(2) Previously filed as an exhibit to the Schedule TO-C on November 8,
2002 by the filing persons named in this Schedule TO and is
incorporated herein by reference.
(3) Previously filed as an exhibit to the Schedule TO Amendment No. 1
on November 22, 2002 by the filing persons named in this Schedule TO
and is incorporated herein by reference.
(4) Previously filed as an exhibit to the Schedule 13E-3 Amendment No.
1 filed by American Realty Investors, Inc. on August 30, 2002 and is
incorporated herein by reference.
(5) Previously filed on August 30, 2002 as Appendix E to the Proxy
Statement/Prospectus contained in the Form S-4 filed by American Realty
Investors, Inc. and is incorporated herein by reference.
(6) Previously filed on August 30, 2002 as Appendix F to the Proxy
Statement/Prospectus contained in the Form S-4 filed by American Realty
Investors, Inc. and is incorporated herein by reference.
ITEM 13. INFORMATION REQUIRED BY SCHEDULE 13E-3.
Item 8. Fairness of the Transaction is hereby amended as follows:
The section title "Special Factors - Fairness Determination of the ARL
Board of Directors, BCM and Mr. Phillips" on page 22 of the Offer to
Purchase is amended to delete the words "and Mr. Phillips" and add the
punctuation and words ", Mr. Phillips and TCI Acquisition Sub".
The first and second sentences of the fifth full paragraph on page 22
are deleted and replaced with the following:
"On November 7, 2002, the ARL board of directors met in person
and telephonically to consider the fairness of the tender
offer to the unaffiliated TCI stockholders. Present at the
meeting telephonically was Earl Cecil and in person were
Richard Humphrey and Joseph Mizrachi. Colleen Currie did not
attend the meeting and subsequently resigned as a member of
the ARL board on November 11, 2002*."
The following sentence is inserted as the second sentence of the sixth
full paragraph on page 22 of the Offer to Purchase:
"The ARL board determined to reconvene its meeting on November
8, 2002 in the event that any member of the board, after
considering the offer and the consideration to be paid to
stockholders of TCI or any matter related thereto, wished to
further discuss, or reconsider, the board's determination that
such offer and consideration were procedurally and
substantively fair to the unaffiliated TCI stockholders."
The following footnote is added to page 22 of the Offer to Purchase:
"* Ms. Currie did not provide any reason for her resignation
and did not advise of any disagreement with any policies or
practices or operations of ARL nor did she furnish ARL with
any letter describing any disagreement or request the matter
be disclosed."
The following sentences are added before the last sentence of the
fourth full bullet point on page 23 of the Offer to Purchase:
"The ARL board felt that book value of the shares of TCI is
one indication of the value of such shares. The board noted,
however, that stockholders had not in the
recent past been able to sell their shares for book value on
the open market. In addition, the board noted that no TCI
stockholder would be compelled to tender his or her shares,
and that as a result, unless such stockholders wish to sell
pursuant to the offer, they are free to remain stockholders of
TCI."
Insert the following as the second bullet point on page 24 of the Offer
to Purchase:
o In determining that the offer was procedurally fair the ARL
board noted that the terms of the offer were dictated
principally from the Settlement Agreement from arms length
negotiations between Settlement Counsel and counsel for ARL.
Additionally, the board noted the offer price was not
determined at a time when market prices were unusually
depressed by virtue of the occurrence of any extraordinary or
unique event and that no stockholder would be compelled to
tender his or her shares.
The third full paragraph after the bullet point on page 24 of the Offer
to Purchase is amended to replace the phrase "BCM and Mr. Phillips"
with the phrase "BCM, Mr. Phillips and TCI Acquisition Sub" each time
it appears in that paragraph.
Insert the following before the next to the last sentence in the last
paragraph on page 24 of the Offer to Purchase:
"In determining that the offer was procedurally fair the IOT
board noted that the terms of the offer were dictated
principally from the Settlement Agreement from arms length
negotiations between Settlement Counsel and counsel for ARL.
Additionally, the board noted the offer price was not
determined at a time when market prices were unusually
depressed by virtue of the occurrence of any extraordinary or
unique event and that no stockholder would be compelled to
tender his or her shares."
Item 9. Reports, Opinions, Appraisals and Negotiations is hereby
amended to include the following information regarding an opinion
received by the board of directors of each of TCI and IOT in connection
with proposed mergers between TCI and ARL and IOT and ARL as more fully
discussed in the Offer to Purchase. While the boards of ARL and IOT
made note of the opinion in determining the fairness of the tender
offer to the unaffiliated stockholders of TCI they did not rely on the
opinion because it was tendered with respect to a separate, materially
different transaction, which transaction proposed materially different
consideration for the TCI shares. The opinion related to a merger,
pursuant to which ARL proposed to acquire all of the common stock of
TCI in exchange for cash, or at the option of each stockholder, shares
of ARL preferred stock. The offer, by contrast, is to pay cash for
shares of the TCI common stock. ARL does not expect all of TCI's
stockholders to tender their shares in the offer. The materials
supplied to the TCI and IOT boards by Houlihan Lokey have been filed as
exhibits to this Schedule TO by incorporation by reference under Item
12.
OPINION OF FINANCIAL ADVISOR - PROPOSED MERGER TRANSACTIONS
In connection with the previously proposed merger transaction, pursuant
to which ARL proposed to acquire TCI and IOT by means of separate mergers
between TCI and TCI Acquisition Sub and IOT and IOT Acquisition Sub, the board
of directors of each of TCI and IOT retained Houlihan Lokey, pursuant to
engagement letters dated October 4, 2001 (the "Engagement Letters"), to render
fairness opinions, from a financial point of view, to public TCI common
stockholders and
public IOT common stockholders, in each case excluding those stockholders
affiliated with ARL, of the consideration proposed to be received by the
nonaffiliated TCI stockholders and the nonaffiliated IOT stockholders in the
proposed merger of TCI and IOT with two subsidiaries of ARL pursuant to which
(a) nonaffiliated TCI stockholders will receive: (i) $17.50 in cash or (ii) if
they affirmatively elect, one share of newly issued ARL Series G redeemable
convertible preferred stock for each share of TCI common stock that they
currently own and (b) nonaffiliated IOT stockholders will receive: (i) $19.00 in
cash or (ii) if they affirmatively elect, one share of newly issued ARL Series H
redeemable convertible preferred stock. Both the Series G redeemable convertible
preferred stock and Series H redeemable convertible preferred stock were to be
convertible into ARL common stock based upon the terms, conditions and exchange
ratios set forth herein. Houlihan Lokey and the board of directors of each of
TCI and IOT amended the Engagement Letters on February 1, 2002, to provide for
Houlihan Lokey's performance of certain additional financial advisory services
on behalf of the board of directors of each of TCI and IOT, specifically,
conducting negotiations with ARL regarding the mergers. Houlihan Lokey did not
set the proposed cash offering price in the mergers of $17.50 per share for TCI
stockholders or $19 per share for IOT stockholders. These amounts were
determined by negotiation between Settlement Counsel and representatives of ARL.
Houlihan Lokey advised the TCI and IOT boards of directors as to the range of
exchange ratios for the conversion factors of ARL Series G and H Preferred Stock
implied by the financial analysis conducted by Houlihan Lokey and assisted the
boards of directors in negotiating such exchange ratios.
Although ARL currently expects to pursue the proposed merger
transaction following consummation of the offer, the offer is not contingent
upon the merger transaction and the consideration offered in the offer is not
the same as that proposed in connection with the proposed mergers. The ARL board
did not seek Houlihan Lokey's advice, assistance or opinion in connection with
the offer, nor did the boards of TCI or IOT seek such an opinion, advice or
assistance. The following description of Houlihan Lokey and its activities
related only to the proposed merger transactions and not to the offer.
Houlihan Lokey is a nationally recognized investment banking firm that
provides financial advisory services in connection with mergers and
acquisitions, leveraged buyouts, business valuations for a variety of regulatory
and planning purposes, recapitalizations, financial restructurings, and private
placements of debt and equity securities. In November of 1999, Houlihan Lokey
acted as financial advisor to an affiliate of ARL, TCI and IOT, National Realty,
L. P. ("NRLP"), and rendered a fairness opinion with respect to the
consideration to be received by unitholders of NRLP in connection with a
business combination. The board of directors of each of TCI and IOT selected
Houlihan Lokey to provide the financial advisory services described herein upon
a referral from NRLP and because of Houlihan Lokey's reputation as a nationally
recognized valuation and financial consulting firm that has substantial
experience providing valuation and consulting services. TCI agreed to pay
Houlihan Lokey a fee of $340,000 and IOT agreed to pay Houlihan Lokey a fee of
$60,000, in each case for its preparation and delivery of a fairness opinion
plus reasonable out-of-pocket expenses that may be incurred by Houlihan Lokey in
connection herewith, plus a refundable indemnification deposit of $42,500 from
TCI and a refundable indemnification deposit of $7,500 from IOT. In accordance
with the Settlement Agreement in the Olive Litigation, Mr. Phillips, BCM and ARL
are required to reimburse TCI and IOT for such expenses. Pursuant to the
amendment to the Engagement Letters, TCI and IOT agreed to jointly pay Houlihan
Lokey an additional fee of $100,000 for the additional services described below.
No portion of Houlihan Lokey's fee is contingent upon the successful completion
of the mergers or any other related transaction. Houlihan Lokey has been
retained by TCI and IOT to deliver fairness opinions to the board of directors
of TCI and IOT and provide certain additional financial advisory services on
behalf of the board of directors of each of TCI and IOT, specifically, to
conduct
negotiations with ARL regarding the terms of the Series G redeemable convertible
preferred and the Series H redeemable convertible preferred. With respect to the
negotiations with ARL, Houlihan Lokey advised the TCI and IOT boards of
directors with respect to the range of exchange ratios implied by Houlihan
Lokey's financial analysis and recommended that the boards of directors ensure
that the stockholders that received the ARL preferred stock would have an
adequate opportunity to evaluate the ARL combined business operation and to
convert the Series G and Series H redeemable convertible preferred stock into
ARL common stock. Houlihan Lokey also negotiated with representatives of ARL at
the direction of the boards of directors of IOT and TCI regarding the timing of
redeeming the preferred stock and converting the preferred stock. The exchange
ratio was determined by the boards of directors of ARL, IOT and TCI following
negotiations conducted by Houlihan Lokey and representatives of ARL. The
limitations on voting rights of the preferred stock were determined by ARL. TCI
and IOT agreed to indemnify Houlihan Lokey and its affiliates against certain
liabilities, including liabilities under federal securities laws that arise out
of the engagement of Houlihan Lokey.
At joint meetings of the TCI and IOT boards of directors (which consist
of the same individuals) on February 1, 2002, Houlihan Lokey rendered its oral
opinion regarding the consideration to be received by the stockholders of TCI
and IOT in connection with the mergers. Thereafter, Houlihan Lokey assisted the
TCI and IOT boards of directors with respect to certain negotiations regarding
modifications to the terms of the Series G redeemable convertible preferred
stock and Series H redeemable convertible preferred stock. On February 4, 2002,
Houlihan Lokey confirmed in writing, that as of February 1, 2002, and subject to
and based upon the various qualifications and assumptions set forth in its
written opinions, the consideration to be received by the stockholders of TCI
and IOT in connection with the mergers was fair, from a financial point of view,
to the nonaffiliated TCI stockholders and the nonaffiliated IOT stockholders.
There were no material limitations to the fairness opinions. The full text of
Houlihan Lokey's opinions, which set forth the assumptions made, general
procedures followed, factors considered and limitations on the review undertaken
by Houlihan Lokey in rendering its opinions are filed as exhibits to this
Schedule TO and are incorporated herein by reference. The discussion of the
opinions below is qualified in its entirety by reference to the opinions. You
are urged to read Houlihan Lokey's opinions in their entirety carefully for a
description of the procedures followed, the factors considered and the
assumptions made by Houlihan Lokey. In reading the Houlihan Lokey opinion,
however, you should remember that it does not relate to the tender offer being
made by ARL for shares of TCI's common stock or to the consideration offered for
such shares. Instead, the Houlihan Lokey opinion relates to a previously
proposed transaction pursuant to which ARL proposed to acquire all of the shares
of TCI's common stock by means of a merger between TCI and TCI Acquisition Sub.
The consideration which would have been offered in that merger was materially
different from that offered in the offer. The Houlihan Lokey opinion will be
made available at the principal executive offices of TCI during its regular
business hours for inspection by any interested stockholder of TCI or a
representative who has been designated in writing upon written request and at
the expense of the requesting stockholder.
Houlihan Lokey's opinions to the TCI and IOT boards of directors
address only the fairness from a financial point of view of the consideration to
be received in the mergers. Houlihan Lokey's opinions do not constitute a
recommendation as to how any person should vote with respect to the mergers or a
recommendation as to the form and amount of consideration that any person should
elect in connection with the mergers. Houlihan Lokey did not render any opinion
on the current or prospective public share prices of any of TCI, IOT or ARL
(collectively, the "Subject Companies"). Houlihan Lokey's opinions also do not
address TCI's or IOT's underlying business decision to effect the mergers, the
tax consequences of the mergers, the fair market value of any of the Subject
Companies' assets either individually or collectively, or the reasonableness of
any aspect of the
mergers not expressly addressed in its fairness opinions. Houlihan Lokey has not
been requested to, is not obligated to and does not intend to update, revise or
reaffirm its fairness opinion in connection with the mergers. Events that could
affect the fairness of the mergers, from a financial point of view, include
adverse changes in industry performance or market conditions and changes to the
business, financial condition and results of operations of the Subject
Companies.
In arriving at its fairness opinions, among other things, Houlihan
Lokey assumed that: (i) each Series G share have a liquidation preference of
$20.00 per share and will pay a cash dividend of 10 percent per annum; (ii) each
Series H share will have a liquidation preference of $21.50 per share and will
pay a cash dividend of 10 percent per annum; (iii) at the holders' option, each
Series G share is convertible into 2.5 shares of ARL common stock during a 75
day period commencing on the fifteenth day after the public issuance of ARL's
form 10-Q (the "10-Q Issuance Date") to the public following the close date of
the mergers; (iv) at the holders' option, each Series H share is convertible
into 2.25 shares of ARL common stock during a seventy-five day period commencing
on the fifteenth day after the 10-Q Issuance Date following the close date of
the mergers; and (v) the Series G and Series H shares will be redeemable by ARL
90 days after the 10-Q Issuance Date following the close date of the mergers at
the liquidation preference plus any accrued and unpaid dividends thereon.
In arriving at its fairness opinions, among other things, Houlihan
Lokey:
1. met with certain members of the senior management of the
Subject Companies and their advisor, BCM, to discuss the
operations, financial condition, future prospects and
projected operations and performance of the Subject Companies;
2. visited certain facilities and business offices of the Subject
Companies;
3. reviewed the Subject Companies' annual reports to stockholders
on Form 10-K for the fiscal years ended December 31, 2000 and
quarterly reports on Form 10-Q for the three quarters ended
September 30, 2001, which Subject Companies' management have
identified as being the most current financial statements
available;
4. reviewed forecasts and projections prepared by the Subject
Companies management with respect to the Subject Companies'
apartment, retail, industrial, hotel and office building
assets for the years ended December, 2002 through 2006;
5. requested the latest appraisals on the Subject Companies'
income producing properties and any and all appraisals for the
Subject Companies' land assets, and reviewed such appraisals
as were provided by management;
6. reviewed ARL's Land Portfolio Book dated September 2001;
7. reviewed certain estimated valuations of TCI and IOT prepared
in connection with the Settlement Agreement;
8. reviewed the historical market prices and trading volume for
the Subject Companies' publicly traded securities;
9. reviewed certain other publicly available financial data for
certain companies that Houlihan Lokey deems comparable to the
Subject Companies; and
10. conducted such other studies, analyses and inquiries as
Houlihan Lokey deemed appropriate.
ANALYSES
In order to determine the fairness, from a financial point of view, of
the consideration proposed to be received by the nonaffiliated IOT stockholders
and the nonaffiliated TCI stockholders in the proposed mergers, Houlihan Lokey
determined an indicated range per share of equity net asset values for ARL, IOT
and TCI and compared such per share concluded equity net asset values to each
other and to the ARL per share public trading price. This analysis was premised
upon a valuation of each of the Subject Companies' income and non-income
producing properties and other assets and considered their respective
liabilities.
In determining the value of the Subject Companies' income producing
properties, Houlihan Lokey conducted several analyses, including the following:
(1) a "Net Asset Value" approach whereby Houlihan Lokey (a) applied
capitalization rates to historical and projected adjusted net operating income
for each of the income producing properties held by the Subject Companies (the
"Income Producing Properties") and (b) estimated the present value of the
projected future cash flows to be generated from the Income Producing Properties
by applying a discount rate to the projected future cash flow, (2) a "Portfolio"
approach whereby Houlihan Lokey determined a level of earnings considered to be
representative of future performance of the Subject Companies, and capitalized
such figure with a risk-adjusted rate, and (3) various other analyses. Houlihan
Lokey used the following valuation methodologies to determine the value of the
land assets: historical sales price per square foot, outstanding offers and
letters of intent, management estimates and book value. In addition, certain
assets, such as Pizza World, Signature Athletic Club and parking lots, were
valued by employing the market multiple approach and other assets, including
notes receivable and oil and gas operations, were valued at book value.
NET ASSET VALUE APPROACH - INCOME PRODUCING PROPERTY
DIRECT CAPITALIZATION
In conducting the direct capitalization net asset value approach,
Houlihan Lokey applied (x) rates from publicly available capitalization rates
estimated in the Second Quarter 2001 Market Monitor and the Fall 2001 Real
Estate Outlook by Cushman & Wakefield, Inc. and The Appraisal Institute to (y)
each of the Income Producing Properties (i) adjusted net operating income for
the twelve months ended September 30, 2001 and (ii) projected adjusted net
operating income for the fiscal year ended December 31, 2002. The capitalization
rates used in the direct capitalization approach ranged from 8.9% to 15.9% for
the twelve-month period ended September 30, 2001 and from 9.3% to 16.4% for the
twelve month period ended December 31, 2002. Capitalization rates applied in
individual property valuations were determined with reference to the type of
property being evaluated and adjusted based on historical and/or projected
occupancy rates for such property, as applicable.
DISCOUNTED CASH FLOW
In conducting the discounted cash flow net asset value approach,
Houlihan Lokey applied a discount rate to the projected future cash flows of
each Income Producing Property to arrive at present value of such Income
Producing Property. The applicable Subject Company provided Houlihan Lokey with
the property level historical and projected financial information used to
determine the net operating income of each property. The discount rates used in
the discounted cash flow approach ranged from 11.3% to 18.3% and were intended
to reflect risks of ownership of the
relevant Income Producing Property and the associated risks of realizing the
stream of projected future cash flows. The discount rates applied by Houlihan
Lokey in its analysis were based on discount rates for office, industrial and
retail properties published by Cushman & Wakefield, Inc. Discount rates applied
in individual property valuations were determined with reference to the types of
property being evaluated and adjusted based on historical and/or projected
occupancy rates for such property, as applicable. Houlihan Lokey's ability to
use the discounted cash flow method of valuation was limited by the lack of
availability of necessary forecasts for certain Income Producing Properties
resulting from changes in tenant occupancy or other factors that effect
projected performance for certain Income Producing Properties. Accordingly,
Houlihan Lokey utilized the discount cash flow method only for those assets with
forecasts considered relevant. Additionally, based upon Houlihan Lokey's
discussions with management, due diligence and analysis of projections, in some
instances the discount rate was adjusted to reflect additional uncertainty and
risk associated with the projections.
SELECTED ASSET VALUES
Based upon the valuation indications of both the direct capitalization
and discounted cash flow analyses, Houlihan Lokey selected a range of values for
each asset. Following the determination of the individual income producing
property asset values, each property's value was allocated to the Subject
Companies based on respective ownership of the assets.
PORTFOLIO (MARKET) APPROACH - INCOME PRODUCING PROPERTY
The Subject Companies own various real estate assets that were
combined, based on asset types, into portfolios. Property level financial data
was provided by the applicable Subject Company based on internally prepared
property operating statements. The market approach consists of determining a
level of earnings and capitalizing this figure by an appropriate risk-adjusted
rate. This approach provides an indication of value for the security, which
corresponds with the particular earnings figure being capitalized. For purposes
of determining the value of the Income Producing Properties owned by the Subject
Companies, net operating income was utilized as a representative level of
earnings for the office, hotel, apartment, retail and industrial assets.
In using the portfolio (market) approach, Houlihan Lokey applied
debt-free market capitalization rates to net operating income of the various
categories of Income Producing Properties of the Subject Companies, in each case
to arrive at the values of the Income Producing Properties.
Houlihan Lokey utilized the Subject Companies' internal financial
statements to determine consolidated net operating income for the twelve months
ended September 30, 2001 and management projections for the twelve months ended
December 31, 2002. In performing the portfolio (market) analysis, Houlihan Lokey
applied capitalization rates ranging from 9.5% to 15.0% to the net operating
income for the twelve months ended September 30, 2001.
ARL VALUATION
Because of the nature of ARL's assets and the diversity in type of
property, age, rental history and other factors, no single valuation methodology
was likely to produce an accurate indication of the value of ARL. As a result,
Houlihan Lokey engaged in a valuation of each ARL asset individually by applying
one or more valuation methodologies that were most likely to yield a meaningful
indication of value. Houlihan Lokey then aggregated the range of indicated
values for each property to determine the range of concluded enterprise values
and concluded equity net asset values for ARL taken as a whole. Based on the
portfolio (market) analysis conducted by Houlihan Lokey, Houlihan Lokey
estimated a range of asset value for ARL's income producing property as
follows: (1) $230.5 million to $254.7 million for the ARL apartment portfolio,
(2) $50.7 million to $55.8 million for the ARL office portfolio, (3) $70.7
million to $77.1 million for the ARL shopping center portfolio and (4) $68.8
million to $80.3 million for ARL's hotel portfolio. In utilizing the "Net Asset
Value" approach, Houlihan Lokey estimated a range of asset value for ARL's
income producing property as follows: (1) $237.6 million to $248.8 million for
apartment assets, (2) $59.4 million to $65.0 million for hotel assets, (3)
$120.9 million to $133.0 million for office assets and (4) $84.4 million to
$90.6 million for retail assets. Houlihan Lokey estimated a range of asset
values for ARL's land assets of $290.0 million to $400.0 million. The estimate
asset value for other assets such as investments in joint ventures, Pizza World,
oil & gas operations, notes receivable, accounts receivable, escrows and earnest
money, net other liabilities such as accounts payable, property taxes and
accrued expenses, was $27.6 million to $35.1 million. Houlihan Lokey estimated a
range of value for ARL's investment in real estate securities of $7.8 million to
$10.5 million for ARL's 28.3 percent ownership interest in IOT and $86.9 million
to $123.6 million for ARL's 49.7 percent ownership interest in TCI. These
estimated values were calculated based upon ARL's percentage ownership in TCI
and IOT multiplied by Houlihan Lokey's concluded equity net asset values for TCI
and IOT.
Based on the approaches discussed above, Houlihan Lokey estimated a
range of concluded enterprise values for ARL of $873.7 million to $1,071.8
million, a range of concluded equity net asset values for ARL of $126.3 million
to $262.8 million and a range of per share concluded equity net asset values of
$11.10 to $23.10.
IOT VALUATION
Because of the nature of IOT's assets and the diversity in type of
property, age, rental history and other factors, no single valuation methodology
was likely to produce an accurate indication of the value of IOT. As a result,
Houlihan Lokey engaged in a valuation of each IOT asset individually by applying
one or more valuation methodologies that were most likely to yield a meaningful
indication of value. Houlihan Lokey then aggregated the range of indicated
values for each property to determine the range of concluded enterprise values
and concluded equity net asset values for IOT taken as a whole. Based on the
portfolio (market) analysis conducted by Houlihan Lokey, Houlihan Lokey
estimated a range of asset value for IOT's income producing property as follows:
(1) $23.8 million to $26.3 million for the IOT apartment portfolio and (2) $38.1
million to $41.9 million for the IOT office portfolio. In utilizing the "Net
Asset Value" approach, Houlihan Lokey estimated a range of asset value for IOT's
income producing property as follows: (1) $21.5 million to $22.8 million for
apartment assets and (2) $41.3 million to $50.2 million for office assets. The
estimated asset value for IOT's land assets was $24.6 million to $31.6 million.
The estimated asset value for other assets such as investments in joint
ventures, notes receivable, accounts receivable and escrow deposits, net other
liabilities such as accounts payable, property taxes and security deposits was
-$0.6 million to $0.5 million.
Based on the approaches discussed above, Houlihan Lokey estimated a
range of concluded enterprise values for IOT of $86.3 million to $102.7 million,
a range of concluded equity net asset values for IOT of $27.4 million to $37.0
million and a range of per share concluded equity net asset values of $19.04 to
$25.71.
TCI VALUATION
Because of the nature of TCI's assets and the diversity in type of
property, age, rental history and other factors, no single valuation methodology
produced an accurate indication of the value of TCI. As a result, Houlihan Lokey
engaged in a valuation of each TCI asset individually by applying
one or more valuation methodologies that were most likely to yield a meaningful
indication of value. Houlihan Lokey then aggregated the range of indicated
values for each property to determine the range of concluded enterprise values
and concluded equity net asset values for TCI taken as a whole. Based on the
portfolio (market) analysis conducted by Houlihan Lokey, Houlihan Lokey
estimated a range of asset value for TCI's income producing property as follows:
(1) $221.0 million to $244.3 million for the TCI apartment portfolio, (2) $200.6
million to $220.7 million for the TCI office portfolio, (3) $25.6 million to
$28.0 million for the TCI shopping center portfolio, (4) $49.7 million to $54.7
million for the TCI industrial portfolio and (5) $13.1 million to $15.1 million
for TCI's hotel portfolio. In utilizing the "Net Asset Value" approach, Houlihan
Lokey estimated a range of asset value for TCI's income producing property as
follows: (1) $270.4 million to $296.0 million for apartment assets (2) $17.6
million to $18.6 million for hotel assets, (3) $51.7 million to $60.7 million
for industrial/warehouse assets, (4) $225.9 million to $261.8 million for office
assets and (5) $28.0 million to $32.5 million for retail assets. Houlihan Lokey
estimated a range of asset values for TCI's land assets from $68.0 million to
$97.0 million. The estimated asset value for other assets such as investments in
joint ventures, the Signature Athletic Club, Alamo and West End parking lots,
notes receivable, advances to affiliates, accounts receivable, pending purchases
and escrow deposits, net other liabilities such as accounts payable, property
taxes and security deposits was $10.9 million to $15.1 million. Houlihan Lokey
estimated a range of asset value for TCI's investment in real estate securities
of $6.6 million to $8.9 million for TCI's 24 percent ownership interest in IOT
and $8.0 million to $16.6 million for TCI's 6.3 percent ownership interest in
ARL. These estimated values were calculated based upon TCI's percentage
ownership in ARL and IOT multiplied by Houlihan Lokey's concluded equity net
asset values for ARL and IOT.
Based on the approaches discussed above, Houlihan Lokey estimated a
range of concluded enterprise values for TCI of $645.3 million to $754.1
million, a range of concluded equity net asset values for TCI of $173.7 million
to $247.2 million and a range of per share concluded equity net asset values of
$20.70 to $29.45.
EXCHANGE RATIO ANALYSIS
Based on the foregoing valuation estimates, Houlihan Lokey notes that
the indicated exchange ratios based on net asset values of IOT and TCI and the
lowest estimated net asset value of ARL was 1.71 to 2.32 for IOT and 1.86 to
2.65 for TCI on an after tax basis and 1.24 to 1.81 for IOT and 1.42 to 2.10 on
a before tax basis.
In conclusion, Houlihan Lokey's analyses indicated that the
consideration being offered to the nonaffiliated TCI stockholders and the
nonaffiliated IOT stockholders in connection with the mergers is fair from a
financial point of view. Houlihan Lokey's analysis did not disclose any specific
factors that did not support Houlihan Lokey's opinion.
Houlihan Lokey's opinions are based on the business, economic, market
and other conditions as they existed as of February 1, 2002, and on the
projected financial information provided to Houlihan Lokey as of that date. In
rendering its opinions, Houlihan Lokey has relied upon and assumed, without
independent verification, that the historical and projected financial
information (including the future value and estimated sale dates of the land
held for sale) provided to Houlihan Lokey by the Subject Companies has been
reasonably and accurately prepared based upon the best current available
estimates of the financial results and condition of the Subject Companies.
Houlihan Lokey did not independently verify the accuracy or completeness of the
information supplied to it with respect to the Subject Companies and does not
assume responsibility with respect to it. Except as set forth above, Houlihan
Lokey did not make any independent appraisal of the specific properties or
assets of the Subject Companies.
The summary set forth above describes the material points of more
detailed analyses performed by Houlihan Lokey in arriving at its fairness
opinions. The preparation of a fairness opinion is a complex analytical process
involving various determinations as to the most appropriate and relevant methods
of financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at its opinions, Houlihan Lokey made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Houlihan
Lokey believes that its analyses and summary set forth herein must be considered
as a whole and that selecting portions of its analyses, without considering all
analyses and factors, or portions of this summary, could create an incomplete
view of the processes underlying the analyses set forth in Houlihan Lokey's
fairness opinions. In its analyses, Houlihan Lokey made numerous assumptions
with respect to the Subject Companies, industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of the respective entities. The estimates contained in the
analyses are not necessarily indicative of actual values or predictive of future
results or values, which may be more or less favorable than suggested by the
analyses. However, there were no specific factors reviewed by Houlihan Lokey
that did not support its opinions. Additionally, analyses relating to the value
of businesses or securities are not appraisals. Accordingly, the analyses and
estimates are inherently subject to substantial uncertainty.
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information is set forth in this statement is true, complete and
correct.
AMERICAN REALTY INVESTORS, INC.
Date: December 6, 2002 By: /s/ Ronald E. Kimbrough
---------------- ----------------------------------------------
Printed Name: Ronald E. Kimbrough
Title: Executive Vice President and Chief
Financial Officer
BASIC CAPITAL MANAGEMENT, INC.
Date: December 6, 2002 By: /s/ Ronald E. Kimbrough
---------------- ----------------------------------------------
Printed Name: Ronald E. Kimbrough
Title: Executive Vice President and Chief
Financial Officer
Date: December 6, 2002 By: /s/ Gene E. Phillips
---------------- ----------------------------------------------
Printed Name: Gene E. Phillips
TRANSCONTINENTAL REALTY
ACQUISITION CORPORATION
Date: December 6, 2002 By: /s/ Ronald E. Kimbrough
---------------- ----------------------------------------------
Printed Name: Ronald E. Kimbrough
Title: Director and President
INCOME OPPORTUNITY ACQUISITION
CORPORATION
Date: December 6, 2002 By: /s/ Ronald E. Kimbrough
---------------- ----------------------------------------------
Printed Name: Ronald E. Kimbrough
Title: Director and President
INCOME OPPORTUNITY REALTY
INVESTORS, INC.
Date: December 6, 2002 By: /s/ Ronald E. Kimbrough
---------------- ----------------------------------------------
Printed Name: Ronald E. Kimbrough
Title: Executive Vice President and Chief
Financial Officer