U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Mark One)
[ X ] Annual Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
[ ] Transition Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _____________
Commission file number: 33-95758
INVESTMENT INCOME PROPERTIES OF AMERICA, INC.
--------------------------------------------
(Name of Small Business Issuer in its Charter)
Delaware 65-0544042
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
950 North Federal Highway, Suite 219 Pompano Beach, Florida 33062
- ------------------------------------ -----------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 954-783-2004
Securities registered under Section 12(b) of the Exchange Act: none
Securities registered under Section 12(g) of the Exchange Act: none
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
or (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $ 203,429.00
-----------
The market value of the voting and non-voting common equity held by
non-affiliates is $0.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
There were 374,125 shares of the Registrant's Common Stock, par value $.001 per
share outstanding on December 31, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Transitional Small Business Disclosure Format (check one): Yes_____ No X
<PAGE>
PART I
Item 1. Business
- ------ --------
Overview
Investment Income Properties of America, Inc. (the ACompany@) was
incorporated in the State of Delaware on January 4, 1995. Initial capitalization
occurred on January 13, 1995. The business of the Company is to invest primarily
in existing residential and commercial properties in the Southeast and
Southwestern Regions of the United States. On June 30, 1997, the Company
purchased the 950 Professional Building, a three story office complex consisting
of 40,000 sq. ft., having an address of 950 North Federal Highway, Pompano
Beach, Florida. The Company will use one suite on the property as its corporate
headquarters. The complete investment objectives and policies of the Company are
described under the caption "Investment Objectives and Policies" on pages 31
through 37 of the Company's Prospectus dated February 15, 1996 (the
"Prospectus") filed with the Securities and Exchange Commission as part of the
Company's Registration Statement on Form S-11 (Registration No. 33-95758), which
are hereby incorporated by reference.
In connection with each of its property acquisitions, the Company will
obtain a Phase I Environment Report, and such additional environmental reports
and surveys as are necessitated by such preliminary reports. Based on such
reports, the Company is not aware of any environmental situations requiring
remediation at its properties which have not been or not currently being
remediated as necessary.
As of the end of 1997, the Company owned only one property. However, the
following is a summary of three properties the Company has considered to be
purchased during 1997.
The Company entered into an agreement on October 2, 1996 to purchase the
Kendale Gardens Apartments in Miami, Florida. The purchase price was $7,135,000
with a closing date of November 15, 1996. A deposit of $10,000 was required at
the time the agreement was signed. On December 17, 1996, the agreement to
purchase Kendale Garden Apartments dated October 2, 1996, was amended. The
amended agreement reduces the purchase price to $6,925,000 if purchased by
February 28, 1997. A deposit of $15,000 was required upon the execution of the
amended agreement. On February 28, 1997, the agreement to purchase Kendale
Gardens Apartments dated December 17, 1996, was amended. The amended agreement
increases the purchase price to $6,975,000, if purchased by April 30, 1997. A
deposit of $25,000 was required upon the execution of the amended agreement. On
June 5, 1997, the agreement was amended to extend the closing date to July 31,
1997. A deposit of $25,000 was required upon the execution of this amendment.
The apartment building purchase will be financed by a private placement or a
public offering of the Company's stock. In June 1997, these deposits were
written-off due to the purchase not materializing.
The Company entered into an agreement on December 20, 1996 to purchase
the Spring House Apartments in Tamarac, Florida. The purchase price was
$16,490,000 with a closing date of February 28, 1997. A deposit of $25,000 was
required and paid in January 1997. The apartment building purchase will be
financed by a private placement or a public offering of the Company's stock. On
January 21, 1997, the agreement to purchase Spring House Apartments dated
December 20, 1996, was amended. The agreement extends the closing date to March
28, 1997. A deposit of $100,000 was required upon the execution of the amended
agreement. On March 25, 1997, the agreement to purchase Spring House Apartments
dated January 21, 1997 was amended. The agreement extends the closing date to
May 5, 1997. A deposit of $25,000 was required upon the execution of the amended
agreement. As of June 5, 1997, the Company has not closed on the property and
has $175,000 in nonrefundable deposits toward the purchase. In June 1997, these
deposits were written-off due to the purchase not materializing.
1
<PAGE>
Item 2. Properties
- ------ ----------
On June 30, 1997, Investment Income Properties of American (the
"Company") purchased 950 Professional Building, a three story office complex
consisting of 40,000 square feet, having an address of 950 North Federal
Highway, Pompano Beach, Florida (the "Property"). The Company purchased the
Property for $2,600,000. The purchase was financed through a purchase money
mortgage of $2,080,000 and funds provided through loans by individuals who also
own shares in the Company. The mortgage bears interest at 1% below the prime
rate, is payable monthly and is collateralized by the property. During any time
the mortgage is outstanding, the seller has the option to convert the mortgage
and note to common stock of the Company. Title to the Property was conveyed by a
fee simple warranty.
The Property consists of 31 rental suits, 29 of which are currently
leased to 29 tenants that are engaged in a variety of businesses, including
financial services, investment banking, publishing, computer technology, health
care services, accounting and law. The suites provide for a combined total of
26,000 square feet of rentable area. The Company purchased the Property from a
third party, unaffiliated with the Company, that had owned the Property and
leased office space thereon for the past 20 years. The Company will use one
suite on the Property as its corporate headquarters and continue to use the
remainder of the Property as office building rental or leasing space.
In consideration of services rendered to the Company in connection with
the selection and acquisition of the Property, the Company will pay Professional
Realty and Management Services, Inc. ("PRMS"), an affiliate of the Company, a
property acquisition fee of 4% of the purchase price of the Property or $104,000
when the equity for the acquisition of the Property is fully raised. PRMS will
serve as property manager for the Property and will be paid a monthly management
fee equal to 5% of the gross revenues of the Property.
The Company's other two real estate properties under contract are described in
Item 1, which is hereby incorporated herein by reference.
Item 3. Legal Proceedings
- ------ -----------------
The Company is not involved in any pending litigation.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
No matters were submitted to a vote of security holders in 1997.
Item 4a. Executive Officers
- ------- ------------------
The following table sets forth certain information concerning the
individuals who constitute the sole executive officers of the Company:
First Became
Name Age Position an Officer
---- --- -------- ------------
Philip Layne 78 Chairman of the Board 1995
Fredric B. Layne 47 President/Treasurer, CEO 1995
Douglas I. Layne 41 Secretary 1995
2
<PAGE>
Fredric B. Layne is President, Chief Executive Officer, shareholder and
Director of Professional Realty and Management Services, Inc. This Company is
involved in the acquisition and management of commercial and residential real
properties. Since 1991, Mr. Layne has held executive and/or ownership positions
in several corporations involved in the management of and investment in real
estate.
Douglas I. Layne is a Secretary of Professional Realty and Management
Services, Inc. He has worked for the Company, or its predecessors since 1991.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- ------ -----------------------------------------------------------------
Matters
-------
The Company's common stock is known as common shares, $.001 par value.
On December 31, 1997, 374,125 shares of the common stock were issued and
outstanding.
On December 31, 1997, there were 31 shareholders of common stock.
Since commencing operations on January 13, 1995, the Company made no cash
distributions to holders of its common shares. No distributions are foreseen for
the future at this time.
Item 6. Selected Financial Data
- ------ -----------------------
Item intentionally left blank.
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
The Company invests primarily in existing residential and commercial
properties in the Southeast and Southwestern Regions of the United States. The
Company intends to quality as a Real Estate Investment Trust ("REIT") under the
Internal Revenue Code of 1986, as amended (the "Code") for federal income tax
purposes. The Company has been capitalized primarily through a limited number of
investors through the purchase of units. At December 31, 1997, $1,560,000 was
owed to these investors. Changes in the Company's liquidity and capital
resources reflect the inability of management and their underwriters in the lack
of sales of shares to investors which effect the ability of the Company for
periodic acquisitions of properties by the Company. Similarly, the lack of
results from operations reflect decreases in income, and the capital base of the
Company.
Liquidity and Capital Resources
There was a significant change in the Company's liquidity during the year
ended December 31, 1997. During 1997, the Company was only able to sell 145,200
shares of its units to its investors bringing the total number of shares
outstanding to 253,600. The total gross proceeds from the shares sold in 1997
was $907,500. With this additional capital, the Company's gross capitalization
still decreased from $(743,410) at December 31, 1996 to $(1,260,907) December
31, 1997. Shares were sold through the Company's management to enhance the
financial structure of the firm.
3
<PAGE>
The Company entered into an agreement on October 2, 1996 to purchase the
Kendale Gardens Apartments in Miami, Florida. The purchase price was $7,135,000
with a closing date of November 15, 1996. A deposit of $10,000 was required at
the time the agreement was signed. On December 17, 1996, the agreement to
purchase Kendale Garden Apartments dated October 2, 1996, was amended. The
amended agreement reduces the purchase price to $6,925,000 if purchased by
February 28, 1997. A deposit of $15,000 was required upon the execution of the
amended agreement. On February 28, 1997, the agreement to purchase Kendale
Gardens Apartments dated December 17, 1996, was amended. The amended agreement
increases the purchase price to $6,975,000, if purchased by April 30, 1997. A
deposit of $25,000 was required upon the execution of the amended agreement. On
June 5, 1997, the agreement was amended to extend the closing date to July 31,
1997. A deposit of $25,000 was required upon the execution of this amendment. In
June 1997, these deposits were written-off due to the purchase not
materializing.
The Company entered into an agreement on December 20, 1996 to purchase
the Spring House Apartments in Tamarac, Florida. The purchase price was
$16,490,000 with a closing date of February 28, 1997. A deposit of $25,000 was
required and paid in January 1997. The apartment building purchase will be
financed by a private placement or a public offering of the Company's stock. On
January 21, 1997, the agreement to purchase Spring House Apartments dated
December 20, 1996, was amended. The agreement extends the closing date to March
28, 1997. A deposit of $100,000 was required upon the execution of the amended
agreement. On March 25, 1997, the agreement to purchase Spring House Apartments
dated January 21, 1997 was amended. The agreement extends the closing date to
May 5, 1997. A deposit of $25,000 was required upon the execution of the amended
agreement. As of June 5, 1997, the Company has not closed on the property. In
June 1997, these deposits were written-off due to the purchase not
materializing.
The Company is working on additional funding by a private placement or a
public offering of the Company's Stock.
The Company intends to hold all of its properties on a totally
unleveraged basis. However, the Company will borrow in conjunction with the
purchase of properties. The full balance of the debt incurred will be repaid
through the sale of additional shares.
Cash and cash equivalents totalled $153,552 on December 31, 1997 versus
$29,660 on December 31, 1996. During the year, the Company did not distribute
any return of capital or dividends to shareholders.
While the Company is always assessing potential acquisitions, no material
negotiations, commitments or agreements to purchase additional properties
existed at year end. The Company expects to acquire new properties as additional
funds are valuable.
The Company has sustained substantial losses from operations since
inception which has resulted in a deterioration in the Company's financial
position. This raises substantial doubt about the Company's ability to continue
as a going concern. (See Note J of the Financial Statements) The Company's
independent Auditors have qualified their opinion to reflect this uncertainty.
The recoverability of a major portion of the recorded asset amounts shown
in the accompanying balance sheet is dependent upon commencement of successful
operations of the company, which in turn is dependent upon the Company's ability
to finance its future operations. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded assets
and liability amounts which might result from the above uncertainties.
The Company has and will continue to take a number of steps to reduce its
operating losses. The Company will continue to increase its efforts in marketing
their initial public offering the Company's shares to raise funds. Management
believes that as a result of the action stated above, the Company can continue
in existence for the next
4
<PAGE>
twelve months; however, there is no assurance that such action will be
consummated or will eliminate the Company's need for additional capital.
Results of Operations
The results of the Company's operations for the year December 31, 1997
does include the one property acquisition where the Company relies on rental
income generated by the property for its cash for the payment of operating
expenses. The Company has had no other sources of revenue. The Company had a net
loss of $1,201,157 in 1997 compared to a loss of $567,691 in 1996.
Selling, general and administrative expenses increased $709,647 to
$1,237,901 in 1997, compared to $528,254 in 1996. The increase is due to the
write-off of deposits of $250,000, compensation expense from granting stock
options of $434,160, expenses incurred in operating the office building, and
increase in general corporate expenses.
Interest expense increased by $127,959 to $168,124 in 1997 compared to
$40,165 in 1996. The increase is due to the increase in notes payable to
investors which increased by $882,500 in 1997.
The Company's other source of income is the investment of its cash and
reserves. The Company had an increase in interest income to $1,439 in 1997 from
$1,120 in 1996. The Company believes with its efforts in marketing their initial
public offering of the Company's shares to raise funds, there will be an
increase of interest income to the Company.
In July 1996, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus on Issue 96-14, regarding the
year 2000 issue. The consensus was that costs associated with modifying computer
software for the year 2000 be expended as incurred. The Company is assessing the
extent of the necessary modification to its computer software but anticipates
that it will not have material effect on the Company's financial statements.
Impact of Inflation.
The Company does not believe that inflation had any significant impact on
the operation of the Company in 1997. Future inflation, if any, would likely
cause increased operating expenses, but the Company believes that increases in
expenses would be more than offset by increases in rental income. Continued
inflation may also cause capital appreciation of the Company's properties over
time, as rental rates and replacement costs increase.
Item 8. Financial Statements and Supplementary Data
- ------ -------------------------------------------
The Financial Statements of the Company required to be included in this
item are set forth in item 12 of this report and are hereby incorporated herein
by reference.
PART III
Item 9. Directors and Executive Officers of the Company
- ------ -----------------------------------------------
The information required by this item is to be included in this item are
set forth in item 12 of this report and are hereby incorporated by reference.
5
<PAGE>
Item 10. Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
The information required by this item is to be included in this item are
set forth in item 12 of this report and are hereby incorporated by reference.
Item 11. Certain Relationships and Related Transactions
- ------- ----------------------------------------------
The information required by this item is to be included in this item are
set forth in item 12 of this report and are hereby incorporated by reference.
Item Number 11 Certain Relationships and Related Transactions
----------------------------------------------
In 1997, the Company has entered into a management agreement with Professional
Realty and Management Services, Inc. (PRMS), whereby PRMS will manage all
properties acquired by the Company for a monthly fee of 5% of monthly gross
revenues of the properties. In addition, the Company will reimburse PRMS for its
expenses, including salaries and related over-head expenses, associated with
accounting and financial reporting services rendered by PRMS under the property
management agreements. PRMS is 60% owned by Layne Property Investments, Inc.
whose owner is an officer of the company.
The Company has entered into an advisory agreement with F & P Realty Advisors,
Inc. ( F&P) whereby F & P will seek to obtain, investigate, evaluate and
recommend property investment opportunities for the Company as well as
administer the day-to-day operations of the Company. F & P will receive an
annual Asset Management Fee, based upon the ratio of Funds from Operations to
Total Contributions (such ratio is called the "Return Ratio"), of between 0.1%
and 0.25 % of Total Contributions.
A principal in a law firm which provides services to the Company is also a
director and stockerholder of the Company, In 1996, he resigned as a director,
but is still a stockholder and provides legal advise on real estate.
He owns less than 5% of the issued and outstanding stock of the Company.
A director, who is also a stockholder of the Company, provides acquisition
services to the Company. The total fees charged were $7,715 and $ 5,000 in 1997
and 1996, respectively.
Item 12 Exhibits and Financial Statement Schedules.
- ------- -------------------------------------------
(a) Documents filed as part of the report
1. Financial Statements
Independent Auditors Reports of Grant Thornton LLP
(included as page F-1 of this report)
Balance Sheets
December 31, 1997 and 1996
Statement of Operations
Years ended December 31, 1997 and 1996.
Statements of Stockholders' Equity Years ended December
31, 1997 and 1996.
Statements of Cash Flows
Years ended December 31, 1997 and 1996.
Notes to Financial Statements
2. Financial Statement Schedule
All other financial statement schedules have been omitted
because they are not applicable or not required or because
the required information is included elsewhere in the
financial statements or notes thereto.
3. Exhibits
Incorporated herein by reference are the exhibits listed
under "Index to Exhibits."
6
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Investment Income Properties of America, Inc.
We have audited the accompanying balance sheets of Investment Income Properties
of America, Inc. as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. 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 Investment Income Properties of
America, Inc. at December 31, 1997 and 1996, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $1,201,157 for the years ended December 31,
1997, and as of that date, the Company's liabilities exceeded its assets by
$1,260,907. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note J. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Fort Lauderdale, Florida
February 20, 1998
7
<PAGE>
<TABLE>
<CAPTION>
Investment Income Properties of America, Inc.
BALANCE SHEETS
December 31,
ASSETS
1997 1996
---------------- -----------
<S> <C> <C>
Cash and cash equivalents $ 153,552 $ 29,660
Income tax receivable 787 -
Due from affiliate 7,050 -
---------------- --------------
Total current assets 161,389 29,660
Property, plant and equipment of net accumulated
depreciation of $37,163 and $441, respectively 2,538,475 9,447
Other assets
Deposit - 25,000
Deferred offering costs 34,949 5,000
Deferred loan costs - 4,115
---------------- ---------------
Total assets $ 2,734,813 $ 73,222
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 302,825 $ 139,132
Mortgage note payable - current portion 19,582 -
Notes payable - related parties 1,560,000 677,500
Notes payable to affiliate 81,500 -
---------------- --------------
Total liabilities 1,963,907 816,632
Mortgage note payable, net of current portion 2,031,813 -
Commitments and contingencies - -
Stockholders' equity
Common stock - $.001 par value, 100,000,000
shares authorized, 374,125 and 109,800 shares
issued and outstanding 124 1
Additional paid-in capital 705,936 22,399
Accumulated deficit (1,966,967) (765,810)
---------------- ---------------
Total stockholders' equity (1,260,907) (743,410)
---------------- ---------------
Total liabilities and stockholders' equity $ 2,734,813 $ 73,222
================ ===============
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Investment Income Properties of America, Inc.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
1997 1996
---------------- ---------------
<S> <C> <C>
Revenue
Rental income $ 203,429 $ -
Expenses
Selling, general and administrative 1,237,901 528,254
---------------- ---------------
Loss from operations (1,034,472) (528,254)
Other (income) expense
Interest expense 168,124 40,165
Interest income (1,439) (1,120)
---------------- ---------------
Loss before income taxes (1,201,157) (567,299)
Income taxes - 392
---------------- ---------------
Net loss $ (1,201,157) $ (567,691)
================ ===============
Net loss per share $ (5.79) $ (6.75)
================ ===============
</TABLE>
9
<PAGE>
Investment Income Properties of America, Inc.
STATEMENT OF STOCKHOLDERS' (DEFICIT)
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance at
December 31,
1995 76,000 $ - $ - $ (198,119) $ (198,119)
Issuance of stock 33,800 1 13,999 - 14,000
Stock options
granted - - 8,400 - 8,400
Net loss for the
year ended
December 31,
1996 - - - (567,691) (567,691)
------------ -------- ---------- ------------ ------------
Balance at
December 31,
1996 109,800 1 22,399 (765,810) (743,410)
Issuance of stock 264,325 123 249,377 - 249,500
Stock options
granted - - 434,160 - 434,160
Net loss for the
year ended
December 31,
1997 - - - (1,201,157) (1,201,157)
------------ -------- ---------- ------------ ------------
Balance at
December 31,
1997 374,125 $ 124 $ 705,936 $ (1,966,967) $ (1,260,907)
============ ======== ========== ============ ============
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Investment Income Properties of America, Inc.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
1997 1996
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,201,157) $ (567,691)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense 34,688 2,034
Compensation expense from stock options 434,160 8,400
Stock issued in lieu of rent expense - 14,000
Changes in operating assets and liabilities
Increase (decrease) in prepaid expenses (787) 13,017
Increase (decrease) in due from affiliate (7,050)
Increase (decrease) in other assets (834) 283,013
Increase (decrease) in accounts payable accrued
expenses 163,693 351
---------------- ---------------
Net cash used in operating activities (577,287) (246,876)
Cash used in investing activities:
Purchase of building (483,716) -
Purchase of equipment - (6,505)
---------------- ---------------
Net cash used in investing activities (483,716) (6,505)
Cash flows from financing activities:
Proceeds from issuance of stock 249,500 -
Payment on mortgage note (28,605) -
Proceeds from notes payable - related parties 882,500 202,500
Proceeds from notes payable to affiliate 104,000 -
Payment on notes payable to affiliate (22,500) -
---------------- ---------------
Net cash provided by financing activities 1,184,895 202,500
---------------- ---------------
Net increase (decrease) in cash and cash equivalents 123,892 (50,881)
Cash and cash equivalents at beginning of period 29,660 80,541
---------------- ---------------
Cash and cash equivalents at end of period $ 153,552 $ 29,660
================ ===============
Supplemental information:
Cash paid during the year for:
Interest $ - $ -
================ ===============
Income taxes $ 787 $ -
================ ===============
Noncash investing and financing activity:
The Company acquired an office building financed
through a mortgage note of $2,080,000
11
</TABLE>
<PAGE>
Investment Income Properties of America, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
Investment Income Properties of America, Inc. (the "Company") was
incorporated on January 4, 1995. The Company was formed for the purpose of
becoming a Real Estate Investment Trust (REIT) which will invest primarily
in rental apartment and commercial buildings.
Cash and Cash Equivalents
-------------------------
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Deferred Offering Costs
-----------------------
At December 31, 1995, the Company has incurred costs in the amount of
$233,898 in connection with an expected public offering of equity
securities. During 1996, the Company concluded that the expected public
offering would not be completed and therefore wrote-off these costs. During
1997, the Company incurred cost of $34,949 in connection with its second
attempt at an initial public offering of equity securities.
Deferred Loan Costs
-------------------
Costs incurred in connection with the issuance of the notes payable have
been capitalized and will be amortized using the interest method over the
life of the loan.
Fixed Assets
------------
Fixed assets are stated at cost, less accumulated depreciation. The Company
provides for depreciation using the straight-line method over the assets
estimated useful lives.
Income Taxes
------------
The Company expects to operate as and will elect to be taxed as a real
estate investment trust under the Internal Revenue Code of 1986, as amended
(the "Code"). Generally, a real estate investment trust which complies with
the provisions of the Code and distributes at least 95% of its taxable
income to its stockholders does not pay Federal income taxes on its
distributed income. If the Company complies with the provisions of the
Code, it will also be exempt from income taxes in the State of Florida.
Accordingly, the Company does not expect to provide for Federal or Florida
income taxes on its distributed income.
12
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Use of Estimates
----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
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.
Impairment of Long-Lived Assets
-------------------------------
The Company evaluates long-lived assets and certain intangibles held and
used for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Impairment is recognized
when the carrying amounts of such assets and liabilities cannot be
recovered by the discounted net cash flow they will generate.
Stock Options
-------------
Options granted under the Company's Stock Option Plans are accounted for
under APB 25, "Accounting for Stock Issued to Employees," and related
interpretations. The additional disclosures required by SFAS 123 are
contained in Note G. Stock options issued to nonemployees are accounted for
in accordance with SFAS 123.
Loss Per Share
--------------
The Company adopted Financial Accounting Standards No. 128 (FAS 128),
"Earnings Per Share" in 1997. FAS 128 requires dual presentation of basic
and diluted earnings per share on the face of the income statement as well
as the restatement of prior periods presented.
Basic net loss per share equals net loss divided by the weighted average
shares outstanding during the year. The computation of diluted net loss per
share includes dilutive common stock equivalents in the weighted average
shares outstanding and has not been presented as it is anti-dilutive in
1996 and 1997.
(continued)
13
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Loss Per Share - Continued
---------------
The Company's common stock equivalents consists of stock options which are
anti-dilutive since the exercise price of the options equals the fair value
of the stock at the date of grant and since the Company has net losses.
Therefore, diluted net loss per share is not presented. The components used
in calculating basic loss per share is as follows:
Weighted
Average Loss
Net Loss Shares Per Share
-------- -------- ---------
1997 $ (1,201,157) 207,437 $ (5.79)
1996 $ (567,691) 84,017 $ (6.75)
NOTE B - ACQUISITION OF OFFICE BUILDING
On June 30, 1997, the Company purchased an office building in Pompano
Beach, Florida for $2,600,000. The purchase was financed through a purchase
money mortgage of $2,060,000 and funds provided through loans by
individuals who also own shares in the Company. The mortgage bears interest
at 1% below the prime rate, is payable monthly, and is collateralized by
the property (see Note D). During any time the mortgage is outstanding, the
seller has the option to convert the mortgage and note to common stock of
the Company.
NOTE C - NOTES PAYABLE TO RELATED PARTIES
In 1997 and 1996, the Company raised $907,500 and $677,500, respectively,
through the issuance of notes payable to investors. These notes bear
interest at the rate of 8% per annum, with principal and accrued interest,
if any, payable upon the earlier of December 31, 1998 or upon the receipt
by the Company of gross proceeds in the aggregate amount of not less than
$10,000,000 from the public offering of the Company's securities.
In connection with the issuance of these notes, these investors as of
December 31, 1997 were given 253,600 common stock and warrants to purchase
an additional 253,600 of common stock for $2.00 per share. The warrants are
exercisable at any time in the next three years. No value has been ascribed
to these shares or warrants.
NOTE D - MORTGAGE NOTE PAYABLE
In June 30, 1997, the Company purchased an office building for $2,600,000
financed through a purchase money mortgage of $2,060,000 (see Note B). The
mortgage bears interest at 1% below the prime rate (7.5% at December 31,
1997), is payable monthly, and is collateralized by the property.
The aggregate maturities of mortgage note payable at December 31, 1997 are
summarized as follows:
1998 $ 19,582
1999 21,103
2000 22,741
2001 24,506
2002 26,409
Thereafter 1,937,054
------------
$ 2,051,395
============
NOTE E - COMMITMENTS
The Company entered into an agreement on April 18, 1995 to purchase the
Northwood Terrace Apartments in Oakland Park, Florida. The original
purchase price was $3,350,000 and was subsequently amended to $3,400,000
with a closing of May 15, 1996. The Company had paid $75,000 in deposits
under the agreement. Subsequent to May 15, 1996, the contract was
terminated because the Company was not able to raise the necessary fund to
purchase the Northwood Apartments.
The $75,000 deposit was retained by the seller and expensed by the Company.
The Company entered into an agreement on October 2, 1996 to purchase the
Kendale Gardens Apartments in Miami, Florida. The purchase price was
$7,135,000 with a closing date of November 15, 1996. A deposit of $10,000
was required at the time the agreement was signed. On December 17, 1996,
the agreement to purchase Kendale Gardens Apartments dated October 2, 1996
was amended. The amended agreement reduces the purchase price to $6,925,000
if purchased by February 28, 1997. A deposit of $15,000 was required upon
the execution of the amended agreement. As of December 31, 1996, the
Company has $25,000 in deposits towards the purchase. On February 28, 1997,
the agreement to purchase Kendale Gardens Apartments dated December 17,
1996 was amended. The amended agreement increases the purchase price to
$6,975,000 if purchased by April 30, 1997. A deposit of $25,000 was
required upon the execution of the amended agreement. In June 1997, these
deposits were written-off due to the purchase not materializing.
(continued)
14
<PAGE>
NOTE E - COMMITMENTS - Continued
The Company entered into an agreement on December 20, 1996 to purchase the
Spring House Apartments in Tamarac, Florida. The purchase price was
$16,490,000 with a closing date of February 28, 1997. A deposit of $25,000
was required and paid in January 1997. The apartment building purchase will
be financed by a private placement or a public offering of the Company's
stock. On January 21, 1997, the agreement to purchase Spring House
Apartments dated December 20, 1996 was amended. The agreement extends the
closing date to March 28, 1997. A deposit of $100,000 was required upon the
execution of the amended agreement. On March 25, 1997, the agreement to
purchase Spring House Apartments dated January 21, 1997 was amended. The
agreement extends the closing date to May 5, 1997. A deposit of $25,000 was
required upon the execution of the amended agreement. In June 1997, these
deposits were written-off due to the purchase not materializing.
NOTE F - STOCKHOLDERS' EQUITY
The Board has authorized the filing of a registration statement relating to
an initial public offering of common stock. The net proceeds from the
issuance and sale of the common stock will be used to purchase rental
property.
NOTE G - RELATED PARTY TRANSACTIONS
In 1997, the Company has entered into a management agreement with
Professional Realty and Management Service (PRMS), whereby PRMS will manage
all properties acquired by the Company for a monthly fee of 5% of monthly
gross revenues of the properties. In addition, the Company will reimburse
PRMS for its expenses, including salaries and related over-head expenses,
associated with accounting and financial reporting services rendered by
PRMS under the property management agreements. PRMS is 60% owned by Layne
Property Investment, Inc. whose owner is an officer of the Company. The
Company incurred $10,815 in management fees during 1997.
The Company has entered into an advisory agreement with F&P Realty
Advisors, Inc. (F&P) whereby F&P will seek to obtain, investigate, evaluate
and recommend property investment opportunities for the Company as well as
administer the day-to-day operations of the Company. F&P will receive an
annual Asset Management Fee, based upon the ratio of Funds from Operations
to Total Contributions (such ratio is called the "Return Ratio"), of
between 0.1% and 0.25% of Total Contributions.
The percentage used to determine the Asset Management Fee will be 0.1% if
the Return Ratio for the preceding calendar quarter is 6% or less, 0.15% if
the Return Ratio for the preceding calendar quarter is more than 6% but not
more than 8%, and 0.25% if the Return Ratio for the preceding calendar
quarter is more than 8%. ("Funds from Operations" is defined as net income
(computed in accordance with generally accepted accounting principles)
excluding gains (or losses) from debt restructuring and sales of property,
plus depreciation of real property, and after adjustments for significant
non-recurring items and unconsolidated partnerships and joint ventures, if
any. "Total Contributions" is defined as the gross proceeds from the sale
of the Shares).
The Company has entered into a property acquisition/disposition agreement
under which PRMS will act as an exclusive real estate broker in connection
with the Company's purchase and sales of property. PRMS will be entitled to
a fee from the Company in an amount which is in accordance with the then
current industry standard; provided, however, that if PRMS's fee on any
such purchase and sale is less than 2% of the purchase or sale price of a
property being purchased or sold by the Company, the Company will pay to
PRMS such amount as is necessary for PRMS's commission on such purchase or
sale to be 2% of the sale or purchase price of the property being sold or
purchased. The Company paid $104,000 in commission in a form of a note to
PRMS in connection with the acquisition of an office building during 1997.
A principal in a law firm which provides services to the Company is also a
director and stockholder of the Company. In 1996, he resigned as a
director, but is still a stockholder and provides legal advise on real
estate. He owns less than 5% of the issued and outstanding stock of the
Company.
A director, who is also a stockholder of the Company, provides acquisition
services to the Company. The total fees charged were $7,715 and $5,000 in
1997 and 1996, respectively.
NOTE H - INCOME TAXES
As discussed in Note A, the Company expects to be exempt from Federal and
Florida income taxes for any future distributed profits provided that it
meets the required tests.
(continued)
15
<PAGE>
NOTE H - INCOME TAXES - Continued
The accumulated losses from inception through the year ended December 31,
1996 of $765,810, contain certain organizational and start-up costs that
must be capitalized and amortized for tax purposes. In June 1997, the
Company purchased an office building which has generated rental income for
the Company. As a result the Company is now considered to be in operations
and therefore organizational and start-up cost are being amortized for tax
purposes over 5 years. Other temporary differences in 1997 consists of
depreciation, related party interest, and the net operating loss
carryforward. No deferred taxes have been recorded for these temporary
differences since a 100% valuation allowance was applied because it is more
likely than not that the related deferred tax assets will not be realized
Income tax expense for 1996 is a result of applying the applicable Federal
rate to interest income earned in that period.
NOTE I - STOCK OPTIONS
The Company has granted stock options which are classified as
non-qualified, and which are not part of an Employee' Incentive Stock
Option Plan. The Company continues to account for such options under APB
Opinion 25 and related Interpretations, The company has however, adopted
the discussion requirements, under SFAS 123, Accounting for Stock Based
Compensation.
The exercise price of all options granted by the Company equals the market
price at the date of grant. Compensation expense of $434,169 and $8,400 has
been recognized in 1997 and 1996, respectively for those options granted to
non-employees.
Had compensation cost for non-qualified options issued to employees been
determined based on the fair value of the options at the grant dates
consistent with the method of SFAS 123, the Company's net loss and loss per
share would have been changed to the pro forma amounts indicated below.
1997 1996
------------- --------------
Net loss
As reported $ (1,201,157) $ (567,691)
Pro forma $ (1,250,405) $ (567,691)
Primary loss per share
As reported $ (5.79) $ (6.75)
Pro forma $ (6.02) $ (6.75)
The above pro forma disclosures may not be representative of the effects on
reported net income for future years as the Company may continue to grant
options to employees.
16
<PAGE>
NOTE I - STOCK OPTIONS - Continued
The fair value of each option grant is estimated on the date of grant using
the binomial option-pricing model with the following weighted-average
assumptions used for grants in 1997: dividend yield of 0.0 percent for all
years; expected volatility of 20 percent in 1997; risk-free interest rates
of 5.9 percent in 1997; and expected holding periods of 3 years in both
periods.
A summary of the status of the Company's fixed stock options as of December
31, 1997 and 1996, and changes during the years ending on those dates is as
follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- ---------------------------------
Weighted - Weighted -
Shares Average Shares Average
(000) Exercise Price (000) Exercise Price
------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 103,500 $ 1.93 83,500 $ 1.91
Granted 895,200 2.00 20,000 2.00
Exercised - - - -
Expired - - - -
Forfeited - - - -
------------- -------------
Outstanding at end of year 998,700 1.98 103,500 1.93
============= =============
Options exercisable at end
of year 998,700 103,500
Weighted-average fair value
of options granted during
the year $ .54 $ -
</TABLE>
The following information applies to options outstanding at December 31,
1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- -------------------------------
Weighted -
Average Weighted - Weighted -
Range of Shares Remaining Average Shares Average
Exercise Prices (000) Contractual Life Exercise Price (000) Exercise Price
--------------- ------------ ----------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$0 - $2.00 998,700 2.50 1.98 998,700 1.98
</TABLE>
NOTE J - GOING-CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company has sustained
substantial losses from operations since inception which has resulted in a
deterioration in the Company's financial position.
The recoverability of a major portion of the recorded asset amounts shown
in the accompanying balance sheet is dependent upon commencement of
successful operations of the Company, which in turn is dependent upon the
Company's ability to finance its future operations. The financial
statements do not include any adjustments relating to the recoverability
and classification of recorded assets and liability amounts which might
result from the above uncertainties.
The Company has and will continue to take a number of steps to reduce its
operating losses. The Company will continue to increase its efforts in
marketing their initial public offering of the Company's shares to raise
funds. Management believes that a result of the action stated above, the
Company can continue in existence for the next twelve months; however,
there is no assurance that such action will be consummated or will
eliminate the Company's need for additional capital.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 31st day of March
1998.
INVESTMENT INCOME PROPERTIES OF
AMERICA, INC.
By: __________________________________
Fredric B. Layne
President
By: __________________________________
Douglas I. Layne
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Capacity Date
- ---------- -------- ----
<S> <C> <C>
- --------------------------
Philip Layne Director, Chairman of the Board March 31, 1998
- --------------------------
Fredric B. Layne Director, President & Treasurer March 31, 1998
- --------------------------
Dr. Winston Mclean Director March 31, 1998
- -------------------------
Ela Meireles Director March 31, 1998
- --------------------------
Richard Hewitt III Director March 31, 1998
- --------------------------
Annie Betancourt Director March 31, 1998
- --------------------------
Richard Arthur Director March 31, 1998
- --------------------------
Pedro. J. Martinez-Fraga Director March 31, 1998
- -------------------------
Carl R. Walston Director March 31, 1998
</TABLE>
18
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
<TABLE>
<CAPTION>
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company. (Exhibit 3.1)*
3.2 Bylaws of the Company. (Exhibit 3.2)*
10.1 Advisory Agreement between the Company and F & P Realty Advisors, Inc.*
10.2 Form of Property Management Agreement between the Company and Professional
Realty and Management Services, Inc. (Exhibit 10.2)*
10.3 Property Acquisition/Disposition Agreement between the Company
and Professional Realty and Management Services, Inc.
(Incorporated by reference to the Exhibit of the same number
filed with the Commission in the Company's registration
statement on Form S-11 (Registration No. 33-95758)). This is a
management contact with a company affiliated with officers of
the Company.
10.7 Registrar, Transfer Agent and Disbursement Agent Agreement between the Company and American
Stock & Transfer.*
11.1 Directors and Executive Officers of the Company .*
11.2 Security Ownership of Certain Beneficial Owners and Management.*
* to be filed by amendment
</TABLE>
Exhibit Number 11.1 Directors and Executive Officers of the Company
Name Position
---- --------
Fredric B. Layne Director, President and Treasurer
Douglas Layne Secretary
Philip Layne Chairman of the Board of Directors
Winston McLean Director
Ela Meireles Director
Richard Hewitt III Director
Annie Bentancourt Director
Richard Arthur Director
Pedro J. Martinez-Fraga Director
Carl R. Walston Director
Exhibit Number 11.2 Security Ownership of Certain Beneficial Owners and
Management
<TABLE>
<CAPTION>
Name of Shares Beneficially Option
Beneficial Owner Owned Shares Position
---------------- ------------------- ------- --------
<S> <C> <C> <C>
1. Fredric B. Layne 2,500 Director, President
2. Layne Property 16,000 16,000 Fredric Layne, President
Investments, Inc.
3. Douglas Layne 2,500 Secretary
4. Yellowin Holdings, Inc. 140,000 140,000 Winston McLean, President
Director
5. P J Land Corp. 24,000 24,000 Pablo Corredor, President,
stock holder
6. Walter Gassner 50,000 Stock holder
</TABLE>
Non-Compensation Stock Holders
------------------------------
<TABLE>
<CAPTION>
Name of Shares Beneficial
Beneficial Owner Owned Position
---------------- ----------------- --------
<S> <C> <C>
1. Layne Property 200,000 Fredric B. Layne, President Director
Investment, Inc.
2. The Pink Rose, Inc. 100,000 Edythe Layne, President, mother of
Fredric Layne and Douglas Layne
3. D.F. Green, Inc. 50,000 Douglas Layne, President, brother of
Fredric B. Layne, son of Edythe Layne
4. Nepo Won, Corp. 50,000 Keith Seidler, President, Shareholder
5. Robert Miller 2,500 Independent Consultant
</TABLE>
<PAGE>
Exhibit Other Shares Issued
Number 11.2 Con't -------------------
<TABLE>
<CAPTION>
Name of Beneficial Beneficial Shares Option Shares
Owner Owned Owned Position
------------------ ----------------- ------------- --------
<S> <C> <C> <C>
1. Atlas, Pearlman, Trop 15,000 15,000 Provides legal
& Borkson, PA services to Company
2. M.A. Gillespie 5,000 Underwriter for
Investment Corp. Company
3. E. Robert Miller 7,500 Independent
Consultant
</TABLE>
