U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(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, 1998
[ ] 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 registrants 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: $ 618,981
---------
The market value of the voting and non-voting common equity held by
non-affiliates is $0.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
There were 2,906,561 shares of the Registrant's Common Stock, par value $.001
per share outstanding on December 31, 1998.
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 "Company") 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 uses 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.
On July 10, 1998, the Company purchased Centre Place Professional Park, a one
story office complex consisting of Three (3) One Story Buildings totaling 33,062
square feet, having an address of 1495,1497,1499 Forest Hill Blvd. West Palm
Beach, Florida. (the "Second Property"). The Company purchased the property for
$2,320,500. The second property was financed through a purchase money mortgage
of $1,972,425 and funds provided through loans by individuals who also own
shares in the Company. The Mortgage bears interest at 7.25% and is payable
monthly and is collateralized by the second property.
The Second Property consists of 29 rental suites, 25 of which are
currently leased to tenants engaged in a variety of business, including
financial services, investment banking, publishing computer technology,
healthcare services, accounting and law. The suites provide for a combined total
of 28,240 square feet of rental area. The Company purchased the Second Property
from a third party, unaffiliated with the Company, that had owned the Property
and leased space thereon for the past 6 years.
In consideration of services rendered to the Company in connection with
the selection and acquisition of the Second Property, the seller paid PRMS, an
affiliate of the Company, a property acquisition fee of 2% of the purchase price
of the Property of $46,410.00. PRMS will serve as a property manager for the
Second Property and will be paid a monthly management fee by the Company equal
to 5% of the gross revenues of the Second Property.
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 1998, the Company owns two properties.
2
<PAGE>
Item 2. Properties
- ------- ----------
On June 30, 1997, 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% above the prime rate, is payable monthly and is collateralized by the
property and an assignment of rental income and the leases. 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 paid 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. PRMS will serve as property manager for the Property and be paid a
monthly management fee equal to 5% of the gross revenues of the Property.
On July 10, 1998, the Company purchased Centre Place Professional Park, a
one story office complex consisting of Three (3) One Story Buildings totaling
33,062 square feet, having an address of 1495,1497,1499 Forest Hill Blvd. West
Palm Beach, Florida. The "Second Property"). The Company purchased the property
for $2,320,500. This property was financed through a purchase money mortgage of
$1,972,425 and funds provided through loans from individuals who also own shares
in the Company. The Mortgage bears interest at 7.25% and is payable monthly and
is collateralized by the real property and an assignment of rental income and
leases.
The property consists of 29 rental suites, 25 of which are currently
leased to tenants engaged in a variety of business, including financial
services, investment banking, publishing computer technology, healthcare
services, accounting and law. The suites provide for a combined total of 28,240
square feet of rental area. The Company purchased the Property from a third
party, unaffiliated with the Company, that had owned the Property and leased
space thereon for the past 6 years.
In consideration of services rendered to the Company in connection with
the selection and acquisition of the Second Property, the seller paid PRMS, an
affiliate of the Company, a property acquisition fee of 2% of the purchase price
of the Property of $46,410. PRMS will serve as a property manager for the Second
Property and will be paid a monthly management fee equal to 5% of the gross
revenues of the Second Property.
Expired Commitments to Purchase Office Buildings
The Company entered into an agreement on October 2, 1996 to purchase the
Kendale Gardens Apartments in Miami, Florida.
During the period October 1996 to June 1997, deposits of $75,000 were
paid in contemplation of purchasing this property at a cost of $6,975,000. The
purchase was to have been financed by either a private placement or initial
public offering of the Company's common stock. In June 1997, these deposits were
written off when the Company determined that the purchase of this property would
not be completed.
3
<PAGE>
The Company entered into an agreement on December 20, 1996 to purchase
the Spring House Apartments in Tamarac, Florida. The purchase price was to be
$16,490,000 with a closing date of February 28, 1997. The Company paid deposits
of $175,000 prior to realizing that the purchase of this property would not be
completed. In June 1997, these deposits were written off.
On September 30, 1998, the Company contracted to purchase a one story
office complex consisting of 8,200 square feet, in Corpus Christi, Texas for
$1,110,000. On September 30, 1998, the Company contracted to purchase a one
story office complex consisting of 5,000 square feet in Tamarac, Florida for
$1,445,000. Both of these acquisitions have been abandoned at no loss to the
Company because the Company was not able to reach satisfactory terms with the
seller.
Subsequent Events
The Company raised $ 15, 900 through the sale of 5,299 shares of the
Company's common stock to an accredited investor.
The Company signed letters of intent for future acquisition of a $394
Million Dollar Portfolio of Apartment Complexes, located in the states of
Florida, Colorado, Texas, Utah and Kansas. The construction of these 15 projects
are planned to be completed between May 1999, and June 2001. Investment Income
Properties of America, Inc. has agreed to take possession of these properties
when they are at least 60% leased.
Beginning March 31, 1999, the Company, pursuant to a Private Placement
Memorandum, is attempting to issue 1,250,000 shares of Company common stock for
total gross proceeds of $5,000,000. As received, the proceeds from this Private
Placement will be used for the repayment of debt , and deposits on properties to
be purchased by the Company.
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 1998.
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
---- --- -------- ----------
Fredric B. Layne 48 Chairman of the Board,
President/Treasurer, CEO 1995
Douglas I. Layne 41 Secretary 1995
4
<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 Registrants Common Equity and Related Stockholder
- ------- ----------------------------------------------------------------
Matters
-------
The Company's common stock is known as common shares, $.001 par value.
On December 31, 1998, 2,906,561 shares of the common stock were issued
and outstanding.
On December 31, 1998, there were 42 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 comprised of notes payable, common
stock, and warrants. At December 31, 1998 the $1,515,000 owed to these investors
was in default for non-payment. Changes in the Company's liquidity and capital
resources reflect the inability of management to secure additional equity or
debt financing which affects the ability of the Company for acquisitions of
properties. Similarly, the lack of positive results from operations reflect
decreases in income, and provide further deterioration of 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, 1998. During 1998, the Company was only able to sell 359,936
shares of its common stock to its investors bringing the total number of shares
outstanding to 2,906,561. The total gross proceeds from the shares sold in 1998
was $632,000. With this additional capital, the Company's stockholders
deficiency decreased from $(1,260,907) at December 31, 1997 to $(1,014,780)
December 31, 1998. Shares were sold through the Company's management to enhance
the financial structure of the firm.
5
<PAGE>
The Company entered into an agreement on October 2, 1996 to purchase the
Kendale Gardens Apartments in Miami, Florida. During the period October 1996 to
June 1997, deposits of $75,000 were paid in contemplation of purchasing this
property at a cost of $6,975,000. The purchase was to have been financed by
either a private placement or initial public offering of the Company's common
stock. In June 1997, these deposits were written off when the Company determined
that the purchase of this property would not be completed.
The Company entered into an agreement on December 20, 1996 to purchase
the Spring House Apartments in Tamarac, Florida. The purchase price was to be
$16,490,000 with a closing date of February 28, 1997. The Company paid deposits
of $175,000 prior to realizing that the purchase of this property would not be
completed. In June 1997, these deposits were written off.
Beginning March 31, 1999, the Company, pursuant to a Private Placement
Memorandum, is attempting to issue 1,250,000 shares of Company common stock for
total gross proceeds of $5,000,000. As received, the proceeds from this Private
Placement will be used for the repayment of debt , and deposits on properties to
be purchased by the Company.
The Company ultimately intends to hold all of its properties without debt.
However, the Company will borrow in conjunction with the purchase of properties.
The outstanding debt incurred will be repaid when possible from proceeds from
the sale of additional shares of Company stock.
Cash and cash equivalents totaled $40,159 on December 31, 1998 versus
$153,552 on December 31, 1997. During the year, the Company did not distribute
any return of capital or dividends to shareholders.
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 2 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 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, 1998
does include the two properties acquired where the Company relies on rental
income generated by the properties 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 $4,352,696 in 1998 compared to a loss of $1,201,957 in 1997.
Rental income increased in 1998 to $611,256 from $203,429 in 1997 due to
the Company owning the property purchased in June 1997 for a full twelve months
in 1998, and also owning the property purchased in July 1998 for five months.
6
<PAGE>
Rental expenses increased in 1998 to $552,466 from $196,313 in 1997, for
the same reasons.
Administrative expenses increased $3,209,499 to $4,419,211 in 1998,
compared to $1,209,712 in 1997. The increase is due to an increase in
compensation expense from granting common stock and stock options of $3,161,823
and an increase in interest and financing costs of $392,135 relating to common
stock and warrants issued in connection with the notes payable stockholders in
the amount of $370,840, offset by a decrease in commission expenses of $288,000
and a decrease in forfeited deposits of $250,000.
The Company's other source of income is the investment of its cash and
reserves. The Company had an increase in interest income to $7,725 in 1998 from
$1,439 in 1997.
The Company is Susceptible to Year 2000 System Risk
Computer-based systems that utilize two digits rather than four digits to
define the applicable year may fail to properly recognize date sensitive
information when the year changes to 2000. We are in the process of completing a
comprehensive review of our computer-based systems to determine if they will be
affected by resulting Year 2000 related compliance issues, that is whether those
systems have Year 2000 related "computer bugs." So far this review has revealed
no material Year 2000 related compliance issues. Because we have purchased most
of our computer hardware and software systems within the last four years, we do
not expect to be affected by Year 2000 issues because of computer-based systems
installed before the problem was recognized. Because most of our systems are
relatively new, we do not expect to incur Year 2000 compliance related costs
that would be material to us. We are asking for confirmation from outside
vendors, financial institutions and others that they are Year 2000 compliant or
that they are developing and implementing plans to become Year 2000 compliant.
However, there is no assurance that these outside vendors, financial
institutions and others will timely resolve their own Year 2000 compliance
issues or that any such failure would not have an adverse effect on us. We are
in the process of developing contingency plans to assure the continuation of our
operations if these outside vendors, financial institutions or other fail to
timely resolve their own Year 2000 compliance issues. We believe we are devoting
the necessary resources to timely address all Year 2000 compliance issues over
which we have control.
Impact of Inflation.
The Company does not believe that inflation had any significant impact on
the operation of the Company in 1998. 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 following table sets forth the names and position with the Company of
the executive officers and directors of the Company as of March 31, 1999
Name Position
---- --------
Fredric B. Layne Director,Chairman of the Board,
President and Treasurer
Douglas Layne Secretary
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
7
<PAGE>
Item 10. 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, Chairman of the
Board, President
2. FEP Worldwide 16,000 16,000 Fredric Layne, Chairman of the Board,
President
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>
<TABLE>
<CAPTION>
Other Shares Issued
-------------------
Name of Beneficial Shares Option Shares
Beneficial 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
4. B & B Ltd. 500,000 Fredric B. Layne, President
5. The Pink Rose, Inc. 300,000 100,000 Edythe Layne, President
6, D.F. Green, Inc. 500,000 250,000 Douglas Layne, President
7. Nepo Won, Corp. 50,000 100,000 Keith Seidler, Stockholder
8. Dr. Nelson Adams 258,000 108,000 Stockholder
9. Ela Meireles 50,000 Director, Stockholder
10. James Black 50,000 Stockholder
</TABLE>
<TABLE>
<CAPTION>
Non-Compensation Stock Holders
------------------------------
Name of Shares Beneficial
------- -----------------
Beneficial Owner Owned Position
---------------- ----- --------
<S> <C> <C>
1. FEP Worldwide 1,000,000 Fredric B. Layne, Chairman of the Board
President and Director
2. The Pink Rose, Inc. 300,000 Edythe Layne, President, mother of
Fredric Layne and Douglas Layne
3. D.F. Green, Inc. 500,000 Douglas Layne, President, brother of
Fredric B. Layne, son of Edythe Layne
4. Nepo Won, Corp. 100,000 Keith Seidler, President, Shareholder
5. Robert Miller 2,500 Independent Consultant
6. Yellowin Holdings, Inc. 250,000 Winston McLean, President and Director
</TABLE>
8
<PAGE>
Item 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 FEP Worldwide Industries,
Inc. whose owner is an officer of the Company. The Company incurred $28,728 and
$10,815 in management fees during 1998 and 1997, respectively.
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 director, who is also a stockholder of the Company, provides acquisition
services to the Company. The total fees charged were $7,715 in 1997.
Item 12 Exhibits and Financial Statement Schedules.
- ------- -------------------------------------------
(a) Documents filed as part of the report
1. Financial Statements
Independent Auditors Reports of Rachlin Cohen & Holtz
(included as page F-1 of this report)
Balance Sheets
December 31, 1998
Statement of Operations
Years ended December 31, 1998 and 1997.
Statements of Stockholders' Equity Years ended December
31, 1998 and 1997.
Statements of Cash Flows
Years ended December 31, 1998 and 1997.
Notes to Financial Statements
2. Financial Statements 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."
9
<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
1999.
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>
__________________________ Chairman of the Board
Fredric B. Layne Director, President & Treasurer March 31, 1999
- --------------------------
Dr. Winston Mclean Director March 31, 1999
- --------------------------
Ela Meireles Director March 31, 1999
- ----------------------
Richard Hewitt III Director March 31, 1999
- --------------------------
Annie Betancourt Director March 31, 1999
- --------------------------
Richard Arthur Director March 31, 1999
- --------------------------
Pedro. J. Martinez-Fraga Director March 31, 1999
- --------------------------
Carl R. Walston Director March 31, 1999
</TABLE>
10
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<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.*
</TABLE>
* to be filed by amendment
<PAGE>
INVESTMENT INCOME PROPERTIES OF AMERICA, INC.
INDEX TO FINANCIAL STATEMENTS
-----------------------------
PAGE
----
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1 to F-2
FINANCIAL STATEMENTS
Balance Sheet F-3
Statements of Operations F-4
Statements of Stockholders' Deficiency F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7 to F-17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors
Investment Income Properties of America, Inc.
Fort Lauderdale, Florida
We have audited the accompanying balance sheet of Investment Income Properties
of America, Inc. as of December 31, 1998, and the related statements of
operations, stockholders' deficiency and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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. as of December 31, 1998, and the results of its operations and its
cash flows for the year 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 $4,352,696 for the year ended December 31,
1998, and as of that date, the Company's liabilities exceeded its assets by
$1,014,780. 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 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
RACHLIN COHEN & HOLTZ LLP
Fort Lauderdale, Florida
March 25, 1999
F-1
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Investment Income Properties of America, Inc.
We have audited the accompanying statement of operations, stockholders' equity
and cash flows of Investment Income Properties of America, Inc. for the year
ended December 31, 1997. 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 results of operations and cash flows of Investment
Income Properties of America, Inc. for the year ended December 31, 1997, 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 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
GRANT THORNTON LLP
Fort Lauderdale, Florida
February 20, 1998
F-2
<PAGE>
INVESTMENT INCOME PROPERTIES OF AMERICA, INC.
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Rental Properties $ 4,790,150
Cash and Cash Equivalents 40,159
Due from Affiliate 9,008
Other Assets 10,225
-----------
$ 4,849,542
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
Liabilities:
Mortgage notes payable $ 3,994,792
Notes payable - stockholders 1,515,000
Accounts payable and accrued expenses 285,393
Notes payable to affiliate 34,500
Deferred revenue 10,457
Tenant deposits 24,180
-----------
Total liabilities 5,864,322
-----------
Commitments, Contingencies,Subsequent Events, and Other Matters --
Stockholders' Deficiency:
Common stock, $.001 par value; 100,000,000 shares authorized;
2,906,561 shares issued and outstanding 2,907
Additional paid-in capital 5,301,976
Deficit (6,319,663)
-----------
Total stockholders' deficiency (1,014,780)
-----------
$ 4,849,542
===========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
INVESTMENT INCOME PROPERTIES OF AMERICA, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenue:
Rental income $ 611,256 $ 203,429
Interest income 7,725 1,439
----------- -----------
618,981 204,868
----------- -----------
Rental Expenses:
Interest 213,185 69,807
Depreciation 84,653 34,688
Utilities 71,387 21,571
Property taxes 71,254 35,789
Repairs and maintenance 57,676 14,705
Other 54,311 19,753
----------- -----------
552,466 196,313
----------- -----------
Administrative Expenses:
Salaries personnel 112,425 72,759
Professional fees 93,146 121,222
Other 127,205 483,254
Interest and financing costs 490,452 98,317
Common stock and options issued for services 3,595,983 434,160
----------- -----------
4,419,211 1,209,712
----------- -----------
Net Loss $(4,352,696) $(1,201,157)
=========== ===========
Net Loss Per Share $ (2.83) $ (5.79)
=========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
INVESTMENT INCOME PROPERTIES OF AMERICA, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 109,800 $ 1 $ 22,399 $ (765,810) $ (743,410)
Year Ended December 31, 1997:
Sale of common stock 264,325 123 249,377 -- 249,500
Stock options granted for services -- -- 434,160 -- 434,160
Net loss -- -- -- (1,201,157) (1,201,157)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 374,125 124 705,936 (1,966,967) (1,260,907)
Year Ended December 31, 1998:
Sale of common stock and options
exercised 359,936 610 631,390 -- 632,000
Common stock issued for services 2,172,500 2,173 2,622,827 -- 2,625,000
Stock options granted for services -- -- 970,983 -- 970,983
Common stock and warrants issued
in connection with debt -- -- 370,840 -- 370,840
Net loss -- -- -- (4,352,696) (4,352,696)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 2,906,561 $ 2,907 $ 5,301,976 $(6,319,663) $(1,014,780)
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
INVESTMENT INCOME PROPERTIES OF AMERICA, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(4,352,696) $(1,201,157)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 84,653 34,688
Common stock and stock options issued for services 3,595,983 434,160
Common stock and warrants issued in connection with debt 370,840 --
Write off of financing costs 34,949 --
Changes in operating assets and liabilities:
Decrease in other assets (9,438) (1,621)
Decrease in due from affiliates (1,958) (7,050)
Increase (decrease) in accounts payable and accrued expenses (14,432) 163,693
Increase in deferred revenue 10,457 --
Increase in tenant deposits 24,180 --
----------- -----------
Net cash used in operating activities (257,462) (577,287)
----------- -----------
Cash Used in Investing Activities:
Purchase of rental properties (363,903) (483,716)
----------- -----------
Net cash used in investing activities (363,903) (483,716)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of common stock 632,000 249,500
Payments on mortgage notes (29,028) (28,605)
Proceeds from notes payable -stockholders -- 882,500
Payments on notes payable - stockholders and affiliates (95,000) (22,500)
Proceeds from notes payable to affiliate -- 104,000
----------- -----------
Net cash provided by financing activities 507,972 1,184,895
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (113,393) 123,892
Cash and Cash Equivalents, Beginning 153,552 29,660
----------- -----------
Cash and Cash Equivalents, Ending $ 40,159 $ 153,552
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 337,094 $ 64,252
=========== ===========
Cash paid during the period for income taxes $ -- $ 787
=========== ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
INVESTMENT INCOME PROPERTIES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1. 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 qualified real estate investment trust
(REIT). A REIT must meet certain criteria set forth in Code Section
856 of the Internal Revenue Code. At December 31, 1998, the Company
had not yet achieved certain of the criteria relating to number of
stockholders and personal holding company status. The Company
invests 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 with an original maturity of
three months or less to be cash equivalents.
Rental Properties
Rental properties are stated at cost, less accumulated
depreciation. The Company provides for depreciation using the
straight-line method over the estimated useful lives of the assets.
Repairs and maintenance are charged to expense as incurred. Any
gain or loss on disposition of assets is recognized currently.
Revenue Recognition
The Company leases its commercial properties pursuant to operating
leases with terms generally of three years with an option to renew
for an additional two years. Rental income is recognized when
earned, which approximates recognition using the straight-line
method over the related lease term At December 31, 1998, leases in
effect provide for annual rentals aggregating approximately
$850,000.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk are cash and cash equivalents.
From time to time during the year, the Company had deposits in
financial institutions in excess of the federally insured limits.
The Company maintains its cash with a high-quality financial
institution that the Company believes limits this risk.
F-7
<PAGE>
INVESTMENT INCOME PROPERTIES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company expects to operate as and will elect to be taxed as a
REIT under the Internal Revenue Code of 1986, as amended (the
"Code"). Generally, a REIT that 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 for
its distributed income. Accordingly, the Company does not expect to
provide for Federal or Florida income taxes on its distributed
income. Until such time as the Company achieves REIT status, it
will continue to be treated for income tax purposes as a C
Corporation.
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.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs
incurred for the years ended December 31, 1998 and 1997 were not
material.
Offering Costs
During 1997, the Company incurred costs of $34,949 in connection
with a proposed initial public offering ("IPO") of Company equity
securities. During 1998, the Company decided not to pursue an IPO
currently and expensed these amounts.
Fair Value of Financial Instruments
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair value. These instruments
include cash, debt, accounts payable, and accrued expenses. Fair
values were assumed to approximate carrying values for these
financial instruments since they are short-term in nature and their
carrying amounts approximate fair values or they are receivable or
payable on demand.
The fair value of debt instruments has been estimated by using
discounted cash flow models incorporating discount rates based on
current market interest rates for similar types of instruments. At
December 31, 1998, the differences between estimated fair value and
the carrying value of debt instruments were not material.
F-8
<PAGE>
INVESTMENT INCOME PROPERTIES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, "Reporting Comprehensive Income" and No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No.
130 establishes standards for reporting and displaying
comprehensive income, its components, and accumulated balances.
SFAS No. 131 establishes standards for the way that public
companies report information about operating segments in annual
financial statements and requires reporting of selected information
about operating segments in interim financial statements issued to
the public. Both SFAS No. 130 and SFAS No. 131 are effective for
periods beginning after December 15, 1997. The Company adopted
these new accounting standards in 1998, and their adoption had no
effect on the Company's financial statements and disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires companies to recognize all
derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as
a hedge, the objective of which is to match the timing of the gain
or loss recognition of the hedging derivative with the recognition
of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss
is recognized in income in the period of change. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after
June 15, 1999.
Historically, the Company has not entered into derivatives
contracts to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new
standard on January 1, 2000 to affect its financial statements.
Reclassifications
Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 presentation.
NOTE 2. BASIS OF PRESENTATION
Going Concern
The accompanying financial statements have been presented in
accordance with generally accepted accounting principles, which
assume the continuity of the Company as a going concern. However,
the Company has generated little revenue to date and incurred
substantial operating losses.
F-9
<PAGE>
INVESTMENT INCOME PROPERTIES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2. BASIS OF PRESENTATION (Continued)
Going Concern (Continued)
As reflected in the accompanying financial statements, the Company
has incurred net losses of approximately $4,353,000 in 1998 and
$1,201,000 in 1997, and reflects a stockholders' deficiency of
approximately $1,015,000 as of December 31, 1998. Additionally,
from time to time the Company has been unable to make principal and
interest payments on notes payable to stockholders on a timely
basis and, consequently, is in default on those obligations (see
Note 4). These conditions raise substantial doubt as to the ability
of the Company to continue as a going concern.
Management's plans with regard to this matter encompass the
following actions:
Business Plan
The Company has adopted, and is in the process of implementing, a
business plan intended to define the Company's strategy for growth.
The Company continues to seek additional rental properties to
acquire pursuant to that business plan; see Note 12 regarding a
series of letters of intent to purchase 15 residential rental
complexes signed on March 10, 1999. Additionally, the Company has
and will continue to take steps to reduce operating losses and net
cash used in operating activities.
Subsequent Financing
In order to achieve its financial plan, the Company is seeking
additional funding, which may consist of debt, equity or a
combination thereof. Beginning March 31, 1999, the Company,
pursuant to a private placement memorandum, is attempting to issue
1,250,000 shares of Company common stock at $4 per share to
accredited investors for total maximum gross offering proceeds of
$5,000,000. If the Company is unable to obtain this or other
funding, the Company will be required to modify its current
business plan. There can be no assurance that the Company will be
able to obtain such additional funding.
Summary
The eventual outcome of the success of management's plans cannot be
ascertained with any degree of certainty. The accompanying
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
F-10
<PAGE>
INVESTMENT INCOME PROPERTIES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3. RENTAL PROPERTIES
<TABLE>
<CAPTION>
Estimated Useful
Lives (Years)
-------------
<S> <C>
Land - $ 490,004
Buildings 39 4,410,040
Other 5-7 11,921
-----------
4,911,965
Less accumulated depreciation 121,815
-----------
$4,790,150
===========
</TABLE>
NOTE 4. NOTES PAYABLE TO STOCKHOLDERS
During 1995, 1996 and 1997, the Company received approximately
$1,585,000 through the issuance of notes payable to investors. As of
December 31, 1998, approximately $70,000 of these notes payable have
been repaid or settled. 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. As of December
31, 1998, the remaining $1,515,000 of notes are all due to be repaid.
The Company is not in a position to repay these loans until such time
as it is able to secure additional financing, either debt or equity. As
a result, these notes payable are currently in default.
In connection with the issuance of these notes, these investors
received 262,000 shares of common stock and warrants to purchase an
additional 262,000 shares of Company common stock for $2.00 per share.
The warrants are exercisable at any time up to three years after the
date of an initial public offering of the Company's capital stock. The
common stock was valued at $2 per share, the estimated fair value. The
warrants were valued at $.54 per warrant as determined using a binomial
pricing model (see Note 9). The stock and warrants issued were recorded
as a discount on the debt and were amortized over the life of the debt,
eighteen months, through December 31, 1998.
F-11
<PAGE>
INVESTMENT INCOME PROPERTIES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
NOTE 5. MORTGAGE NOTES PAYABLE
<S> <C>
On June 30, 1997, the Company purchased an office building in Pompano
Beach, Florida for $2,600,000 financed through a purchase money mortgage
of $2,060,000. The mortgage bears interest at 1% above the prime rate
(8.75% at December 31, 1998), is payable monthly in installments of
$14,398 with all unpaid principal and interest due July 10, 2004, and is
collateralized by the property and an assignment of all rents and leases
associated with the property. During any time the mortgage is
outstanding, the seller has the option to convert the mortgage note to
common stock of the Company. The mortgagor would receive the number of
shares of common stock valued at market value at the time of conversion
equivalent to $2,700,000. Any discount resulting from conversion by the
mortgagor will be recorded in the Company financial statements as a
charge to earnings at the time the conversion takes place. In addition,
the note contains a prepayment clause whereby the mortgagee can prepay
the mortgage either in cash or common stock, as directed by the
mortgagor within 90 days notice. In the event the mortgagor chooses to
accept stock as payment for the mortgage note, the mortgagor will
receive Company common stock with a market value of $2,700,000 at the
time of early repayment. Any discount resulting from an early repayment
will be recorded in the Company financial statements as a charge to
earnings at the time the mortgage note is paid in full. $2,031,813
On July 10, 1998, the Company purchased an office building in West Palm
Beach, Florida for $2,320,500. The purchase was financed through a
purchase money mortgage of $1,972,425 and funds provided through loans
by individuals who also own shares of the Company common stock. The
mortgage bears interest at 7.25%, is payable monthly in installments of
$14,257 with all unpaid principal and interest due August 10, 2005, and
is collateralized by the property and an assignment of all rents and
leases associated with the property. 1,962,979
------------
$3,994,792
============
</TABLE>
<TABLE>
<CAPTION>
The aggregate maturities of mortgage notes payable at December 31, 1998
are summarized as follows:
<S> <C> <C>
1999 $ 50,847
2000 54,694
2001 58,875
2002 63,355
2003 68,307
Thereafter 3,698,694
----------
$3,994,792
==========
</TABLE>
F-12
<PAGE>
INVESTMENT INCOME PROPERTIES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 6. DEPOSITS
During 1997, the Company, for various reasons, decided not to move
forward on two commitments to purchase property. As a result, $235,000
of deposits were forfeited and charged against earnings in 1997 in the
accompanying financial statements.
NOTE 7. RELATED PARTY TRANSACTIONS
During 1998, the Company issued 1,800,000 shares of common stock and
options to purchase 850,000 shares of common stock for $2.00 per share
to certain related parties in exchange for various consulting services
performed in connection with establishing the Company. These common
shares and options have been recorded in these financial statements as
consulting fees in the amount $2,542,500.
The Company has entered into a management agreement with Professional
Realty and Management Service ("PRMS") for a term of five years
commencing in June 1997, 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 overhead
expenses, associated with accounting and financial reporting services
rendered by PRMS under the property management agreements. A majority
interest of PRMS is owned by a stockholder and officer of the Company.
The Company incurred $28,728 and $10,815 in management fees during 1998
and 1997, respectively.
The Company has also 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 the form of a note to PRMS in connection
with the acquisition of an office building during 1997. In 1998, the
commission due PRMS of $46,410 in connection with the acquisition of an
office building was paid by the seller.
The Company has entered into an advisory agreement with F&P Realty
Advisors, Inc. ("F&P") for a term of five years commencing in 1997,
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 is controlled by a
stockholder of the Company. F&P will receive an annual Asset Management
Fee, based upon the ratio of Funds from Operations to Total
Contributions, as defined ("Return Ratio"), of between 0.1% and 0.25%
of Total Contributions.
F-13
<PAGE>
INVESTMENT INCOME PROPERTIES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 7. RELATED PARTY TRANSACTIONS (Continued)
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 less 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
Company's capital stock. Through December 31, 1998, no asset management
fee has been earned under this agreement.
NOTE 8. INCOME TAXES
As discussed in Note 1, the Company expects to be exempt from Federal
and Florida income taxes for any future distributed profits provided
that it meets the required tests.
The accumulated losses from inception through the year ended December
31, 1996 of $765,810, contain certain organizational and start-up costs
that are ordinarily required to be capitalized and amortized for tax
purposes.
In June 1997 and 1998, the Company purchased office buildings that have
generated rental income for the Company. As a result, the Company is
considered to be operational and, therefore, organizational and
start-up costs are being amortized for tax purposes over 5 years
commencing in June 1997. Other temporary differences consist of
depreciation, related party interest, common stock and stock options
issued for services and the net operating loss carry forward. 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.
Significant components of the Company's deferred tax assets as of
December 31, 1998 are as follows:
Benefit of net operating loss carryforwards $ 340,000
Restricted common stock for services 957,000
Start up costs 170,000
Valuation allowance (1,467,000)
----------
Net deferred tax asset $ -
==========
F-14
<PAGE>
INVESTMENT INCOME PROPERTIES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8. INCOME TAXES (Continued)
The following table reconciles the income tax provision (benefit) at
the U.S. statutory rate to that in the financial statements:
1998 1997
---- ----
Taxes (benefit) computed at 37% $(1,610,000) $(444,000)
Permanent differences 358,000 180,000
Start up costs (57,000) (57,000)
Valuation allowance 1,309,000 321,000
----------- ---------
Income tax provision $ - $ -
=========== =========
In accordance with certain provisions of the Tax Reform Act of 1986, a
change in ownership of greater than 50% of a corporation within a three
year period will place an annual limitation on the corporation's
ability to utilize its existing tax benefit carryforwards. Such a
change in ownership occurred on August 1, 1998. As a result, based upon
the amount of the taxable loss incurred to December 31, 1998
(approximately $920,000), the Company estimates that an annual
limitation of approximately $102,000 will apply to approximately
$774,000 of the net operating loss carry forward existing as of
December 31, 1998. The Company's utilization of its tax benefit
carryforwards may be further restricted in the event of subsequent
changes in the ownership of the Company.
NOTE 9. STOCK OPTIONS
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Compensation cost for stock
options, if any, is measured as the excess of the estimated market
price of the Company's common stock at the date of grant, over the
amount the recipient must pay to acquire the common stock. As of
December 31, 1998, the Company has not granted any options to
employees.
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," established accounting and
disclosure requirements using a fair-value-based method of accounting
for stock-based employee compensation plans. The Company has elected to
retain its current method of accounting as described above, and has
adopted the disclosure requirements of SFAS No. 123.
The Company has granted stock options to various consultants which are
classified as non-qualified, and are not part of an Employees'
Incentive Stock Option Plan. The Company has adopted the provisions
required under SFAS 123, Accounting for Stock Based Compensation.
The exercise price of options granted by the Company equals or exceeds
the market price at the date of grant.
F-15
<PAGE>
INVESTMENT INCOME PROPERTIES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 9. STOCK OPTIONS (Continued)
The fair value of each option grant is estimated on the date of grant
using a binomial option-pricing model with the following
weighted-average assumptions: dividend yield of 0.0 percent for all
years; expected volatility of 20 percent; risk-free interest rates of
6.0% in 1998 and 5.9% in 1997; and expected holding periods of 3 years
in both periods.
Consulting expense of $ 970,983 and $434,169 has been recognized and
charged to earnings in 1998 and 1997, respectively.
A summary of the status of the Company's fixed stock options as of
December 31, 1998 and 1997, and changes during the years ending as of
those dates is as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------- -------------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 998,700 $1.98 103,500 $1.93
Granted 2,148,300 $2.00 895,200 2.00
Exercised (2,500) - - -
---------- ----------
Outstanding at end of year 3,144,500 $2.00 998,700 $1.98
========== ===== ========== =====
Options exercisable at end of year 3,144,500 998,700
========= =======
Weighted-average fair value of
options granted during the year $.45 $.54
==== ====
</TABLE>
NOTE 10. NET LOSS PER SHARE
The Company adopted Financial Accounting Standards No. 128 (SFAS 128),
"Earnings Per Share" in 1997. SFAS 128 requires dual presentation of
basic and diluted earnings per share on the face of the income
statement.
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 that includes dilutive common stock equivalents in
the weighted average shares outstanding, has not been presented as it
is anti-dilutive in 1998 and 1997.
F-16
<PAGE>
INVESTMENT INCOME PROPERTIES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 10. NET LOSS PER SHARE (Continued)
The components used in calculating basic net loss per share are as
follows:
Weighted
Average Loss
Net Loss Shares Per Share
-------- ------ ---------
1998 $(4,352,696) 1,539,260 $(2.83)
1997 (1,201,157) 207,437 (5.79)
NOTE 11. YEAR END ADJUSTMENTS
During the fourth quarter of the year ended December 31, 1998, the
Company recorded certain adjustments that are considered material to
the operating results of the fourth quarter. The following is an
analysis of these adjustments:
<TABLE>
<CAPTION>
(Increase) Decrease
in Net Loss
-----------
<S> <C>
Adjustment of interest expense $(127,000)
Write off to expense of offering costs (34,000)
Recognition of common stock and options issued for services (3,550,000)
Recognition of common stock and warrants issued in connection
with debt (371,000)
Other 100,000
-------------
Total $(3,982,000)
=============
Per Share $(2.69)
======
</TABLE>
NOTE 12. SUBSEQUENT EVENTS
On March 10, 1999, the Company signed a series of letters of intent to
purchase 15 residential rental complexes in five states throughout the
Southeast and Southwest United States. Each commitment ranges from $19
million to $34 million for a total of $394 million, to be paid for all
15 complexes. The complexes, which are all being developed by one
company, are expected to be completed between May 1999 and June 2001.
The Company has committed to acquire each property once the property is
at least 60% leased.
F-17
