<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 1995
Registration Statement No. 33-__________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM S-4
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
-------------------------
INCOME OPPORTUNITY REALTY INVESTORS, INC.
(Exact name of registrant as specified in its governing instrument)
<TABLE>
<S> <C> <C>
NEVADA 6513 (Applied For)
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer Identification No.)
Classification Code Number)
</TABLE>
10670 NORTH CENTRAL EXPRESSWAY
SUITE 300
DALLAS, TEXAS 75231
(214) 692-4700
(Address and telephone number of principal executive offices)
ROBERT A. WALDMAN, ESQ.
10670 NORTH CENTRAL EXPRESSWAY
SUITE 300
DALLAS, TEXAS 75231
(214) 692-4700
(Name, address and telephone number of agent for service)
-------------------------
Copy to:
THOMAS R. POPPLEWELL, ESQ.
Andrews & Kurth L.L.P.
4400 Thanksgiving Tower
Dallas, Texas 75201
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
ASSUMING SHAREHOLDERS APPROVE THE PROPOSED INCORPORATION PROCEDURE, AS SOON AS
PRACTICABLE AFTER THE DATE OF THE SPECIAL MEETING OF SHAREHOLDERS OF INCOME
OPPORTUNITY REALTY TRUST
-------------------------
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
-------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
============================================================================================================================
Proposed maximum Proposed maximum
Title of securities Amount being offering price aggregate Amount of
being registered registered per unit(1) offering price(1) registration fee
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par 791,444 shares $19.625 $15,532,088.50 $5,355.90
value $.01 per share
============================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1), and based on the average of the high and low prices
of the Shares of beneficial interest of Income Opportunity Realty Trust on the
American Stock Exchange on August 23, 1995.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
<PAGE> 2
INCOME OPPORTUNITY REALTY INVESTORS, INC.
-------------------------
CROSS REFERENCE SHEET TO FORM S-4
<TABLE>
<CAPTION>
Location in
Item Number and Caption Proxy Statement/Prospectus
----------------------- --------------------------
<S> <C> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside Front Cover
Page of Prospectus . . . . . . . . . . . . . . . . . . . . . Cover Page; Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus . . Inside Front and Outside Back Cover Pages
3. Risk Factors, Ratio of Earnings to Fixed Charges and Other
Information . . . . . . . . . . . . . . . . . . . . . . . . SUMMARY; CERTAIN RISK FACTORS
4. Terms of the Transaction . . . . . . . . . . . . . . . . . . Outside Front Cover Page; SUMMARY; General Discussion;
Principal Reasons for the Incorporation Procedure;
Comparison of Principal Differences Between the Trust and
IORI Nevada; Management after Incorporation Procedure;
Business Activities after Incorporation Procedure;
Comparison of the Securities of IORI Nevada and the
Trust; Stockholder-Management Relations; The Business
Combination Provision; The Evaluation Provision; Amendment
Provisions; Certain Federal Income Tax Consequences;
Certain Foreign, State and Local Taxes; SELECTED
HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
5. Pro Forma Financial Information . . . . . . . . . . . . . . *
6. Material Contracts with the Company Being Acquired . . . . . General Discussion
7. Additional Information Required for Reoffering by Persons and
Parties Deemed to be Underwriters . . . . . . . . . . . . . *
8. Interests of Named Experts and Counsel . . . . . . . . . . . *
9. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities . . . . . . . . . . . . . . . . . Liability of Certain Persons
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants . . . . . . . . *
11. Incorporation of Certain Information by Reference . . . . . *
12. Information with Respect to S-2 or S-3 Registrants . . . . . BUSINESS AND PROPERTIES OF IORI NEVADA;
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
INFORMATION; MARKET PRICES OF THE SHARES;
DIVIDENDS; Comparison of the Securities of
IORI Nevada and the Trust; Listing
13. Incorporation of Certain Information by Reference . . . . . INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
14. Information with Respect to Registrants other than
S-3 or S-2 Registrants . . . . . . . . . . . . . . . . . . . *
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies . . . . . . . . . *
16. Information with Respect to S-2 or S-3 Companies . . . . . . The Advisor; Replacement of the Fixed-Life Trust with a
Perpetual-Life Corporation; Management after Incorporation
Procedure; BUSINESS AND PROPERTIES OF THE TRUST; SELECTED
HISTORICAL CONSOLIDATED FINANCIAL INFORMATION; MARKET
PRICES OF THE SHARE; DIVIDENDS; DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS;
Introduction; Liquidity and Capital Resources;
Commitments; Results of Operations
17. Information with Respect to other than S-3 or S-2 Companies *
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations are to be
Solicited . . . . . . . . . . . . . . . . . . . . . . . . . Outside Front Cover Page; SUMMARY; Interests of
Certain Persons in the Incorporation Procedure; GENERAL
SHAREHOLDER INFORMATION; Shareholders Entitled to Vote;
Voting of Proxies; Vote Required for Approval; Revocation
of Proxies; Involvement in Certain Legal Proceedings;
Certain Business Relationships and Related-Party
Transactions; Dissenters' Rights to Dissent and Obtain
Payment
19. Information if Proxies, Consents or Authorizations are not
to be Solicited or in an Exchange Offer . . . . . . . . . . *
</TABLE>
* Not applicable
<PAGE> 4
PROXY STATEMENT/PROSPECTUS
INCOME OPPORTUNITY REALTY TRUST
10670 NORTH CENTRAL EXPRESSWAY
SUITE 300
DALLAS, TEXAS 75231
____, 1995
Dear Shareholders:
We are pleased to invite you to a Special Meeting of Shareholders of
Income Opportunity Realty Trust (the "Trust") to be held at 2:00 p.m., Dallas
time, on October __, 1995, at 10670 North Central Expressway, Suite 600,
Dallas, Texas 75231.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to convert the Trust from a California business trust (which in
accordance with the terms of its Declaration of Trust has been required to
distribute to Shareholders net cash proceeds from sales or refinancing of
equity investments received by the Trust after October 24, 1991, in excess of
cash reserves necessary for maintenance and improvement of its properties, and
will be required to begin liquidation of its assets on or prior to October 24,
1996) into a Nevada corporation that has perpetual duration (the "Incorporation
Procedure"). As discussed in the accompanying Proxy Statement/Prospectus, the
Incorporation Procedure would be implemented by incorporating the Trust in
California and merging the Trust (the "Merger"), after it is so incorporated,
with and into its wholly-owned Nevada subsidiary, Income Opportunity Realty
Investors, Inc. ("IORI Nevada"), which has been organized for this purpose. If
the Shareholders approve the Incorporation Procedure, you will own after the
Merger one share of common stock of IORI Nevada for each share of beneficial
interest in the Trust you now own. The Incorporation Procedure will not affect
your proportionate equity interest. The Incorporation Procedure is not
expected to cause any interruption in the trading of your shares on the
American Stock Exchange. If Shareholders approve the Incorporation Procedure,
it would be effected without further action by the Shareholders. Each of the
current Trustees of the Trust would continue to serve as a director of IORI
Nevada until his initial term expires under IORI Nevada's Articles of
Incorporation or until a successor is elected. IORI Nevada would succeed to
and assume, by operation of law, all rights and obligations of the Trust.
The Incorporation Procedure will result in the elimination of the
Trust's liquidation requirement; however, (except as discussed below) the
Incorporation Procedure would not otherwise significantly change the nature or
conduct of the Trust's business or, except to the extent IORI Nevada may issue
preferred stock in the future, voting rights per common share (see "Proposed
Incorporation Procedure -- Comparison of the Securities of IORI Nevada and the
Trust -- Preferred Stock" below), nor would it affect the tax status of the
Trust as a real estate investment trust under the Internal Revenue Code of
1986, as amended. The Incorporation Procedure would result in certain other
changes affecting Shareholders, including, among other things, (i) removal of
certain restrictions on permitted investments that currently apply to the
Trust, (ii) introduction of more
<PAGE> 5
clearly defined guidelines and extensive coverage regarding director liability
and indemnification, (iii) inclusion of more extensive safeguards for
stockholders in connection with a hostile acquisition or change in control of
IORI Nevada and (iv) existence of certain legal and procedural differences
caused by the Trust's change from a business trust governed by California law
and its Declaration of Trust and Trustees' Regulations to a corporation
governed by Nevada corporate law and by its Articles of Incorporation and
Bylaws. As discussed more fully in the attached Proxy Statement/Prospectus,
the Incorporation Procedure could have the effect of rendering more difficult
or discouraging a future attempt to acquire control of IORI Nevada by a merger,
tender offer, proxy contest or removal of incumbent management without the
approval of the Board of Directors, even though certain stockholders of IORI
Nevada might desire such a change in control. The Incorporation Procedure,
therefore, might be viewed as limiting Shareholders' rights. The attached
Proxy Statement/Prospectus provides a detailed description of the Incorporation
Procedure. Please give this information your careful attention.
The Trustees have unanimously approved the Incorporation Procedure as
in the best interest of the Trust and its Shareholders and strongly recommend
that you vote FOR the Incorporation Procedure. Whether or not you plan to
attend the Special Meeting in person, please sign, date and return the enclosed
proxy card today. We appreciate your support.
Cordially,
Randall M. Paulson
President
***************************************************************************
* *
* IF YOUR SHARES ARE HELD IN THE NAME OF A BROKERAGE FIRM, NOMINEE OR *
* OTHER INSTITUTION, ONLY IT CAN VOTE YOUR SHARES. PLEASE CONTACT *
* PROMPTLY THE PERSON RESPONSIBLE FOR YOUR ACCOUNT AND GIVE *
* INSTRUCTIONS FOR YOUR SHARES TO BE VOTED. *
* *
***************************************************************************
SHAREHOLDERS SHOULD NOT SURRENDER THEIR SHARE CERTIFICATES AT THIS
TIME IN CONNECTION WITH THE PROPOSED INCORPORATION PROCEDURE.
-2-
<PAGE> 6
INCOME OPPORTUNITY REALTY TRUST
10670 North Central Expressway, Suite 300
Dallas, Texas 75231
(214) 692-4700
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To the Shareholders of Income Opportunity Realty Trust:
PLEASE TAKE NOTICE that a Special Meeting of the Shareholders of
Income Opportunity Realty Trust (the "Trust") will be held at 2:00 p.m., Dallas
time, on October __, 1995, at 10670 North Central Expressway, Suite 600,
Dallas, Texas 75231, to consider and vote on a proposal described in the
accompanying Proxy Statement/Prospectus to convert the Trust from a California
business trust (which in accordance with the terms of its Declaration of Trust
has been required to distribute to Shareholders net cash proceeds from sales or
refinancing of equity investments received by the Trust after October 24, 1991,
in excess of cash reserves necessary for maintenance and improvement of its
properties, and will be required to begin liquidation of its assets on or prior
to October 24, 1996) into a Nevada corporation that would have perpetual
duration (the "Incorporation Procedure").
The principal components of the Incorporation Procedure are the
following:
(i) the filing of articles of incorporation with the
Secretary of State of California, converting the Trust from a
California business trust into Income Opportunity Realty Corporation,
a California corporation (the "California Corporation") and converting
shares of the Trust into shares of the California Corporation on a
one-for-one basis;
(ii) the execution of an Agreement and Plan of Merger
between the California Corporation (as successor to the Trust) and its
recently organized, wholly-owned Nevada subsidiary Income Opportunity
Realty Investors, Inc. ("IORI Nevada"), that provides, among other
things, for (a) the merger of the California Corporation with and into
IORI Nevada such that the California Corporation shall cease to exist
and IORI Nevada shall be the surviving corporation (the "Merger"), (b)
the issuance by IORI Nevada of one share of its common stock in
exchange for each share of common stock of the California Corporation
and (c) for the cancellation of all shares of IORI Nevada's common
stock then held by the California Corporation, with the effect that
(i) the shareholders of the California Corporation would become the
stockholders of IORI Nevada without any change in their percentage
ownership, (ii) the California Corporation would cease to exist and
(iii) IORI Nevada would succeed to all the rights and properties, and
be subject to all the obligations and liabilities, of the Trust
incorporated as the California Corporation; and
(iii) the filing of articles of merger with the Secretary
of State of Nevada and the Secretary of State of California to effect
the Merger.
<PAGE> 7
THE INCORPORATION PROCEDURE IS PRESENTED AS A SINGLE UNIFIED
PROPOSAL TO BE APPROVED OR REJECTED BY SHAREHOLDERS IN ITS ENTIRETY. APPROVAL
OF THE INCORPORATION PROCEDURE WILL CONSTITUTE APPROVAL OF EACH OF COMPONENTS
(I) TO (III) ABOVE, INCLUDING (1) ADOPTION OF THE AGREEMENT AND PLAN OF MERGER
IN ALL RESPECTS, INCLUDING AS A SHAREHOLDER OF THE CALIFORNIA CORPORATION, (2)
APPROVAL AND RATIFICATION OF (A) THE FORMATION OF IORI NEVADA AS A WHOLLY-OWNED
SUBSIDIARY OF THE TRUST AND (B) EACH OF THE OTHER COMPONENTS OF THE
INCORPORATION PROCEDURE AND (3) APPROVAL AND RATIFICATION OF ANY AND ALL
FURTHER STEPS NECESSARY OR APPROPRIATE IN THE JUDGMENT OF MANAGEMENT TO
EFFECTUATE THE INCORPORATION PROCEDURE.
If Shareholders approve the proposed Incorporation Procedure, each of
the current Trustees of the Trust would continue to serve as a director of IORI
Nevada until his initial term expires under IORI Nevada's Articles of
Incorporation or until a successor is elected. IORI Nevada would succeed to
and assume, by operation of law, all rights and obligations of the Trust.
Only Shareholders of record at the close of business on __________
___, 1995 will be entitled to vote at the Special Meeting. Shareholders are
cordially invited to attend the Special Meeting in person.
Regardless of whether you plan to be present at the Special Meeting,
please promptly date, mark, sign and mail the enclosed proxy ballot card to
American Stock Transfer and Trust Company in the envelope provided. ANY
SHAREHOLDER WHO EXECUTES AND DELIVERS THE ENCLOSED PROXY CARD MAY REVOKE THE
AUTHORITY GRANTED THEREUNDER AT ANY TIME PRIOR TO ITS USE BY GIVING WRITTEN
NOTICE OF SUCH REVOCATION TO AMERICAN STOCK TRANSFER AND TRUST COMPANY, 40 WALL
STREET, NEW YORK, NEW YORK 10005, OR BY EXECUTING AND DELIVERING A PROXY
BEARING A LATER DATE. A SHAREHOLDER MAY ALSO REVOKE A PROXY BY ATTENDING AND
VOTING AT THE SPECIAL MEETING. YOUR VOTE IS IMPORTANT, REGARDLESS OF THE
NUMBER OF SHARES YOU OWN.
Dated: __________, 1995.
BY ORDER OF THE BOARD OF TRUSTEES OF
INCOME OPPORTUNITY REALTY TRUST
Robert A. Waldman
Secretary
IMPORTANT
YOU CAN HELP THE TRUST AVOID THE NECESSITY AND EXPENSE OF SENDING
FOLLOW-UP LETTERS TO ENSURE A QUORUM BY PROMPTLY RETURNING THE ENCLOSED PROXY
BALLOT CARD. IF YOU ARE UNABLE TO ATTEND THE SPECIAL MEETING, PLEASE MARK,
DATE, SIGN AND RETURN THE ENCLOSED PROXY BALLOT CARD SO THAT THE NECESSARY
QUORUM MAY BE REPRESENTED AT THE SPECIAL MEETING. THE ENCLOSED ENVELOPE
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
FAILURE TO VOTE MAY SUBJECT THE TRUST TO FURTHER EXPENSE.
-2-
<PAGE> 8
***************************************************************************
* *
* IF YOUR SHARES ARE HELD IN THE NAME OF A BROKERAGE FIRM, NOMINEE OR *
* OTHER INSTITUTION, ONLY IT CAN VOTE YOUR SHARES. PLEASE CONTACT *
* PROMPTLY THE PERSON RESPONSIBLE FOR YOUR ACCOUNT AND GIVE *
* INSTRUCTIONS FOR YOUR SHARES TO BE VOTED. *
* *
***************************************************************************
-3-
<PAGE> 9
Subject to Completion, Dated August 29, 1995
PROXY STATEMENT/PROSPECTUS
PROXY STATEMENT PROSPECTUS
--------------- ----------
INCOME OPPORTUNITY REALTY TRUST INCOME OPPORTUNITY REALTY INVESTORS, INC.
10670 North Central Expressway 10670 North Central Expressway
Suite 300 Suite 300
Dallas, Texas 75231 Dallas, Texas 75231
(214) 692-4700 (214) 692-4700
Special Meeting of Shareholders To 791,444 Shares of Common Stock, par
Be Held on October ___, 1995 value $.01 per share
-------------------------
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Trustees of Income Opportunity Realty Trust (the
"Trust") of proxies to be used at a Special Meeting of Shareholders for a vote
upon a proposal to convert the Trust from a California business trust (which in
accordance with the terms of its Declaration of Trust has been required to
distribute to Shareholders net cash proceeds from sales or refinancing of
equity investments received by the Trust after October 24, 1991, in excess of
cash reserves necessary for maintenance and improvement of its properties, and
will be required to begin liquidation of its assets on or prior to October 24,
1996) into a Nevada corporation that would have perpetual duration (the
"Incorporation Procedure"). The Special Meeting will be held at 2:00 p.m.,
Dallas time, on October ___, 1995, at 10670 North Central Expressway, Suite
600, Dallas, Texas 75231. This Proxy Statement/Prospectus and the accompanying
proxy card are first being mailed to Shareholders on or about _________, 1995.
FOR A DESCRIPTION OF CERTAIN RISKS ASSOCIATED WITH THE APPROVAL OF THE
INCORPORATION PROCEDURE AND AN INVESTMENT IN THE SHARES OF COMMON STOCK OF
INCOME OPPORTUNITY REALTY INVESTORS, INC., SEE "CERTAIN RISK FACTORS" BEGINNING
ON PAGE 16 HEREIN.
-------------------------
THE COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE INCORPORATION PROCEDURE
HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-------------------------
The date of this Proxy Statement/Prospectus is _____, 1995.
<PAGE> 10
As a result of the Incorporation Procedure, Income Opportunity Realty
Investors, Inc., a Nevada corporation ("IORI Nevada"), would become the
successor to the Trust, but would not be subject to the Trust's requirement (as
set forth in its Declaration of Trust, as defined below) that it liquidate its
assets. The Incorporation Procedure would not otherwise significantly change
the nature or conduct of the Trust's business. Pursuant to the Trust's
liquidation policy, the Trust has been required to distribute to Shareholders
net cash proceeds from any sales or refinancing of equity investments received
by the Trust after October 24, 1991, in excess of cash reserves necessary for
maintenance and improvement of its properties, and would be required to begin
liquidating its remaining assets on or prior to October 24, 1996 and to
distribute the net proceeds therefrom to Shareholders. At June 30, 1995, the
book value of the Trust's assets was $30.91 per Share, compared to the market
price per Share on such date of $19.625. The market price per Share at August
23, 1995 was $19.625. Book value per Share represents the proportionate value
of the Trust's assets minus liabilities as determined under generally accepted
accounting principles and does not purport to represent the price that could be
obtained for the Trust's assets, particularly in a bulk disposition. As
discussed in "Proposed Incorporation Procedure -- Replacement of the
Fixed-Life Trust with a Perpetual-Life Corporation", the Board of Trustees
believes that the liquidation policy of the Trust has failed to and will
continue to fail to maximize either current or long-term return to
Shareholders.
The Incorporation Procedure would neither affect voting rights per
common share, except to the extent IORI Nevada may issue preferred stock in the
future (see "Proposed Incorporation Procedure -- Comparison of the Securities
of IORI Nevada and the Trust -- Preferred Stock"), nor affect the Trust's
continued qualification for taxation as a real estate investment trust under
the Internal Revenue Code of 1986, as amended (the "Code"). If Shareholders
approve the proposed Incorporation Procedure, each of the current Trustees of
the Trust would continue to serve as a director of IORI Nevada until his
initial term expires under IORI Nevada's Articles of Incorporation or until a
successor is elected. IORI Nevada would succeed to and assume, by operation of
law, all rights and obligations of the Trust, including those under (i) its
current advisory agreement (the "Advisory Agreement") with Basic Capital
Management, Inc. ("BCM"), as such Advisory Agreement is amended to provide for
a substantially identical contractual operating expense limitation and for the
payment of certain commissions to BCM upon the acquisition of properties by
IORI Nevada, and (ii) its current Brokerage Agreement (the "Brokerage
Agreement") with Carmel Realty, Inc. ("Carmel Realty"), as such Brokerage
Agreement is amended to encompass acquisitions as well as sales of properties.
The Incorporation Procedure would, however, result in certain other
changes affecting Shareholders, including, among other things, (i) removal of
certain restrictions on permitted investments that currently apply to the
Trust, (ii) introduction of more clearly defined guidelines and extensive
coverage regarding director liability and indemnification, (iii) inclusion of
more extensive safeguards for stockholders in connection with a hostile
acquisition or change in control of IORI Nevada and (iv) existence of certain
legal and procedural differences caused by the Trust's change from a business
trust governed by California law and by the Second Amended and Restated
Declaration of Trust dated as of April 1, 1987 (the "Declaration of Trust") and
the Restated Trustees'
-2-
<PAGE> 11
Regulations dated as of April 21, 1989 (the "Trustees' Regulations") to a
corporation governed by Nevada corporate law and by its Articles of
Incorporation and Bylaws. The Incorporation Procedure could have the effect of
rendering more difficult or discouraging a future attempt to acquire control of
IORI Nevada by a merger, tender offer, proxy contest or removal of incumbent
management without the approval of the Board of Directors, even though certain
stockholders of IORI Nevada might desire such a change in control. The
Incorporation Procedure, therefore, might be viewed as limiting Shareholders'
rights. See "Proposed Incorporation Procedure -- Acquisition Safeguards --
Possible Negative Considerations".
The Incorporation Procedure is also likely to result in BCM, as
advisor, earning greater fees for a longer period of time than would be the
case under the Trust's current liquidation policy. In addition, the advisor
and its affiliates (such as Carmel Realty) would be entitled to receive fees or
commissions on any future acquisitions of real property by the Trust. See
"Proposed Incorporation Procedure -- Replacement of the Fixed-Life Trust with a
Perpetual- Life Corporation". The advisory fees of BCM are currently subject
to an operating expense limitation contained in the Declaration of Trust.
Although this limitation does not exist in the Articles of Incorporation of
IORI Nevada, the Advisory Agreement will be amended upon consummation of the
Incorporation Procedure to provide for a substantially identical contractual
operating expense limitation. See "Certain Risk Factors -- Elimination of
Charter Limitation on Operating Expenses", and "Proposed Incorporation
Procedure -- Business Activities after Incorporation Procedure". While the
Board of Trustees believes that the Incorporation Procedure is in the best
interest of the Trust and its Shareholders, certain members of management could
benefit from the Incorporation Procedure and, therefore, may be viewed as
having a conflict of interest. See "Certain Risk Factors -- Interests of
Certain Persons in the Incorporation Procedure".
THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE
INCORPORATION PROCEDURE.
IORI Nevada has filed a registration statement on Form S-4, No.
33-__________ (the "Registration Statement"), pursuant to the Securities Act of
1933, as amended, with respect to the shares of Nevada Common Stock, as
hereinafter defined, to be issued in connection with the Merger. This Proxy
Statement/Prospectus constitutes the prospectus of IORI Nevada filed as part of
the Registration Statement. All information herein with respect to the Trust
and IORI Nevada has been furnished by the Trust.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST OR IORI NEVADA. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO PURCHASE, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION OF AN OFFER OR PROXY
-3-
<PAGE> 12
SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES OFFERED HEREBY SHALL UNDER ANY CIRCUMSTANCES
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE TRUST
OR IORI NEVADA SINCE THE DATE HEREOF OR THAT THE INFORMATION SET FORTH OR
INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
AVAILABLE INFORMATION
The Trust is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith is required to file periodic reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information filed by
the Trust may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street
N.W., Washington, D.C. 20549, and the following regional offices of the SEC:
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048 and Midwest Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can also be
obtained from the Commission at prescribed rates by addressing written requests
for such copies to the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. The Trust's shares are listed on the
American Stock Exchange (the "AMEX") and such material can also be inspected at
the AMEX Information Center at 86 Trinity Place, New York, New York
10006-1881.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed with the Commission by the Trust under
the Exchange Act, are incorporated in and made a part of this Proxy
Statement/Prospectus by reference:
(i) the Trust's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994;
(ii) the Trust's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995; and
(iii) the Trust's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995.
THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM INCOME OPPORTUNITY
REALTY TRUST, 10670 NORTH CENTRAL EXPRESSWAY, SUITE 300, DALLAS, TEXAS 75231.
IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS PRIOR TO THE SPECIAL
MEETING, ANY REQUEST SHOULD BE RECEIVED BY ______________, 1995.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for all purposes to the extent
that a statement contained in this Proxy Statement/Prospectus, or in any other
subsequently filed document which is also, or is deemed to be, incorporated by
reference, modifies or replaces such statement. Any such statement so modified
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<PAGE> 13
or superseded shall not be deemed to constitute a part of this Proxy
Statement/Prospectus, except as so modified or superseded.
-5-
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TABLE OF CONTENTS
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SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
CERTAIN RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Elimination of the Trust's Liquidation Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Elimination of Charter Limitation on Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Interests of Certain Persons in the Incorporation Procedure . . . . . . . . . . . . . . . . . . . . . . . . 19
Authorization to Issue Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Certain Anti-takeover Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Effect of Certain Super-Majority Voting Provisions of IORI Nevada . . . . . . . . . . . . . . . . . . . . . 20
Transactions with Related Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Other Potential Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Certain Risk Factors Associated with Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
GENERAL SHAREHOLDER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Shareholders Entitled to Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Voting of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Vote Required for Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Revocation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
PROPOSED INCORPORATION PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
General Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Principal Reasons for the Incorporation Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Greater Legal Certainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Replacement of the Fixed-Life Trust with a Perpetual-Life Corporation . . . . . . . . . . . . . . . . . . . 29
Acquisition Safeguards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Possible Negative Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Certain Potential Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
The One-for-One Exchange of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Comparison of Principal Differences Between the Trust and IORI Nevada . . . . . . . . . . . . . . . . . . . 37
Management after Incorporation Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Constituency of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
The Director Removal Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
IORI Nevada's Advisor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Liability of Certain Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
The Management Liability Provision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Shareholder Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Business Activities after Incorporation Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
The Restrictions on Related-Party Transactions Provision. . . . . . . . . . . . . . . . . . . . . . 46
Comparison of the Securities of IORI Nevada and the Trust . . . . . . . . . . . . . . . . . . . . . . . . . 50
Common Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Dissenters' Rights to Dissent and Obtain Payment. . . . . . . . . . . . . . . . . . . . . . . . . . 52
Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Listing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
No Restrictions on Ownership and Transfer of Common Stock. . . . . . . . . . . . . . . . . . . . . . 52
Stockholder-Management Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
The Consent Provision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
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The Stockholder Meeting Provision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Other Provisions Regarding Stockholder-Management Relations. . . . . . . . . . . . . . . . . . . . . 54
The Business Combination Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
The Evaluation Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Establishment of Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Amendment Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
The Bylaw Amendment Provision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
The Articles of Incorporation Amendment Provision. . . . . . . . . . . . . . . . . . . . . . . . . . 62
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Consequences to Shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Consequences to the Trust and IORI Nevada. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Certain Foreign, State and Local Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
MARKET PRICES OF THE SHARES; DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
BUSINESS AND PROPERTIES OF IORI NEVADA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
IORI Nevada's Policy With Respect to Certain Activities . . . . . . . . . . . . . . . . . . . . . . . . . . 66
BUSINESS AND PROPERTIES OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Business Plan and Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Trust Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Geographic Location of Real Estate Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Types of Real Estate Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Properties Held for Sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Partnership Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Certain Factors Associated with Real Estate and Related Investments . . . . . . . . . . . . . . . . . . . . 73
Method of Operating and Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
The Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Property Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Real Estate Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
The Advisory Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Involvement in Certain Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Southmark Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
San Jacinto Savings Association . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Litigation Against Southmark and its Affiliates Alleging Fraud or Mismanagement . . . . . . . . . . 78
Litigation Relating to Lincoln Savings and Loan Association, F.A. . . . . . . . . . . . . . . . . . 78
Southmark Partnership Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Olive Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Certain Business Relationships and Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . 81
Certain Business Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
First Six Months of 1995 compared to First Six Months of 1994 . . . . . . . . . . . . . . . . . . . . . . . 85
1994 Compared to 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
1993 Compared to 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Taxation as a REIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Recent Accounting Pronouncement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
APPENDICES
Glossary of Principal Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix A
Form of Agreement and Plan of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix B
Articles of Incorporation of Income
Opportunity Realty Investors, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix C
Bylaws of Income Opportunity Realty
Investors, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix D
Declaration of Trust of Income Opportunity
Realty Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix E
Trustees' Regulation of Income Opportunity
Realty Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix F
EXHIBITS
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibit 99.1
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SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Proxy Statement/Prospectus. This summary is not intended to
be complete and is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Proxy Statement/Prospectus, including
the Appendices hereto. Shareholders are urged to review carefully the entire
Proxy Statement/Prospectus, including the Appendices. Initially capitalized
terms used in this summary but not defined herein have the meanings assigned to
them in this Proxy Statement/Prospectus. A glossary of principal defined terms
appears in Appendix A of this Proxy Statement/Prospectus.
THE TRUST AND IORI NEVADA
The Trust is a California business trust that has invested in mortgage
loans and in equity interests in real estate. IORI Nevada is a Nevada
corporation and a wholly-owned subsidiary of the Trust formed on August 23,
1995 to facilitate the proposed Incorporation Procedure. The principal
executive offices of the Trust and IORI Nevada are located at 10670 North
Central Expressway, Suite 300, Dallas, Texas 75231, telephone number (214)
692-4700.
THE SPECIAL MEETING
TIME, DATE AND PLACE. The Special Meeting of the Trust's Shareholders
will be held at 2:00 p.m., Dallas time, on October __, 1995, at 10670 North
Central Expressway Suite 600, Dallas, Texas 75231.
PURPOSE OF THE SPECIAL MEETING. At the Special Meeting, Shareholders
will be asked to consider and vote upon a proposal to convert the Trust from a
California business trust (which in accordance with the terms of its
Declaration of Trust has been required to distribute to Shareholders net cash
proceeds from sales or refinancing of equity investments received by the Trust
after October 24, 1991, in excess of necessary cash reserves for maintenance
and improvement of its properties, and will be required to begin liquidation of
its assets on or prior to October 24, 1996) into IORI Nevada, a Nevada
corporation that has perpetual duration (the "Incorporation Procedure"). The
Trust's financial statements for the year ended December 31, 1994 were audited
by BDO Seidman, LLP. As the Trust's independent certified public accountants,
representatives from BDO Seidman, LLP are expected to be present at the Special
Meeting to respond to appropriate questions, and such representatives will have
an opportunity to make a statement if they desire to do so.
RECORD DATE; VOTING INFORMATION. Only holders of record of issued and
outstanding shares of beneficial interest of the Trust (the "Shares") at the
close of business on the record date, ________________, 1995, are entitled to
vote at the Special Meeting. As of August 23, 1995, there were 791,444 Shares
outstanding and entitled to one vote each, of which 383,226 are currently held
by Trustees, executive officers and their affiliates. The affirmative vote of
the holders of a majority of the outstanding Shares (i.e., at least 395,723
Shares) is required to approve the proposed Incorporation Procedure. See
"General Shareholder Information". Shareholders will not have any
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dissenters' rights of appraisal with respect to the Incorporation Procedure.
See "Proposed Incorporation Procedure -- Comparison of the Securities of IORI
Nevada and the Trust -- Dissenters' Rights to Dissent and Obtain Payment".
PROPOSED INCORPORATION PROCEDURE
The Incorporation Procedure would be accomplished by incorporating the
Trust in California into a California corporation named Income Opportunity
Realty Corporation (the "California Corporation") and merging the Trust, after
it is so incorporated, with and into IORI Nevada (the "Merger"). As a result
of the Merger, (i) IORI Nevada, by operation of law, would succeed to all the
rights and properties, and be subject to all the obligations and liabilities,
of the Trust as incorporated as the California Corporation, (ii) each of the
current Trustees of the Trust would continue to serve as directors of IORI
Nevada and (iii) existing Shareholders would automatically become stockholders
of IORI Nevada by the exchange of all shares of the California Corporation for
newly issued shares of common stock, par value $.01 per share, of IORI Nevada
("Nevada Common Stock") on the basis of a one-to-one exchange.
The issuance of shares of Nevada Common Stock and the aforementioned
exchange will not affect the proportionate security holdings of any Shareholder
of the Trust. Although Shareholders will be required to surrender their Share
certificates in exchange for Nevada Common Stock certificates if the
Incorporation Procedure is approved, Shareholders should not return their Share
certificates with their proxies at this time. The Trust's Shares are currently
listed on the American Stock Exchange ("AMEX"). Pending approval of the
proposed Incorporation Procedure, the Nevada Common Stock will be listed on the
AMEX at the time of the effectiveness of the Merger.
If Shareholders approve the proposed Incorporation Procedure, each of
the current Trustees of the Trust would continue to serve as a director of IORI
Nevada until his initial term expires under IORI Nevada's Articles of
Incorporation or until a successor is elected. Under IORI Nevada's Articles of
Incorporation, the initial terms of its directors extend to IORI Nevada's first
annual meeting of stockholders. See "Proposed Incorporation Procedure --
Management after Incorporation Procedure."
IORI Nevada would succeed to and assume, by operation of law, all
rights and obligations of the Trust, including those under (i) its current
Advisory Agreement with BCM (as amended to provide for the continuation of
certain operating expense limitations and for the payment of certain
commissions to BCM upon the acquisition of properties by IORI Nevada) and (ii)
its current Brokerage Agreement with Carmel Realty (as amended to encompass
acquisitions, as well as sales, of properties).
PRINCIPAL COMPONENTS OF THE INCORPORATION PROCEDURE. The principal
components of the Incorporation Procedure are the following:
(i) the filing of articles of incorporation with the
Secretary of State of California, converting the Trust from a
California business trust into the California Corporation and
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converting shares of the Trust into shares of the California
Corporation on a one-for-one basis;
(ii) the execution of an Agreement and Plan of Merger
between the California Corporation (as successor to the Trust) and
IORI Nevada that provides, among other things, for (a) the merger of
the California Corporation with and into IORI Nevada such that the
California Corporation shall cease to exist and IORI Nevada shall be
the surviving corporation (the "Merger"), (b) the issuance by IORI
Nevada of one share of Nevada Common Stock in exchange for each share
of common stock outstanding of the California Corporation and (c) the
cancellation of all shares of Nevada Common Stock then held by the
California Corporation, with the effect that (i) the shareholders of
the California Corporation would become the stockholders of IORI
Nevada without any change in their percentage ownership, (ii) the
California Corporation would cease to exist and (iii) IORI Nevada
would succeed to all the rights and properties, and be subject to all
the obligations and liabilities, of the Trust incorporated as the
California Corporation, including, without limitation, those under the
Advisory Agreement referred to above (as amended to provide for a
substantially identical contractual operating expense limitation); and
(iii) the filing of articles of merger with the Secretary
of State of Nevada and the Secretary of State of California to effect
the Merger.
THE INCORPORATION PROCEDURE IS PRESENTED AS A SINGLE UNIFIED PROPOSAL
TO BE APPROVED OR REJECTED BY SHAREHOLDERS IN ITS ENTIRETY. APPROVAL OF THE
INCORPORATION PROCEDURE WILL CONSTITUTE APPROVAL OF EACH OF THE AFOREMENTIONED
COMPONENTS OF THE INCORPORATION PROCEDURE, INCLUDING (1) ADOPTION OF THE
AGREEMENT AND PLAN OF MERGER REFERENCED ABOVE IN ALL RESPECTS, INCLUDING AS A
SHAREHOLDER OF THE CALIFORNIA CORPORATION, (2) APPROVAL AND RATIFICATION OF (A)
THE FORMATION OF IORI NEVADA AS A WHOLLY-OWNED SUBSIDIARY OF THE TRUST AND (B)
EACH OF THE OTHER COMPONENTS OF THE INCORPORATION PROCEDURE AND (3) APPROVAL
AND RATIFICATION OF ANY AND ALL FURTHER STEPS NECESSARY OR APPROPRIATE IN THE
JUDGMENT OF MANAGEMENT TO EFFECTUATE THE INCORPORATION PROCEDURE.
PRINCIPAL REASONS FOR THE INCORPORATION PROCEDURE. The members of the
Board of Trustees have approved the Incorporation Procedure as in the best
interest of the Trust and its Shareholders because the Board of Trustees
believes it would afford IORI Nevada (i) the opportunity for enhanced
long-range planning, flexibility and long-term growth as a perpetual-life
corporation as opposed to the more limited alternatives of a business trust
that in accordance with the terms of its Declaration of Trust has been required
to distribute to Shareholders net cash proceeds from sales or refinancing of
equity investments received by the Trust after October 24, 1991, in excess of
cash reserves necessary for maintenance and improvement of its properties
(which proceeds have totaled $211,000 through June 30, 1995) and is required to
begin liquidation of its assets on or prior to October 24, 1996, (ii) certain
safeguards regarding acquisition of IORI Nevada not available to the Trust,
which safeguards are designed to (a) discourage unsolicited, non- negotiated
takeover attempts that can be unfair to stockholders, pressure management and
disrupt the operational continuity, long-range planning and long-term growth of
the business of IORI Nevada as successor to the Trust and (b) encourage persons
who may wish to make a bona fide offer to acquire IORI Nevada to negotiate with
the Board of Directors in good faith and to submit a
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proposal that is fair and equitable to IORI Nevada and all its stockholders and
(iii) greater legal certainty in matters of corporate governance and
indemnification as a corporation as opposed to a business trust and hence
greater predictability in the conduct of its business as a corporation under
Nevada law. Because no substantial body of law has developed concerning the
legal status, rights, obligations and liabilities of business trusts and their
trustees and shareholders, there is a degree of uncertainty as to the legal
principles applicable to business trusts under the laws of the various states,
including California, the jurisdiction of organization of the Trust. By
contrast, the status, rights, obligations and liabilities of the stockholders,
officers and directors of a corporation are governed not only by a
corporation's charter documents, but also by comprehensive statutes and a body
of case law interpreting those statutes and their application to a corporation
and its charter documents. The Board of Trustees believes that the Articles of
Incorporation of IORI Nevada, coupled with the existence of a growing body of
Nevada corporate law, would allow IORI Nevada to plan the legal aspects of its
future activities with more certainty and predictability than currently exists
with respect to the Declaration of Trust and the less well-defined provisions
of law currently applicable to the operations of a business trust. See
"Proposed Incorporation Procedure -- Greater Legal Certainty".
BUSINESS ACTIVITIES AFTER INCORPORATION. The Incorporation Procedure
will result in the elimination of the liquidation provisions of the Trust's
Declaration of Trust; however, (except as noted below) the Incorporation
Procedure would not otherwise significantly change the nature or conduct of the
Trust's business, assets, operations, location of executive office,
liabilities, financial status or, except to the extent IORI Nevada may issue
preferred stock in the future, voting rights per share. See "Proposed
Incorporation Procedure -- Comparison of the Securities of IORI Nevada and the
Trust - Preferred Stock". The affairs and the rights of stockholders of IORI
Nevada will be governed by Nevada corporate law and articles of incorporation
and bylaws rather than by California law and the Declaration of Trust and the
Trustees' Regulations; the governing documents of IORI Nevada provide for no
restrictions on the investments of IORI Nevada, indemnification standards that
are somewhat more beneficial to directors and a larger array of anti-takeover
mechanisms than is found in the Declaration of Trust. The Incorporation
Procedure could have the effect of rendering more difficult or discouraging a
future attempt to acquire control of IORI Nevada, either by a merger, tender
offer, proxy contest or removal of incumbent management without the approval of
the Board of Directors, even though certain stockholders of IORI Nevada might
desire such a change in control, as discussed more fully below under "Proposed
Incorporation Procedure -- Acquisition Safeguards -- Possible Negative
Considerations". The Incorporation Procedure, therefore, might be viewed as
limiting Shareholders' rights. See "Proposed Incorporation Procedure --
Comparison of Principal Differences Between the Trust and IORI Nevada". No
change in the Trust's continued qualification for taxation as a real estate
investment trust under the Code is expected to result from the Incorporation
Procedure or IORI Nevada's operation of the Trust's business in corporate form
following the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The following discussion of
the federal income tax consequences of the Incorporation Procedure is based on
the advice of Andrews & Kurth L.L.P., securities and tax counsel to the Trust
("Counsel"). The Trust and IORI Nevada have received an opinion from Counsel
to the effect that the Incorporation Procedure will constitute a reorganization
within the meaning of Section 368(a)(1)(F) of the Code. No gain or loss will
be recognized by the Trust as a result of the Incorporation Procedure.
Similarly, no gain or loss will
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<PAGE> 21
be recognized by Shareholders. It should be noted that an opinion of counsel
is not binding on the Internal Revenue Service or on the courts. The federal
income tax consequences of the Incorporation Procedure to the Trust and to
Shareholders would be materially different from those described herein if a
determination were made that the Incorporation Procedure did not constitute a
reorganization under the Code. Such a determination would have adverse federal
income tax consequences to IORI Nevada and to Shareholders. All Shareholders
should carefully read the discussion under "Proposed Incorporation Procedure --
Certain Federal Income Tax Consequences" and should consult their own tax
advisors as to the effect of the Incorporation Procedure on their individual
tax liability under applicable foreign, state or local income tax laws.
REGULATORY REQUIREMENTS. The Board of Trustees is not aware of any
license, regulatory permit or of any approval by any domestic or foreign
governmental or administrative agency that would be required to effect the
Incorporation Procedure.
CERTAIN POTENTIAL CONFLICTS OF INTEREST
The Incorporation Procedure is also likely to result in BCM, as
advisor, and Carmel Realty, as broker, earning greater fees for a longer period
of time than would be the case under the Trust's current liquidation
provisions. See "Proposed Incorporation Procedure -- Replacement of the
Fixed-Life Trust with a Perpetual-Life Corporation". The advisory fees of BCM
are currently subject to an operating expense limitation contained in the
Declaration of Trust. Although this limitation does not exist in the Articles
of Incorporation of IORI Nevada, the Advisory Agreement will be amended upon
consummation of the Incorporation Procedure to provide for a substantially
identical contractual operating expense limitation (and for the payment of
certain commissions to BCM upon the acquisition of properties by IORI Nevada).
See "Certain Risk Factors -- Elimination of Charter Limitation on Operating
Expenses" and "Proposed Incorporation Procedure -- Business Activities after
Incorporation Procedure". Carmel Realty may earn increased fees if IORI Nevada
acquires, as well as sells properties, from time to time. While the Board of
Trustees believes that the Incorporation Procedure is in the best
interest of the Trust and its Shareholders, certain members of management could
benefit from the Incorporation Procedure and, therefore, may be viewed as
having a conflict of interest. See "Certain Risk Factors -- Interests of
Certain Persons in the Incorporation Procedure".
EFFECT OF CERTAIN SUPER-MAJORITY VOTING PROVISION OF IORI NEVADA
Shareholders should note that affiliates of BCM effectively will have
veto power over a limited number of corporate actions requiring the vote of
stockholders under super-majority provisions included in the Articles of
Incorporation of IORI Nevada. See "Proposed Incorporation Procedure --
Possible Negative Considerations" and "Proposed Incorporation Procedure --
Management after Incorporation Procedure -- The Director Removal Provision"
below.
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<PAGE> 22
MARKET PRICES OF THE SHARES; DIVIDENDS
The Trust's Shares are traded on the AMEX using the symbol "IOT". As
of the close of business on August 23, 1995, there were 791,444 Shares
outstanding. The range of high and low bid quotations per Share as reported by
the AMEX are set forth in the table below:
<TABLE>
<CAPTION>
Quarter High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
First Quarter, 1993 $ 11 5/8 $ 6
Second Quarter, 1993 13 1/2 11 7/8
Third Quarter, 1993 14 1/4 13 1/8
Fourth Quarter, 1993 17 1/2 14 1/2
First Quarter, 1994 $ 20 $ 15 1/8
Second Quarter, 1994 20 7/8 18 1/4
Third Quarter, 1994 20 3/4 17 1/2
Fourth Quarter, 1994 19 5/8 17 1/2
First Quarter, 1995 $ 20 3/8 $ 19
Second Quarter, 1995 20 19
Third Quarter, 1995 20 5/8 19
(through August 23, 1995)
</TABLE>
As of July 31, 1995, there were 2,236 Shareholders of record. On
December 5, 1989, the Board of Trustees approved a program pursuant to which
the Trust is authorized to repurchase up to a total of 100,000 of its shares of
beneficial interest. As of July 28, 1995, the Trust had repurchased 67,952
shares pursuant to such program.
On _______, 1995, the last trading day prior to the public
announcement of the Board of Trustees' decision to proceed with the proposed
Incorporation Procedure, the closing price per Share on the AMEX Composite Tape
was $__________. On August 23, 1995, the closing price per Share on the AMEX
Composite Tape was $19.625. On August 10, 1995, the Trust publicly reported
that the Board of Trustees was evaluating whether to recommend changes similar
to the Incorporation Procedure to Shareholders. Shareholders should obtain
current market quotations for Shares.
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<PAGE> 23
Distributions were declared and paid on the following dates in the
following amounts during the periods indicated below.
<TABLE>
<CAPTION>
Amount
Date Declared Date of Record Date Payable Per Share
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993 01/27/93 02/15/93 03/01/93 $ .10
04/30/93 05/24/93 06/01/93 .10
06/30/93 08/16/93 09/01/93 .15
10/29/93 11/30/93 12/15/93 .15
1994 02/15/94 03/01/94 03/21/94 $ .15
05/06/94 06/01/94 06/15/94 .15
08/24/94 09/15/94 09/30/94 .15
12/01/94 12/15/94 12/30/94 .15
1995 03/03/95 03/15/95 03/31/95 $ .15
05/22/95 06/15/95 06/30/95 .15
08/24/95 09/15/95 09/30/95 .15
</TABLE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table summarizes selected historical consolidated
financial information of the Trust for the six months ended June 30, 1995 and
the six months ended June 30, 1994 and the last five years ended December 31,
1990 through 1994. IORI Nevada is a newly-created corporation that, by
operation of law, would succeed to all the rights and properties, and be
subject to all the obligations and liabilities, of the Trust as incorporated as
the California Corporation upon consummation of the proposed Incorporation
Procedure. Thus, for accounting purposes, IORI Nevada would be treated as the
continuing accounting entity which would be the successor to the Trust.
The historical consolidated financial information is not necessarily
indicative of IORI Nevada's future results of operations or financial
condition. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the "Trust's Consolidated Financial Statements and
Supplementary Data". Results for the interim periods are not necessarily
indicative of the results for a full year.
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<PAGE> 24
Income Opportunity Realty Trust
Selected Financial Data (Historical)
(Dollars in thousands, except per share)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Years Ended December 31,
--------------------- ------------------------------------------------------------------
EARNINGS DATA: 1995 1994 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income $ 1,272 $ 1,769 $ 6,938 $ 7,316 $ 6,619 $ 5,592 $ 8,463
Expense 2,152 1,632 7,225 7,247 7,089 14,645 17,552
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
(loss) on sale of
real estate and
extraordinary gain (880) (137) (287) 69 (470) (9,053) (9,089)
(Loss) on sale of real estate - - - - (81) - -
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary gain (880) (137) (287) 69 (551) (9,053) (9,089)
Extraordinary gain - - - 806 - 4,765 -
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ (880) $ (137) $ (287) $ 875 $ (551) $ (4,288) $ (9,089)
======== ======== ======== ======== ======== ======== ========
PER SHARE DATA:
Income (loss) before (loss)
on sale of real estate and
extraordinary gain $ (1.11) $ (.17) $ (.36) $ .09 $ (.55) $ (9.97) $ (9.79)
(Loss) on sale of real estate - - - - (.09) - -
Extraordinary gain - - - 1.00 - 5.25 -
-------- -------- -------- -------- -------- -------- --------
Net Income (loss) $ (1.11) $ (.17) $ (.36) $ 1.09 $ (.64) $ (4.72) $ (9.79)
======== ======== ======== ======== ======== ======== ========
Weighted average number
of Shares outstanding 791,444 791,444 791,441 804,716 864,321 907,665 928,606
Distributions per share $ .15 $ .15 $ .60 $ .50 $ - $ 1.44 $ .88
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
-------- -------------------------------------------------------------------
BALANCE SHEET DATA: 1995 1994 1993 1992 1991 1990
---- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Notes and interest receivable $ 1,980 $ 1,974 $ 2,983 $ 2,922 $ 2,583 $ 33,694
Real estate 40,756 41,156 40,952 41,767 44,311 34,831
Total assets 47,860 49,035 50,127 51,275 52,401 75,631
Notes and interest payable 20,413 20,717 21,354 22,447 22,651 40,798
Redeemable shares of
beneficial interest - - - - 6,062 6,062
Shareholders' equity 24,462 25,572 26,334 26,380 20,904 25,574
Book value per share $ 30.91 $ 32.31 $ 33.27 $ 30.52 $ 30.14 $ 34.00
</TABLE>
____________________________
Shares and per share data have been restated to give effect to the one-for-four
reverse share split effected September 9, 1991.
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<PAGE> 25
CERTAIN RISK FACTORS
In evaluating the proposed Incorporation Procedure, Shareholders
should consider, among other things, the risk factors set forth below and in
particular with respect to the Incorporation Procedure, the risk factors
discussed under "Certain Risk Factors -- Elimination of the Trust's Liquidation
Provisions", "-- Interests of Certain Persons in the Incorporation Procedure",
"-- Authorization to Issue Preferred Stock" and "-- Certain Anti-takeover
Effects."
ELIMINATION OF THE TRUST'S LIQUIDATION PROVISIONS
The Incorporation Procedure will replace the limited duration Trust
(which in accordance with the terms of the Declaration of Trust has been
required to distribute to Shareholders net cash proceeds from sales or
refinancing of equity investments received by the Trust after October 24, 1991,
in excess of cash reserves necessary for maintenance and improvement of its
properties, and is required to begin liquidation of its assets on or prior to
October 24, 1996) with a perpetual-life corporation which the Board of Trustees
believes will have more flexibility in holding and selling assets. The Board
of Trustees believes that replacing the Trust's liquidation provisions with a
corporation that provides for perpetual existence will enhance long-range
planning and long-term growth and afford the Trust with an opportunity to seek
higher prices for the Trust's assets over time, acquire additional assets and
enhance shareholder value.
Nevertheless, Shareholders should recognize that a combination of the
expected increased costs to renovate and improve Trust properties, additional
operating expenses (including advisory fees) for operating the Trust for a
potentially longer period of time and the potentially slower rate of sales of
the Trust's assets may reduce the amount of cash available for distribution to
Shareholders. The minimum amount of distributions will be determined by the
amount required to qualify for taxation as a real estate investment trust under
the Code, which requires distribution of at least 95% of the Trust's taxable
income (excluding any net capital gain).
Eliminating the Trust's liquidation provisions will enable the Trust
to make new investments beyond October 24, 1996 (the date on which it is
currently scheduled to begin its liquidation of assets phase) and is likely to
reduce the amount and rate of asset dispositions and result in the Trust's
having greater reported assets than would be the case under such liquidation
provisions. As a result, to the extent that BCM continues to serve as the
advisor under the current Advisory Agreement, which provides for fees based in
part on gross assets (and which, if the Incorporation Procedure is approved,
will be amended to provide for certain commissions on property acquisitions),
such fees (and acquisition commissions) are likely to be higher over time.
This effect may be partially offset by a reduction in brokerage commissions,
attributable to a slower rate of property sales, payable to BCM or its
affiliates for the sale of real estate. Furthermore, under the Brokerage
Agreement (which will be amended to encompass acquisitions as well as sales of
real estate), Carmel Realty may receive increased amounts of fees in the event
that IORI Nevada acquires, as well as sells, properties.
The effect on distributions to Shareholders of eliminating the
liquidation provisions in the Declaration of Trust through the Incorporation
Procedure will depend upon IORI Nevada's success in improving its operating
results, the prices of which IORI Nevada is ultimately able to sell its
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<PAGE> 26
properties and the general or local economic conditions of the real estate
markets in which the Trust owns properties. If the elimination of the
liquidation provisions in the Declaration of Trust through the Incorporation
Procedure achieves the desired result, Shareholders would, over time, receive a
greater return on their investment rather than under such liquidation policy.
However, the success of the Incorporation Procedure is dependent, in part, on
factors beyond management's control and there can be no assurance that the
Incorporation Procedure will achieve the desired result.
ELIMINATION OF CHARTER LIMITATION ON OPERATING EXPENSES
Under certain provisions of the Declaration of Trust, Operating
Expenses of the Trust (as defined in the Declaration of Trust and discussed
specifically under "Proposed Incorporation Procedure -- Business Activities
after Incorporation Procedure") for any fiscal year must not exceed the lesser
of (a) 1.5% of the average of the Book Values of Invested Assets (as defined in
the Declaration of Trust) of the Trust at the end of each calendar month of
such fiscal year or (b) the greater of 1.5% of the average of the Net Asset
Value (as defined in the Declaration of Trust) of the Trust at the end of each
calendar month of such fiscal year or 25% of the Trust's Taxable Income (as
defined in the Declaration of Trust). The Declaration of Trust also provides
that any advisory agreement must specifically provide for a refund to the Trust
of the amount, if any, by which the operating expenses exceed the applicable
amount, provided that the maximum amount of such refund shall not exceed the
amount of the advisory fees paid to the advisor with respect to such fiscal
year. The Operating Expenses of the Trust in 1994 exceeded such limitation by
$6,000.
In accordance with such provisions, the current Advisory Agreement
with BCM specifically provides for a refund to the Trust of the amount by
which the Operating Expenses of the Trust for any fiscal year exceed the
limitation set forth in the aforementioned provisions of the Declaration of
Trust, "or any similar limitation (if contained) in a successor Declaration of
Trust or [Articles] of Incorporation . . . ." Although the Articles of
Incorporation place no limits on IORI Nevada's operating expenses, the
aforementioned limitation on operating expenses, assuming Shareholders approve
the Incorporation Procedure, will be included contractually in an amended
Advisory Agreement. See "Proposed Incorporation Procedure -- Business
Activities after Incorporation Procedure".
The Trust's Declaration of Trust provides that any contract with an
advisor must provide for annual renewal or extension after an initial term of
no more than two years, subject to approval by Shareholders of the Trust. The
Articles of Incorporation of IORI Nevada contain no such requirement. Although
the current directors of IORI Nevada intend to continue to submit the Advisory
Agreement annually to stockholders following consummation of the Incorporation
Procedure, such practice may be discontinued at some time in the future.
The various fees payable to BCM under the current Advisory Agreement
and the means by which such fees are calculated are discussed in detail below
under "The Advisory Agreement".
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<PAGE> 27
INTERESTS OF CERTAIN PERSONS IN THE INCORPORATION PROCEDURE
In considering the proposed Incorporation Procedure, Shareholders
should be aware that certain of the Trust's executive officers have interests
that may present them with conflicts of interest in connection with the
Incorporation Procedure. To the extent that BCM continues to serve as advisor,
the Incorporation Procedure is also likely to result in BCM earning greater
fees for a longer period of time than would be the case under the Trust's
current liquidation provisions. Mr. Gene E. Phillips served as a Trustee of
the Trust until December 31, 1992, and as a director of BCM until December 22,
1992 and as Chief Executive Officer of BCM until September 1, 1992. Although
Mr. Phillips no longer serves as an officer or director of BCM or as a Trustee
of the Trust he serves as a representative of the trust established for the
benefit of his children, which trust owns BCM, and, in such capacity, has
substantial contact with the management of BCM and input regarding its
performance of advisory services for the Trust. As such, Mr. Phillips or his
children could benefit financially from Shareholder approval of, and may be
viewed as having a conflict of interest in connection with, the Incorporation
Procedure.
Additionally, in the future, BCM may benefit from the elimination of
certain limitations on investments currently applicable to the Trust. The
Articles of Incorporation of IORI Nevada would permit it to engage in a larger
class of transactions with related parties than is permitted by the existing
Declaration of Trust; however, pursuant to the terms of the Olive Modification
(as defined herein), certain related party transactions prior to April 28,
1999, will require unanimous approval of IORI Nevada's Board of Directors. See
"Proposed Incorporation Procedure -- Business Activities after Incorporation
Procedure -- The Restrictions on Related-Party Transactions Provision" below.
Furthermore, the proposed Incorporation Procedure contains certain safeguards
regarding acquisition of IORI Nevada which may, among other things, have the
effect of making it more difficult for Shareholders to remove incumbent
management. See "Proposed Incorporation Procedure -- Acquisition Safeguards --
Possible Negative Considerations" below. The Articles of Incorporation of IORI
Nevada would also limit the liability of directors to a greater degree than the
Declaration of Trust, as discussed more fully below under "Proposed
Incorporation Procedure -- Liability of Certain Persons -- The Management
Liability Provision".
Furthermore, Carmel Realty, an affiliate of BCM (see "Business and
Properties of the Trust -- Certain Business Relationships and Related Party
Transactions"), may benefit from the elimination of the Trust's liquidation
provisions. Under the Brokerage Agreement (which will be amended to encompass
acquisitions as well as sales of real estate), Carmel Realty may receive
increased amounts of fees if IORI Nevada acquires, as well as sells,
properties.
Certain other conflicts of interest that are not expected to be
affected by the Incorporation Procedure are described below under "Other
Conflicts of Interest".
AUTHORIZATION TO ISSUE PREFERRED STOCK
The Articles of Incorporation of IORI Nevada authorize the issuance of
up to 1,000,000 shares of preferred stock by action of the Board of Directors
without stockholder approval, which preferred stock may be issued in one or
more series with such preferences, limitations and rights as
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<PAGE> 28
shall be determined by the Board of Directors of IORI Nevada. See "Proposed
Incorporation Procedure -- Comparison of the Securities of IORI Nevada and the
Trust -- Preferred Stock". Although no preferred stock has been issued or is
being issued as part of the Incorporation Procedure, and the Board of Directors
has no present intention of issuing any preferred stock, such stock could be
issued as a safeguard against acquisition of IORI Nevada to dilute the stock
ownership and voting power of a person or entity seeking to acquire control of
IORI Nevada by (i) privately placing such preferred stock with purchasers not
hostile to the IORI Nevada Board to oppose an unsolicited takeover bid or (ii)
authorizing holders of a series of preferred stock to vote as a class, either
separately or with the holders of the Nevada Common Stock, on any merger, sale
or exchange of assets or any other extraordinary corporate transaction
involving IORI Nevada.
CERTAIN ANTI-TAKEOVER EFFECTS
Shareholders should recognize that the acquisition safeguards
discussed more fully below under "Proposed Incorporation Procedure --
Acquisition Safeguards" could have the effect of rendering more difficult or
discouraging a future attempt to acquire control of IORI Nevada by a merger,
tender offer, proxy contest or removal of incumbent management without the
approval of the Board of Directors, even though certain stockholders of IORI
Nevada might desire such a change in control. As a result, stockholders might
be deprived of an opportunity to receive a premium for their shares over
prevailing market prices and the Incorporation Procedure, therefore, might be
viewed as limiting stockholders' rights. See "Proposed Incorporation Procedure
- -- Acquisition Safeguards -- Possible Negative Considerations". These
safeguards against acquisition of IORI Nevada include (i) the requirement of
an 80% vote to make, adopt, alter, amend, change or repeal (a) IORI Nevada's
Bylaws or (b) certain key provisions of IORI Nevada's Articles of Incorporation
that embody, among other things, the aforementioned acquisition-related
safeguards, (ii) the requirement of a two-thirds supermajority vote for (a)
the removal of a director from the Board of Directors and (b) certain
extraordinary corporate transactions and (iii) the inability generally of
stockholders to call meetings of stockholders. See "Proposed Incorporation
Procedure -- Comparison of the Principal Differences Between the Trust and IORI
Nevada". These acquisition-related safeguards and the collective beneficial
ownership of 48.4% of the Trust's Shares (as of August 23, 1995) by the
Trustees and the Trust's executive officers and entities with which they are
affiliated, could help entrench the Board of Directors and may effectively give
IORI Nevada's management the power to block certain extraordinary corporate
transactions, as discussed more fully below under "Proposed Incorporation
Procedure -- Acquisition Safeguards -- Possible Negative Considerations".
EFFECT OF CERTAIN SUPER-MAJORITY VOTING PROVISIONS OF IORI NEVADA
Shareholders should note that affiliates of BCM effectively will have
veto power over a limited number of corporate actions requiring the vote of
stockholders under super-majority provisions (i.e., provisions requiring more
than a simple majority vote) included in the Articles of Incorporation of IORI
Nevada. See "Proposed Incorporation Procedure -- Acquisition Safeguards --
Possible Negative Considerations" and "Proposed Incorporation Procedure --
Management after Incorporation Procedure -- The Director Removal Provision"
below.
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<PAGE> 29
TRANSACTIONS WITH RELATED PARTIES
The Trust has engaged, and IORI Nevada may continue to engage, in
transactions with certain related parties, as discussed more fully below under
"Business and Properties of the Trust - Certain Business Relationships and
Related Party Transactions". Currently certain related party transactions
require the unanimous approval of the Trust's Board of Trustees. In addition,
such related party transactions currently are to be discouraged and may only be
entered into in exceptional circumstances and after a determination by the
Trust's Board of Trustees that (i) the transaction is in the best interest of
the Trust and (ii) no other opportunity exists that is as good as the
opportunity presented by such transaction. Pursuant to the provisions of the
Modification of Stipulation of Settlement (the "Olive Modification") dated
April 28, 1994 with regard to a class and derivative action entitled Olive et
al. v. National Income Realty Trust et al. (which action is described more
fully in "Business and Properties of the Trust -- Involvement in Legal
Proceedings") (the "Olive Litigation"), even if the Incorporation Procedure is
adopted, the scrutiny of certain related party transactions will continue with
respect to such related party transactions prior to April 28, 1999, requiring
the unanimous approval of the Board of Directors rather than the Board of
Trustees. Likewise, the Board of Directors will be required to make the
determination as to whether (i) the transaction is in the best interest of IORI
Nevada and (ii) no other opportunity exists that is as good as the opportunity
presented by such related party transaction. After April 28, 1999, however,
the Board of Directors will have greater discretion as to related party
transactions, subject to certain limitations.
IORI Nevada's Articles of Incorporation generally permit related party
transactions if approved by a majority of the independent directors, whereas
the existing Declaration of Trust absolutely prohibits certain transactions
between the Trust and certain related parties, regardless of the fairness of
the terms of such transactions and whether such transactions are authorized by
a majority of unaffiliated Trustees or approved by the Shareholders. Such
specific prohibitions as well as the general restrictions on transactions
between the Trust and certain related parties are described under "Proposed
Incorporation Procedure -- Business Activities after Incorporation Procedure --
The Restrictions on Related Party Transactions Provision". Because IORI
Nevada's Articles of Incorporation contain no analogous prohibitions, the
Incorporation Procedure could potentially permit IORI Nevada greater
flexibility to engage in a larger class of transactions with related parties
than the more limited class of transactions between the Trust and certain
related parties that is currently permitted by the Declaration of Trust (but,
for the reasons discussed above, only subsequent to April 28, 1999).
With respect to renewal and modification from time to time of the
Advisory Agreement with BCM, the Declaration of Trust mandates the affirmative
vote of a majority of the votes cast at an annual meeting of Shareholders prior
to any such renewal or modification; however, if the Incorporation Procedure is
approved, IORI Nevada's Articles of Incorporation will not mandate such
stockholder approval. Instead, IORI Nevada's Board of Directors will be able
to renew and modify the Advisory Agreement with BCM upon the affirmative vote
of a majority of the Board of Directors (subject to the requirement of the
Olive Modification that two-thirds of the Board of Directors approve any such
renewal or modification). However, the Board of Directors intends to continue
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<PAGE> 30
to submit future renewals and modifications of the Advisory Agreement with BCM
to stockholders of IORI Nevada at their annual meetings.
The Board of Trustees believes that the restrictions in IORI Nevada's
Articles of Incorporation and those under the Nevada General Corporation Law,
together with the oversight of related party transactions mandated by the Olive
Modification (see "Proposed Incorporation Procedure -- Business Activities
after Incorporation Procedure -- The Restrictions on Related Party Transactions
Provision"), will offer adequate protection to ensure the fairness and
propriety of transactions between IORI Nevada and related parties.
OTHER POTENTIAL CONFLICTS OF INTEREST
The real estate business is highly competitive, and the Trust
competes, and IORI Nevada will compete, with numerous entities engaged in real
estate activities. As described below under "Business and Properties of the
Trust -- Certain Business Relationships", the officers and trustees of the
Trust also serve as officers, directors or trustees of certain other entities,
each of which is also advised by BCM, and each of which has business objectives
similar to those of the Trust. Such Trustees and officers and BCM each owe a
fiduciary duty to such other entities as well as to the Trust under applicable
law. Additionally, the Trust also competes with other entities that are
affiliates of BCM and that may have investment objectives similar to those of
the Trust and that may compete with the Trust in leasing, selling and financing
real estate and mortgage notes. In resolving any potential conflicts of
interest which may arise, BCM has informed the Trust that it intends to
continue to exercise its best judgment as to what is fair and reasonable under
the circumstances in accordance with applicable law.
CERTAIN RISK FACTORS ASSOCIATED WITH REAL ESTATE
The Trust is, and IORI Nevada will be, subject to all the risks
incident to ownership and financing of real estate and interests therein, many
of which relate to the general illiquidity of real estate investments. These
risks include, but are not limited to, (i) changes in general or local economic
conditions, (ii) changes in interest rates and availability of permanent
mortgage financing that may render the sale or refinancing (and, in the event
the Incorporation Procedure is adopted, the acquisition) of a property
difficult or unattractive and that may make debt service more burdensome, (iii)
changes in real estate and zoning laws, (iv) increases in real estate taxes,
(v) federal or local economic or rent controls, and (vi) floods, earthquakes
and other similar acts. See "Business and Properties of the Trust -- Certain
Factors Associated with Real Estate and Related Investments". The illiquidity
of real estate investments generally may impair the ability of the Trust to
respond promptly to changing circumstances. The Trust's management believes
that such risks are partially mitigated by the diversification by geographical
region and property type of the Trust's real estate portfolio.
The Trust has acquired properties subject to or assumed existing debt
and has mortgaged, pledged or otherwise obtained financing for its properties.
Such borrowings increase the Trust's risks of loss because they represent a
prior claim on the Trust's assets and require fixed payments regardless of
profitability. If the Trust (or IORI Nevada) defaults on secured indebtedness,
the
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lender may foreclose and the Trust (or IORI Nevada) could lose its investment
in the property. With regard to the Trust's mortgage loan portfolio, if a
borrower becomes unable to meet principal or interest payments on a loan from
the Trust or a loan cross-collateralized by property that is security for a
Trust loan, the Trust (or IORI Nevada) might be forced to foreclose on a
mortgaged property. The Trust (or IORI Nevada) might not succeed in selling
the foreclosed property for the total principal and accrued interest owed to
the Trust on the debt, or the ability of the Trust (or IORI Nevada) to
liquidate its collateral through foreclosure on a property could be delayed
because of the bankruptcy of the borrower or an injunctive proceeding brought
by the borrower. If the borrower defaults in payment of a loan held by a prior
lienholder, the Trust (or IORI Nevada) to protect its own interest may be
required to make payments directly to the holder of the prior lien to maintain
the current status of such loan or to discharge it entirely. As of June 30,
1994, the Trust's mortgage notes receivable portfolio consisted of one
wrap-around mortgage note, with an outstanding balance of $2.0 million, secured
by a shopping center in Joliet, Illinois.
In the opinion of the Trust's management the real property owned by
the Trust is adequately covered by insurance; however, certain types of losses
(generally of a catastrophic nature) may be uninsurable or not economically
insurable. Such excluded risks generally include war, earthquakes, floods,
environmental liabilities and punitive damage judgments. If such losses occur
and are not covered by insurance, the Trust (or IORI Nevada) might suffer a
loss of capital invested in, and any profits that might be anticipated from,
the property.
LIQUIDITY
The Trust's cash and cash equivalents at December 31, 1994 were
$232,000. As of June 30, 1995, the Trust's cash and cash equivalents had
increased to $447,000. The Trust's principal sources of cash have been and
will continue to be property operations, proceeds from property sales,
collection of mortgage notes receivable and partnership distributions. The
Trust anticipates that it will have sufficient cash in the remainder of 1995 to
meet its various cash requirements including the payment of distributions, debt
service obligations and property renovations and improvement costs, as
discussed more fully under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Commitments".
In 1994, the Trust received $254,000 in distributions from the
Tri-City Limited Partnership ("Tri-City"); in July 1995 the Trust received a
further distribution from Tri-City of $127,000. The Trust owns a 36.3% general
partner interest in Tri-City. In 1994, the Trust also received $154,000 in
distributions from and made $145,000 in contributions to Nakash Income
Associates ("NIA"). The Trust owns a 40% general partner interest in NIA.
GENERAL SHAREHOLDER INFORMATION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Trustees of the Trust of proxies to be used at a
Special Meeting of Shareholders for a vote upon a proposal to convert the Trust
from a California business trust (which in accordance with the terms of its
Declaration of Trust has been required to distribute to Shareholders net cash
proceeds from sales or refinancing of equity investments received by the Trust
after October 24, 1991, in excess
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of cash reserves necessary for maintenance and improvement of its properties,
and will be required to begin liquidation of its assets on or prior to October
24, 1996) into a Nevada corporation that would have perpetual duration (the
"Incorporation Procedure") by incorporating the Trust in California and merging
the Trust, after it is so incorporated, with and into its wholly-owned Nevada
subsidiary that has been organized for this purpose. The Special Meeting will
be held at 2:00 p.m., Dallas time, on October ____, 1995, at 10670 North
Central Expressway, Suite 600, Dallas, Texas 75231. The Trust's financial
statements for the year ended December 31, 1994 were audited by BDO Seidman,
LLP. A representative from BDO Seidman, LLP is expected to be present at the
Special Meeting to respond to appropriate questions and such representative
will have an opportunity to make a statement if such representative desires to
do so. This Proxy Statement/Prospectus and the accompanying Proxy are first
being mailed to shareholders on or about __________, 1995.
SHAREHOLDERS ENTITLED TO VOTE
Only holders of record of issued and outstanding shares of beneficial
interest of the Trust (the "Shares") at the close of business on August 23,
1995 (the "Record Date"), are entitled to vote at the Special Meeting and at
any adjournments thereof. At the close of business on August 23, 1995, there
were 791,444 Shares outstanding. Each holder is entitled to one vote for each
Share held on the Record Date.
VOTING OF PROXIES
When the enclosed proxy card is properly executed and returned, the
Shares represented thereby will be voted at the Special Meeting in accordance
with the instructions noted thereon. Shareholders may choose to vote for,
against or abstain from voting on the Incorporation Procedure proposal in its
entirety.
In the absence of other instructions, the Shares represented by a
properly executed and submitted proxy card will be voted in favor of the
Incorporation Procedure.
When a signed proxy card is returned with choices specified with
respect to voting matters, the Shares represented are voted by the proxies
designated on the proxy card in accordance with the Shareholder's instructions
to the tabulator. A Shareholder wishing to name another person as his or her
proxy may do so by crossing out the names of the designated proxies and
inserting the name of such other person to act as his or her proxy. In that
case, it will be necessary for the Shareholder to sign the proxy card and
deliver it to the person named as his or her proxy and for the person so named
to be present and to vote at the Special Meeting. Proxy cards so marked should
not be mailed directly to the Trust.
VOTE REQUIRED FOR APPROVAL
Pursuant to Section 6.8 of the Declaration of Trust, a majority of the
issued and outstanding Shares entitled to vote at a meeting of Shareholders,
represented in person or by proxy, shall constitute a quorum at the Special
Meeting. For the purposes of determining the presence of a quorum at the
Special Meeting and the number of votes cast thereat with respect to the
Incorporation
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Procedure, all votes cast for or against and abstentions will be included.
Abstentions will have the same legal effect as a vote against the proposal.
Broker nonvotes, if any, will be treated as not present and not entitled to
vote for the proposal. If a quorum should not be present, the Special Meeting
may be adjourned from time to time until a quorum is obtained. Shareholders
are, therefore, urged to sign the accompanying form of proxy and return it
promptly.
Although Section 3.5 of the Declaration of Trust requires the
affirmative vote of only a majority of the votes cast at a meeting of
Shareholders to incorporate the Trust, Section 200.5 of the California General
Corporation Law requires an affirmative vote of the holders of a majority of
the outstanding Shares to approve the Incorporation Procedure.
REVOCATION OF PROXIES
A proxy card is enclosed herewith. Any Shareholder who executes and
delivers the proxy card may revoke the authority granted thereunder at any time
prior to its use by giving written notice of such revocation to American Stock
Transfer and Trust Company, 40 Wall Street, 46th Floor, New York, New York
10005, or by executing and delivering a proxy bearing a later date. A
SHAREHOLDER MAY ALSO REVOKE A PROXY BY ATTENDING AND VOTING AT THE SPECIAL
MEETING.
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PROPOSED INCORPORATION PROCEDURE
GENERAL DISCUSSION
The Board of Trustees has approved, and recommends adoption by the
Shareholders of, the proposal that the Trust be transformed from a California
business trust (which in accordance with the terms of its Declaration of Trust
has been required to distribute to Shareholders net cash proceeds from sales or
refinancing of equity investments received by the Trust after October 24, 1991,
in excess of cash reserves necessary for maintenance and improvement of its
properties, and will be required to begin liquidation of its assets on or prior
to October 24, 1996) into a Nevada corporation that would have perpetual
duration. Because no explicit statutory authority permits a California
business trust to become a Nevada corporation directly or to merge directly
with and into a Nevada corporation, the Incorporation Procedure would be
accomplished by incorporating the Trust in California (the "California
Corporation"), and merging the California Corporation (as successor to the
Trust) with and into its wholly-owned Nevada subsidiary corporation (the
"Merger"). The Board of Trustees has caused IORI Nevada to be organized in
Nevada to facilitate the Incorporation Procedure. Prior to the Merger, IORI
Nevada will have no significant business, assets or liabilities of any
consequence and no operating history. The audited balance sheet of IORI Nevada
as of August 23, 1995 is included under "Index to Financial Statements and
Supplementary Data".
The Merger will be accomplished pursuant to the terms of the proposed
agreement and plan of merger, a form of which is attached as Appendix B to this
Proxy Statement/Prospectus (the "Agreement and Plan of Merger") and which is
incorporated herein by reference and made a part of this Proxy
Statement/Prospectus. As a result of the Merger, (i) the California
Corporation would cease to exist as a separate entity, (ii) IORI Nevada, by
operation of law, would succeed to all the rights and properties, and be
subject to all the obligations and liabilities, of the Trust incorporated as
the California Corporation including, without limitation, those under the
current Advisory Agreement, (iii) each of the current Trustees of the Trust
would continue to serve as a director of IORI Nevada until his initial term
expires under IORI Nevada's Articles of Incorporation or until a successor is
elected and (iv) existing Shareholders would automatically become stockholders
of IORI Nevada by the exchange of all shares of the California Corporation for
newly issued Nevada Common Stock on a basis of a one-for-one exchange (the
"One-for-One Exchange"). The issuance of Nevada Common Stock via the
One-for-One Exchange will not affect the proportionate security holdings of any
Shareholder of the Trust, either individually or in a group.
Shareholders will be required to surrender their Share certificates in
exchange for Nevada Common Stock certificates, but should not do so at this
time. Shareholders who do not surrender their Share certificates will accrue
dividends, if declared, but will have their distribution checks, if any, held
by American Stock Transfer and Trust Company until they surrender their old
certificates. No interest will be paid on amounts so held.
SHAREHOLDERS OF THE TRUST WILL NOT HAVE ANY DISSENTERS' RIGHTS OF
APPRAISAL WITH RESPECT TO THE INCORPORATION PROCEDURE.
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The discussion of the principal terms of the Merger contained in this
Proxy Statement/Prospectus is qualified in its entirety by reference to the
Agreement and Plan of Merger. THE PROPOSED INCORPORATION PROCEDURE IS A SINGLE
UNIFIED PROPOSAL TO BE APPROVED OR REJECTED BY SHAREHOLDERS IN ITS ENTIRETY.
If Shareholders do not approve the Incorporation Procedure, the Trust would not
incorporate in California, the formation of IORI Nevada as a wholly-owned
subsidiary of the Trust will be reversed and the Merger with IORI Nevada and
the attendant One-for-One Exchange will not occur. Rather, the Trust would
continue to operate as an unincorporated California business trust, subject to
the liquidation provisions set forth in the Declaration of Trust.
As more fully discussed below under "-- Principal Reasons for the
Incorporation Procedure", the members of the Board of Trustees have
approved the Incorporation Procedure as in the best interest of the Trust and
its Shareholders because the Board of Trustees believes it would afford IORI
Nevada (i) the opportunity for enhanced long- range planning, flexibility and
long-term growth as a perpetual-life corporation as opposed to the more limited
alternatives of a business trust that in accordance with the terms of its
Declaration of Trust has been required to distribute to Shareholders net cash
proceeds from sales or refinancing of equity investments received by the Trust
after October 24, 1991, in excess of cash reserves necessary for maintenance
and improvement of its properties (which proceeds have totaled $211,000 through
June 30, 1995) and is required to begin liquidation of its assets on or prior
to October 24, 1996, (ii) certain acquisition safeguards not available to the
Trust, which safeguards are designed to (a) discourage unsolicited,
non-negotiated takeover attempts that can be unfair to stockholders, pressure
management and disrupt the operational continuity, long-range planning and
long-term growth of the business of IORI Nevada as successor to the Trust and
(b) encourage persons who may wish to make a bona fide offer to acquire IORI
Nevada to negotiate with the Board of Directors in good faith and to submit a
proposal that is fair and equitable to IORI Nevada and all its stockholders and
(iii) greater legal certainty in matters of corporate governance and
indemnification as a corporation as opposed to a business trust and hence
greater predictability in the conduct of its business as a corporation under
Nevada law. Because no substantial body of law has developed concerning the
legal status, rights, obligations and liabilities of business trusts and their
trustees and shareholders, there is a degree of uncertainty as to the legal
principles applicable to business trusts under the laws of the various states,
including California, the jurisdiction of organization of the Trust. By
contrast, the status, rights, obligations and liabilities of the stockholders,
officers and directors of a corporation are governed not only by a
corporation's charter documents, but also by comprehensive statutes and a body
of case law interpreting those statutes and their application to a corporation
and its charter documents. The Board of Trustees believes that the Articles of
Incorporation of IORI Nevada, coupled with the existence of a growing body of
Nevada corporate law, would allow IORI Nevada to plan the legal aspects of its
future activities with more certainty and predictability than currently exists
with respect to the Declaration of Trust and the less well- defined provisions
of law currently applicable to the operations of a business trust. See "--
Greater Legal Certainty" and "-- Comparison of Principal Differences Between
the Trust and IORI Nevada". No change in the Trust's continued qualification
for taxation as a real estate investment trust ("REIT") under the Code is
expected to result from the Incorporation Procedure or IORI Nevada's operation
of the Trust's business in corporate form following the Merger. See "--
Certain Federal Income Tax Consequences".
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Consummation of the Incorporation Procedure is contingent upon
Shareholder approval of the Incorporation Procedure. Pursuant to the
California General Corporation Law, the affirmative vote of the holders of a
majority of the outstanding Shares will be required to approve the
Incorporation Procedure. In addition, Section 3.5 of the Declaration of Trust
requires a vote of two-thirds of the Trustees to approve the Incorporation
Procedure, which exceeds the voting requirement for aspects of the
Incorporation Procedure by applicable state law. The Trustees have approved
the Incorporation Procedure.
The Board of Trustees may, in its discretion and without further
approval by Shareholders, abandon the proposed Incorporation Procedure, in
whole or in part, at any time before the Merger is effective if any event
occurs that, in the Board's opinion, makes consummation of any part of the
Incorporation Procedure inadvisable. The Trustees anticipate consummating the
Incorporation Procedure as promptly as practicable after approval by the
Shareholders.
PRINCIPAL REASONS FOR THE INCORPORATION PROCEDURE
As mentioned above, the Board of Trustees have approved the
Incorporation Procedure as in the best interest of the Trust and its
Shareholders because the Board of Trustees believes it would afford IORI Nevada
(i) the opportunity for enhanced long-range planning, flexibility and long-term
growth as a perpetual-life corporation as opposed to the more limited
alternatives of a business trust that in accordance with the terms of its
Declaration of Trust has been required to distribute to Shareholders net cash
proceeds from sales or refinancing of equity investments received by the Trust
after October 24, 1991, in excess of cash reserves necessary for maintenance
and improvement of its properties, and is required to begin liquidation of its
assets on or prior to October 24, 1996, (ii) certain acquisition safeguards not
available to the Trust, which safeguards are designed to (a) discourage
unsolicited, non- negotiated takeover attempts that can be unfair to
stockholders, pressure management and disrupt the operational continuity,
long-range planning and long-term growth of the business of IORI Nevada as
successor to the Trust and (b) encourage persons who may wish to make a bona
fide offer to acquire IORI Nevada to negotiate with the Board of Directors in
good faith and to submit a proposal that is fair and equitable to IORI Nevada
and all its stockholders and (iii) greater legal certainty in matters of
corporate governance and indemnification as a corporation as opposed to a
business trust and hence greater predictability in the conduct of its business
as a corporation under Nevada law.
GREATER LEGAL CERTAINTY
The Trustees urge Shareholders to adopt the Incorporation Procedure
because it will convert the Trust from a California business trust to the more
legally certain and predictable form of a Nevada corporation. The business
trust is an adaptation for the purpose of carrying on a business enterprise of
the traditional common law trust. Business trusts are entities created by
agreement or under a governing document, such as the Declaration of Trust, for
which there is no prescribed form. Accordingly, the powers, rights and
obligations of the Trustees and Shareholders of the Trust are determined to a
large extent by contractual interpretation, rather than by reference to powers
or privileges under any statute.
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Although the business trust form is regarded as legal and valid in a
majority of states, no substantial body of law has developed concerning the
legal status, rights, obligations and liabilities of business trusts and their
trustees and shareholders, and there is a degree of uncertainty as to the legal
principles applicable to business trusts under the laws of the various states,
including California, the jurisdiction of organization of the Trust. For
example, although the trustees of a business trust are clearly fiduciaries
owing a duty as such to the trust and its shareholders, it might be asserted
that their fiduciary duties are governed by principles of law and equity
applicable to traditional common law trusts, rather than by the standards of
care, loyalty and business judgment applied to the directors of a corporation
and by the standards defined in the governing trust documents.
By contrast, the status, rights, obligations and liabilities of the
stockholders, officers and directors of a corporation are governed not only by
a corporation's charter documents, but also by comprehensive statutes and a
body of case law interpreting those statutes and their application to a
corporation and its charter documents. The existence of a more well-defined
body of law allows a corporation to plan the legal aspects of its future
activities with more certainty and predictability than currently exists with
respect to the Declaration of Trust and the less well-defined provisions of law
currently applicable to the operations of a business trust. Additionally,
state law governing qualification of an out-of-state business entity to
transact business is generally clearer for corporations than for business
trusts. Furthermore, corporations are far more numerous than business trusts
and are more familiar to investors or persons doing or proposing to do business
with a company.
Nevada has been selected as the proposed new governing jurisdiction
because, among other reasons, the Trustees believe that the Nevada Revised
Statutes ("NRS") set forth modern statutes that will meet the business needs of
the Trust once the Incorporation Procedure is effected. The NRS is regarded as
an extensive and modern corporate statute. In adopting the NRS, the
legislature in Nevada has demonstrated an ability and a willingness to act
quickly and effectively to meet businesses' changing needs. For many years,
Nevada has followed a policy of encouraging incorporation in that state and, in
furtherance of that policy, has adopted comprehensive, modern, flexible
corporate statutes (very similar to those in effect in Delaware) that are
periodically updated and reviewed to meet changing business needs. The Trust's
Board of Trustees believe that the Incorporation Procedure will allow IORI
Nevada to plan the continuing legal aspects of its future activities with more
certainty and predictability than presently exists with respect to the
Declaration of Trust and the less-well defined provisions of law currently
applicable to the operations of a business trust. Incorporating in Nevada will
also enable the Trust to avoid significant annual franchise taxes assessed in
certain other states of incorporation. Corporations incorporated in Nevada
presently pay no annual taxes. The only annual corporate fee in Nevada is
$85.00 for filing a mandatory annual list of officers and directors.
REPLACEMENT OF THE FIXED-LIFE TRUST WITH A PERPETUAL-LIFE CORPORATION
The Trustees urge Shareholders to adopt the Incorporation Procedure
because, among other things, it will replace the limited duration Trust (which
in accordance with the terms of the Declaration of Trust has been required to
distribute to Shareholders net cash proceeds from sales or
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refinancing of equity investments received by the Trust after October 24, 1991,
in excess of necessary cash reserves for maintenance and improvement of its
properties, and will be required to begin liquidation of its assets on or
prior to October 24, 1996) with a perpetual-life corporation that the Board of
Trustees believes will have more flexibility in holding and liquidating
investments to enhance long-range planning and long-term growth. Corporations
may provide for perpetual existence, while even non-liquidating business trusts
generally have only limited duration. Further, Section 8.2(a) of the
Declaration of Trust states that "[t]he Trustees intend to begin to liquidate
the assets of the Trust within ten years of the termination of its first public
offering of Shares to the public . . . ." The Trust terminated its first
public offering of Shares on October 24, 1986. The Declaration of Trust has
required the Trust to distribute to Shareholders the net cash proceeds from
sales or refinancing of equity investments received by the Trust after October
24, 1991, in excess of cash reserves necessary for maintenance and improvement
of its properties, and the Trust will be required to distribute to Shareholders
the net cash proceeds from satisfaction of mortgage loan investments received
after October 24, 1996. Such provisions are hereinafter collectively referred
to as the "Liquidation Provisions". The Trust may also be terminated by the
vote or consent of holders of a majority of all outstanding Shares. In
contrast, IORI Nevada has provided for perpetual duration, unless it is
terminated by its Board of Directors acting with stockholder consent. See
"Proposed Incorporation Procedure -- Stockholder-Management Relations".
The Board of Trustees believes that the Liquidation Provisions it
inherited, coupled with certain restrictions on new investments, has failed to
and will continue to fail to maximize either current or long-term return to the
Shareholders and is inconsistent with the Trust's goal of increasing the
Trust's capital. The Trust's current management believes that liquidating the
Trust's real estate portfolio is likely to minimize the Trust's return on such
investments. Some of the Trust's real estate requires capital improvements and
renovation. In addition, some of the Trust's real estate investments are held
subject to substantial debt. To the extent that the Trust seeks to sell any of
its properties, the sales price for such properties may be affected by
competition from other real estate entities also attempting to sell their
properties and governmental agencies and financial institutions, whose assets
are located in areas in which the Trust's properties are located, and are
seeking to liquidate foreclosed properties. In addition, the inability to
reinvest the proceeds from disposition of the Trust's better performing assets
could result in the Trust's assets being increasingly concentrated in problem
categories such as foreclosed real estate and non-accruing loans. It is
impossible to predict with certainty when and if the real estate markets in
which the Trust owns real property will peak, and no assurance can be given
that the Trust will be able to receive the same or higher prices for its real
property in the future. Nevertheless, the Board of Trustees believes that it
is in the Shareholders' long-term interests to afford the Trust more time to
try to improve the Trust's operations and seek higher prices for its real
property.
At the same time, the Liquidation Provisions make it more difficult
for the Trust to obtain bank credit because its obligation to liquidate could
impair a potential lender's position. Consequently, the Trust might be
required in the future to maintain much greater cash reserves if the
Liquidation Provisions is continued. The Trust will have to expend funds to
renovate and improve its properties regardless of whether the Incorporation
Procedure is adopted. Although the amount of such expenditures might be
greater in the short term and is expected to be greater over the long term if
the Incorporation Procedure is adopted and the Liquidation Provisions are
eliminated through
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the Incorporation Procedure, it is anticipated that the Trust may in time have
greater access to bank credit to the extent that its assets are not encumbered
to finance such renovations and improvements. A combination of the expected
increased costs of renovating and improving the Trust's properties, the
additional operating expenses (including advisory fees) of operating the Trust
for a potentially longer period of time and the potentially slower rate of
sales of the Trust's portfolio may reduce the amount of cash available for
distribution to Shareholders. This effect may be partially offset by the
Trust's ability to avoid the substantial costs associated with its current
Liquidation Provisions as well as the Trust's reduced need for cash reserves.
The effect of eliminating the Liquidation Provisions through the
Incorporation Procedure on distributions to Shareholders over the long term,
including the amount available for distribution at a future liquidation, will
depend upon IORI Nevada's success in improving its operating results, the
prices at which IORI Nevada is ultimately able to sell its properties and on
the stability of the real estate markets in which the Trust owns real property.
Eliminating the Trust's Liquidation Provisions will enable the Trust to
continue to make new investments beyond October 26, 1996 (the date on or prior
to which it is currently required to begin liquidation of its assets) and is
likely to reduce the amount and rate of asset dispositions and result in the
Trust's having greater reported assets than would be the case under such
Liquidation Provisions. As a result, to the extent that BCM continues to serve
as the advisor under an advisory agreement providing for similar fees as the
current Advisory Agreement, which fees are based in part on gross assets (and
which, if the Incorporation Procedure is approved, will be amended to provide
for certain commissions on property acquisitions) (discussed in more detail
above under "The Advisory Agreement"), such fees (and acquisition commissions)
are likely to be higher over time. See "Certain Risk Factors -- Elimination of
Charter Limitation on Operating Expenses". This effect may be partially offset
by a reduction in sales commissions, attributable to a slower rate of property
sales, payable to BCM or its affiliates for the sale of properties. The Board
of Directors of IORI Nevada currently intends to continue to make any renewal
of the Advisory Agreement subject to approval by the stockholders of IORI
Nevada if Shareholders approve the Incorporation Procedure, although (i)
advisory fees would not be subject to a charter limitation on operating
expenses, as they are under the Declaration of Trust, and (ii) such stockholder
approval is not required by the Articles of Incorporation of IORI Nevada, as it
is under the Declaration of Trust. See "Certain Risk Factors -- Elimination of
Charter Limitation on Operating Expenses" and "--Business Activities after
Incorporation Procedure".
Furthermore, Carmel Realty, an affiliate of BCM, may receive increased
amounts of fees under the Brokerage Agreement (as amended to encompass
acquisitions as well as sales of real estate) if IORI Nevada acquires, as well
as sells, real estate.
In any event, management believes that the potential long-term
benefits of eliminating the Liquidation Provisions through the Incorporation
Procedure justify affording the Trust an opportunity to improve the Trust's
operations and to seek higher prices for the Trust's properties over time.
With respect to future investments, if Shareholders approve the proposed
Incorporation Procedure, IORI Nevada plans to continue to focus on investment
in real estate. The Trust's investment strategy has been to maximize each
property's operating income through aggressive property management by closely
monitoring expenses while at the same time renovating properties where
appropriate. While such renovations require greater expenditures and therefore
increase the
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amount of revenue required to be generated by such property to cover operating
expenses, the Trust believes that such renovations are necessary to maintain
and, possibly, enhance the value of the Trust's properties. With respect to
properties acquired through foreclosure, management intends to enhance the
value of such properties through renovations. However, no assurance can be
given that eliminating the Liquidation Provisions through the Incorporation
Procedure will result in any improvement in the Trust's operations or higher
prices for the Trust's properties.
The Board of Trustees believes that the current market price for the
Shares (see "Market Prices of the Shares; Dividends") does not represent the
long-term value of the Trust's assets. Nevertheless, no assurance can be given
that eliminating the Liquidation Provisions through the Incorporation Procedure
will result either in the Trust's receiving a higher return on its assets upon
sale or in increased stock prices (after giving effect to the One-for-One
Exchange).
ACQUISITION SAFEGUARDS
The Board of Trustees also endorses the Incorporation Procedure
because it will afford IORI Nevada certain safeguards against acquisition of
IORI Nevada that, together with certain provisions of Nevada law, are designed
to (a) discourage unsolicited, non-negotiated takeover attempts that can be
unfair to stockholders, pressure management and disrupt the operational
continuity, long-range planning and long-term growth of the business and (b)
encourage persons who may wish to make a bona fide offer to acquire IORI Nevada
to negotiate in good faith and to submit a proposal that is fair and equitable
to IORI Nevada and all its stockholders. See "-- The Director Removal
Provision", "--The Business Combination Provision", "-- The Evaluation
Provision", "-- Amendment Provisions" and "-- Acquisition Safeguards --
Possible Negative Considerations".
It has become common for third parties to accumulate substantial stock
positions in public companies as a prelude to proposing a takeover,
restructuring, sale of all or a substantial part of the target company or other
similar extraordinary corporate action, or simply as a means to put the target
company "in play". Such actions are often undertaken by the third party
without advance notice to or consultation with management of the target
company. In many cases, the purchaser seeks representation on the target
company's board of directors or trustees in order to increase the likelihood
that its proposal will be implemented by the company. If the target company
resists the efforts of the purchaser to obtain representation on the company's
board, the purchaser may commence a proxy contest to have its nominees elected
to the board in place of certain directors or the entire board. The purchaser
may not be truly interested in taking over and running the target company, but
rather in using the threat of a proxy fight or a bid to take over the company
as a means of forcing it to repurchase the purchaser's equity position at a
substantial premium over market price. This predatory practice has come to be
known as "greenmail".
The Board of Trustees believes that the imminent threat of removal of
management in such situations would severely curtail management's ability to
negotiate effectively with such purchasers and with any other third party
interested in acquiring the Trust. Management would be deprived of the time
and information necessary to evaluate the takeover proposal, to study
alternative proposals and to help ensure that the best price is obtained.
Furthermore, management could be faced with the
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following dilemma: either to pay greenmail or to allow the Trust's business
and management to be disrupted, perhaps irreparably.
In addition to pressuring the management of the target company,
unsolicited tender offers and other non- negotiated acquisition proposals may
involve terms and be structured in ways that may be less favorable to all the
stockholders than those of a transaction negotiated and approved by the board
of directors. Although such proposals may be made at a price substantially
above prevailing market prices, they are sometimes made for less than all of
the outstanding shares of a company. As a result, stockholders may be forced
either to partially liquidate their investment under circumstances that may be
disadvantageous to them or to retain their investment as minority stockholders
in an enterprise that is controlled by persons whose objectives may be at odds
with those of the remaining minority stockholders and former management.
Unsolicited tender offers or other purchases of substantial blocks of
outstanding shares may also be followed by non-negotiated mergers or similar
transactions that involve the elimination of the remaining public stockholders
of the target company. Such transactions may not assure fair treatment of the
public stockholders remaining after the first step of the acquisition, because
the controlling stockholder's influence dominates the negotiations. Such
tender offers or purchase programs may also take the form of a two-tiered offer
in which cash is offered for a portion of a company's outstanding shares, and,
thereafter, securities that are or may be worth less than the cash portion are
offered for the remaining shares. Thus, stockholders are pressured into
selling as many of their shares as possible either to the purchaser or in the
open market without having the opportunity to make a considered investment
choice between remaining a stockholder of the company or disposing of their
shares. Two-tiered pricing tactics, as well as certain other unsolicited
proposals, may also be timed and designed to foreclose or minimize the
possibility of more favorable competing bids, which in turn may result in
stockholders losing the opportunity to consider alternative and possibly more
attractive proposals. In addition, persons who accumulate large blocks of
stock without negotiating with management through private or open market
transactions may achieve a position of substantial influence and control
without paying stockholders a fair control premium.
The Trustees recognize that acquisition proposals that have not been
negotiated with and approved by a company's board of directors do not always
have the unfavorable consequences or effects described above. See "Acquisition
Safeguards -- Possible Negative Considerations". However, it is the view of
the Board of Trustees that the potential disadvantages of non-negotiated
acquisition proposals are sufficiently great that it would be in the best
interest of IORI Nevada and its stockholders to encourage potential acquirors
to negotiate directly with the Board of Directors of IORI Nevada and to submit
proposals that are fair and equitable to IORI Nevada and all of its
stockholders. In the judgment of the Board of Trustees, the proposed
acquisition safeguards will help ensure that the Board of Directors of IORI
Nevada, if confronted by a proposal from a third party that has acquired a
significant block of IORI Nevada stock, will have sufficient opportunity to
review and analyze the proposal and appropriate alternatives, and to act as it
believes the best interest of all stockholders dictates. The Trustees also
believe that the changes resulting from the Incorporation Procedure should not
discourage acquisition proposals at a price reflective of the true value of
IORI Nevada that are fair and equitable to all stockholders. None of the
proposed acquisition safeguards would prevent any person from making a tender
offer to IORI Nevada's stockholders or prevent any stockholder from accepting
such an offer.
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The Incorporation Procedure does not reflect any present knowledge on
the part of the Trustees of any pending, proposed or threatened takeover,
tender offer, leveraged buyout, proxy contest, sale of assets or other similar
transaction involving a change in control of the Trust. In addition to the
reasons discussed above, the Board of Trustees believes that the acquisition
safeguards are nonetheless necessary at this time because the effectiveness of
the acquisition safeguards depends on their being implemented before an
acquisition proposal is made. Otherwise, one of the purposes of the
acquisition safeguards -- to encourage potential acquirors to negotiate
directly with the Board of Directors of IORI Nevada -- might be thwarted. In
any event, it is unlikely that the Trust or IORI Nevada would be able to
implement the full range of acquisition safeguards once a takeover attempt is
already in progress. For these reasons, the Board of Trustees believes that it
would be beneficial to adopt the acquisition safeguards as part of the
Incorporation Procedure.
The Board of Trustees does not currently have under consideration, and
does not have any current intention to propose or adopt, any other measures
that may have the effect of discouraging acquisitions apart from those proposed
in this Proxy Statement/Prospectus. However, circumstances may change and it
is, of course, possible that the Board of Directors of IORI Nevada may adopt
further measures in the future, which measures may or may not require
stockholder approval. See "-- Comparison of Principal Differences Between the
Trust and IORI Nevada". As discussed more fully below under "-- Comparison of
the Securities of IORI Nevada and the Trust -- No Restrictions on Ownership and
Transfer of Nevada Common Stock", the Declaration of Trust generally prohibits
ownership by any one Shareholder of more than 5.0% of the outstanding Shares.
Although the Board of Trustees has consented, pursuant to its discretionary
authority under the Declaration of Trust, to acquisitions by a corporate
Shareholder of Shares in excess of such 5.0% limit, it should be noted that
this restriction (as well as others discussed more fully below under "--
Comparison of the Securities of IORI Nevada and the Trust --No Restrictions on
Ownership and Transfer of Nevada Common Stock") potentially could discourage
certain acquisition proposals but that such restrictions would be eliminated as
a result of the Incorporation Procedure.
POSSIBLE NEGATIVE CONSIDERATIONS. In addition to and amplification of
the risk factors discussed above under "Certain Risk Factors" and the possible
negative effects of eliminating the Trust's Liquidation Provisions discussed
above under "-- Replacement of the Fixed Life Trust with a Perpetual-Life
Corporation", Shareholders should take into account the following possible
negative considerations concerning the acquisition safeguards described above
in evaluating the proposed Incorporation Procedure as a whole. Notwithstanding
the benefits of the Incorporation Procedure anticipated by the Board of
Trustees, Shareholders should recognize that the acquisition safeguards could
discourage a future attempt to acquire control of IORI Nevada that is not
presented to and approved by the Board of Directors, but which some of IORI
Nevada's stockholders might believe to be in their best interest or which might
offer stockholders a premium for their shares over prevailing market prices.
As a result, stockholders who might desire to participate in such a transaction
may not have an opportunity to do so and the Incorporation Procedure might
therefore be viewed as limiting stockholders' rights. Furthermore, unsolicited
proposals are not necessarily less advantageous than transactions negotiated
with management.
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Consummation of the Incorporation Procedure could have the effect of
making it more difficult for holders of even a majority of the outstanding
shares of IORI Nevada (i) to obtain control either directly by making a tender
offer for the outstanding stock of IORI Nevada (see "-- The Business
Combination Provision") or by soliciting proxies or consents (see "--
Stockholder/Management Relations -- The Consent Provision") for use at a
special or regular meeting of IORI Nevada's stockholders (see "--
Stockholder/Management Relations -- The Stockholder Meeting Provision") or (ii)
to change the composition of the Board to remove incumbent management (see "--
Management after Incorporation Procedure -- The Director Removal Provision").
Accordingly, the Incorporation Procedure, together with the protection afforded
by the collective beneficial ownership of 48.4% of the Trust's Shares (as of
August 23, 1995) by the Trustees and the Trust's executive officers and
entities with which they are affiliated, could entrench the Board of Directors,
even in circumstances where a majority of the stockholders may be dissatisfied
with the performance of the incumbent directors or otherwise desire to make
changes.
With respect to (i) certain mergers and other related transactions and
(ii) certain amendments to IORI Nevada's Articles of Incorporation, the
acquisition safeguards will also effectively give veto power to holders of more
than one- third and one-fifth, respectively, of the outstanding voting shares
of IORI Nevada, even if such mergers or amendments were desired by a majority
of the stockholders. At present, the Trustees are aware of two Shareholders,
Transcontinental Realty Investors, Inc. ("TCI") and American Realty Trust, Inc.
("ART") (each of which are affiliates of BCM), who hold more than 20% of the
outstanding shares of the Trust and would hold more than 20% of the outstanding
common stock of IORI Nevada if the Incorporation Procedure is effected.
The cumulative effect of the various changes resulting from the
Incorporation Procedure might also discourage some persons from investing in or
acquiring a large block of IORI Nevada stock by making it more difficult for a
substantial stockholder to exercise control, to complete an acquisition of IORI
Nevada or to negotiate a repurchase of its shares by IORI Nevada. Stockholders
may also have less opportunity to take advantage of temporary increases in the
market price of IORI Nevada's shares that might be caused by takeover
speculation.
The Trustees have considered these potential disadvantages and
differences and have concluded that the acquisition safeguards included in the
Incorporation Procedure outweigh these possible disadvantages.
CERTAIN POTENTIAL CONFLICTS OF INTEREST
The Incorporation Procedure is also likely to result in BCM, as
advisor, earning greater fees for a longer period of time than would be the
case under the Trust's current liquidation provisions. See "-- Replacement of
the Fixed-Life Trust with a Perpetual-Life Corporation". In addition, such
advisory fees would not be subject to the operating expense limitation
currently contained in the Declaration of Trust, although a substantially
similar provision would be included in an amendment to the current Advisory
Agreement, as discussed under "Certain Risk Factors -- Elimination of Charter
Limitation on Operating Expenses", "Business and Properties of the Trust -- The
Advisory Agreement" and "Proposed Incorporation Procedure -- Business
Activities after Incorporation
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Procedure". Furthermore, Carmel Realty, an affiliate of BCM, may receive
increased amounts of fees under the Brokerage Agreement (as amended to
encompass acquisitions as well as sales of real estate) if IORI Nevada
acquires, as well as sells, properties. While the Board of Trustees
believes that the Incorporation Procedure is in the best interest of the Trust
and its Shareholders, certain members of management could benefit from the
Incorporation Procedure and, therefore, may be viewed as having a conflict of
interest. See "Certain Risk Factors -- Interests of Certain Persons in the
Incorporation Procedure".
THE ONE-FOR-ONE EXCHANGE OF SHARES
As part of the Merger, existing Shareholders of the Trust would
automatically become stockholders of IORI Nevada by the exchange of all shares
of the California Corporation for newly issued Nevada Common Stock on the basis
of the One-for-One Exchange. For reasons discussed below under "Proposed
Incorporation Procedure -- Comparison of the Securities of IORI Nevada and the
Trust -- Common Equity", each new share of Nevada Common Stock would have $0.01
par value, unlike each existing Share, which has no par value.
The One-for-One Exchange would result in issuance by IORI Nevada of a
number of shares of Nevada Common Stock equal to the number of Shares of the
Trust outstanding immediately before commencement of the Incorporation
Procedure. Based upon the 791,444 Shares outstanding on August 23, 1995, the
One-for-One Exchange would result in issuance of 791,444 shares of Nevada
Common Stock.
The One-for-One Exchange will not affect any Shareholder's
proportionate equity interest in the Trust. Upon consummation of the
Incorporation Procedure, each outstanding share of Nevada Common Stock will be
entitled to one vote at each meeting of stockholders, as is the case with each
currently outstanding Share of the Trust.
THERE CAN BE NO ASSURANCE THAT THE MARKET PRICE PER SHARE OF NEVADA
COMMON STOCK AFTER THE ONE-FOR-ONE EXCHANGE WILL BE EQUAL TO THE MARKET PRICE
PER SHARE OF THE SHARES BEFORE THE ONE-FOR-ONE EXCHANGE OR THAT THE
MARKETABILITY OF NEVADA COMMON STOCK WILL REMAIN CONSISTENT WITH THE
MARKETABILITY OF THE SHARES. Prices for IORI Nevada Common Stock will be
determined in the marketplace and may be influenced by many factors, including
investor perception of the changes effected through the Incorporation
Procedure.
Assuming that the proposed Incorporation Procedure is approved,
Shareholders will be furnished with the necessary materials and instructions to
exchange their certificates representing the existing Shares for new
certificates representing Nevada Common Stock.
ADOPTION AND APPROVAL OF THE INCORPORATION PROCEDURE WILL
SIGNIFICANTLY AFFECT CERTAIN RIGHTS OF SHAREHOLDERS. ACCORDINGLY, SHAREHOLDERS
ARE URGED TO READ CAREFULLY THIS ENTIRE PROXY STATEMENT/PROSPECTUS AND THE
APPENDICES HERETO AND TO CONSIDER CAREFULLY THE DIFFERENCES BETWEEN THEIR
RIGHTS AS SHAREHOLDERS OF THE TRUST AND AS STOCKHOLDERS OF IORI NEVADA BEFORE
VOTING.
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COMPARISON OF PRINCIPAL DIFFERENCES BETWEEN THE TRUST AND IORI NEVADA
If the proposed Incorporation Procedure is approved and consummated,
the business of the Trust will be conducted by a Nevada corporation rather than
by a business trust organized under the laws of the State of California. The
rights and powers of the Trust and its Shareholders and Trustees currently are
governed primarily by the Declaration of Trust and the Trustees' Regulations
and, to a lesser extent, by California business trust law, while those of IORI
Nevada and its stockholders and directors would be governed by its Articles of
Incorporation and Bylaws and by Nevada corporate law. Set forth below is a
comparison of the principal differences between those respective rights and
powers. Although the Trustees believe that the following discussion sets forth
the material differences between the rights of Shareholders of the Trust and
stockholders of IORI Nevada, the comparison does not purport to be a complete
statement of all differences and is qualified in its entirety by reference to
the Articles of Incorporation and Bylaws of IORI Nevada and the Declaration of
Trust and the Trustees' Regulations. Shareholders should refer to the full
text of IORI Nevada's Articles of Incorporation and Bylaws attached hereto as
Appendices C and D, respectively, and compare them with the Declaration of
Trust and the Trustees' Regulations, attached hereto as Appendices E and F,
respectively.
For convenience and ease of reference, comparisons between the Trust
and IORI Nevada are set forth as follows: "Management after Incorporation
Procedure" discusses the role of IORI Nevada's advisor and how the Trust's
Board of Trustees would be reconstituted as IORI Nevada's Board of Directors;
"Liability of Certain Persons" addresses exculpation of trustees and directors,
indemnification of trustees, directors and officers and shareholder liability;
"Business Activities after Incorporation Procedure" compares business
objectives and restrictions on certain activities and related party
transactions; "Comparison of the Securities of IORI Nevada and the Trust", in
addition to comparing the Shares with the Nevada Common Stock, outlines
dissenters' rights, preferred stock, listing with the AMEX and the elimination
of certain restrictions on ownership and transfer of shares;
"Stockholder-Management Relations" describes the mechanics of stockholder
voting and meetings; "The Business Combination Provision" discusses certain
provisions of IORI Nevada's Articles of Incorporation relating to acquisition
transactions with interested stockholders; "The Evaluation Provision" describes
certain new provisions; and "Amendment Provisions" sketches the requirements
for amending the governing documents of the Trust and IORI Nevada.
MANAGEMENT AFTER INCORPORATION PROCEDURE
CONSTITUENCY OF THE BOARD. The Olive Modification required that the
Board of Trustees be reduced from 8 to 7 members. The Articles of
Incorporation of IORI Nevada sets the number of initial directors at 6. The
exact number of directors may be fixed or changed by the affirmative vote of a
majority of the entire Board of Directors, from time to time, within the limits
set by the Articles of Incorporation, subject to the limitations mandated by
the Olive Modification. By comparison, the Declaration of Trust provides that
the number of Trustees shall be no less than 5 nor more than 15 as determined
by the vote of the Shareholders of the Trust or the Trustees.
Notwithstanding any limitation on the maximum number of directors in
the Articles of Incorporation, whenever IORI Nevada issues preferred stock and
gives its holders the right to elect
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a director at an annual or special meeting of stockholders, then the election,
term of office, filling of vacancies and other features of such directorships
shall be governed by the terms of the Articles of Incorporation or the
resolution(s) adopted by the Board applicable thereto. See "Proposed
Incorporation Procedure -- Comparison of the Securities of IORI Nevada and the
Trust -- Preferred Stock".
Any vacancy on the Board of IORI Nevada will be filled by a vote of
the majority of the directors then in office or by a sole remaining director.
Any director elected to fill a vacancy not resulting from an increase in the
number of directors shall have the same remaining term as that of his
predecessor. The Declaration of Trust provides for filling Board of Trustees
vacancies by the remaining Trustees or by the vote or consent of a majority of
the outstanding shares entitled to vote thereon.
The Declaration of Trust requires that a majority of Trustees be
persons who are not affiliates of Consolidated Capital Equities Corporation
("CCEC"), the original sponsor of the Trust and one of the Trust's former
advisors, or any of CCEC's affiliates or successor entities. Under the
Declaration of Trust, "Affiliate" is defined: "as to any person, any other
person who owns beneficially, directly, or indirectly, 1% or more of the
outstanding capital stock, shares or equity interests of such person or of any
other person which controls, is controlled by, or is under common control with,
such person or is an officer, retired officer, director, employee, partner, or
trustee (excluding non-interested trustees not otherwise affiliated with the
entity) of such person or of any other person which controls, is controlled by,
or is under common control with, such person." Under the Declaration of Trust,
"Person" is defined to include "individuals, corporations, limited
partnerships, general partnerships, joint stock companies or associations,
joint ventures, associations, companies, trusts, banks, trust companies, land
trusts, business trusts, or other entities and governments and agencies and
political subdivisions thereof".
By contrast, Article SIXTH of the Articles of Incorporation does not
require that any of IORI Nevada's directors be independent of the advisor or
any other person. It should be noted, however, that each of the Trustees, who
would serve as directors of IORI Nevada, are unaffiliated with BCM. Moreover,
AMEX rules recommend that every company with shares listed on the AMEX have at
least two independent directors; that is, directors who are not officers of the
company, who are neither related to its officers nor represent concentrated or
family holdings of its shares, and who, in the view of the company's board of
directors, are free of any relationship that would interfere with the exercise
of independent judgment. Each of the Trustees are, in the Board's view,
independent Trustees under these criteria. AMEX rules also recommend that
every listed company maintain an audit committee composed solely of independent
directors. The three members of the Trust's current audit committee are all
independent Trustees. Such members will also serve on the audit committee of
IORI Nevada if Shareholders approve the Incorporation Procedure.
THE DIRECTOR REMOVAL PROVISION. Under Article ELEVENTH of the
Articles of Incorporation (the "Director Removal Provision"), each Director of
the Board may be removed only by the affirmative vote of the holders of not
less than two- thirds of the outstanding stock of IORI Nevada then entitled to
vote for the election of such director. By contrast, under the Declaration of
Trust, Trustees may be removed by vote or consent of the holders of a majority
of the outstanding
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Shares entitled to vote thereon, or by a majority of the remaining Trustees.
The Director Removal Provision makes removal of a director of IORI Nevada more
difficult by requiring a super-majority vote.
Shareholders should note that, together, ART and TCI, affiliates of
BCM, effectively will have veto power over the removal of directors of IORI
Nevada pursuant to the Director Removal Provision.
The Director Removal Provision tends to ensure managerial continuity
and to deter certain kinds of unsolicited takeovers while making changes in
control somewhat more difficult. See "Proposed Incorporation Procedure --
Acquisition Safeguards -- Possible Negative Considerations".
IORI NEVADA'S ADVISOR. It is anticipated that the day-to-day
operations of IORI Nevada will be performed by BCM from the effective time of
the Merger under the modified Advisory Agreement described under "Business and
Properties of the Trust -- The Advisory Agreement", subject to Shareholder
approval of the Incorporation Procedure.
Article THIRTEENTH of the Articles of Incorporation provides that the
Board of Directors may authorize advisory agreements. There is no requirement
that the Board of Directors obtain stockholder approval prior to any renewal or
modification of such advisory agreements (although the Board of Directors
intends to continue this practice). In contrast, the Declaration of Trust
currently requires that all such advisory agreements have an initial term of no
more than two years and provide for annual renewal or extension thereafter,
subject to shareholder approval. Pursuant to the terms of the Olive
Modification, which became effective on January 11, 1995, if BCM or any other
entity affiliated with members of the Trust's management serves as advisor,
advisory agreements are and will remain subject to the review and approval of
two-thirds of the Board of Directors. See "Proposed Incorporation Procedure --
Business Activities after Incorporation Procedure -- The Restrictions on
Related-Party Transactions Provision".
The Declaration of Trust also provides for termination of advisory
agreements without penalty, (i) by the advisor upon 120 days' written notice or
(ii) by the Shareholders (by a vote of the majority of the outstanding Shares)
or (iii) by the Board of Trustees (by majority vote including a majority of
unaffiliated Trustees) upon 60 days' written notices. The IORI Nevada Articles
of Incorporation leave termination provisions regarding advisory agreements to
the negotiation of the parties. See "Proposed Incorporation Procedure -- The
Advisor" for a discussion of the relationship between the Trust and BCM.
Neither IORI Nevada's Articles of Incorporation nor the Declaration of Trust
requires Shareholder approval for the selection of the advisor per se.
The Declaration of Trust requires that any advisory agreement entered
into with a Trustee or an affiliate (see "Proposed Incorporation Procedure --
Management after Incorporation Procedure -- The Classified Board Provision") of
a Trustee must be made, approved or ratified by a majority of the Trustees who
are not so affiliated. Transactions of IORI Nevada with any advisor or
affiliate thereof would be governed by the NRS and the unified related-party
provisions contained in Article FOURTEENTH of the Articles of Incorporation
together with the Olive Modification. As explained
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more fully in "Proposed Incorporation Procedure -- Business Activities after
Incorporation Procedure -- The Restrictions on Related-Party Transactions
Provision", prior to entering any related party transaction, except certain
specified contracts including the Advisory Agreement, pursuant to the Olive
Modification, the Board of Directors would be required to unanimously agree
that the transaction is in the best interest of the corporation and that no
other opportunity exists that is as good as the opportunity presented by such
transaction. Direct contractual agreements for services between the Trust and
BCM or one of its affiliates such as the Advisory Agreement would require the
prior approval of two-thirds of the directors.
Section 4.3 of the Declaration of Trust requires the Trust's advisor
to use its best efforts to present to the Trust a continuing and suitable
investment program, consistent with the Trust's investment policies and
objectives. However, consistent with the Declaration of Trust, neither the
advisor nor any affiliate of the advisor is obligated to present any particular
investment opportunity to the Trust. The advisor is, in fact, expressly
authorized to take for its own account or recommend to others any particular
investment opportunity. There is no comparable provision to such Section 4.3
in the Articles of Incorporation.
The Articles of Incorporation impose fewer explicit restrictions on
compensation of IORI Nevada's advisor than does the Declaration of Trust.
Article THIRTEENTH of the Articles of Incorporation provides that the
compensation payable under the Advisory Agreement must be approved as "fair and
equitable" by the Board of Directors, and the Restrictions on Related-Party
Transactions Provision also applies to compensation of the advisor. See,
however, the discussion of contractual limits on operating expenses below under
"Proposed Incorporation Procedure -- Business Activities after Incorporation
Procedure".
LIABILITY OF CERTAIN PERSONS
THE MANAGEMENT LIABILITY PROVISION. The Incorporation Procedure will
enable IORI Nevada to define the liability of corporate officers and directors
with greater precision. The Board of Trustees believes that limited liability
will help retain and attract the best possible officers and directors.
Currently, each of the Trustees has been offered contractual indemnification to
the fullest extent permitted by the Declaration of Trust or to the fullest
extent not prohibited under applicable law. Under the Management Liability
Provision (Article NINTH of the Articles of Incorporation), the directors will
not have personal liability to IORI Nevada or its stockholders for monetary
damages for any breach of their fiduciary duties as directors (including,
without limitation, any liability for gross negligence in the performance of
their duties), except (i) for acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law or (ii) for the payment of
dividends in violation of NRS 78.300. By precluding personal liability for
certain breaches of fiduciary duty, including grossly negligent business
decisions in evaluating takeover proposals to acquire IORI Nevada, the
Management Liability Provision supplements indemnification rights afforded
under IORI Nevada's Articles of Incorporation and Bylaws which provide, in
substance, that IORI Nevada shall indemnify its directors, officers, employees
and agents to the fullest extent permitted by the NRS and other applicable
laws.
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The Articles of Incorporation provide that "IORI Nevada shall
indemnify to the fullest extent authorized or permitted by law (as now or
hereafter in effect) . . . to any person made or threatened to be made a party
or witness to any action, suit or proceeding (whether civil or criminal or
otherwise) by reason of the fact that such person is or was a director,
officer, employee or agent of IORI Nevada . . . ." Further, the Bylaws provide
that "[e]ach officer, director or employee . . . shall be indemnified . . . to
the full extent permitted under Chapter 78 of the Nevada Revised Statutes . . .
and other applicable law." Pursuant to the NRS, a corporation may indemnify
persons for expenses related to an action, suit or proceeding, except an action
by or in the right of the corporation, by reason of the fact that such person
is or was a director, officer, employee or agent, if such person acted in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, if such person had no reasonable cause to believe his conduct
was unlawful. The expenses indemnified against in this provision include
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with the action, suit or proceeding. The NRS
further provides that a corporation may indemnify persons for attorneys' fees
related to an action, suit or proceeding by or in the right of the corporation
to procure a judgment in its favor by reason of the fact that such person is or
was a director, officer, employee or agent, if such person acted in good faith
and in a manner which he reasonably believed to be in or not opposed to the
best interests of the corporation. The corporation may also indemnify
directors for amounts paid in judgments and settlements in such a suit, but
only if ordered by a court after determining that the person is "fairly and
reasonably" entitled to indemnity.
The Management Liability Provision contained in the Articles of
Incorporation is analogous to Article VII of the Declaration of Trust. Article
VII, however, explicitly exculpates Trustees, officers, employees and agents of
the Trust while the Management Liability Provision explicitly exculpates only
directors. Further, under the Declaration of Trust, a Trustee would not be
indemnified for liability arising from gross negligence or reckless disregard
of duty, whereas a director of IORI Nevada would be indemnified for such
liability under the Articles of Incorporation.
Current Trustees and the directors of IORI Nevada could personally
benefit from expanding the limitation on their personal liability.
The NRS and Nevada common law provide that a corporation's board of
directors owes certain fiduciary duties to the corporation and its
stockholders, including a duty of loyalty and a duty of care. The duty of care
is generally considered to require directors to be sufficiently diligent and
careful in informing themselves regarding, and in deciding whether to take or
not to take, corporate action. The duty of care to which directors are bound
is that which ordinarily prudent and diligent men would exercise under similar
circumstances. The duty of loyalty is generally considered to require
directors to act in what they determine in good faith, after appropriate
consideration, to be in the best interest of the corporation and not to engage
in self-dealing. With respect to limitations on the personal liability of
directors to IORI Nevada or its stockholders, the Management Liability
Provision is more expansive than the provision in the Declaration of Trust that
addresses the limitations on the personal liability of Trustees to the Trust or
its shareholders. Consequently, the Management Liability Provision expands the
current limitation on personal liability of members of management to cover, in
addition, certain violations of their fiduciary duty of care rising to the
level
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of gross negligence or reckless disregard of duty. The Management Liability
Provision would not, however, insulate directors of IORI Nevada from liability
to IORI Nevada or its stockholders for (i) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law or (ii) the payment
of distributions in violation of NRS 78.300. The limitation of liability
applies only to claims by IORI Nevada or its stockholders and does not preclude
or limit recovery of damages by others, such as creditors. Furthermore, the
limitation of liability applies prospectively only and would therefore not
affect a Trustee's potential liability for acts or omissions in his capacity as
a Trustee prior to the effective time of the Merger.
The Management Liability Provision further provides that any repeal or
modification of Article NINTH would not increase the personal liability of any
director of IORI Nevada for any act or occurrence taking place prior to such
repeal or modification, or otherwise adversely affect any right or protection
of a director of IORI Nevada existing at the time of such repeal or
modification. Moreover, the Management Liability Provision provides that if
Nevada law is in the future amended to further eliminate or limit the liability
of directors, then the liability of a director shall be eliminated or limited
to the fullest extent permitted by Nevada law, as so amended.
By protecting directors from assessments of monetary damages for
breaches of the duty of care, the Management Liability Provision limits the
remedies available to a stockholder seeking to challenge a Board decision
protected by the Management Liability Provision, including, for example,
decisions relating to acquisition proposals or similar transactions. However,
it does not eliminate or change the duty of care. Accordingly, the Management
Liability Provision does not limit the availability of equitable remedies, such
as an injunction or rescission based on a director's breach of the duty of
care, although, as a practical matter, particular equitable remedies may not be
available (e.g., after a transaction has already been effected). Additionally,
the Bylaws of IORI Nevada provide indemnification to each officer, director and
employee of IORI Nevada to the fullest extent permitted by Chapter 78 of the
NRS and other applicable law.
The Management Liability Provision also provides that IORI Nevada
shall indemnify to the fullest extent permitted by law any person who is a
party or is made or threatened to be made a party or witness to any action,
suit or proceeding (whether civil or criminal or otherwise) or by reason of the
fact that such person is or was a director, officer, employee or agent of IORI,
or is or was serving at the request of IORI Nevada, any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise in
any capacity. The Management Liability Provision also provides that IORI
Nevada shall advance expenses to the fullest extent permitted by law to such
indemnitee. The Management Liability Provision further states that any
amendment to or repeal of Article NINTH would not diminish such indemnification
with respect to any acts or omissions occurring prior to such amendment or
repeal. The Declaration of Trust provides that the Trust shall indemnify and
reimburse any person made a party to any action, suit or proceeding or against
whom any claim or liability is asserted because he, his testator or intestate
was or is a Trustee, officer, employee or agent of the Trust for any judgments,
fines, amounts paid on amount thereof (whether in settlement or otherwise) and
reasonable expenses, including attorneys' fees, actually and reasonably
incurred by him in defending against such claim, action, suit or proceeding, or
alleged liability or in connection with any appeal therein, except where the
claim, obligation or liability arose out of such person's willful misfeasance,
bad faith, gross negligence or reckless disregard of duty. The
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indemnity provisions of the Management Liability Provision and Section 78.751
of the NRS are comparable except that Section 78.751 of the NRS provides that a
corporation shall make no indemnification in respect of any claim as to which a
final adjudication establishes that the director is liable to IORI Nevada or
for amounts paid in settlement to IORI Nevada unless and only to the extent
that the court in which the action was brought determines upon application that
in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such expenses.
As herein described, directors and officers of IORI Nevada are
indemnified against certain liabilities under provisions of the Articles of
Incorporation and Bylaws. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, the registrant
has been informed that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
In addition, the Management Liability Provision provides, as permitted
by the NRS, that IORI Nevada may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of IORI Nevada or another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against such expense, liability or loss, whether or not IORI Nevada
would have the power to indemnify such person against any such expense,
liability or loss under the NRS. Section 7.4 of the Trust's Declaration of
Trust is analogous to this portion of the Management Liability Provision.
Although the Trust has had the power to purchase such insurance, to date the
Trust has not done so.
The Trustees and officers of the Trust are indemnified under the
Declaration of Trust against judgments, fines, amounts paid on account of and
reasonable expenses (including attorneys' fees) incurred in connection with the
defense of suits or proceedings in which a claim or liability against a person
is asserted by reason of the fact that he is a Trustee or officer of the Trust,
as the case may be. Currently, each of the Trustees of the Trust has been
offered contractual indemnification to the fullest extent permitted by the
Declaration of Trust or to the fullest extent not prohibited under applicable
law.
SHAREHOLDER LIABILITY. The Trustees believe that limitations on the
potential personal liability of stockholders for the acts and obligations
applicable to IORI Nevada under Nevada law are comparable to the limitations
under California law and the Declaration of Trust applicable to Shareholders of
the Trust with respect to the Trust's acts and obligations. Though the
Articles of Incorporation do not expressly limit stockholder liability,
pursuant to Article 8 Section 3 of the Nevada constitution and Section 78.225
of the NRS, stockholders are not personally liable for the payment of a
corporation's debts, except to the extent a stockholder has not paid the
consideration for which that stockholder's shares were authorized to be issued
or which was specified in a written subscription agreement between the
corporation and the stockholder. Similarly, the Declaration of Trust provides
that Shareholders shall not be subject to any personal liability for the acts
or obligations of the Trust and that every written undertaking made by the
Trust shall contain a provision that such undertaking is not binding on any
Shareholders personally. Under Section 23001 of the California Corporations
Code, no shareholder of a real estate investment trust like the Trust shall be
personally liable for any liabilities, debts or obligations of, or claims
against, such real estate investment trust. Section 23002 of the California
Corporations Code further provides that Section
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23001 applies to any real estate investment trust organized under the laws of
California with respect to liabilities, debts, obligations and claims wherever
arising. Under Section 23000 of the California Corporations Code, the Trust is
classified as a "real estate investment trust" for purposes of the foregoing
provisions of California law. Thus, the Trustees believe that the
Incorporation Procedure will not materially alter Shareholder liability in
California. It should be noted that the law regarding trusts in other states
where the Trust does business might treat Shareholders' liability in a
different manner (i.e., impose liability) if a court in such state were not to
apply California law to such issue.
BUSINESS ACTIVITIES AFTER INCORPORATION PROCEDURE
No significant change in the nature of the Trust's business (other
than the elimination of the Trust's liquidation provision) is anticipated as a
result of the Incorporation Procedure, though IORI Nevada will be empowered
under the Articles of Incorporation to engage in a wider range of business
activities than those currently permitted under the Declaration of Trust,
including the acquisition of properties from time to time. It should be noted
that the Articles of Incorporation place no limitations on IORI Nevada's
operating expenses, as discussed below.
Article THIRD of the Articles of Incorporation states that IORI Nevada
may engage in any lawful activity, subject to the restrictions set forth above
under "Proposed Incorporation Procedure -- Management after Incorporation
Procedure -- IORI Nevada Advisor" and below under "Proposed Incorporation
Procedure -- Business Activities after Incorporation Procedure -- The
Restrictions on Related-Party Transactions Provision". While, unlike the
Declaration of Trust, the Articles of Incorporation neither dictate specific
investment policies nor formally restrict particular activities of IORI Nevada,
it is currently expected that the investment policies and activities of IORI
Nevada will be substantially similar to the existing investment policies and
activities of the Trust. Notwithstanding such expectation, IORI Nevada may
avail itself of the greater flexibility permitted by the Articles of
Incorporation to make certain investments that the Trust is not authorized to
make. No assurance can be given that IORI Nevada's investment policies will
not change if, in the opinion of the Board of Directors, circumstances so
require, and certain investment policies may be changed without stockholder
approval.
To continue to qualify for taxation as a REIT under the Code, IORI
Nevada will, among other things, be required (i) to hold at least 75% of the
value of its total assets in real estate assets, government securities, cash
and cash items at the close of each quarter of each taxable year, (ii) to
distribute 95% of its taxable income each year (excluding any net capital gain)
as dividends, (iii) to ensure that no more than 50% in value of its outstanding
stock is held by five or fewer individuals or certain organizations at any time
during the last half of each taxable year and (iv) to ensure that no fewer than
100 persons are beneficial owners of stock of IORI Nevada during at least 335
days of each taxable year. Section 5.2 of the Declaration of Trust contains
substantial limits on the business activities in which the Trust may engage,
some of which facilitate compliance with the aforementioned Code requirements.
Section 5.2 of the Declaration of Trust prohibits or restricts the
Trustees from investing (i) in any foreign currency, bullion or commodities,
(ii) in contracts of sale for real estate, except in conjunction with the
acquisition or sale of real property or when such investments are held as
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security for mortgages made or acquired by the Trust, (iii) in any equity
security, including the shares of other REITs, and (iv) in single-family homes.
Furthermore, Section 5.2 prohibits the Trustees from investing more than 10% of
the assets of the Trust estate (i) in equity ownership of, or mortgage loans
on, unimproved real property that does not produce income or in participations
in the ownership of, or mortgage loans on, unimproved real property that does
not produce income, except pursuant to an agreement for the development of the
land within a reasonable time or (ii) in junior mortgage loans, excluding
wraparound loans, and from issuing certain equity and debt securities as more
fully described in "Proposed Incorporation Procedure -- Comparison of the
Securities of IORI Nevada and the Trust -- Preferred Stock".
Section 5.2 also prohibits the Trust from making any loan to the
original sponsor, CCEC, or its affiliates unless such loan is approved by a
majority of the independent Trustees and determined to be commercially
reasonable by an independent expert, or from purchasing, selling or leasing any
real property to or from CCEC or its affiliates (other than through joint
ventures or partnerships with affiliates for the acquisition, development or
lease of real property or the funding of mortgage loans), and from engaging in
any short sale, engaging in trading as compared with investment activities or
engaging in the business of underwriting or agency distribution of securities
issued by others, or borrowing, on an unsecured basis if such borrowing would
result in an asset coverage ratio (defined as the ratio of the value of total
assets less liabilities and indebtedness, other than unsecured borrowings, to
the aggregate amount of unsecured borrowings) of less than 300%, holding
property primarily for sale to customers in the ordinary course of the trade or
business of the Trust and acquiring securities in any company holding any of
the investments prescribed by Section 5.2 or engaging in any of the activities
prohibited by Section 5.2.
Subject to the foregoing restrictions and the restrictions on
related-party transactions discussed below, the Trustees may change the
investment policy of the Trust without Shareholder approval if they determine
that such change would be in the best interest of the Trust. As mentioned
above, certain of the restrictions contained in Section 5.2 were designed to
facilitate the Trust's continuing qualification as a REIT under the Code.
Provided IORI Nevada operates as a REIT, and it is not expected that IORI
Nevada will conduct its future business activities in such a manner as to
terminate its anticipated REIT status, its investment policies would be limited
by applicable Code provisions. Nevertheless, IORI Nevada would have
substantially greater flexibility and fewer restrictions on its investment
policy than the Trust presently has.
Additionally, Section 4.4 of the Declaration of Trust places specific
limits on the Trust's operating expenses (defined in Section 1.4(r) of the
Declaration of Trust). For purposes of those limits, operating expenses
include (i) aggregate annual expenses constituting operating expenses under
generally accepted accounting principles, (ii) the advisory fee payable to the
Trust's advisor and (iii) the fees and expenses paid to the Trustees who are
not employees or affiliates of the advisor. However, such operating expenses
specifically exclude (i) the cost of money borrowed by the Trust, (ii) income
taxes, taxes and assessments on real property and all other taxes applicable to
the Trust, (iii) expenses and taxes incurred in connection with the issuance,
distribution, transfer, registration and stock exchange listing of the Trust's
securities, (iv) fees and expenses paid to independent mortgage servicers,
contractors, consultants, managers and other agents retained by or on behalf of
the Trust, (v) expenses directly connected with the purchase origination,
ownership and disposition
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of real properties or mortgage loans, other than expenses with respect thereto
of employees of the Trust's advisor, except legal, internal auditing, mortgage
servicing, foreclosure and computer costs and transfer agent services performed
by employees of the Trust's advisor, (vi) the expenses of maintaining and
managing real estate equity interests and processing and servicing mortgage and
other loans, (vii) expenses connected with payments of dividends, interest or
distributions by the Trust to Shareholders, (viii) expenses connected with
communicating to Shareholders and maintaining Shareholder relations, (ix)
transfer agent's, registrar's and indenture trustee's fees and charges, (x) the
cost of any accounting, statistical, bookkeeping or computer equipment
necessary for maintaining the Trust's books and records and (xi) reserves for
depletion, depreciation and amortization and losses and provisions for losses.
The following direct expenses of the advisor shall be excluded from the Trust's
operating expenses and shall be borne by the advisor: (a) employment expenses
of the advisor's personnel (including Trustees, officers and employees of the
Trust who also serve as directors, officers, or employees of the Trust's
advisor or affiliates of the advisor), (b) rent, telephone, utilities, office
furnishings and other office expenses of the Trust's advisor (except those
relating to a separate office, if any, maintained solely for the Trust) and (c)
overhead of the Trust's advisor directly related to performance of its
functions under the Advisory Agreement.
Under Section 4.4 of the Declaration of Trust, operating expenses of
the Trust for any fiscal year must not exceed the lesser of (a) 1.5% of the
average of the "Book Values of Invested Assets" (as defined in the Declaration
of Trust) of the Trust at the end of each calendar month of such fiscal year,
or (b) the greater of 1.5% of the average of the "Net Asset Value" (as defined
in the Declaration of Trust) of the Trust at the end of each calendar month of
such fiscal year and 25% of the Trust's "Taxable Income" (as defined in the
Declaration of Trust). Section 4.4 of the Declaration of Trust further
provides that any advisory agreement shall specifically provide for a refund to
the Trust of the amount, if any, by which the operating expenses exceed the
applicable amount, provided that the amount of such refund shall not exceed the
aggregate of the advisory fees paid to the advisor under such contract with
respect to such fiscal year.
In accordance with this section, the Advisory Agreement described
under "Business and Properties of the Trust -- The Advisory Agreement"
specifically provides for a refund to the Trust of the amount by which the
operating expenses of the Trust for any fiscal year exceed the limitation set
forth in Section 4.4 of the Declaration of Trust, "or in any similar limitation
(if contained) in a successor Declaration of Trust or Certificate or [Articles]
of Incorporation . . . ." Although the Articles of Incorporation place no
limitations on IORI Nevada's operating expenses, the limitation on operating
expenses under the current Advisory Agreement, assuming Shareholders approve
the Incorporation Procedure, will be included contractually in the Advisory
Agreement through an amendment thereto. See "Certain Risk Factors --
Elimination of Charter Limitation on Operating Expenses". The operating
expenses of the Trust in 1994 exceeded such limitation by $6,000.
THE RESTRICTIONS ON RELATED-PARTY TRANSACTIONS PROVISION. Article
FOURTEENTH of the Articles of Incorporation provides that IORI Nevada shall
not, directly or indirectly, contract or engage in any transaction with (i) any
director, officer or employee of IORI Nevada, (ii) any director, officer or
employee of the advisor, (iii) the advisor or (iv) any affiliate or associate
(as such terms are defined in Rule 12b-2 under the Exchange Act, as amended) of
IORI Nevada or any person identified in the foregoing clauses (i) through (iii)
unless (a) the material facts as to the relationship
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among or financial interest of the relevant individuals or persons and as to
the contract or transaction are disclosed to or are known by the Board of
Directors or the appropriate committee thereof and (b) the Board of Directors
or committee thereof determines that such contract or transaction is fair to
IORI Nevada and simultaneously authorizes or ratifies such contract or
transaction by the affirmative vote of a majority of the independent directors
of IORI Nevada entitled to vote thereon. Article FOURTEENTH defines an
"independent director" as one who is neither an officer or employee of IORI
Nevada nor a director, officer or employee of IORI Nevada's advisor.
Pursuant to the Olive Modification, prior to April 28, 1999, all
related party transactions require the unanimous approval of the Trust's Board
of Trustees and may only be entered into in exceptional circumstances and after
a determination by the Trust's Board of Trustees that no other opportunity
exists that is as good as the opportunity presented by such related-party
transaction. If the Incorporation Procedure is adopted, the Board of Directors
will continue to review related party transactions to determine whether such
transactions satisfy the criteria established by the Olive Modification. While
the Board of Directors will necessarily consider the permissibility of any
related-party transaction under IORI Nevada's Articles of Incorporation, such
Articles of Incorporation generally permit related-party transactions if
approved by a majority of the independent directors. Each of the members of
the Board of Directors is not an officer, director or employee of IORI Nevada's
advisor and will not be an officer or employee of IORI Nevada. Apart from the
different standards applicable to related-party transactions under the Articles
of Incorporation and Declaration of Trust, respectively, the proposed
Incorporation Procedure is not expected to affect the review and approval of
related-party transactions.
Stockholders should note that ArticleFOURTEENTH does not supplant
Nevada law regarding related-party transactions; rather, Article FOURTEENTH
provides additional protection against the possibility of related-party
transactions unfavorable to IORI Nevada. Under the NRS, a contract or
transaction between a corporation and one or more of its directors or officers,
or between a corporation and any corporation, firm or association in which one
or more of its directors or officers are directors or officers or are
financially interested, is not void or voidable solely for this reason, or
solely because the director or officer is present at the meeting of the board
of directors or a committee thereof which authorizes or approves the contract
or transaction, or solely because the vote or votes of common or interested
directors are counted for that purpose, provided that one of the four
requirements below is met:
(i) The fact that the common directorship, office or
financial interest is disclosed or known to the board of directors or
committee and noted in the minutes, and the board or committee
authorizes, approves or ratifies the contract or transaction in good
faith by a vote sufficient for the purpose without counting the vote
or votes of the common or interested director or directors.
(ii) The fact that the common directorship, office or
financial interest is disclosed or known to the stockholders, and they
approve or ratify the contract or transaction in good faith by a
majority vote of stockholders holding a majority of voting power. The
votes of the common or interested directors or officers must be
counted in any such vote of stockholders.
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(iii) The fact that the common directorship, office or
financial interest is not disclosed or known to the director or
officer at the time the transaction is brought before the board of
directors of the corporation for action.
(iv) The contract or transaction is fair as to the
corporation at the time it is authorized or approved.
The basic restriction on transactions between the Trust and related
parties contained in the Declaration of Trust is similar to restrictions
contained in IORI Nevada's Articles of Incorporation and the NRS. Section 7.6
of the Declaration of Trust provides that absent fraud and except as otherwise
prohibited by the Declaration of Trust, a contract, act or other transaction
between the Trust and any other person, or in which the Trust is interested,
shall be valid even though one or more of the Trustees or officers of the Trust
(i) are directly or indirectly interested in, or connected with, or are
trustees, partners, directors, officers or related officers of such other
person or (ii) individually or jointly with others, are parties to or directly
or indirectly interested in, or connected with, such contract, act or
transaction. Further, no Trustee or officer shall be under any disability from
or have any liability as a result of entering into any such contract, act or
transaction provided that (i) such interest or connection is disclosed or known
to the Trustees and thereafter the non-interested Trustees vote to authorize
such contract, act or other transaction; (ii) such interest or connection is
disclosed or known to the Shareholders and thereafter such contract, act or
transaction is approved by the Shareholders; and (iii) such contract, act or
transaction is fair and reasonable to the Trust at the time it is authorized by
the Trustees or by the Shareholders.
The Declaration of Trust also contains specific restrictions on
certain transactions between the Trust and certain other persons. Although the
standards and procedures by which such transactions are permissible under IORI
Nevada's Articles of Incorporation and Nevada law, on the one hand, and the
Declaration of Trust, on the other, are not dissimilar in the opinion of the
Board of Trustees, the Declaration of Trust absolutely prohibits certain
transactions between the Trust and certain related parties, as discussed below,
regardless of the fairness of the terms of such transactions and whether such
transactions are authorized by a majority of unaffiliated Trustees or approved
by the Shareholders. Because IORI Nevada's Articles of Incorporation contains
no analogous prohibition, the Incorporation Procedure could potentially permit
IORI Nevada greater flexibility to engage in a larger class of transactions
with related parties than the more limited class of transactions between the
Trust and certain related parties that is currently permitted by the
Declaration of Trust. Nevertheless, the Board of Trustees believes that the
restrictions in IORI Nevada's Articles of Incorporation and the restrictions
mandated by the NRS, together with the oversight by the Board of Directors
required through April 28, 1999, pursuant to the Olive Modification, will offer
adequate protection to ensure the fairness and propriety of transactions
between IORI Nevada and related parties.
Section 7.6 of the Declaration of Trust states that the Trust "shall
not purchase or lease, directly or indirectly, any real property or purchase
any mortgage from the [a]dvisor or any affiliated person or from any
partnership in which any of the foregoing may also be a general partner or
sponsor." Further, the Trust shall not "sell or lease, directly or indirectly,
any of its real property or sell any mortgages to any of the foregoing
persons." CCEC or the Trust's advisor may make
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mortgage loans, purchase real property and assume loans in connection therewith
in its own name and temporarily hold title thereto for the purpose of
facilitating the acquisition of such real property or mortgage loans or the
borrowing of money or obtaining of financing for the Trust, or for any other
purpose related to the Trust's business, as long as the price for which the
Trust purchases such asset is no greater than the cost to CCEC or the Trust's
advisor and there is no difference in the interest rates of the loans related
thereto at the time acquired by CCEC or the Trust's advisor and the time
acquired by the Trust, nor any other benefit to CCEC or the Trust's advisor
arising out of such transaction apart from compensation otherwise permitted by
the prospectus pursuant to which the Trust offered its Shares to the public.
As discussed under "-- Business Activities After Incorporation Procedure",
Section 5.2 of the Declaration of Trust also prohibits the Trustees from (i)
making any loan to CCEC or its affiliates except as to loans which have been
approved by a majority of the independent Trustees and reviewed and determined
to be commercially reasonable by an independent expert and (ii) purchasing,
selling or leasing any real properties to or from CCEC or its affiliates,
including any investor program in which CCEC may also be a general partner or
sponsor. CCEC no longer has any relationship to the Trust.
The Declaration of Trust further provides in Section 7.6 that:
the Trust shall not, directly or indirectly, engage in any
transaction with any Trustee, officer, or employee of the Trust or any
director, officer, or employee of the [a]dvisor, or of any company or
other organization of which any of the foregoing is an
affiliate,except for . . . (iii) entering into joint ventures or
partnerships with the [a]dvisor or its affiliates including other
programs sponsored by the [a]dvisor; and (iv) transactions with the
[a]dvisor or Affiliates thereof involving loans, real estate brokerage
services, mortgage brokerage services, real property management
services, the servicing of mortgages, the leasing of real or personal
property, or other services, provided such transactions are on terms
not less favorable to the Trust than the terms on which non-affiliated
parties are then making similar loans or performing similar services
for comparable entities in the same area and are not entered into on
an exclusive basis with such person; provided, however, that any
transaction referred to in clause (iv) may be entered into only upon
approval by affirmative vote or consent of a majority of the Trustees
who are not interested in or affiliates of any person who is
interested in the transaction.
The Declaration of Trust defines "Affiliate" as follows:
[A]s to any person, any other person who owns beneficially, directly
or indirectly, 1% or more of the outstanding capital stock, shares, or
equity interests of such person or of any other person which controls,
is controlled by, or is under common control with, such person or is
an officer, retired officer, director, employee, partner, or trustee
(excluding noninterested trustees not otherwise affiliated with the
entity) of such person or of any other person which controls, is
controlled by, or is under common control with such person.
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COMPARISON OF THE SECURITIES OF IORI NEVADA AND THE TRUST
COMMON EQUITY. IORI Nevada is authorized by its Articles of
Incorporation to issue up to 10,000,000 shares of Nevada Common Stock. By
contrast, the Trust may issue an unlimited number of Shares, and such Shares
have no par value per share. The directors of IORI Nevada decided to fix the
par value of the common stock at $0.01 per share because the filing fees
associated with organizing IORI Nevada in Nevada are considerably less
expensive than if IORI Nevada had common stock with no par value.
With respect to conversion, preemptive, dividend and, except to the
extent IORI Nevada may issue preferred stock in the future, voting rights, the
Nevada Common Stock is comparable to the Shares. For a discussion of
liquidation preferences, voting rights and other features of the Nevada
preferred stock, see the discussion on preferred stock below. As with the
Shares, each holder of Nevada Common Stock will be entitled to one vote for
each share on all matters submitted to the stockholders. Similarly, there is
no cumulative voting, redemption right, sinking fund provision or right of
conversion with respect to either the Nevada Common Stock or the Shares. The
holder of the Nevada Common Stock will not have any preemptive rights to
acquire additional shares of Nevada Common Stock when issued, as Trust
Shareholders currently have no such preemptive rights. All outstanding shares
of IORI Nevada issued in the One- for-One Exchange will be fully paid and
nonassessable.
DISTRIBUTIONS. All shares of the common stock of IORI Nevada will be
entitled to share equally in dividends from funds legally available therefor,
when, as and if declared by the Board of directors of IORI Nevada, and upon
liquidation or dissolution of IORI Nevada, whether voluntary or involuntary, to
share equally in the assets of IORI Nevada available for distribution to
stockholders, subject to any rights of holders of preferred stock, as discussed
below. Similarly, the Declaration of Trust provides that Shareholders have no
right to any dividend or distribution unless and until the Trustees declare
such dividend or distribution. The Declaration of Trust imposes an additional
requirement not contained in IORI Nevada's Articles of Incorporation: the
Trustees must furnish the Shareholders with a statement in writing not later
than 60 days after the close of each fiscal year in which a distribution is
made identifying the source of the funds so distributed. The Trustees
currently intend to continue this practice after the Incorporation Procedure.
In prior years, the Trust's distribution policy provided for an annual
determination of distributions after the Trust's year end until such time as
property operations stabilized at a level producing cash flow from property
operations in excess of anticipated needs. In January 1993, the Trust's Board
of Trustees approved the resumption of quarterly distributions. IORI Nevada
intends to continue this policy. The minimum amount of distributions will be
determined by the amount required to continue to qualify as a REIT under the
Code, which is presently 95% of taxable income (excluding any net capital
gain).
The Declaration of Trust provides that cash distributions may be paid
from any source, in the discretion of the Trustees. In contrast, under Nevada
law, IORI Nevada may pay dividends from any source, but only if (i) IORI Nevada
would continue to be able to pay its debts as they become due in the usual
course of business and (ii) IORI Nevada's total assets would continue to exceed
the sum of its total liabilities plus the amount that would be needed, if IORI
Nevada were to be dissolved at
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the time of distribution, to satisfy the preferential rights upon dissolution
of stockholders whose preferential rights are superior to those receiving the
distribution.
PREFERRED STOCK. Unlike the Declaration of Trust, the Articles of
Incorporation of IORI Nevada authorize the issuance of up to 1,000,000 shares
of preferred stock by action of the Board of Directors without stockholder
approval, which may be issued in one or more series with such preferences,
qualifications and limitations rights as shall be determined by the Board of
Directors of IORI Nevada. The Board of Directors may fix and determine, among
other things, (i) the distinctive designation and number of shares comprising
such series; (ii) the dividend rates payable with respect to such shares of
preferred stock (including whether and in what manner such dividends shall be
accumulated); (iii) the extent of the voting rights, if any, of such shares;
(iv) whether such shares shall be redeemable and, if so, the prices, terms and
conditions of such redemption; (v) the rights and preferences given such shares
in the event of voluntary or involuntary liquidation, dissolution or
distribution of assets; (vi) the nature of any purchase, retirement or sinking
fund provisions with respect to such shares; (vii) the nature of any conversion
rights with respect to such shares; (viii) whether the issuance of additional
shares of Preferred Stock shall be subject to restrictions as to issuance, or
as to the powers, preferences or other rights of any other series; (ix) the
right of the shares of such series to the benefits of conditions and
restrictions upon the creation of indebtedness of IORI Nevada or any subsidiary
thereof; and (x) any other preferences, privileges and powers, in relative
participating, optional or other special rights, and qualifications,
limitations or restrictions of such shares, as the Board of Directors may deem
advisable.
Although no preferred stock has been issued or is being issued as part
of the Incorporation Procedure, and the Board of Directors has no present
intention of issuing any preferred stock, it is deemed advisable to have such
shares available for issuance (i) for possible use to raise additional equity
capital or to make acquisitions, (ii) as an acquisition safeguard to dilute the
stock ownership and voting power of a person or entity seeking to obtain
control of IORI Nevada by (a) privately placing such preferred stock with
purchasers not hostile to the IORI Nevada Board of Directors to oppose an
unsolicited takeover bid or (b) authorizing holders of a series of preferred
stock to vote as a class, either separately or with the holders of Nevada
Common Stock, on any merger, sale or exchange of assets or any other
extraordinary corporate transaction involving IORI Nevada or (c) for such other
uses as the Board of Directors of IORI Nevada may deem appropriate from time to
time. The AMEX may decline to list preferred stock that does not have certain
minimum voting rights.
In contrast, the Trust is not authorized to issue preferred shares.
In addition, Section 5.2 of the Declaration of Trust prohibits the Trustees
from issuing warrants, options or rights to buy Shares, except as part of (i) a
ratable issue or distribution to Shareholders, (ii) a public offering or (iii)
a financial arrangement with parties other than the Trust's advisor or
directors, Trustees, officers, or employees of the Trust or its advisor. The
Trustees are also prohibited from issuing (a) equity securities of more than
one class (other than convertible obligations, warrants, rights and options);
(b) "redeemable securities", as defined in Section 2(a)(32) of the Investment
Company Act of 1940, as amended, "face-amount certificates of the installment
type", as defined in Section 2(a)(15) thereof, and "periodic payment plan
certificates", as defined in Section 2(a)(27) thereof; or (c) convertible or
non-convertible debt securities to the public unless the historical cash flow
of the Trust or the substantiated future cash flow of the Trust, excluding
extraordinary items, is sufficient to cover the
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interest on the debt securities. The Articles of Incorporation impose no such
explicit prohibitions on IORI Nevada's power to issue securities.
DISSENTERS' RIGHTS TO DISSENT AND OBTAIN PAYMENT. Under Nevada law,
IORI Nevada's stockholders will not have the right to dissent and obtain
payment with respect to any plan of merger or exchange upon which the
stockholders may be entitled to vote for so long as IORI Nevada's Common Stock
is listed on the AMEX or is held of record by in excess of 2,000 persons. As
discussed below under "Listing" IORI Nevada will file a listing application
with the AMEX and expects its shares of Nevada Common Stock to be listed at the
time of the effectiveness of the Merger. Similarly, the Declaration of Trust
provides that Shareholders have no dissenters' rights. Dissenting Shareholders
will, therefore, not have any right of appraisal in connection with the
Incorporation Procedure.
WARRANTS. The Trust has no outstanding warrants for the purchase of
Shares. IORI Nevada has no outstanding warrants and does not currently
anticipate issuing any warrants for the purchase of its capital stock.
LISTING. The Shares have been listed on the AMEX since May 20, 1987.
IORI Nevada has filed a listing application with the AMEX for the common stock
of IORI Nevada. If Shareholders approve the proposed Incorporation Procedure,
the Nevada Common Stock will be listed on the AMEX at the time of the
effectiveness of the Merger.
NO RESTRICTIONS ON OWNERSHIP AND TRANSFER OF COMMON STOCK. Neither
IORI Nevada's Articles of Incorporation nor its Bylaws contain any restriction
on the transfer or percentage ownership of shares of the Nevada Common Stock.
Although the governing documents of the Trust do contain such restrictions, the
Board of Trustees has largely eliminated the application of those restrictions
with respect to corporate Shareholders because ownership of the Shares by
corporate Shareholders in most cases will not affect the continued
qualification for taxation as a REIT under the Code and because of the burdens
they impose on the Trust and its Shareholders.
Section 6.7 of the Declaration of Trust provides that no Shareholder
is permitted to acquire Shares such that it would own more than 5% of the
outstanding Shares, absent the consent of a majority of Trustees. This
limitation applies to all Shares issued, including Shares issued upon the
exercise of warrants. To the extent a Shareholder owns Shares in excess of the
5% limit, the Shareholder is not entitled to vote those excess Shares nor to
receive dividends on those Shares. These transfer and ownership restrictions
inherited by management of the Trust were apparently motivated by the Code,
which requires that no more than 50% of the value of a REIT's outstanding stock
be held by five or fewer individuals or certain organizations at any time
during the last half of each taxable year. The transfer and ownership
restrictions are currently noted in a legend on the certificates representing
the Trust's Shares. Other provisions of the Trust's governing documents
empower the Trustees to prevent Share transfers, redeem Shares or obtain
information from Shareholders or proposed transferees if necessary to protect
the Trust's continued qualification for taxation as a REIT under the Code. It
should be noted that these provisions potentially have anti-takeover effects.
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The Board of Trustees has determined that the 5% ownership limit is
artificial and not well suited to protect the Trust's continued qualification
for taxation as a REIT. The 5% limit restricts ownership by all Shareholders,
including corporations, partnerships and other entities, but the Code
provisions target only ownership by individuals and certain organizations.
Furthermore, the ownership limit potentially introduces uncertainty into the
market for Shares and therefore may impose additional transaction costs on
Shareholders and transferees. For these reasons, the Board of Trustees, at its
meeting on December 5, 1989, consented, pursuant to its discretionary power
under Section 6.7 of the Declaration of Trust, to any future acquisition by a
corporate Shareholder of Shares in excess of 5%, provided that such acquisition
does not endanger the Trust's status as a REIT for tax purposes. At the same
meeting, the Board of Trustees repealed Section 4.12 of the Trustees'
Regulations, which has prohibited any Shareholder that owns in excess of 9.8%
of the Trust's outstanding Shares from voting the Shares in excess of the 9.8%
limit, and had empowered the Trustees to redeem excess Shares. The Trust
retains its other discretionary powers.
On March 24, 1989, the Trust distributed one share purchase right for
each outstanding share of beneficial interest of the Trust. On December 10,
1991, the Trust's Board of Trustees voted to redeem the rights having
determined that they were no longer necessary to protect the Trust from
coercive tender offers. On February 10, 1992, the rights were redeemed, the
Shareholders of the Trust receiving $.04 for each right. In connection with
such redemption, Mr. Phillips and his affiliates, who owned approximately 12%
of the Trust's outstanding shares of beneficial interest at the time, agreed
not to acquire more than 40% of the Trust's outstanding shares of beneficial
interest without the prior action of the Trust's Board of Trustees to the
effect that they do not object to such increased ownership.
On August 23, 1994, the Trust's Board of Trustees took action to the
effect that they do not object to the acquisition of up to 49% of the Trust's
outstanding shares of beneficial interest by Mr. Phillips and his affiliates.
Pursuant to this action, Mr. Phillips and his affiliates may not acquire more
than 49% of the Trust's outstanding shares of beneficial interest without the
prior action of the Trust's Board of Trustees to the effect that they do not
object to such increased ownership. At August 23, 1995, Mr. Phillips and his
affiliates, primarily ART and TCI, owned approximately 48.8% of the Trust's
outstanding shares of beneficial interest.
In the Trustees' view, concentration of ownership of IORI Nevada stock
is unlikely to threaten IORI Nevada's continued qualification for taxation as a
REIT under the Code. In the opinion of the Trustees, the carefully designed
acquisition safeguards built into the Articles of Incorporation and Bylaws of
IORI Nevada are sufficient to meet the needs of IORI Nevada. See "--
Acquisition Safeguards". Accordingly, IORI Nevada's Articles of Incorporation
and Bylaws do not contain restrictions on transfer or percentage ownership of
the Nevada Common Stock nor do they grant the directors the related
discretionary powers, and the certificates representing the Nevada Common Stock
will contain no legend to that effect.
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STOCKHOLDER-MANAGEMENT RELATIONS
THE CONSENT PROVISION. The Consent Provision (Article EIGHTH of the
Articles of Incorporation) provides that stockholders of IORI Nevada may not
act without a duly called annual or special meeting except by written consent
setting forth the action to be taken and signed by all of the stockholders
entitled to vote thereon. Under the NRS, unless otherwise provided in a
corporation's articles of incorporation, any action which is required or
permitted to be taken at an annual or special meeting of stockholders may
instead be taken without a meeting if a written consent setting forth the
action to be taken is signed by stockholders holding at least a majority of the
voting power, or of such greater proportion as is required for such action.
Unlike the IORI Nevada Articles of Incorporation, the Declaration of Trust
permits Shareholders of the Trust to approve certain acts by written consent
without a meeting if such consent sets forth the action so taken and is signed
by holders of the majority of the Trust's outstanding Shares.
For all practical purposes, the Consent Provision would allow
stockholders to act only at an annual or special meeting. By effectively
prohibiting stockholders from acting without a meeting, the Consent Provision
ensures that all stockholders will have the opportunity to consider any matter
that could affect their rights. However, such a limitation on a major
stockholder's ability to act could conceivably adversely affect a potential
major stockholder's decision to purchase voting securities of IORI Nevada.
THE STOCKHOLDER MEETING PROVISION. The Stockholder Meeting Provision
(also set forth in ArticleEIGHTH of the Articles of Incorporation) provides
that subject to the rights of the holders of any series of preferred stock,
special meetings of stockholders may be called only by the Board of Directors,
the Chairman of the Board or the President of IORI Nevada. Stockholders of
IORI Nevada may not by themselves call a special meeting of stockholders. In
contrast to the Stockholder Meeting Provision, the Declaration of Trust permits
Shareholders to call special meetings upon the written request of Shareholders
holding not less than 10% of the outstanding Shares of the Trust entitled to
vote in the manner provided in the Trustees' Regulations. The Trustees'
Regulations further provide that special meetings of Shareholders may be called
at any time by the President or the Trustees or by any two or more Trustees, or
by one or more Shareholders holding not less than two-thirds of the outstanding
Shares of the Trust.
The Stockholder Meeting Provision would have the effect of inhibiting
stockholder actions that require a meeting of stockholders unless the Board of
Directors, the Chairman thereof or the President of IORI Nevada calls such a
meeting. Such meetings can impose considerable expenses upon IORI Nevada. The
Trustees believe that the Board of Directors will be in the best position to
determine those issues which are properly the subject of a special meeting of
stockholders. In the view of the Board of Trustees, stockholders would have a
full opportunity to make proper proposals at duly convened stockholder meetings
and to request that any such proposal be presented for consideration to other
stockholders in IORI Nevada's annual proxy statement.
OTHER PROVISIONS REGARDING STOCKHOLDER-MANAGEMENT RELATIONS. IORI
Nevada's Bylaws provide, among other things, that any stockholder entitled to
vote in the election of directors of IORI Nevada's Board of Directors generally
may nominate one or more persons for election as directors
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at a meeting only if such stockholder gives not fewer than 35 nor more than 60
days' prior written notice of intent to make such nomination or nominations to
the Secretary of IORI Nevada (or, if fewer than 45 days' notice or prior public
disclosure of the meeting date is given or made to stockholders, not later than
10 days following such notice or disclosure). Each such notice must set forth
(i) the name and address of the stockholder who intends to make the nomination
and of the person or persons to be nominated; (ii) the class and number of
shares of stock held of record, owned beneficially and represented by proxy by
such stockholder as of the record date for the meeting and as of the date of
such notice; (iii) a representation that the stockholder intends to appear in
person or by proxy at the meeting to nominate the person or persons specified
in the notice; (iv) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons pursuant to
which the nomination or nominations are to be made by the stockholder; (v) such
other information regarding each nominee proposed by such stockholder as would
be required to be included in a proxy statement filed pursuant to the proxy
rules of the Commission; and (vi) the consent of each nominee to serve as a
director of IORI Nevada if so elected. The Chairman of the meeting may refuse
to acknowledge the nomination of any person not made in compliance with the
foregoing procedure, which is referred to herein as the "Nomination Provision".
Neither the Declaration of Trust nor the Trustees' Regulations contains any
provisions analogous to the Nomination Provision.
Although the Nomination Provision will not give IORI Nevada's Board
any power to approve or disapprove of stockholder nominations for the election
of directors, the Nomination Procedure may have the effect of precluding a
nomination for the election of directors at a particular annual meeting if the
proper procedures are not followed and may discourage or deter a third party
from conducting a solicitation of proxies to elect its own slate of directors
or otherwise attempting to obtain control of IORI Nevada, even if such attempt
might be deemed by some stockholders to be beneficial to IORI Nevada and its
stockholders. The Board of Trustees is currently unaware of any controlling
judicial precedent addressing the validity of the Nomination Provision and
therefore the matter is not entirely free from doubt. The Board of Trustees
nevertheless believes that this provision is appropriate because it requires
stockholders to give adequate notice to allow orderly and considered evaluation
of nominees and fair elections.
IORI Nevada's Bylaws also provide that, in addition to any other
applicable requirements, for business not specified in the notice of meeting or
brought by or at the direction of the Board of Directors of IORI Nevada to be
properly introduced by a stockholder, the stockholder must give not fewer than
35 nor more than 60 days' prior notice to the Secretary of IORI Nevada (or if
fewer than 45 days' notice or prior public disclosure of the meeting date is
given or made to stockholders, not later than 10 days following such event).
This provision (the "Stockholder Proposal Provision") does not preclude
discussion by any stockholder of any business properly brought before any
meeting. Each such notice must set forth (i) a description of each item of
business proposed to be brought before the meeting; (ii) the name and address
of the stockholder proposing to bring such item of business before the meeting;
(iii) the class and number of shares of stock held of record, owned
beneficially and represented by proxy by such stockholder as of the record date
for the meeting and as of the date of such stockholder meeting notice; and (iv)
all other information that would be required to be included in a proxy
statement filed with the Commission. Neither the
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Declaration of Trust nor the Trustees' Regulations contains any provisions
analogous to the Stockholder Proposal Provision.
Although the Stockholder Proposal Provision does not give IORI
Nevada's Board of Directors or the Chairman of the meeting any powers to
approve or disapprove such matters, the Stockholder Proposal Provision may have
the effect of precluding the consideration of matters at a particular meeting
if the proper procedures are not followed, even if approval of such matters may
be deemed by some stockholders to be beneficial to IORI Nevada and its
stockholders. IORI Nevada is presently unaware of any controlling judicial
precedent addressing the validity of the Stockholder Proposal Provision and
therefore the matter is not entirely free from doubt. As with the Nomination
Provision, the Trustees believe that the Stockholder Proposal Provision is
appropriate because it requires stockholders to give both management and other
stockholders adequate notice of such proposals and time to consider and respond
to such proposals.
IORI Nevada's Bylaws also provide that annual meetings of stockholders
shall be held within the first eight months of the calendar year, or as soon as
practicable thereafter, beginning in 1996. Written or printed notice of annual
and special meetings of stockholders shall be given to stockholders entitled to
vote not fewer than 10 nor more than 60 days before the date of such meeting,
unless stockholders are to vote upon a proposed merger, consolidation or
disposition of substantially all of IORI Nevada's assets, in which case notice
shall be given no later than 20 nor more than 60 days before the date of such
meeting. The Declaration of Trust contains similar provisions except that
pursuant to the Declaration of Trust annual meetings of stockholders are to be
held in the first six months of the calendar year.
A full and correct statement of the affairs of IORI Nevada is to be
prepared annually and submitted at the annual meeting. Such annual reports
will include a balance sheet and a financial statement of operations for the
preceding fiscal year. IORI Nevada will be subject to the information
requirements of the Exchange Act, as amended, and the balance sheet and
financial statement will be required by such Act to be certified by independent
certified public accountants, although the Bylaws do not impose such a
requirement. The Declaration of Trust provides that the Trustees must mail an
annual report not later than 120 days after the close of each fiscal year. The
annual report must include a statement of assets and liabilities and a
statement of income and expenses of the Trust, accompanied by the report of an
independent certified public accountant. The Trustees are also required to
send shareholders interim reports at least quarterly.
THE BUSINESS COMBINATION PROVISION
The Business Combination Provision (Article TENTH of the Articles of
Incorporation) is designed to encourage companies interested in acquiring IORI
Nevada to negotiate with the Board of Directors and to give greater assurance
to the stockholders of IORI Nevada that they will receive fair and equitable
treatment in the event of a "Business Combination" (as defined below) involving
IORI Nevada or a subsidiary thereof with, or proposed by or on behalf of, an
"Interested Stockholder" (as defined below) or certain related parties.
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Under Article TENTH of the Articles of Incorporation, a Business
Combination with, or proposed by or on behalf of, any Interested Stockholder or
any affiliate or associate (as such terms are defined in Rule 12b-2 promulgated
under the Exchange Act, as amended) of any Interested Stockholder or any Person
who thereafter would be an affiliate or associate of any Interested Stockholder
would require approval by the affirmative vote of not less than sixty-six and
two-thirds of the votes entitled to be cast on such transaction by the holders
of all shares of voting stock of IORI Nevada then outstanding (the "Voting
Stock"), voting together as a single class, excluding shares Beneficially Owned
by such Interested Stockholders. However, the two-thirds affirmative vote of
stockholders is not required if a majority of the members of the Board of
Directors or, in the case of such Business Combination involving any affiliate
of IORI Nevada, a majority of the Board of Directors including a majority of
the members of the Board of Directors who at the time are neither officers or
employees of IORI Nevada nor directors, officers or employees of IORI Nevada's
advisor, approves the Business Combination prior to the date on which the
Interested Stockholder became the beneficial owner of 20% or more of IORI
Nevada's shares (the "Acquisition Date"). If such prior Board of Director's
approval is obtained, the Business Combination will be subject to the
applicable voting requirement under the NRS. Presently, for most types of
Business Combination transactions on which a stockholder vote would be
required, the affirmative vote of the holders of a majority of the outstanding
shares entitled to vote on the matter (including shares beneficially owned by
the Interested Stockholder) is required. If the two-thirds vote required by
the Business Combination Provision is obtained in connection with a particular
proposed Business Combination, approval of a majority of IORI Nevada's Board of
Directors will not be necessary. Under certain circumstances a Business
Combination will be presumed to be proposed by or on behalf of an Interested
Stockholder unless a majority of the members of the Board of Directors
determines otherwise.
If, as expected, the Nevada Common Stock is listed on the AMEX at the
time of effectiveness of the Merger, then, in addition, certain rules of the
AMEX would apply to IORI Nevada. These rules require prior stockholder
approval as a prerequisite to the AMEX's approval of applications to list
additional shares where such shares are to be issued in any transaction or
series of related transactions (i) as sole or partial consideration for an
acquisition of the stock or assets of another company (a) if any individual
director, officer or substantial stockholder of the listed company has a 5% or
greater interest (or such persons collectively have a 10% or greater interest),
directly or indirectly, in the company or assets to be acquired or in the
consideration to be paid in the transaction and the present or potential
issuance of common stock, or securities convertible into common stock, could
result in an increase in outstanding common shares of 5% of more; or (b) where
the present or potential issuance of common stock, or securities convertible
into common stock, could result in an increase in outstanding common shares of
20% or more; (ii) in connection with (a) the sale or issuance of common stock
(or securities convertible into common stock) at a price less than the greater
of book or market value which together with sales by officers, directors or
principal stockholders of the company equals 20% or more of presently
outstanding common stock or (b) the sale or issuance by the company of common
stock (or securities convertible into common stock) equal to 20% or more of
presently outstanding stock for less than the greater of book or market value
of the stock; or (iii) the net effect of which is that a listed company is
acquired by a unlisted company even though the listed company is the nominal
survivor.
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An "Interested Stockholder" is defined in the Business Combination
Provision to include any person who (i) is, or who has announced or publicly
disclosed a plan or intention to become, the Beneficial Owner of 20% or more of
the Voting Stock or (ii) is an affiliate or associate of IORI Nevada and at any
time within the two year period immediately prior to the date in question was
the Beneficial Owner of 20% or more of the Voting Stock. A person is the
"Beneficial Owner" of Voting Stock that such person and certain related
parties, directly or indirectly, own or have the right to acquire, hold, vote
or dispose of. IORI Nevada, any of its subsidiaries and certain profit-sharing
and employee-benefit plans are among the entities specifically excepted from
the definition of "Interested Stockholder." Currently IORI Nevada is not aware
of any Shareholder or group of Shareholders that would be an "Interested
Stockholder" subsequent to the Merger.
A "Business Combination" includes the following transactions with, or
proposed by or on behalf of, any Interested Stockholder or certain related
parties: (i) a merger or consolidation of IORI Nevada or any subsidiary with
an Interested Stockholder or certain related parties, (ii) the sale, lease,
exchange, mortgage, pledge, transfer or other disposition by IORI Nevada or a
subsidiary of any assets or securities to an Interested Stockholder or certain
related parties, or any other arrangement with or for the benefit of an
Interested Stockholder or any such related party (including investments, loans,
advances, guarantees, extensions of credit, security interests and joint
venture participation) that (except in certain circumstances), together with
all other such arrangements (including all contemplated future events), involve
assets or securities having a value (or involving aggregate commitments) of $5
million or more or constitute more than 5% of the book value of the total
assets (in the case of transactions involving assets or commitments other than
capital stock) or 5% of the stockholders equity (in the case of transactions in
capital stock) of the entity in question, as reflected in the most recent
fiscal year-end consolidated balance sheet of such entity existing at the time
the stockholders of IORI Nevada would be required to approve or authorize such
transaction, (iii) the adoption of any plan or proposal for the liquidation or
dissolution of IORI Nevada, (iv) any reclassification of securities,
recapitalization, merger with a subsidiary or other transaction which has the
effect, directly or indirectly, of increasing an Interested Stockholder's
proportionate share of the outstanding capital stock of IORI Nevada or a
subsidiary or (v) any agreement or arrangement providing for any one or more of
the actions specified in the foregoing clauses (i) through (iv).
By providing that the two-thirds vote requirement would not be invoked
if a majority of IORI Nevada's Board of Directors approves a Business
Combination prior to the Acquisition Date, the business Combination Provision
is intended to encourage companies interested in acquiring IORI Nevada to
negotiate in advance with IORI Nevada's Board of Directors. See "--
Acquisition Safeguards". The Business Combination Provision may discourage
attempts to take over IORI Nevada by a principal stockholder. By requiring a
two-thirds vote of stockholders other than the relevant Interested Stockholder
to approve a Business Combination not approved by IORI Nevada's Board of
Directors, the Business Combination Provision may enable a minority of IORI
Nevada's stockholders to prevent consummation of a Business Combination. To
the extent that the Business Combination Provision discourages tender offers or
the accumulation of Nevada Common Stock by a third party, stockholders may be
deprived of higher market prices for their stock which may result from such
events.
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Article TENTH effectively allows the Board of Directors to waive the
requirement that any Business Combination with, or proposed by or on behalf of,
any Interested Stockholder requires the approval of not less than two-thirds of
the votes cast by the holders of all shares of Voting Stock (excluding Voting
Stock owned by such Interested Stockholder). If a majority of the members of
the Board of Directors or, in the case of such Business Combination involving
any affiliate or IORI Nevada, a majority of the Board of Directors including a
majority of the members of the Board of Directors who at the time are neither
officers or employees of IORI Nevada nor directors, officers or employees of
IORI Nevada's advisor, approves such Business combination prior to the
Acquisition date, such Business Combination requires only such affirmative
vote, if any, as is required by applicable law or by any other provision of the
Articles of Incorporation or Bylaws or by any agreement with any national
securities exchange.
The NRS imposes generally similar restrictions upon certain business
combinations with interested stockholders of a Nevada corporation, but, among
other differences, the NRS defines the terms "business combination" and
"interested stockholder" differently and, unlike Article TENTH of the Articles
of Incorporation, Nevada law subjects certain business combinations with
interested stockholders to a three-year moratorium unless specified conditions
are met. The NRS prohibits a Nevada corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the
date that such person becomes an "interested stockholder." With certain
exceptions, an "interested stockholder" is a person or group that owns 10% or
more (compared to more than 20% under Article TENTH of the Articles of
Incorporation) of such corporation's outstanding voting stock, or is an
affiliate or associate of the corporation and was the beneficial owner of 10%
or more of such voting stock at any time within the previous three years.
However, a Nevada corporation may elect not to be governed by the
Business Combination provisions of Nevada law by expressly electing not to be
governed by such statutes in the original Articles of Incorporation or an
amendment thereto. Because IORI Nevada's Board of Directors believes that the
Business Combination Provision offers sufficient protection, Article TENTH of
the Articles of Incorporation contain a provision expressly electing not to be
governed by NRS statutes governing business combinations with interested
stockholders (NRS Sections 78.411 through 78.444, inclusive) and acquisitions
of a controlling interest (NRS Sections 78.378 through 78.3793, inclusive).
California has adopted legislation that has certain anti-takeover
implications. Although the California Corporations Code does not specifically
apply to business trusts, certain of its provisions could be applied to
business trusts by analogy. If the proposed Incorporation Procedure is
adopted, such legislation will not apply to IORI Nevada.
Sections 1101 and 407 of the California General Corporation Law
require that holders of nonredeemable common stock receive nonredeemable common
stock in a merger of the corporation with the holder of more than 50% but less
than 90% of such common stock or its affiliate unless either (i) all of the
holders of such common stock consent to the transaction or (ii) the terms and
conditions of the transaction and the fairness of such terms and conditions
have been approved by the appropriate state regulatory agency. This provision
of California law may have the effect of making a "cash-out" merger by a
majority shareholder more difficult to accomplish. Nevada law
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has no comparable provision. California law also requires that shareholders be
provided with a fairness opinion under certain circumstances when a tender
offer or a proposal for a reorganization or for a sale of assets is made by an
interested party. Again, Nevada law has no provision comparable to such
provision.
THE EVALUATION PROVISION
Article TWELFTH of the Articles of Incorporation (the "Evaluation
Provision") permits the Board of Directors to take into account all factors it
deems relevant in evaluating, among other things, tender offers, proposals of
business sales or combinations and proposals for corporate liquidation or
reorganizations involving IORI Nevada, including the potential impact of any
such transaction on IORI Nevada's creditors, partners, joint venturers, other
constituents or IORI Nevada and the communities in which its offices, other
establishments or investments are located (collectively, "Non-Stockholder
Constituencies") and on IORI Nevada's continuing status as a qualified REIT
under the Code.
The Evaluation Provision does not specify the relative weight that the
Board of Directors should give to the various factors. Under the Evaluation
Provision, the Board of Directors might, for example, take into account whether
a potential acquiror proposed to use IORI Nevada's assets to finance an
acquisition of IORI Nevada and the effect that such use of IORI Nevada's assets
might have on its Non-Stockholder Constituencies, if any, and its REIT status.
The Trustees believe that consideration of the effect of a business combination
proposal on IORI Nevada's Non-Stockholder Constituencies and REIT status may
help to maintain or improve the financial condition of IORI Nevada and, as a
result, confer related benefits upon its stockholders. However, because the
Evaluation Provision allows the Board of Directors to consider numerous
judgmental or subjective factors affecting such a proposal, including certain
non-financial matters, their consideration may lead the Board of Directors to
oppose a transaction that, as an exclusively financial matter, may be
attractive to stockholders.
The Declaration of Trust does not contain any provision similar to the
Evaluation Provision. Courts construing California law have held that the
decisions of California corporate directors in evaluating takeover bids
generally are protected by the "business judgment rule," under which a court
will not question the directors' business judgment so long as they act in
accordance with their fiduciary duties to the corporation and to all of the
stockholders. The Trustees are currently unaware of any judicial precedent
construing California law that addresses the question of whether corporate
directors (and, by analogy, trustees of unincorporated business trusts) may
consider the interests of Non-Stockholder Constituencies or whether such
consideration of such interests would be protected by the "business judgment
rule".
The NRS expressly provides that directors in evaluating acquisition
proposals may consider certain interest of Non-Stockholders Constituencies
including (i) the interests of the corporation's employees, supplies, creditors
and customers; (ii) the economy of the state and nation; (iii) the interests of
the community and of society; and (iv) the long term as well as short term
interests of the corporation and its stockholders, including the possibility
that these interests may be best served by the continued independence of the
corporation.
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ESTABLISHMENT OF SUBSIDIARIES
Under Section 3.5 of the Declaration of Trust, a vote of two-thirds of
the Trustees and holders of a majority of the Shares voting at a meeting called
for such purpose is required for the formation of a subsidiary to hold, all or
part of the Trust's assets. Shareholders, by approving the Incorporation
Procedure, will be ratifying the actions of the Trustees in forming IORI
Nevada. There exists no comparable provision in the Articles of Incorporation.
AMENDMENT PROVISIONS
The Bylaw Amendment Provision and the Articles of Incorporation
Amendment Provision (each as defined below) generally require a supermajority
vote for changes in the governing documents of IORI Nevada submitted to
stockholders. Although those provisions may by themselves have a deterrent
effect on some potential acquisitions of IORI Nevada, they are designed
primarily to ensure that an acquiror cannot circumvent the acquisition
safeguards contained in the governing documents. See "-- Acquisition
Safeguards" and "-- Comparison of Principal Differences Between the Trust and
IORI Nevada". The Trustees recognize that the amendment provisions may serve
to entrench current management (see "-- Acquisition Safeguards -- Possible
Negative Considerations"); however, for the same reasons the Trustees deem
acquisition safeguards to be in the best interest of IORI Nevada and its
stockholders, the amendment provisions are required to buttress those
safeguards.
THE BYLAW AMENDMENT PROVISION. Article SEVENTH of the Articles of
Incorporation (the "Bylaw Amendment Provision") expressly authorizes IORI
Nevada's Board of Directors to make, adopt, alter, amend, change or repeal IORI
Nevada's Bylaws. The Bylaw Amendment Provision further states that the
stockholders of IORI Nevada may not make, adopt, alter, amend, change or repeal
IORI Nevada's Bylaws except upon the affirmative vote of holders of not less
than 75% of the outstanding stock of IORI Nevada entitled to vote thereon. The
Trustees are currently unaware of any controlling judicial precedent under the
NRS addressing the validity of this aspect of the Bylaw Amendment Provision
and, therefore, the matter is not entirely free from doubt. This supermajority
voting provision could enable holders of only 26% of the Nevada Common Stock to
prevent holders of a substantial majority of the Nevada Common Stock who do not
approve of certain provisions of the Bylaws from amending or repealing such
provisions. In this regard, it should be noted that certain executive
officers of the Trust and entities with which they are affiliated have
collective beneficial ownership of 48.4% of the Shares (as of August 23, 1995).
Nevertheless, IORI Nevada's Board of Directors believes that the Bylaw
Amendment Provision will help to ensure continuity with respect to the
management of the day-to-day operations of IORI Nevada. In addition, the
provision will prevent a purchaser who acquires a majority of the shares of the
Nevada Common Stock from adopting Bylaws that are not in the best interest of
the minority stockholders or repealing Bylaws that are in such stockholders'
interest.
Section 3.3 of the Declaration of Trust vests the power to make,
adopt, amend or repeal Trustees' Regulations in the Trustees. Nevertheless,
the Trustees' Regulations provide that they may be amended or repealed either
by the majority vote of Shareholders or by the Board of Trustees.
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<PAGE> 70
THE ARTICLES OF INCORPORATION AMENDMENT PROVISION. Article
SEVENTEENTH of the Articles of Incorporation (the "Articles of Incorporation
Amendment Provision") requires the affirmative vote of at least 75% of all of
the Voting Stock to alter, amend or repeal the Bylaw Amendment Provision,
Consent Provision, Stockholder Meeting Provision, Business Combination
Provision, Director Removal Provision, Evaluation Provision and Articles of
Incorporation Amendment Provision, unless a majority of IORI Nevada's Board of
Directors approves such alteration, amendment or repeal.
In contrast, the Declaration of Trust generally may be amended (i) by
Shareholders holding a majority of the outstanding Shares entitled to vote
thereon or (ii) by the Trustees without the vote or consent of Shareholders to
the extent they deem it necessary to cure any ambiguity or inconsistency
therein or to conform the Declaration of Trust to REIT requirements or other
applicable law, unless, in either case, the proposed amendment would change
certain rights with respect to any outstanding securities of the Trust, in
which case the Declaration of Trust requires the vote or consent of the holders
of two-thirds of the outstanding Shares entitled to vote thereon.
Although the Declaration of Trust already requires a supermajority
vote for certain proposed amendments, the Articles of Incorporation Amendment
Provision will make it more difficult for stockholders to make changes in the
Articles of Incorporation, including changes designed to enable holders of a
majority of the Nevada Common Stock to obtain control over IORI Nevada.
However, the Articles of Incorporation Amendment Provision may help protect
minority stockholders from disadvantageous changes supported by less than a
substantial majority of other stockholders.
THE FOREGOING IS ONLY A SUMMARY OF THE SIMILARITIES AND DIFFERENCES
BETWEEN IORI NEVADA'S ARTICLES OF INCORPORATION AND BYLAWS, ON THE ONE HAND,
AND THE TRUST'S DECLARATION OF TRUST AND TRUSTEES' REGULATIONS, ON THE OTHER,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPLETE TEXTS OF THOSE
DOCUMENTS, WHICH ARE ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS APPENDICES
C THROUGH F, RESPECTIVELY.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the federal income tax consequences of the
Incorporation Procedure is based on the advice of Andrews & Kurth L.L.P.,
securities and tax counsel to the Trust ("Counsel").
GENERAL. The following is a general discussion of certain of the
anticipated federal income tax consequences to the Trust and Shareholders of
the Incorporation Procedure. The discussion is based on laws, regulations,
rulings and decisions now in effect, all of which are subject to change or
possibly differing interpretations.
IORI Nevada has received an opinion from Counsel to the effect that
the Incorporation Procedure will constitute a reorganization within the meaning
of Section 368(a)(1)(F) of the Code.
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<PAGE> 71
CONSEQUENCES TO SHAREHOLDERS. Pursuant to the Incorporation
Procedure, (i) each Shareholder will receive one share of Nevada Common Stock
for each share of beneficial interest in the Trust that it owns, and (ii) the
Shares will be canceled. No gain or loss will be recognized by Shareholders in
respect of these transactions and the tax basis to a Shareholder of the shares
of the Nevada Common Stock it receives will equal the tax basis to the
Shareholder of its Shares. In addition, the holding period of the Nevada
Common Stock received by a Shareholder will include the period during which the
Shareholder held its Shares, provided that the Shares were held by the
Shareholder as a capital asset at the time the Incorporation Procedure was
effected.
CONSEQUENCES TO THE TRUST AND IORI NEVADA. Pursuant to the
Incorporation Procedure, the Trust will be incorporated in California and the
California Corporation will be merged with and into IORI Nevada. No gain or
loss will be recognized by the Trust as a result of these transactions. The
tax basis of the assets received by IORI Nevada in the Merger will equal the
tax basis of those assets to the Trust immediately prior to the time the
Incorporation Procedure is effected. The holding period of the assets received
by IORI Nevada in the Merger will include the period during which such assets
were held by the Trust.
It should be noted that an opinion of counsel is not binding on the
Internal Revenue Service or on the courts. The Trust has not applied to the
Internal Revenue Service for a ruling confirming that the Incorporation
Procedure will qualify as a reorganization under the Code. The federal income
tax consequences of the Incorporation Procedure to the Trust and to
Shareholders would be materially different from those described herein if a
determination were made that the Incorporation Procedure did not constitute a
reorganization under the code. Such a determination would have adverse federal
income tax consequences to the Trust and to Shareholders.
CERTAIN FOREIGN, STATE AND LOCAL TAXES
If the Incorporation Procedure is consummated, IORI Nevada may become
subject to state franchise or income taxes in addition to those which the Trust
is already obligated to pay. See the discussion of filing fees associated with
organizing IORI Nevada under "Proposed Incorporation Procedure -- Comparison of
the Securities of IORI Nevada and the Trust -- Common Equity" above.
Management of the Trust believes that the net effect on IORI Nevada of any
additional state franchise or income taxes will not be material.
No determination has been made as to how the proposed Incorporation
Procedure would be treated under the various foreign, state or local tax laws
that might apply to Shareholders, and Shareholders should consult their own tax
advisors as to the effect of the Incorporation Procedure on their individual
tax liability under applicable foreign, state or local income tax laws.
MARKET PRICES OF THE SHARES; DIVIDENDS
The Shares of the Trust have been traded on the AMEX since May 20,
1987 using the symbol "IOT." As of the close of business on August 23, 1995,
there were 791,444 Shares outstanding. The range of high and low bid
quotations per share as reported by the AMEX are set forth in the table below:
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<PAGE> 72
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Quarter High Low
---------------------------------------------------------------------
<S> <C> <C>
First Quarter, 1993 $ 11 5/8 $ 6
Second Quarter, 1993 13 1/2 11 7/8
Third Quarter, 1993 14 1/4 13 1/8
Fourth Quarter, 1993 17 1/2 14 1/2
First Quarter, 1994 $ 20 $ 15 1/8
Second Quarter, 1994 20 7/8 18 1/4
Third Quarter, 1994 20 3/4 17 1/2
Fourth Quarter, 1994 19 5/8 17 1/2
First Quarter, 1995 $ 20 3/8 $ 19
Second Quarter, 1995 20 19
Third Quarter, 1995 20 5/8 19
(through August 23, 1995)
</TABLE>
As of July 31, 1995 there were 2,236 Shareholders of record. On
December 5, 1989, the Board of Trustees approved a share repurchase program
pursuant to which the Trust is authorized to repurchase a total of 100,000 of
its shares of beneficial interest. As of July 28, 1995, the Trust had
repurchased 67,952 shares pursuant to such program.
On ___________, 1995, the last trading day prior to the public
announcement of the Board of Trustees' decision to proceed with the proposed
Incorporation Procedure, the closing price per Share on the AMEX Composite Tape
was $19.625. On August 23, 1995, the closing price per Share on the AMEX
Composite Tape was $19.625. On August 10, 1995, the Trust publicly reported
that the Board of Trustees was evaluating whether to recommend changes similar
to the Incorporation Procedure to Shareholders. Shareholders should obtain
current market quotations for Shares.
Distributions were declared and paid by the Trust on the following
dates in the following amounts during the periods indicated below.
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<PAGE> 73
<TABLE>
<CAPTION>
Amount
Date Declared Date of Record Date Payable Per Share
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993 01/27/93 02/15/93 03/01/93 $ .10
04/30/93 05/24/93 06/01/93 .10
06/30/93 08/16/93 09/01/93 .15
10/29/93 11/30/93 12/15/93 .15
1994 02/15/94 03/01/94 03/21/94 $ .15
05/06/94 06/01/94 06/15/94 .15
08/24/94 09/15/94 09/30/94 .15
12/01/94 12/15/94 12/30/94 .15
1995 03/03/95 03/15/95 03/31/95 $ .15
05/22/95 06/15/95 06/03/95 .15
08/24/95 09/15/95 09/30/95 .15
</TABLE>
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<PAGE> 74
BUSINESS AND PROPERTIES OF
IORI NEVADA
IORI Nevada was formed as a Nevada corporation on August 23, 1995. It
is a wholly-owned subsidiary of the Trust. Prior to the Merger, IORI Nevada
will have no business, assets or liabilities of any consequence and no
operating history. The audited balance sheet of IORI Nevada is included under
"Index to Financial Statements." As a result of the Merger, IORI Nevada, by
operation of law, would succeed to all the rights and properties, and be
subject to all the obligations and liabilities, of the Trust incorporated as
the California Corporation, including, without limitation, those under the
modified Advisory Agreement described under "Business and Properties of the
Trust -- The Advisory Agreement" (if approved). The principal assets of the
Trust to which IORI Nevada would succeed as a result of the Merger are
described below under "Business and Properties of the Trust -- Mortgage Loans."
As described more fully under "Proposed Incorporation Procedure -- Business
Activities after Incorporation Procedure," no significant change in the nature
of the Trust's business or investment policies (other than the elimination of
the Trust's Liquidation Provisions) is currently expected as a result of the
Incorporation Procedure, though IORI Nevada would be empowered under the
Articles of Incorporation to engage in a wider range of business activities
than those currently permitted under the Declaration of Trust (including the
acquisition of properties), and IORI Nevada would be able to alter its
investment policies without obtaining stockholder approval.
IORI NEVADA'S POLICY WITH RESPECT TO CERTAIN ACTIVITIES
The Articles of Incorporation impose no limitations on IORI Nevada's
ability to invest in equity securities of, or acquire interests in, other
persons engaged in real estate activities. Although IORI Nevada has no present
intention of purchasing securities of other issuers for the purpose of
exercising control, it reserves the right to purchase securities of other
issuers in the future. IORI Nevada does not propose to engage in underwriting
the securities of other issuers. Furthermore, to continue to qualify for
taxation as a REIT under the Code, IORI Nevada will, among other things, be
required to hold at least 75% of the value of its total assets in real estate
assets, government securities, cash and cash items at the close of each quarter
of each taxable year. See "Proposed Incorporation Procedure -- Business
Activities after Incorporation Procedure".
IORI Nevada has the authority to issue shares of Nevada Common Stock
(up to a total of 10,000,000) and preferred stock (in one or more series up to
a total of 1,000,000) on terms which the IORI Nevada's Board of Directors
believe to be in the best interests of IORI Nevada. However, the directors
currently do not intend to issue any preferred stock. See "Proposed
Incorporation Procedure -- Comparison of the Securities of IORI Nevada and the
Trust -- Preferred Stock".
Subject to available financing, IORI Nevada may borrow money for its
day-to-day operations and to acquire additional assets or refinance existing
assets. Market financing terms available at the time of any borrowings and the
objective of paying dividends on the Nevada Common Stock will place a practical
limit on the nature and extent of those borrowings. Borrowing may come from
banks, other institutional lenders and private lenders, including BCM and other
REITs of which the directors of IORI Nevada may serve as directors, officers or
trustees, subject to the limitations set forth in the "Proposed Incorporation
Procedure -- Business Activities after Incorporation
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<PAGE> 75
Procedure -- The Restrictions on Related-Party Transactions Provision". IORI
Nevada may also take properties subject to, or assume, existing debt and may
mortgage, pledge or otherwise obtain financing for its real properties. IORI
Nevada may also establish lines of credit with banks or other lenders. The
Declaration of Trust prohibits the aggregate secured and unsecured indebtedness
of the Trust to exceed 300% of the Trust's net asset value (defined as the book
value, as defined in the Declaration of Trust, of all assets of the Trust minus
all of its liabilities). Although the Articles of Incorporation impose no such
limitation, the Board of Directors currently intends to continue this policy.
However, the directors of IORI Nevada may alter such policy without a vote of
the stockholders. No assurance can be given as to the availability of credit
for IORI Nevada, the amount or terms thereof or of the restrictions that may be
imposed upon IORI Nevada by lenders. For a discussion of the Trust's access to
credit, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources". IORI Nevada also
has the authority to issue notes, debentures, convertible notes and other debt
securities. IORI Nevada has the authority to repurchase or otherwise reacquire
its shares of capital stock without the consent of its stockholders, except as
and unless restricted by Nevada law. Nevada law does not presently restrict
the repurchase of capital stock by a corporation. See "Proposed Incorporation
Procedure -- Comparison of the Securities of IORI Nevada and the Trust" above.
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<PAGE> 76
BUSINESS AND PROPERTIES OF
THE TRUST
GENERAL
The Trust is a California business trust organized pursuant to a
declaration of trust dated December 14, 1984, and amended and restated as of
May 27, 1987. The Trust commenced operations on April 10, 1985. The Trust has
elected to be treated as a REIT under Sections 856 through 860 of the Code, and
has qualified for taxation as a REIT for all periods since May 1, 1985. See
"Proposed Incorporation Procedure -- Business Activities after Incorporation
Procedure".
On April 20, 1987, the Trust changed its name from Consolidated
Capital Income Opportunity Trust/2 to Income Opportunity Realty Trust. On May
20, 1987, the Trust's Shares began trading on the American Stock Exchange
("AMEX") under the symbol "IOT". The Trust's real estate at June 30, 1995,
consisted of seven properties, all of which are held for sale, and an interest
in a partnership which owns five properties. One of the properties held for
sale was obtained during 1994 through an in substance foreclosure. In
addition, the Trust has an interest in a partnership which holds two wraparound
mortgage loans. The Trust's real estate and mortgage note receivable
portfolios are more fully discussed below.
BUSINESS PLAN AND INVESTMENT POLICIES
The Trust's primary business and only industry segment is investing in
and financing real estate and real- estate related activities through mortgage
loans and in equity interests in real estate through direct acquisitions,
leases and partnerships. The properties in which the Trust invests are located
throughout the continental United States. Information regarding the properties
and mortgage note receivable of the Trust is set forth below and in Schedules
III and IV, respectively, to the Consolidated Financial Statements included in
"Index to Financial Statements".
The business of the Trust is not seasonal. The Trust had previously
pursued a balanced investment policy, seeking both current income and capital
appreciation. Since October 24, 1991, the Trust's plan of operation has been
to continue to service the mortgage note receivable that it holds and to manage
its real estate for income and long-term appreciation for the benefit of its
shareholders. Under the Declaration of Trust, the Trust is prohibited from
reinvesting the net cash proceeds from the sale or refinancing of any of its
properties. During the remainder of the holding phase, the Trust's investment
strategy is to maximize each properties operating income by aggressive property
management through closely monitoring expenses while at the same time making
property renovations and/or improvements where appropriate. While such
expenditures increase the amount of revenue required to cover operating
expenses, the Trust's management believes that such expenditures are necessary
to maintain or enhance the value of the Trust's properties.
TRUST ASSETS
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<PAGE> 77
The Trust's principal executive offices are located at 10670 North
Central Expressway, Suite 300, Dallas, Texas 75231. In the opinion of the
Trust's management, the Trust's offices are suitable and adequate for its
present operations.
Details of the Trust's real estate and mortgage note receivable
portfolios at December 31, 1994 are set forth in Schedules III and IV,
respectively, to the Consolidated Financial Statements included under "Index to
Financial Statements". The discussion set forth below under the headings
"Business and Properties of the Trust -- Real Estate" and -- -- Mortgage Loans"
provide certain summary information concerning the Trust's real estate and
mortgage notes receivable portfolios.
The Trust's real estate portfolio consists of properties acquired
through equity investments (which include direct equity investments and
partnerships) and properties obtained through foreclosure of the collateral
securing mortgage notes receivable. The discussion set forth below under the
heading "Real Estate" provides certain summary information concerning the
Trust's real estate and further summary information with respect to the portion
of the Trust's real estate which consists of equity investments, all of which
are held for sale, and the Trust's investments in partnerships.
The Trust's real estate is geographically diversified. At December
31, 1994, the Trust held equity investments in apartments and office buildings
in the Pacific, Southwest, Southeast and Midwest regions of the continental
United States, as shown more specifically in the table under "Business and
Properties of the Trust -- Real Estate". The majority of the Trust's
properties, however, are located in California and Texas. At June 30, 1995,
the Trust held one wraparound mortgage note receivable, secured by a shopping
center in Joliet, Illinois.
In November 1993, the Trust placed the $1.1 million wraparound
mortgage note receivable, secured by the Cedars Apartments in Irving, Texas on
nonperforming, nonaccrual status. The Trust had sold the property securing the
mortgage note in 1992 providing purchase money financing in conjunction with
the sale. In December 1993, the borrower filed for bankruptcy protection. The
Trust accepted a deed in lieu of foreclosure on March 2, 1995. The Trust
recorded an in substance foreclosure of the property at the December 31, 1994.
The Trust did not incur a loss on foreclosure as the fair value of the
property, less estimated costs of sale, exceeded the principal balance of the
mortgage note receivable.
At June 30, 1995, three of the Trust's properties, Plumtree
Apartments, Porticos Apartments and the Saratoga Office Building each exceeded
10% of the Trust's total assets. At June 30, 1995, 84% of the Trust assets
consisted of real estate held for sale, 4% consisted of mortgage notes and
interest receivable and 7% consisted of investments in partnerships. The
remaining 5% of the Trust's assets at June 30, 1995, were cash, cash
equivalents and other assets. It should be noted, however, that the percentage
of the Trust assets invested in any one category is subject to change and that
no assurance can be given that the composition of the Trust's assets in the
future will approximate the percentages listed herein. To continue to qualify
for federal taxation as a REIT under the Code, the Trust is required, among
other things, to hold at least 75% of the value of its total assets in real
estate assets, government securities, cash and cash equivalents at the close of
each quarter of each taxable year. See "Proposed Incorporation Procedure --
Business Activities after Incorporation Procedure".
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<PAGE> 78
GEOGRAPHIC LOCATION OF REAL ESTATE INVESTMENTS. The Trust has divided
the continental United States into the following geographic regions.
Northeast region comprised of the states of Connecticut, Delaware,
Maryland, Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, Rhode Island and Vermont and the District of Columbia.
The Trust has no properties in this region.
Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia.
The Trust has 1 commercial property in this region.
Southwest region comprised of the states of Arizona, Arkansas,
Louisiana, New Mexico, Oklahoma and Texas. The Trust has 3 apartment
buildings in this region.
Midwest region comprised of the states of Illinois, Indiana, Iowa,
Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North
Dakota, Ohio, South Dakota, West Virginia and Wisconsin. The Trust
has 1 apartment building in this region.
Mountain region comprised of the states of Colorado, Idaho, Montana,
Nevada, Utah and Wyoming. The Trust has no properties in this region.
Pacific region comprised of the states of California, Oregon and
Washington. The Trust has 1 apartment building and 1 commercial
property in this region.
REAL ESTATE. At June 30, 1995, over 90% of the Trust's assets were
invested in real estate, located throughout the continental United States,
either on a leveraged or nonleveraged basis. The Trust real estate portfolio
consisted of direct equity investments, investments in partnerships and
properties obtained through foreclosure of the collateral securing mortgage
notes receivable.
Types of Real Estate Investments. The Trust has made real estate
investments in commercial properties, primarily office buildings and shopping
centers and in apartments or similar properties having established income-
producing capabilities. In selecting real estate for investment, the location,
age and type of property, gross rentals, lease terms, financial and business
standing of tenants, operating expenses, fixed charges, land values and fiscal
conditions were considered. The Trust has acquired properties subject to or
assumed, existing debt and has mortgaged, pledged or otherwise obtained
financing for its properties. Since October 24, 1991, the Trust, pursuant to
the terms of its Declaration of Trust, has been prohibited from reinvesting in
the cash proceeds from the sale or refinancing of any of its properties and is
required to distribute to its shareholders such net cash proceeds, in excess of
amounts required for renovations and improvements to its properties.
Accordingly, the Trust has classified all of its properties as held for sale in
the accompanying Consolidated Balance Sheets included in "Index to Financial
Statements".
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<PAGE> 79
At June 30, 1995, the Trust had no properties on which significant
capital improvements were in process. In the opinion of the Trust's
management, the properties owned by the Trust are adequately covered by
insurance.
The following table sets forth the percentages, by property type and
geographic region of the Trust real estate (including partnership properties)
at June 30, 1995.
<TABLE>
<CAPTION>
Region Apartments Commercial Properties
------ ---------- ---------------------
<S> <C> <C>
Pacific 11% 31%
Southwest 65% 60%
Southeast 0% 9%
Midwest 24% 0%
---- ----
100% 100%
==== ====
</TABLE>
The foregoing table is based solely on the number of apartment units
and commercial square footage owned by the Trust and does not reflect the value
of the Trust's investment in each region. See Schedule III to the Consolidated
Financial Statements included under "Index to Financial Statements" below.
Properties Held for Sale. Set forth below is the real estate owned by
the Trust, all of which is presently held for sale:
<TABLE>
<CAPTION>
Units/ Occupancy
Property Location Square Footage at June 30, 1995
-------- -------- -------------- ----------------
<S> <C> <C> <C>
Apartments
----------
Spanish Trace Irving, TX 136 units 89%
Eastpoint Mesquite, TX 126 units 97%
Plumtree Martinez, CA 116 units 94%
Porticos Milwaukee, WI 256 units 94%
Treehouse San Antonio, TX 106 units 96%
Office Buildings
----------------
Saratoga Saratoga, CA 89,825 sq. ft. 99%
Town Center Boca Raton, FL 24,518 sq. ft. 100%
</TABLE>
Occupancy presented here is without reference to whether leases in effect are
at, below or above market rates.
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<PAGE> 80
To the extent that the Trust seeks to sell any of its properties, the
sales prices for such properties may be affected by competition from other real
estate entities also attempting to sell their properties and governmental
agencies and financial institutions that are seeking to liquidate foreclosed
properties, and whose assets are located in areas in which the Trust's
properties are located.
Partnership Properties. The following table summarizes the Trust's
investments in partnership properties as of June 30, 1995:
<TABLE>
<CAPTION>
Units/ Occupancy
Property Location Square Footage at June 30, 1995
-------- -------- -------------- ----------------
<S> <C> <C> <C>
Apartments
----------
Inwood Greens Houston, TX 126 units 93%
Oaks of Inwood Houston, TX 198 units 93%
Office Building
---------------
MacArthur Mills Carrollton, TX 53,472 sq. ft. 89%
Shopping Centers
----------------
Chelsea Square Houston, TX 70,275 sq. ft. 58%
Summit at Bridgewood
Fort Worth, TX 48,696 sq. ft. 63%
</TABLE>
The Trust owns a 36.3% general partner interest and TCI owns a 63.7%
combined general and limited partner interest in Tri-City Limited Partnership
which in turn owns the five properties listed above. The five properties are
unencumbered by mortgage debt. As vacant space in the office building and the
shopping centers is leased, the partnership is required to make certain tenant
improvements and pay leasing commissions. In 1994 and through June 30, 1995,
the Trust made no advances to the partnership as the tenant improvements and
leasing commissions were funded by the partnership. The Trust received
distributions of $254,000 and $127,000 from the partnership during 1994 and
through July 1995, respectively.
MORTGAGE LOANS. Prior to 1991, a substantial portion of the Trust's
assets had been invested in mortgage notes receivable secured by
income-producing real estate. The Trust's mortgage notes have included first
mortgage loans, wraparound mortgage loans and junior mortgage loans. BCM, in
its capacity as a mortgage servicer, services the Trust's mortgage notes.
At June 30, 1995, the Trust's mortgage note receivable portfolio
consisted of one wraparound mortgage note, with an outstanding balance of $2.0
million, secured by a shopping center in Joliet,
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<PAGE> 81
Illinois. A wraparound mortgage loan, sometimes called an all-inclusive loan,
is a mortgage loan having an original principal amount equal to the outstanding
balance under the prior existing mortgage loan plus the amount actually
advanced under the wraparound mortgage loan.
Through June 30, 1995, the Trust funded no new mortgage loans and made
no additional advances on existing mortgage loans.
CERTAIN FACTORS ASSOCIATED WITH REAL ESTATE AND RELATED INVESTMENTS
The Trust is subject to all the risks incident to ownership of real
estate and interests therein, many of which relate to the general illiquidity
of real estate investments. These risks include, but are not limited to,
changes in general or local economic conditions, changes in interest rates and
availability of permanent mortgage financing that may render the acquisition,
sale or refinancing of a property difficult or unattractive and that may make
debt service more burdensome, changes in federal or local economic or rent
controls, floods, earthquakes, other acts of God and other factors beyond the
control of the advisor or the Trust. The illiquidity of real estate
investments generally may impair the ability of the Trust to respond promptly
to changed circumstances. See "Certain Risk Factors -- Certain Risk Factors
Associated with Real Estate". The Trust's management believes that such risks
are partially mitigated by the diversification by geographical location and
property type of the Trust's real estate portfolio.
METHOD OF OPERATING AND FINANCING
The Declaration of Trust has permitted the Trust to acquire real
estate investments for cash, for other property, through issuing Shares, notes,
debentures, bonds or other obligations of the Trust, including borrowing money,
subject to the following restrictions. Under the Declaration of Trust, upon
and after giving effect to any proposed borrowing, the amount of outstanding
indebtedness of the Trust may not exceed 300% of the net asset value of the
Trust. The Declaration of Trust does not limit the number or amount of
mortgages which can be placed on any one of the Trust's real estate
investments. Apart from the aforementioned restrictions, the Trustees may
alter the Trust's method of operating and financing without a vote of
Shareholders. IORI Nevada's Articles of Incorporation impose no limitations
either on borrowing or on the number or amount of mortgages which can be placed
on any one of IORI Nevada's real estate investments. See "Proposed
Incorporation Procedure -- Business Activities after Incorporation".
OFFICERS
The following persons currently serve as executive officers of the
Trust and, if the Incorporation Procedure is approved, will serve as the
executive officers of IORI Nevada: Randall M. Paulson, President; Thomas A.
Holland, Executive Vice President and Chief Financial Officer; and Bruce A.
Endendyk, Executive Vice President. Although not executive officers of the
Trust, the following persons currently serve as officers of the Trust and, if
the Incorporation Procedure is approved, will serve as officers of the IORI
Nevada: Drew D. Potera, Treasurer; and Robert A. Waldman, Senior Vice
President, General Counsel and Secretary.
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<PAGE> 82
THE ADVISOR
Although the Board of Trustees is directly responsible for managing
the affairs of the Trust and for setting the policies which guide the Trust,
the day-to-day operations of the Trust are performed by a contractual advisor
under the supervision of the Board of Trustees. The duties of the advisor
include, among other things, locating, investigating, evaluating and
recommending real estate and mortgage note refinancing and sales opportunities
to the Trust. The advisor also serves as a consultant in connection with
business planning for the Trust.
BCM has served as the Trust's advisor since March 1989. BCM also
serves as advisor to Continental Mortgage and Equity Trust ("CMET") and TCI.
The Trustees of the Trust are also trustees of CMET and directors of TCI, and
the officers of the Trust are also officers of CMET and TCI. Randall M.
Paulson, President of the Trust, also serves as President of CMET, TCI, BCM and
Syntek Asset Management, Inc. ("SAMI"), the managing general partner of Syntek
Asset Management, L.P. ("SAMLP"). The officers of the Trust are also officers
of ART. As of August 23, 1995, ART owned approximately 26% and TCI owned
approximately 22% of the Trust's outstanding shares of beneficial interest and
BCM owned approximately 41.6% of ART's outstanding shares of common stock.
PROPERTY MANAGEMENT
Since February 1, 1990, affiliates of BCM have provided property
management services to the Trust. Currently Carmel Realty Services, Ltd.
("Carmel, Ltd.") provides such property management services for a fee of 5% or
less of the monthly gross receipts collected on the properties under its
management. Carmel, Ltd. subcontracts with other entities for the provision of
the property-level management services to the Trust at various rates. The
general partner of Carmel, Ltd. is BCM. Carmel, Ltd. subcontracts the
property-level management and leasing of one of the Trust's office buildings
and the commercial properties owned by a real estate partnership in which the
Trust and TCI are partners to Carmel Realty, which is a company owned by SWI.
Carmel Realty, Inc. ("Carmel Realty") is entitled to receive property and
construction management fees and leasing commissions in accordance with the
terms of its property-level management agreement with Carmel, Ltd.
REAL ESTATE BROKERAGE
Prior to December 1, 1992, affiliates of BCM provided brokerage
services to the Trust and received brokerage commissions in accordance with the
Advisory Agreement. Effective December 1, 1992, the Trust's Board of Trustees
approved the non-exclusive engagement of Carmel Realty to perform brokerage
services for the Trust. Under the Brokerage Agreement, Carmel Realty is
entitled to receive a real estate sales commission for the sale of each Trust
property in accordance with the following sliding scale of total fees to be
paid by the Trust: (i) maximum fee of 5% on the first $2.0 million of any sale
transaction of which no more than 4% would be paid to Carmel Realty or
affiliates; (ii) maximum fee of 4% on transaction amounts between $2.0 million
to $5.0 million of which no more than 3% would be paid to Carmel Realty or
affiliates; (iii) maximum fee of 3% on transaction amounts between $5.0 million
to $10.0 million of which no more than 2% would be
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paid to Carmel Realty or affiliates; and (iv) maximum fee of 2% on transaction
amounts in excess of $10.0 million of which no more than 1 1/2% would be paid
to Carmel Realty or affiliates. If the Incorporation Procedure is approved,
the Brokerage Agreement will be amended to provide for payment of such fees
upon the acquisition, as well as the sale, of properties.
THE ADVISORY AGREEMENT
BCM has served as advisor to the Trust since March 28, 1989. The
current Advisory Agreement was entered into effective December 1, 1992. At the
Trust's annual meeting of shareholders held on March 7, 1995, the renewal
(until the next Annual Meeting of the Trust or IORI Nevada as its successor) of
the Trust's Advisory Agreement with BCM was approved.
Under the Advisory Agreement, BCM is required to formulate and submit
annually for approval by the Board of Trustees a budget and business plan for
the Trust containing a twelve-month forecast of operations and cash flow, a
general plan for asset sales, foreclosure and borrowing activity, and BCM is
required to report quarterly to the Trust's Board of Trustees on the Trust's
performance against the business plan. In addition, all transactions by the
Trust require prior approval by the Trust's Board of Trustees unless such
transactions are explicitly provided for in the approved business plan or are
made pursuant to authority expressly delegated to BCM by the Board of Trustees.
The Advisory Agreement also requires prior approval of the Board of
Trustees for the retention of all consultants and third party professionals,
other than legal counsel. The Advisory Agreement provides that BCM shall be
deemed to be in a fiduciary relationship to the Trust's shareholders; contains
a broad standard governing BCM's liability for losses by the Trust; and
contains guidelines for BCM's allocation of investment opportunities as among
itself, the Trust and other entities it advises.
The Advisory Agreement provides for BCM to be responsible for the
day-to-day operations of the Trust and to receive an advisory fee comprised of
a gross asset fee of .0625% per month (.75% per annum) of the average of the
gross asset value of the Trust (total assets less allowance for amortization,
depreciation or depletion and valuation reserves) and an annual net income fee
equal to 7.5% per annum of the Trust's net income.
The Advisory Agreement also provides for BCM to receive an annual
incentive sales fee equal to 10% of the amount, if any, by which the aggregate
sales consideration for all real estate sold by the Trust during such fiscal
year exceeds the sum of: (1) the cost of each such property as originally
recorded in the Trust's books for tax purposes (without deduction for
depreciation, amortization or reserve for losses), (ii) capital improvements
made to such assets during the period owned by the Trust and (iii) all closing
costs (including real estate commissions) incurred in the sale of such
property; provided, however, no incentive fee shall be paid unless (a) such
real estate sold in such fiscal year, in the aggregate, has produced an 8%
simple annual return on the Trust's net investment including capital
improvements, calculated over the Trust's holding period before depreciation
and inclusive of operating income and sales consideration and (b) the aggregate
net
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operating income from all real estate owned by the Trust for each of the prior
and current fiscal years shall be at least 5% higher in the current fiscal year
than in the prior fiscal year.
The Advisory Agreement requires BCM or any affiliate of BCM to pay to
the Trust one-half of any compensation received from third parties with respect
to the origination, placement or brokerage of any loan made by the Trust,
provided, however, that the compensation retained by BCM or any affiliate of
BCM shall not exceed the lesser of (i) 2% of the amount of the loan committed
by the Trust or (ii) a loan brokerage and commitment fee that is reasonable and
fair under the circumstances.
The Advisory Agreement also provides that BCM or an affiliate of BCM
is to receive a mortgage or loan acquisition fee with respect to the
acquisition or purchase of any existing mortgage loan by the Trust equal to the
lesser of (i) 1% of the amount of the loan purchased or (ii) a loan brokerage
or commitment fee which is reasonable and fair under the circumstances. Such
fee will not be paid in connection with the origination or funding by the Trust
of any mortgage loan.
Under the Advisory Agreement, BCM or an affiliate of BCM is also to
receive a mortgage brokerage and equity refinancing fee for obtaining loans to
the Trust or refinancing on Trust properties equal to the lesser of (i) 1% of
the amount of the loan or the amount refinanced or (ii) a brokerage or
refinancing fee that is reasonable and fair under the circumstances; provided,
however, that no such fee shall be paid on loans from BCM or an affiliate of
BCM without the approval of the Trust's Board of Trustees. No fee shall be
paid on loan extensions.
Under the Advisory Agreement, BCM is to receive reimbursement of
certain expenses incurred by it in the performance of advisory services to the
Trust.
Under the Advisory Agreement (as required by the Declaration of
Trust), all or a portion of the annual advisory fee must be refunded by the
Advisor to the Trust if the Operating Expenses of the Trust (as defined in the
Declaration of Trust) exceed certain limits specified in the Declaration of
Trust based on the book value, net asset value and net income of the Trust
during such fiscal year. In 1994, the effect of this limitation was to require
that BCM refund $6,000 of the 1994 annual advisory fee.
Additionally, if the Trust were to request that BCM render services to
the Trust other than those required by the Advisory Agreement, BCM or an
affiliate of BCM will be separately compensated for such additional services on
terms to be agreed upon from time to time. The Trust has hired Carmel, Ltd.,
an affiliate of BCM, to provide property management for the Trust's properties,
and the Trust has engaged Carmel Realty, also an affiliate of BCM, on a non-
exclusive basis, to provide brokerage services for the Trust.
BCM may only assign the Advisory Agreement with the prior consent of
the Trust.
As discussed above and as mandated by the Declaration of Trust, the
current Advisory Agreement requires that a portion of the annual advisory fee
be refunded to the Trust if operating expenses exceed certain limits. Although
IORI Nevada's Articles of Incorporation do not require
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such a limitation, it will be included contractually in an amendment to the
Advisory Agreement if the Incorporation Procedure is approved. Additionally,
if the Incorporation Procedure is approved, the Advisory Agreement will be
amended such that BCM will be entitled to acquisition commissions for
supervising the acquisition, purchase or long term lease of real property for
IORI Nevada. Such additional fees will be equal to the lesser of (i) up to 1%
of the cost of acquisition, inclusive of commissions, if any, paid to
nonaffiliated brokers or (ii) the compensation customarily charged in
arm's-length transactions by others rendering similar services.
The director and principal officers of BCM are set forth below.
M. NED PHILLIPS Director
RYAN T. PHILLIPS Director
RANDALL M. PAULSON President
THOMAS A. HOLLAND Executive Vice President and Chief Financial
Officer
OSCAR W. CASHWELL Executive Vice President
MARK BRANIGAN Executive Vice President
BRUCE A. ENDENDYK Executive Vice President
COOPER B. STUART Executive Vice President
CLIFFORD C. TOWNS, JR. Executive Vice President, Finance
ROBERT A. WALDMAN Senior Vice President, General Counsel and
Secretary
DREW D. POTERA Vice President, Treasurer and Securities Manager
M. Ned Phillips is Gene E. Phillips' brother, and Ryan T. Phillips is
Gene E. Phillips' son. Mr. Phillips served as a Trustee of the Trust until
December 31, 1992, as a Director of BCM until December 22, 1992 and as Chief
Executive Officer of BCM until September 1, 1992. Although Mr. Phillips no
longer serves as an officer or director of BCM or as a Trustee of the Trust, he
serves as a representative of the trust established for the benefit of his
children, which trust owns BCM, and, in such capacity, Mr. Phillips has
substantial contact with the management of BCM and input with respect to its
performance of advisory services for the Trust.
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INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
SOUTHMARK BANKRUPTCY. Until January 1989, Mr. Phillips, who served as
a Trustee of the Trust until December 31, 1992, served as Chairman of the Board
and Director (since 1980) and President and Chief Executive Officer (since
1981) of Southmark Corporation ("Southmark").
As a result of a deadlock on Southmark's Board of Directors, Mr.
Phillips, among others, reached agreement with Southmark in January 1989 such
that Mr. Phillips resigned his positions with Southmark and certain of
Southmark's subsidiaries and affiliates. Southmark filed a voluntary petition
in bankruptcy under Chapter 11 of the United States Bankruptcy Code on July 14,
1989.
SAN JACINTO SAVINGS ASSOCIATION. On November 30, 1990, San Jacinto
Savings Association ("SJSA"), a savings institution that had been owned by
Southmark since 1983 and for which Mr. Phillips served as a director from 1987
to January 1989, was placed under conservatorship of the Resolution Trust
Corporation ("RTC") by federal banking authorities. On December 14, 1990, SJSA
was converted into a Federal Association and placed in receivership. On
November 26, 1993, the RTC filed lawsuits in Dallas and New York City against
Mr. Phillips, six former directors, auditors and lawyers of SJSA, alleging that
the auditors and former directors could and should have stopped SJSA's poor
lending practice during the period it was owned by Southmark and that the
former directors abdicated their responsibility for reviewing loans during the
same period. The Office of Thrift Supervision ("OTS") also conducted a formal
examination of SJSA and its affiliates.
On November 21, 1994, Mr. Phillips entered into an agreement with the
RTC and the OTS settling all claims relating to his involvement with SJSA.
LITIGATION AGAINST SOUTHMARK AND ITS AFFILIATES ALLEGING FRAUD OR
MISMANAGEMENT. There were several lawsuits filed against Southmark, its former
officers and directors (including Mr. Phillips) and others, alleging, among
other things, that such persons and entities engaged in conduct designed to
defraud and mislead the investing public by intentionally misrepresenting the
financial condition of Southmark. All such lawsuits have been settled or
dismissed without any findings or admissions of wrongdoing by Mr. Phillips.
THE TRUST WAS NOT A DEFENDANT IN ANY OF THESE LAWSUITS.
LITIGATION RELATING TO LINCOLN SAVINGS AND LOAN ASSOCIATION, F.A. In
an action filed in the United States District Court for the District of Arizona
on behalf of Lincoln Savings and Loan Association, F.A. ("Lincoln"), and
captioned RTC v. Charles H. Keating, Jr., et al., the RTC alleged that Charles
H. Keating, Jr. and other persons, including Mr. Phillips, fraudulently
diverted funds from Lincoln.
The RTC alleged that Mr. Phillips aided and abetted the insider
defendants in a scheme to defraud Lincoln and its regulators; that Southmark,
its subsidiaries and affiliates, including SJSA, facilitated and concealed the
use of Lincoln's funds to finance the sale, at inflated prices, of assets of
Lincoln's parent, American Continental Corp. ("ACC"), in return for loans from
Lincoln and participations in contrived transactions; and that the insider
defendants caused Southmark to purchase ACC assets at inflated prices. The RTC
alleged that Lincoln and/or ACC engaged in three
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illegal transactions with Southmark or its affiliates while Mr. Phillips was
affiliated with Southmark. Southmark was not a defendant in this action.
The RTC alleged nine separate causes of action against Mr. Phillips,
including aiding and abetting the violation of, and conspiracy to violate,
federal and state Racketeer Influenced and Corrupt Organizations Act ("RICO")
statutes, violations of Arizona felony statutes, common law fraud, civil
conspiracy and breach of fiduciary duty. The RTC sought to recover from the
defendants more than $1 billion, as well as treble damages under the federal
RICO statute, punitive damages of at least $100 million and attorneys' fees and
costs.
On November 21, 1994, Mr. Phillips entered into an agreement with the
RTC settling all claims relating to his involvement with Lincoln.
SOUTHMARK PARTNERSHIP LITIGATION. One of Southmark's principal
businesses was real estate syndication, and from 1981 to 1987 Southmark raised
over $500 million in investments from limited partners of several hundred
limited partnerships. The following two cases relate to and involve such
activities.
In an action filed in May 1992 in a Texas state court captioned HCW
Pension Real Estate Fund, et al. v. Phillips, et al., the plaintiffs, 15
former Southmark related public limited partnerships, alleged that the
defendants violated the partnership agreements by charging certain
administrative costs and expenses to the plaintiffs. The complaint alleged
claims for breach of fiduciary duty, fraud and conspiracy to commit fraud and
sought to recover actual damages of approximately $12.6 million plus punitive
damages, attorneys' fees and costs. The defendants included, among others, Mr.
Phillips. In October 1993, the court granted partial summary judgment in favor
of Mr. Phillips on the plaintiffs' breach of fiduciary duty claims. Notice of
non-suit in favor of Mr. Phillips was entered on March 9, 1994.
In an action filed in January 1993 in a Michigan state court captioned
Van Buren Associates Limited Partnership, et al., v. Friedman, et al., the
plaintiff, a former Southmark sponsored limited partnership, alleged a claim
for breach of fiduciary duty in connection with the 1988 transfer of certain
property by the partnership. The plaintiff sought damages in an unspecified
amount, plus costs and attorneys' fees. The plaintiff also sought to quiet
title to the property at issue. The defendants included, among others, Mr.
Phillips. This lawsuit was settled in November 1994.
OLIVE LITIGATION. In February 1990, the Trust, together with CMET,
National Income Realty Trust ("NIRT") and TCI, three real estate entities with,
at the time, the same officers, directors or trustees and advisor as the Trust,
entered into a settlement of a class and derivative action entitled Olive et
al. v. National Income Realty Trust et al. relating to the operation and
management of each of the entities (the "Olive Litigation"). On April 23,
1990, the court granted final approval of the terms of the settlement.
On May 4, 1994, the parties entered into the Olive Modification that
settled subsequent claims of breaches of the settlement that were asserted by
the plaintiffs and that modified certain provisions of the April 1990
settlement. The Olive Modification was preliminarily approved by the
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court on July 1, 1994, and final court approval was entered on December 12,
1994. The effective date of the Olive Modification was January 11, 1995.
The Olive Modification, among other things, provided for the addition
of three new unaffiliated members to the Trust's Board of Trustees and set
forth new requirements for the approval of transactions with affiliates over
the next five years. In addition, BCM, the Trust's advisor, Gene E. Phillips
and William S. Friedman, who served as President and Trustee of the Trust until
February 24, 1994, President of BCM until May 1, 1993 and Director of BCM until
December 22, 1989, agreed to pay a total of $1.2 million to the Trust, CMET,
NIRT and TCI, of which $150,000 was to be paid to the Trust. The Trust
received $12,300 in May 1994 and the remaining $137,000 is to be paid in 18
monthly installments which began February 1, 1995. As of August 1, 1995, all
payments required to be paid to the Trust under the Olive Modification by BCM
and Messrs. Phillips and Friedman have been made.
Under the Olive Modification, the Trust, CMET, NIRT, TCI and their
shareholders released the defendants from any claims relating to the
plaintiffs' allegations. The Trust, CMET, NIRT and TCI also agreed to waive
any demand requirement for the plaintiffs to pursue claims on behalf of each of
them against certain persons or entities. The Olive Modification also requires
that any shares of the Trust held by Messrs. Phillips, Friedman or their
affiliates shall be (i) voted in favor of the reelection of all current members
of the Board of Trustees that stand for reelection during the two calendar
years following the effective date of the Olive Modification and (ii) voted in
favor of all new members of the Board of Trustees appointed pursuant to the
terms of the Olive Modification that stand for reelection during the three
calendar years following the effective date of the Olive Modification.
Pursuant to the terms of the Olive Modification, certain related party
transaction which the Trust (or IORI Nevada, as successor to the Trust) may
enter into prior to April 28, 1999, will require the unanimous approval of the
Board of Trustees. In addition, such related party transactions are to be
discouraged and may only be entered into in exceptional circumstances and after
a determination by the Board of Trustees that the transaction is in the best
interest of the Trust and that no other opportunity exists that is as good as
the opportunity presented by such transaction. Direct contractual agreements
for services between the Trust and BCM or one of its affiliates, including the
Advisory Agreement and any property management contracts, shall require prior
approval by two-thirds of the Trustees of the Trust and, pursuant to the terms
of the Declaration of the Trust, approval by a majority of the shareholders.
The Olive Modification also terminated a number of the provisions of
the original settlement including the requirement that the Trust, CMET, NIRT
and TCI maintain a Related Party Transaction Committee and a Litigation
Committee of their respective Boards. The Court retained jurisdiction to
enforce the Olive Modification.
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CERTAIN BUSINESS RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
CERTAIN BUSINESS RELATIONSHIPS. In February 1989, the Trust's Board
of Trustees voted to retain BCM as the Trust's advisor. The Trust's President
and all Executive Vice Presidents serve also as executive officers of BCM.
Since February 1, 1991, affiliates of BCM have provided property
management services to the Trust. Currently, Carmel, Ltd. provides such
property management services. The general partner of Carmel, Ltd. is BCM. The
limited partners of Carmel, Ltd. are (i) Syntek West Inc. ("SWI"), of which
Mr. Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust for
the benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the
property-level management and leasing of one of the Trust's office buildings
and commercial properties owned by a real estate partnership in which the Trust
and TCI are partners to Carmel Realty, which is a company owned by SWI.
Prior to December 1, 1992, affiliates of BCM provided brokerage
services to the Trust and received brokerage commissions in accordance with the
Advisory Agreement. Since December 1, 1992, the Trust has engaged, on a non-
exclusive basis, Carmel Realty to perform brokerage services to the Trust.
The Trustees and officers of the Trust also serve as trustees or
directors and officers of CMET and TCI. The Trustees owe fiduciary duties to
such entities as well as to the Trust under applicable law. CMET and TCI have
the same relationship with BCM as the Trust. Mr. Phillips is a general partner
of SAMLP, the general partner of National Realty, L.P. ("NRLP") and National
Operating, L.P. ("NOLP"). BCM performs certain administrative functions for
NRLP and NOLP on a cost-reimbursement basis. BCM also serves as advisor to
ART. Mr. Phillips served as Chairman of the Board and director of ART, until
November 16, 1992. The officers of the Trust also serve as officers of ART.
From April 1992 to December 31, 1992, Ted P. Stokely, a Trustee of the
Trust, was employed as a paid real estate consultant and since January 1993 as
a part-time unpaid consultant for Eldercare Housing Foundation ("Eldercare"), a
nonprofit corporation engaged in the acquisition of low income and elderly
housing. Eldercare has a revolving loan commitment from BCM, of which Mr.
Phillips is the sole shareholder. Eldercare filed for bankruptcy protection in
July 1993 and was dismissed from bankruptcy on October 12, 1994. Eldercare
filed again for bankruptcy protection in May 1995.
RELATED PARTY TRANSACTIONS. Historically, the Trust has engaged in
and may continue to engage in business transactions, including real estate
partnerships, with related parties. The Trust's management believes that all
of the related party transactions represented the best investments available at
the time and were at least as advantageous to the Trust as could have been
obtained from unrelated third parties.
The Trust is a partner with TCI in the Tri-City Limited Partnership.
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In 1994, the Trust paid BCM and its affiliates $367,000 in advisory
fees, $126,000 in property and construction management fees (net of property
management fees paid to subcontractors, other than Carmel Realty) and $20,000
in leasing commissions. In addition, as provided in the Advisory Agreement,
BCM received cost reimbursements from the Trust of $158,000 in 1994. No
brokerage commissions were paid to BCM or its affiliates in 1994.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table summarizes selected historical consolidated
financial information of the Trust for the six months ended June 30, 1995 and
the six months ended June 30, 1994 and the last five years ended December 31.
IORI Nevada is a newly-created corporation that, by operation of law, would
succeed to all the rights and properties, and be subject to all the obligations
and liabilities, of the Trust as incorporated as the California Corporation
upon consummation of the proposed Incorporation Procedure. Thus, for
accounting purposes, IORI Nevada would be treated as the continuing accounting
entity which would be the successor to the Trust.
The historical consolidated financial information is not necessarily
indicative of IORI Nevada's future results of operations or financial
condition. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Trust's Consolidated Financial Statements and notes thereto
appearing under "Index to Financial Statements". Results for the interim
periods are not necessarily indicative of the results for a full year.
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Income Opportunity Realty Trust
Selected Financial Data (Historical)
(Dollars in thousands, except per share)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Years Ended December 31,
--------------------- ------------------------------------------------------------------
EARNINGS DATA: 1995 1994 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income $ 1,272 $ 1,769 $ 6,938 $ 7,316 $ 6,619 $ 5,592 $ 8,463
Expense 2,152 1,632 7,225 7,247 7,089 14,645 17,552
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
(loss) on sale of
real estate and
extraordinary gain (880) (137) (287) 69 (470) (9,053) (9,089)
(Loss) on sale of real estate - - - - (81) - -
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary gain (880) (137) (287) 69 (551) (9,053) (9,089)
Extraordinary gain - - - 806 - 4,765 -
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ (880) $ (137) $ (287) $ 875 $ (551) $ (4,288) $ (9,089)
======== ======== ======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Income (loss) before (loss)
on sale of real estate and
extraordinary gain $ (1.11) $ (.17) $ (.36) $ .09 $ (.55) $ (9.97) $ (9.79)
(Loss) on sale of real estate - - - - (.09) - -
Extraordinary gain - - - 1.00 - 5.25 -
-------- -------- -------- -------- -------- -------- --------
Net Income (loss) $ (1.11) $ (.17) $ (.36) $ 1.09 $ (.64) $ (4.72) $ (9.79)
======== ======== ======== ======== ======== ======== ========
Weighted average number
of Shares outstanding 791,444 791,444 791,441 804,716 864,321 907,665 928,606
Distributions per share $ .15 $ .15 $ .60 $ .50 $ - $ 1.44 $ .88
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
-------- -------------------------------------------------------------------
BALANCE SHEET DATA: 1995 1994 1993 1992 1991 1990
------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Notes and interest receivable $ 1,980 $ 1,974 $ 2,983 $ 2,922 $ 2,583 $ 33,694
Real estate 40,756 41,156 40,952 41,767 44,311 34,831
Total assets 47,860 49,035 50,127 51,275 52,401 75,631
Notes and interest payable 20,413 20,717 21,354 22,447 22,651 40,798
Redeemable shares of
beneficial interest - - - - 6,062 6,062
Shareholders' equity 24,462 25,572 26,334 26,380 20,904 25,574
Book value per share $ 30.91 $ 32.31 $ 33.27 $ 30.52 $ 30.14 $ 34.00
</TABLE>
____________________________
Shares and per share data have been restated to give effect to the one-for-four
reverse share split effected September 9, 1991.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Trust was formed to invest in mortgage loans, including first,
wraparound, junior, development and construction loans and to invest in equity
interests in real property through direct acquisitions, leases, joint venture
development projects and partnership agreements. The Trust was organized on
December 14, 1984 and commenced operations on April 10, 1985.
Under the Declaration of Trust, the Trust is a self-liquidating trust
and has scheduled, unless and until the Trust's shareholders decide on a
contrary course of action, to begin liquidation of its assets prior to October
24, 1996. The Declaration of Trust also requires the distribution to the
Trust's shareholders of (i) the net cash proceeds from sale or refinancing of
equity investments received by the Trust and (ii) the net cash proceeds from
the satisfaction of mortgage notes receivable received after October 24, 1996.
However, the Board of Trustees has discretionary authority to hold any
investment past October 24, 1996, should circumstances so dictate. The Trust's
management does not believe that the Trust's status as a liquidating Trust has
impaired the carrying value of the Trust's assets because liquidation is
expected to be carried out in an orderly fashion.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at June 30, 1995 aggregated $447,000,
compared with $232,000 at December 31, 1994. The Trust's principal sources of
cash have been and will continue to be property operations and collection of
interest on its mortgage note receivable and distributions from partnerships.
The Trust anticipates that it will have sufficient cash to meet its various
cash requirements during the remainder of 1995, including the payment of
distributions, debt service obligations and property maintenance and
improvements.
In the first quarter of 1995, the Trust paid quarterly distributions
aggregating $0.30 per share or a total of $238,000. The Trust's distribution
policy previously provided for an annual determination of distributions after
the Trust's year end until such time as property operation stabilized at a
level producing cash flow from property operations in excess of anticipated
needs. In January 1993, the Trust's Board of Trustees approved the resumption
of quarterly distributions. In 1994 and 1993, the Trust paid distributions to
shareholders totaling $475,000 ($.60 per share) and $406,000 ($.50 per share),
respectively. The Trust paid no distribution to shareholders in 1992.
As of July 28, 1995, the Trust had repurchased 67,952 of its shares of
beneficial interest at a cost of $1.2 million pursuant to a repurchase program
commenced in December 1989. None of such shares were repurchased in 1995. The
Trust's Board of Trustees has authorized the Trust's repurchase of a total of
100,000 shares under such repurchase program, of which 32,048 shares remain to
be repurchased. The level of any future shares repurchases will depend on the
market price of the Trust's shares and the continued availability to the Trust
of excess funds.
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In 1994, the Trust received $254,000 in distributions from the
Tri-City. The Trust owns a 36.3% general partner interest and TCI owns a 63.7%
combined general and limited partner interest in Tri-City. In 1994, the Trust
also received $154,000 in distributions from and made $145,000 in contributions
to NIA. The Trust received a distribution of $127,000 from Tri-City in July
1995. The Trust owns a 40% general partner interest and TCI owns a 60% general
partner interest in NIA.
On a quarterly basis, the Trust's management reviews the carrying
values of the Trust's mortgage note receivable and properties. Generally
accepted accounting principles require that the carrying amount of an
investment cannot exceed the lower of its cost or its estimated net realizable
value. In an instance where the estimate of net realizable value of a Trust
property or note is less than the carrying value thereof at the time of
evaluation, a provision for loss is recorded by a charge against earnings. The
estimate of net realizable value of the Trust's mortgage note receivable is
based on management's review and evaluation of the collateral property securing
the mortgage note. The property review generally includes selective property
inspections, a review of the property's current rents compared to market rents,
a review of the property's expenses, a review of the maintenance requirements,
discussions with the manager of the property and a review of the surrounding
area. See "Recent Accounting Pronouncement" below.
RESULTS OF OPERATIONS
FIRST SIX MONTHS OF 1995 COMPARED TO FIRST SIX MONTHS OF 1994
For the six months ended June 30, 1995, the Trust incurred a net loss
of $872,000, as compared with a net loss of $2,000 in the corresponding period
in 1994. For the three months ended June 30, 1995, the Trust had net loss of
$880,000 as compared with net income of $137,000 in the corresponding period in
1994. The primary factor contributing to the Trust's net loss in the three and
six months ended June 30, 1995 was an increase in equity in losses of
partnerships of $707,000 and $673,000, respectively, as discussed in detail
below.
Net rental income (rents less property operating expense) for the
first six months of 1995 of $1.7 million approximated the $1.7 million in the
corresponding period in 1994. Net rental income for the three months ended
June 30, 1995 was $882,000, as compared to $1.1 million in the corresponding
period in 1994. The decline in second quarter net rental income is primarily
due to operating losses incurred at the Cedars Apartments, a property obtained
by deed- in-lieu of foreclosure in March 1995 and to higher expenses in both
the Trust's residential and commercial portfolios.
Equity in loss of partnerships was a loss of $729,000 and $644,000 for
the three and six months ended June 30, 1995 compared to a loss of $22,000 and
income of $29,000 in the corresponding periods in 1994, respectively. The
increased equity loss is primarily due to the write down of a wraparound
mortgage note receivable to the balance of the underlying mortgage payable by
the Nakash Income Associates, a partnership in which the Trust has a 40%
general partner interest.
-85-
<PAGE> 94
Interest income, interest expense, depreciation and advisory fee
expense for the three and six months ended June 30, 1995 all approximated that
of the corresponding periods in 1993.
General and administrative expenses increased to $263,000 and $398,000
for the three and six months ended June 30, 1995, from $138,000 and $279,000 in
the corresponding periods in 1994, respectively. The increase is primarily due
to higher communications and legal fees relating to the Trust's 1995 annual
meeting held in March 1995.
1994 COMPARED TO 1993
For the year ended December 31, 1994, the Trust had a net loss of
$287,000, as compared with net income of $875,000 in fiscal year 1993. The
Trust's 1993 net income included an extraordinary gain of $806,000 on the early
payoff of mortgage debt. The primary factors contributing to the Trust's 1994
net loss are discussed in the following paragraphs.
Net rental income (rental income less property operating expenses) for
1994 was $3.1 million, as compared to $3.4 million in 1993. A decrease of
$242,000 is due to a decline in occupancy at one of the Trust's commercial
properties and a decrease of $113,000 is due to a decline in occupancy and an
increase in expenses at one of the Trust's apartment complexes. These
decreases are partially offset by an increase in net rental income of $108,000
from increases in occupancy and a decrease in expenses at one of the Trust's
other apartment complexes. Net rental income is expected to increase in 1995
due to anticipated increases in rental and occupancy rates and from obtaining
the Cedars Apartments, the collateral securing a note receivable. This
property was recorded as an in substance foreclosure as of December 31, 1994
with title to the property being received on March 2, 1995.
Equity in income of partnerships was $86,000 in 1994, as compared to
$203,000 in 1993. The decrease is attributable to an increase in expenses at
one of the Tri-City apartment complexes.
Interest income of $294,000 for 1994 approximated the $308,000 in
1993. Interest income in 1995 is expected to decrease due to the in substance
foreclosure as of December 31, 1994, of the Cedars Apartments, the collateral
securing one of the Trust's mortgage notes receivable. Interest expense of
$1.9 million in 1994 approximated the $1.8 million in 1993.
Depreciation expense was $967,000 in 1994 compared to $949,000 in
1993. The increase is attributable to an increase in tenant improvement at one
of the Trust's commercial properties.
The advisory fee was $367,000 in 1994 as compared to $447,000 in 1993.
The decrease is due to the Trust having paid a net income incentive fee in
1993, while no such fee was paid in 1994.
General and administrative expenses were $555,000 in 1994 as compared
to $700,000 in 1993. The decrease is due to a decrease in legal fees
associated with the Olive Litigation, which was settled in 1994.
-86-
<PAGE> 95
In 1993 the Trust recognized an extraordinary gain of $806,000 on the
early payoff of the mortgage secured by the Porticos Apartments. The Trust
reported no such gain in 1994.
The Trust's distribution policy previously provided for an annual
determination of distributions after the Trust's year end until such time as
property operation stabilized at a level producing cash flow from property
operations in excess of anticipated needs. In January 1993, the Trust's Board
of Trustees approved the resumption of quarterly distributions. In 1994 and
1993, the Trust paid distributions to shareholders totaling $475,000 ($.60 per
share) and $406,000 ($.50 per share), respectively. The Trust paid no
distribution to shareholders in 1992.
1993 COMPARED TO 1992
For the fiscal year ended December 31, 1993, the Trust had net income
of $875,000 as compared to a net loss of $551,000 in 1992. The primary factor
contributing to the Trust's 1993 net income was an extraordinary gain of
$806,000 recognized on the early payoff of mortgage debt. This and the other
factors contributing to the Trust's 1993 net income are discussed in the
following paragraphs.
Net rental income (rental income less property operating expenses) for
1993 was $3.4 million, as compared to $3.0 million in 1992. The increase in
net rental income is attributable to the Trust having obtained through
foreclosure the Saratoga Office Building in April 1992.
Equity in income of partnerships was $203,000 for 1993, as compared to
$26,000 for 1992. The increase is primarily due to decreased administrative
expenses in Tri-City in which the Trust has a 36.3% general partner interest.
Interest income of $308,000 for 1993 approximated the $296,000 in 1992.
Interest expense for 1993 was $1.8 million, which approximated the
$1.9 million in 1992.
Depreciation expense for 1993 was $949,000 compared with $910,000 in
1992. The increase is attributable to depreciation of improvements made on the
Trust's commercial properties.
The advisory fee for 1993 was $447,000 as compared to $327,000 in
1992. The increase is due to the Trust's 1993 net income which required the
payment of a net income incentive fee to the Trust's advisor.
General and administrative expenses of $700,000 in 1993 approximated
the $668,000 in 1992.
The Trust recognized an extraordinary gain of $806,000 on the early
payoff of the mortgage secured by the Porticos Apartments in 1993. The Trust
reported no such gain in 1992.
-87-
<PAGE> 96
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances
and regulations, the Trust may be potentially liable for removal or remediation
costs, as well as certain other potential costs, relating to hazardous or toxic
substances (including governmental fines and injuries to persons and property)
where property-level managers have arranged for the removal, disposal or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the
air, and third parties may seek recovery from the Trust for personal injury
associated with such materials. The Trust's management is not aware of any
environmental liability relating to the above matters that would have a
materially adverse effect on the Trust's business, assets or results of
operations.
INFLATION
The effects of inflation on the Trust's operations are not
quantifiable. Gross revenues from property operations fluctuate
proportionately with inflationary increases and decreases in housing costs.
Fluctuations in the rate of inflation also affect the sale value of properties
and, correspondingly, the ultimate realizable value of the Trust's real estate
and notes receivable portfolios.
TAXATION AS A REIT
For the years ended December 31, 1994, 1993 and 1992, the Trust
elected and, in management's opinion, qualified to be treated as a REIT as
defined under Sections 856 through 860 of the Code. To continue to qualify for
federal taxation as a REIT under the Code, the Trust is required to hold at
least 75% of the value of its total assets in real estate assets, government
securities, cash and cash equivalents at the close of each quarter of each
taxable year. The Code also requires a REIT to distribute at least 95% of its
REIT taxable income plus 95% of its net income from foreclosure property, all
as defined in Section 857 of the Code, on an annual basis to shareholders.
RECENT ACCOUNTING PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121 - "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed
Of."
The Trust is a self liquidating trust. Accordingly, all of the
Trust's properties are classified as held for sale. SFAS No. 121 requires
long-lived assets held for sale ". . .be reported at the lower of carrying
amount or fair value less cost to sell." If a reduction in a held for sale
asset's carrying amount to fair value less cost to sell is required, a
provision for loss shall be recognized by a charge against earnings.
Subsequent revisions, either upward or downward, to be held for sale asset's
carrying amount when originally classified as held for sale. A corresponding
charge against or credit to earnings is to be recognized. Long-lived assets
held for sale are not to be depreciated. SFAS No. 121 is effective for fiscal
years beginning after December 15, 1995.
-88-
<PAGE> 97
The Trust's management has not fully evaluated the effects of adopting
SFAS No. 121, but it estimates that if the Trust had adopted SFAS No. 121
effective January 1, 1995, the Trust would have recorded no depreciation in the
first half of 1995, the Trust's reported net loss for the six months ended June
30, 1995 would have decreased by $502,000 and that a provision for loss to
reduce any property's carrying amount to its fair value less cost to sell would
not have been required.
LEGAL MATTERS
The validity of the shares of the Nevada Common Stock to be issued by
IORI Nevada pursuant to the Incorporation Procedure and the federal income tax
consequences of the Incorporation Procedure have been passed upon by Andrews &
Kurth L.L.P., Dallas, Texas. Andrews & Kurth L.L.P. will rely as to all
matters of Nevada law on Kummer Kaempfer Bonner & Renshaw, Las Vegas, Nevada.
EXPERTS
The consolidated balance sheets as of December 31, 1994 and 1993, the
consolidated statements of operations, cash flows and shareholders' equity for
the years ended December 31, 1994, 1993 and 1992 of the Trust and its
subsidiaries, and the balance sheet as of August 23, 1995 of IORI Nevada,
included in the Proxy Statement/Prospectus have been audited by BDO Seidman,
LLP, independent certified public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing.
-89-
<PAGE> 98
INDEX TO FINANCIAL STATEMENTS
1. Consolidated Financial Statements:
Income Opportunity Realty Investors, Inc.:
Report of Independent Certified Public Accountants - BDO
Seidman, LLP
Consolidated Balance Sheet at December 31, 1994
Notes to Balance Sheet December 31, 1994
Income Opportunity Realty Trust:
Report of Independent Certified Public Accountant - BDO
Seidman, LLP
Consolidated Balance Sheets at December 31, 1994 and 1993
Consolidated Statements of Operations - Years ended December
31, 1994, 1993 and 1992
Consolidated Statements of Shareholder's Equity - Years ended
December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows - Years ended December
31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements - Years ended
December 31, 1994, 1993 and 1992
Consolidated Balance Sheet at June 30, 1995
Consolidated Statements of Operations - Six months ended June
30, 1995 and 1994
Consolidated Statements of Shareholder's Equity - Six months
ended June 30, 1995 and 1994
Consolidated Statements of Cash Flows - Six months ended June
30, 1995 and 1994
Notes to Consolidated Financial Statements - Six Months ended
June 30, 1995
2. Consolidated Financial Statement Schedules:
III - Real Estate and Accumulated Depreciation
IV - Mortgage Loans on Real Estate
All other schedules are omitted because they are not applicable or because the
required information is shown in the consolidated financial statements or the
notes thereto.
F-1
<PAGE> 99
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholder
Income Opportunity Realty Investors, Inc.
We have audited the accompanying balance sheet of Income Opportunity Realty
Investors, Inc. as of August 23, 1995. This financial statement is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement 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 balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Income Opportunity Realty
Investors, Inc. as of August 23, 1995 in conformity with generally accepted
accounting principles.
August 25, 1995
BDO SIEDMAN
F-2
<PAGE> 100
INCOME OPPORTUNITY REALTY
INVESTORS, INC.
<TABLE>
<CAPTION>
BALANCE SHEET
AUGUST 23, 1995
- -----------------------------------------------------------------------------
<S> <C>
ASSETS
Cash $ 1,000
- -----------------------------------------------------------------------------
Total assets 1,000
- -----------------------------------------------------------------------------
STOCKHOLDER'S EQUITY
Common stock, $.01 par value; 10,000,000 authorized shares,
100 shares issued and outstanding 1
Preferred stock, no par value, 1,000,000 shares authorized
No shares issued -
Additional paid-in capital 999
- -----------------------------------------------------------------------------
Total stockholder's equity $ 1,000
</TABLE>
F-3
<PAGE> 101
INCOME OPPORTUNITY REALTY
INVESTORS, INC.
NOTES TO BALANCE SHEET
- --------------------------------------------------------------------------------
1. ORGANIZATION Income Opportunity Realty Investors, Inc. ("the
Company"), a Nevada corporation, was formed on
August 23, 1995, and has had no operations since
that date. The corporation is a wholly-owned
subsidiary of Income Opportunity Realty Trust, a
California business trust (the "Trust).
2. PURPOSES The Company was formed to facilitate the
incorporation to the Trust in Nevada. It is
anticipated that the Trust will be incorporated as
a California corporation, which corporation will be
merged into IORT to complete this reorganization.
3. INCOME The Company intends to qualify as a real estate
TAXES investment trust ("REIT"), as defined in Sections
856 through 860 of the Internal Revenue Code of
1986, as amended, and as such, will not be taxed
for federal income tax purposes on that portion of
its taxable income which is distributed to the
shareholders, provided that at least 95 percent of
its REIT taxable income, plus 95 percent of its net
income from foreclosure property, is distributed.
F-4
<PAGE> 102
ITEM 8.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Report of Independent Certified Public Accountants...................... F-6
Consolidated Balance Sheets -
December 31, 1994 and 1993.................................. F-7
Consolidated Statements of Operations -
Years Ended December 31, 1994, 1993 and 1992................ F-8
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1994, 1993 and 1992................ F-9
Consolidated Statements of Cash Flows -
Years Ended December 31, 1994, 1993 and 1992................ F-10
Notes to Consolidated Financial Statements.............................. F-12
Schedule III - Real Estate and Accumulated Depreciation................. F-24
Schedule IV - Mortgage Loans on Real Estate............................ F-26
</TABLE>
All other schedules are omitted because they are not required, are not
applicable or the information required is included in the Consolidated
Financial Statements or the notes thereto.
F-5
<PAGE> 103
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Trustees of
Income Opportunity Realty Trust
We have audited the accompanying consolidated balance sheets of Income
Opportunity Realty Trust and Subsidiaries as of December 31, 1994 and 1993 and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1994.
We have also audited the schedules listed in the accompanying index. These
financial statements and schedules are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
schedules are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and schedules. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and schedules.
We believe our audits provide a reasonable basis for our opinion.
As described in Note 1, the Trust is to begin the liquidation of its assets
prior to October 24, 1996. The Trust is also required to distribute the net
cash proceeds from the sale or refinancing of its equity investments.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Income
Opportunity Realty Trust and Subsidiaries as of December 31, 1994 and 1993, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
Also, in our opinion, the schedules referred to above present fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN
Dallas, Texas
February 28, 1995
F-6
<PAGE> 104
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1994 1993
------------- -------------
(dollars in thousands)
<S> <C> <C>
Assets
------
Notes and interest receivable,
performing......................................... $ 1,974 $ 1,962
Nonperforming, nonaccruing.......................... - 1,021
-------------- --------------
1,974 2,983
Real estate held for sale, net of accumulated
depreciation ($5,055 in 1994 and $4,088 in 1993)... 41,156 40,952
Less - allowance for estimated losses............... (121) (121)
-------------- --------------
43,009 43,814
Investment in partnerships.......................... 3,980 4,157
Cash and cash equivalents........................... 232 582
Other assets (including $44 in 1994 and $58 in
1993 due from affiliates).......................... 1,814 1,574
-------------- --------------
$ 49,035 $ 50,127
============== ==============
Liabilities and Shareholders' Equity
------------------------------------
Liabilities
Notes and interest payable.......................... $ 20,717 $ 21,354
Other liabilities (including $407 in 1994 and $242
in 1993 due to affiliates)......................... 2,746 2,439
-------------- --------------
23,463 23,793
Commitments and contingencies
Shareholders' equity
Shares of beneficial interest, no par value;
authorized shares, unlimited; issued and
outstanding 791,444 shares in 1994 and 1993........ 3,347 3,347
Paid-in capital..................................... 62,093 62,093
Accumulated distributions in excess of accumulated
earnings........................................... (39,868) (39,106)
-------------- --------------
25,572 26,334
-------------- --------------
$ 49,035 $ 50,127
============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-7
<PAGE> 105
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------
1994 1993 1992
--------------- --------------- ---------------
(dollars in thousands, except per share)
<S> <C> <C> <C>
Income
Rentals.............................. $ 6,558 $ 6,805 $ 6,297
Interest (including $11 in 1992
from affiliates).................. 294 308 296
Equity in income of partnerships..... 86 203 26
--------------- --------------- --------------
6,938 7,316 6,619
Expenses
Property operations (including $146
in 1994, $133 in 1993 and $64 in
1992 to affiliates)............... 3,425 3,382 3,284
Interest............................. 1,911 1,769 1,900
Depreciation......................... 967 949 910
Advisory fee to affiliate............ 367 447 327
General and administrative
(including $158 in 1994, $160 in
1993 and $145 in 1992 to
affiliate)........................ 555 700 668
--------------- --------------- --------------
7,225 7,247 7,089
--------------- --------------- --------------
Income (loss) before (loss) on sale of
real estate and extraordinary gain... (287) 69 (470)
(Loss) on sale of real estate......... - - (81)
Extraordinary gain.................... - 806 -
--------------- --------------- --------------
Net income (loss)..................... $ (287) $ 875 $ (551)
=============== =============== ==============
Earnings per share
Income (loss) before (loss) on sale of
real estate and extraordinary gain... $ (.36) $ .09 $ (.55)
(Loss) on sale of real estate......... - - (.09)
Extraordinary gain.................... - 1.00 -
------------- ------------- -------------
Net income (loss)..................... $ (.36) $ 1.09 $ (.64)
============= ============= =============
Weighted average shares of
beneficial interest used in
computing earnings per share......... 791,444 804,716 864,321
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-8
<PAGE> 106
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Shares of Distributions
Beneficial Interest in Excess of
-------------------------- Paid-in Accumulated Shareholders'
Shares Amount Capital Earnings Equity
---------- --------- --------- ------------ -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1992 693,571 2,774 57,154 (39,024) 20,904
Redemption of share
purchase rights....... - - (35) - (35)
Reclassification of
redeemable shares of
beneficial interest... 170,750 683 5,379 - 6,062
Net (loss)..................... - - - (551) (551)
------------ ------------ ------------ ---------- ------------
Balance, December 31,
1992.................. 864,321 3,457 62,498 (39,575) 26,380
Repurchase of shares of
beneficial interest... (72,877) (110) (405) - (515)
Distributions ($.50 per
share)................ - - - (406) (406)
Net income..................... - - - 875 875
------------ ------------ ------------ ---------- ------------
Balance, December 31,
1993.................. 791,444 3,347 62,093 (39,106) 26,334
Distributions ($.60 per
share)................ - - - (475) (475)
Net (loss)..................... - - - (287) (287)
------------ ------------ ------------ ---------- ------------
Balance, December 31,
1994.................. 791,444 $ 3,347 $ 62,093 $ (39,868) $ 25,572
============ ============ ============ ========= ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-9
<PAGE> 107
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------
1994 1993 1992
------------ ------------- -------------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Rentals collected.......................... $ 6,694 $ 6,703 $ 6,278
Interest collected (including $40 in
1992 from affiliates)................... 282 248 274
Interest paid.............................. (1,828) (1,748) (1,913)
Payments for property operations
(including $146 in 1994, $133 in 1993
and $64 in 1992 to affiliate)........... (2,973) (3,739) (2,918)
Advisory fee paid to affiliate............. (371) (449) (341)
General and administrative expenses paid
(including $158 in 1994, $160 in 1993
and $145 in 1992 to affiliates)......... (792) (380) (1,006)
Funding of partnerships.................... (145) (92) (79)
Distributions from partnerships............ 408 478 36
Funding of escrows, debt refinancing....... - (608) -
Other...................................... (331) 825 187
------------- ------------ ------------
Net cash provided by operating
activities........................ 944 1,238 518
Cash Flows from Investing Activities
Collections on note receivable from
affiliate.................................. - - 616
Real estate improvements................... (184) (134) (191)
Net proceeds from sale of real estate...... - - 137
------------- ------------ ------------
Net cash provided by (used in)
investing activities................. (184) (134) 562
Cash Flows from Financing Activities
Proceeds from notes payable................ - 10,500 -
Payments on notes payable.................. (635) (10,774) (170)
Cash paid in conjunction with debt
refinancing............................. - (472) -
Distributions to shareholders.............. (475) (406) -
Repurchase of shares of beneficial
interest................................ - (515) -
Redemption of share purchase rights........ - - (35)
------------- ------------ ------------
Net cash (used in)
financing activities.............. (1,110) (1,667) (205)
Net increase (decrease) in cash and
cash equivalents........................... (350) (563) 875
Cash and cash equivalents, beginning of
year...................................... 582 1,145 270
------------- ------------ ------------
Cash and cash equivalents, end of year...... $ 232 $ 582 $ 1,145
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-10
<PAGE> 108
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------
1994 1993 1992
------------- -------------- --------------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of net income (loss) to net
cash provided by operating activities
Net income (loss)............................ $ (287) $ 875 $ (551)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities
Depreciation and amortization.......... 1,041 914 876
Provision for losses................... - - -
Extraordinary gain..................... - (806) -
Equity in income of partnerships....... (86) (203) (26)
Loss on sale of real estate............ - - 81
Funding of partnerships................ (145) (92) (79)
Distributions from partnerships........ 408 478 36
Decrease in interest receivable........ - - 29
(Increase) decrease in other assets.... (284) 95 516
(Decrease) in interest payable......... (3) (3) (30)
Increase (decrease) in other
liabilities......................... 300 (20) (334)
------------- ------------ ------------
Net cash provided by operating
activities....................... $ 944 $ 1,238 $ 518
============= ============ ============
Schedule of noncash investing and financing
activities
Note receivable from sale of real estate..... $ - $ - $ 1,050
Forgiveness of notes payable through
discount on early payoff of mortgage...... - 806 -
Carrying value of real estate obtained
through insubstance foreclosure in
satisfaction of note receivable with a
carrying value of $990.................... 990 - -
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-11
<PAGE> 109
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of Income Opportunity Realty
Trust and consolidated entities(the "Trust") have been prepared in conformity
with generally accepted accounting principles, the most significant of which
are described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES." These,
along with the remainder of the Notes to Consolidated Financial Statements, are
an integral part of these Consolidated Financial Statements. The data
presented in the Notes to Consolidated Financial Statements are as of December
31 of each year and for the year then ended, unless otherwise indicated.
Dollar amounts in tables are in thousands, except per share amounts.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Trust business. Income Opportunity Realty Trust ("IORT"), is
a California business trust organized on December 14, 1984. The Trust may hold
interests in real estate through direct ownership, leases and partnerships and
it may also invest in mortgage loans on real estate, including first,
wraparound and junior mortgage loans.
The Trust is a self-liquidating trust and is scheduled, unless and until the
Trust's shareholders decide on a contrary course of action, to begin
liquidation of its assets prior to October 24, 1996. However, the Trust's
Board of Trustees has discretionary authority to hold any investment past
October 24, 1996, should circumstances so dictate. The Trust's Declaration of
Trust also requires the distribution to the Trust's shareholders of (i) the net
cash proceeds from sale or refinancing of equity investments received by the
Trust, and (ii) after October 24, 1996 the net cash proceeds received from the
satisfaction of mortgage notes receivable.
The Trust's management does not believe that the Trust's status as a
liquidating Trust has impaired the carrying value of the Trust's assets because
liquidation is expected to be carried out in an orderly fashion.
Basis of consolidation. The Consolidated Financial Statements include the
accounts of IORT and partnerships which it controls. All intercompany
transactions and balances have been eliminated.
Interest recognition on notes receivable. It is the Trust's policy to cease
recognizing interest income on notes receivable that have been delinquent for
60 days or more. In addition, accrued but unpaid interest income is only
recognized to the extent that the net realizable value of the underlying
collateral exceeds the carrying value of the receivable.
Allowance for estimated losses. Valuation allowances are provided for
estimated losses on notes receivable and properties held for sale to the extent
that the investment in the notes or properties exceeds the Trust's estimate of
net realizable value of the property or collateral securing such note, or fair
value of the collateral if foreclosure is probable. In estimating net
realizable value, consideration is given to the current estimated collateral or
property value adjusted for costs to
F-12
<PAGE> 110
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
complete or improve, hold and dispose. The cost of funds, one of the criteria
used in the calculation of estimated net realizable value (approximately 4.8%
and 4.1% as of December 31, 1994 and 1993, respectively) is based on the
average cost of all capital. The provision for losses is based on estimates,
and actual losses may vary from current estimates. Such estimates are reviewed
periodically, and any additional provision determined to be necessary is
charged against earnings in the period in which it becomes reasonably
estimable.
Foreclosed real estate held for sale. Foreclosed real estate is initially
recorded at new cost, defined as the lower of original cost or fair value minus
estimated costs of sale. After foreclosure, the excess of new cost, if any,
over fair value minus estimated costs of sale is recognized in a valuation
allowance. Subsequent changes in fair value either increase or decrease such
valuation allowance. See "Allowance for estimated losses" above. Properties
held for sale are depreciated in accordance with the Trust's established
depreciation policies. See "Real estate and depreciation" below.
Real estate and depreciation. Real estate is carried at the lower of cost or
estimated net realizable value, except for foreclosed properties held for sale,
which are recorded initially at the lower of original cost or fair value minus
estimated costs of sale. Depreciation is provided for by the straight-line
method over the estimated useful lives of the assets, which range from 3 to 40
years.
Present value discounts. The Trust provides for present value discounts on
notes receivable that have interest rates that differ substantially from
prevailing market rates and amortizes such discounts by the interest method
over the lives of the related notes. The factors considered in determining a
market rate for notes receivable include the borrower's credit standing, nature
of the collateral and payment terms of the note.
Revenue recognition on the sale of real estate. Sales of real estate are
recognized when and to the extent permitted by Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No.
66"). Until the requirements of SFAS No. 66 for full profit recognition have
been met, transactions are accounted for using either the deposit, the
installment sale, the cost recovery or the financing method, whichever is
appropriate.
Investment in noncontrolled partnerships. The Trust uses the equity method to
account for investments in partnerships which it does not control. Under the
equity method, the Trust's initial investment, recorded at cost, is increased
by the Trust's proportionate share of the partnership's operating income and
additional advances and decreased by the Trust's proportionate share of the
partnership's operating losses and distributions received.
F-13
<PAGE> 111
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair value of financial instruments. The Trust used the following assumptions
in estimating the fair value of its notes receivable and payable. For
performing notes receivable the fair value was estimated by discounting future
cash flows using current interest rates for similar loans. For nonperforming
notes receivable, the estimated fair value of the Trust's interest in the
collateral property was used. The estimated fair value presented does not
purport to represent the amounts to be ultimately realized by the Trust. The
amounts ultimately realized may vary significantly from the estimated fair
value presented. For notes payable the fair value was estimated using current
rates for mortgages with similar terms and maturities.
Cash equivalents. For purposes of the Consolidated Statements of Cash Flows,
the Trust considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
Earnings per share. Income (loss) per share of beneficial interest is computed
based upon the weighted average number of shares of beneficial interest
outstanding during each year.
NOTE 2. NOTES AND INTEREST RECEIVABLE
Notes and interest receivable consisted of the following:
<TABLE>
<CAPTION>
1994 1993
-------------------------------- ------------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Notes Receivable
Performing................. $ 1,989 $ 2,000 $ 2,119 $ 2,000
Nonperforming, nonaccruing. - - 1,695 1,050
-------------- ------------ ------------ ------------
$ 1,989 2,000 $ 3,814 3,050
============== ============
Interest...................... 17 16
Unamortized discount.......... (43) (83)
------------ ------------
$ 1,974 $ 2,983
============ ============
</TABLE>
The Trust does not recognize interest income on nonperforming notes receivable.
Notes receivable are considered to be nonperforming when they become 60 days or
more delinquent. For the years 1994 and 1993, unrecognized interest income on
nonperforming notes receivable aggregated $121,000 and $86,000, respectively.
No notes receivable were nonperforming during 1992.
The Trust's note receivable at December 31, 1994, matures in 1998 and bears
interest at 10.0% per annum. The weighted average interest rate on the Trust's
notes receivable outstanding during 1994 was 9.2%.
In April 1992, the Trust sold the Cedars Apartments in Irving, Texas for $1.3
million, consisting of $250,000 in cash with the Trust providing
F-14
<PAGE> 112
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)
purchase money financing in the form of a wraparound mortgage note for the
remainder of the purchase price. The Trust incurred a loss on the sale of
$81,000 in excess of the amount previously provided. The mortgage note was
non-interest bearing through May 1, 1993 and thereafter bore interest at 10%
per annum through May 1, 1994, the maturity date of the note. In November
1993, the Trust placed the $1.1 million wraparound mortgage note on
nonperforming, nonaccrual status. In December 1993, the borrower filed for
bankruptcy protection. The Trust accepted a deed in lieu of foreclosure on
March 2, 1995. The Trust recorded the property as an insubstance foreclosure
as of December 31, 1994. The Trust did not incur a loss on foreclosure as the
fair value of the property, less estimated costs of sale, exceeds the principal
balance of the note receivable.
NOTE 3. REAL ESTATE AND DEPRECIATION
As further described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Organization and Trust business", the Trust is scheduled, unless and until the
shareholders decide on a contrary course of action, to begin liquidation of its
assets prior to October 24, 1996 and to distribute to its shareholders the net
cash proceeds from the sale or refinancing of equity investments received by
the Trust. Accordingly, the Trust has classified all of its properties as held
for sale in the accompanying Consolidated Balance Sheets.
As discussed in NOTE 2. "NOTES AND INTEREST RECEIVABLE", as of December 31,
1994, the Trust recorded the insubstance foreclosure of the Cedars Apartments.
NOTE 4. ALLOWANCE FOR ESTIMATED LOSSES
Activity in the allowance for estimated losses was as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ -----------
<S> <C> <C> <C>
Balance January 1,.......... $ 121 $ 121 $ 532
Amounts charged off........ - - (411)
-------------- -------------- -------------
Balance December 31,........ $ 121 $ 121 $ 121
============== ============== =============
</TABLE>
NOTE 5. INVESTMENT IN EQUITY METHOD PARTNERSHIPS
The Trust's investments in equity method partnerships consisted of the
following:
<TABLE>
<CAPTION>
1994 1993
-------------- --------------
<S> <C> <C>
Tri-City Limited Partnership ("Tri-City")... $ 2,852 $ 3,026
Nakash Income Associates ("NIA")............ 1,128 1,131
-------------- --------------
$ 3,980 $ 4,157
============== ==============
</TABLE>
F-15
<PAGE> 113
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. INVESTMENT IN EQUITY METHOD PARTNERSHIPS (Continued)
The Trust uses the equity method to account for its investment in Tri-City, a
36.3% owned limited partnership, and in NIA, a 40% owned partnership.
In June 1989, the Trust issued to F. C. MacArthur, Inc. ("MacArthur"), a
wholly-owned subsidiary of Collecting Bank, N.A. (a national bank in
liquidation), 170,750 of its shares of beneficial interest with a market value
at the date of issuance of $6.1 million, in exchange for a 36.3% general
partner interest in Tri-City, which owns and operates five properties in Texas.
Transcontinental Realty Investors, Inc. ("TCI") with a 23.6% general partner
interest is the other general partner in Tri-City. In November 1992, TCI
purchased MacArthur's 40.1% limited partner interest in Tri-City increasing its
ownership interest to 63.7%. Also in November 1992, TCI acquired all of the
shares of beneficial interest of the Trust owned by MacArthur. As of March 3,
1995, TCI owned approximately 22% of the Trust's outstanding shares of
beneficial interest.
In September 1989, the Trust acquired a 40% interest in the NIA partnership
from Nakash Brothers Realty in exchange for 50,000 of its shares of beneficial
interest with a market value at the date of issuance of $1.3 million, cash of
$800,000 and a contribution of property and notes with a carrying value of
$462,000. In addition, 12,500 of the Trust's shares of beneficial interest
were issued to consultants for services provided in connection with the
acquisition of the partnership interest. In February 1993, the Trust purchased
the 62,500 shares of beneficial interest for a total purchase price of
$375,000. TCI owns the remaining 60% interest in NIA.
Set forth below are summarized financial data for the partnerships the Trust
accounts for using the equity method (unaudited):
<TABLE>
<CAPTION>
1994 1993
----------- ------------
<S> <C> <C>
Notes receivable............................ $ 4,099 $ 4,099
Real estate, net of accumulated
depreciation ($2,586 in 1994 and $1,982
in 1993)................................... 10,757 11,132
Other assets................................ 194 307
Notes payable............................... (2,634) (2,699)
Other liabilities........................... (520) (423)
-------------- --------------
Partners' capital........................... $ 11,896 $ 12,416
============== ==============
</TABLE>
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- --------------
<S> <C> <C> <C>
Rental income................ $ 2,380 $ 2,409 $ 2,369
Interest income.............. 349 397 988
Interest expense............. (283) (317) (904)
Property operations.......... (1,656) (1,528) (1,666)
Depreciation expense......... (605) (583) (516)
Provision for losses......... - - (263)
-------------- -------------- --------------
Net income................... $ 185 $ 378 $ 8
============== ============== ==============
</TABLE>
F-16
<PAGE> 114
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. INVESTMENT IN EQUITY METHOD PARTNERSHIPS (Continued)
The excess of the Trust's investment over its respective share of the equity in
the underlying net assets of the partnerships relates principally to the
remaining unamortized property acquisition costs of $373,000, which are being
amortized over the remaining estimated useful lives of the properties.
NOTE 6. NOTES AND INTEREST PAYABLE
Notes and interest payable consisted of the following:
<TABLE>
<CAPTION>
1994 1993
--------------------------------- ---------------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Notes payable................... $ 19,408 $ 20,580 $ 21,746 $ 21,214
=============
Interest payable................ 137 140
------------ ------------
$ 20,717 $ 21,354
============ ============
</TABLE>
Scheduled notes payable principal payments are due as follows:
<TABLE>
<S> <C>
1995.................................... $ 511
1996.................................... 339
1997.................................... 370
1998.................................... 5,865
1999.................................... 316
Thereafter.............................. 13,179
--------
$ 20,580
========
</TABLE>
Mortgage notes payable at December 31, 1994, bear interest at rates ranging
from 7.75% to 10.0% and mature between 1995 and 2025. These notes are
collateralized by deeds of trust on real estate with a net carrying value of
$25.2 million.
In November 1993, the Trust refinanced the Porticos Apartments, an apartment
complex in Milwaukee, Wisconsin for $10.0 million. The Trust used cash of
$10.1 million with the lender accepting a second lien mortgage of $500,000, to
pay the existing mortgage of $11.5 million. In accordance with the terms of
the extinguished first mortgage, the Trust received a discount of $806,000 and
recognized an extraordinary gain of a like amount. The second lien mortgage
bears interest at 8.5% per annum, requires monthly principal payments of
$25,000 plus interest and matures August 1, 1995. As a condition of accepting
the second lien mortgage, the lender required that the Trust's advisor pledge
to it 166,667 shares of American Realty Trust, Inc. ("ART") common stock owned
by the advisor as additional collateral for the second lien mortgage. As of
March 3, 1995, ART owned approximately 22% of the Trust's outstanding shares of
beneficial interest.
F-17
<PAGE> 115
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. DISTRIBUTIONS
In January 1993, the Trust's Board of Trustees approved the resumption of the
payment of quarterly distributions to shareholders. In 1994 and 1993, the
Trust paid distributions of $.60 and $.50 per share of beneficial interest,
respectively, aggregating $475,000 and $406,000, respectively.
No distributions were declared or paid in 1992.
The Trust reported to the Internal Revenue Service that 100% of the
distributions paid in 1994 represented a return on capital and 100% of the
distributions paid in 1993 represented ordinary income.
NOTE 8. RENTALS UNDER OPERATING LEASES
The Trust's rental operations include the leasing of office buildings. The
leases thereon expire at various dates through 1999. The following is a
schedule of minimum future rentals on non-cancelable operating leases as of
December 31, 1994:
<TABLE>
<S> <C>
1995...................................... $ 1,345
1996...................................... 1,200
1997...................................... 531
1998...................................... 275
1999...................................... 169
-------------
$ 3,520
=============
</TABLE>
NOTE 9. ADVISORY AGREEMENT
Basic Capital Management, Inc. ("BCM" or the "Advisor") has served as advisor
to the Trust since March 28, 1989. BCM is a company owned by a trust for the
benefit of the children of Gene E. Phillips. Mr. Phillips served as a Trustee
of the Trust until December 31, 1992, and as a director of BCM until December
22, 1989, and as Chief Executive Officer of BCM until September 1, 1992. Mr.
Phillips serves as a representative of his children's trust which owns BCM and,
in such capacity, has substantial contact with the management of BCM and input
with respect to its performance of advisory services to the Trust.
At the Trust's annual meeting of shareholders held on March 7, 1995, the
renewal of the Trust's Advisory Agreement with BCM through the next annual
meeting of the Trust's shareholders was approved. Subsequent renewals of the
Trust's Advisory Agreement with BCM require the approval of the Trust's
shareholders.
Under the Advisory Agreement, the Advisor is required to formulate and submit
annually for approval by the Trust's Board of Trustees a budget and business
plan for the Trust containing a twelve-month forecast of operations and cash
flow, a general plan for asset sales, foreclosure and borrowing activity and
the Advisor is required to report quarterly to the Trust's Board of Trustees on
the Trust's performance against the
F-18
<PAGE> 116
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. ADVISORY AGREEMENT (Continued)
business plan. In addition, all transactions by the Trust shall require prior
approval by the Trust's Board of Trustees, unless they are explicitly provided
for in the approved business plan or are made pursuant to authority expressly
delegated to the Advisor by the Trust's Board of Trustees.
The Advisory Agreement also requires prior approval of the Trust's Board of
Trustees for the retention of all consultants and third party professionals,
other than legal counsel. The Advisory Agreement provides that the Advisor
shall be deemed to be in a fiduciary relationship to the Trust's shareholders
and contains a broad standard governing the Advisor's liability for losses by
the Trust.
The Advisory Agreement provides for BCM to be responsible for the day-to-day
operations of the Trust and to receive an advisory fee comprised of a gross
asset fee of .0625% per month (.75% per annum) of the average of the gross
asset value of the Trust (total assets less allowance for amortization,
depreciation or depletion and valuation reserves) and an annual net income fee
equal to 7.5% per annum of the Trust's net income.
The Advisory Agreement also provides for BCM to receive an annual incentive
sales fee equal to 10% of the amount, if any, by which the aggregate sales
consideration for all real estate sold by the Trust during such fiscal year
exceeds the sum of: (i) the cost of each such property as originally recorded
in the Trust's books for tax purposes (without deduction for depreciation,
amortization or reserve for losses), (ii) capital improvements made to such
assets during the period owned by the Trust, and (iii) all closing costs,
(including real estate commissions) incurred in the sale of such property;
provided, however, no incentive fee shall be paid unless (a) such real estate
sold in such fiscal year, in the aggregate, has produced an 8% simple annual
return on the Trust's net investment including capital improvements, calculated
over the Trust's holding period before depreciation and inclusive of operating
income and sales consideration and (b) the aggregate net operating income from
all real estate owned by the Trust for each of the prior and current fiscal
years shall be at least 5% higher in the current fiscal year than in the prior
fiscal year.
Under the Advisory Agreement, BCM or an affiliate of BCM is also to receive a
mortgage brokerage and equity refinancing fee for obtaining loans to the Trust
or refinancing on Trust properties equal to the lesser of (i) 1% of the amount
of the loan or the amount refinanced or (ii) a brokerage or refinancing fee
which is reasonable and fair under the circumstances; provided, however, that
no such fee shall be paid on loans from BCM or an affiliate of BCM without the
approval of the Trust's Board of Trustees. No fee shall be paid on loan
extensions.
Under the Advisory Agreement, BCM is to receive reimbursement of certain
expenses incurred by it, in the performance of advisory services to the Trust.
F-19
<PAGE> 117
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. ADVISORY AGREEMENT (Continued)
Under the Advisory Agreement (as required by the Trust's Declaration of Trust)
all or a portion of the annual advisory fee must be refunded by the Advisor to
the Trust if the Operating Expenses of the Trust (as defined in the Trust's
Declaration of Trust) exceed certain limits specified in the Declaration of
Trust based on the book value, net asset value and net income of the Trust
during such fiscal year. The effect of this limitation was to require that BCM
refund $6,000 and $42,000, of the 1994 and 1992 annual advisory fee,
respectively. No refund was required in 1993.
Additionally, if the Trust were to request that BCM render services to the
Trust other than those required by the Advisory Agreement, BCM or an affiliate
of BCM will be separately compensated for such additional services on terms to
be agreed upon from time to time. As discussed in NOTE 10. "PROPERTY
MANAGEMENT," the Trust has hired Carmel Realty Services, Ltd. ("Carmel, Ltd."),
an affiliate of BCM, to provide property management for the Trust's properties
and, as discussed in NOTE 11. "REAL ESTATE BROKERAGE," the Trust has engaged
Carmel Realty, Inc. ("Carmel Realty"), also an affiliate of BCM, on a
non-exclusive basis, to provide brokerage services for the Trust.
BCM may only assign the Advisory Agreement with the prior consent of the Trust.
NOTE 10. PROPERTY MANAGEMENT
Since February 1, 1990, affiliates of BCM have provided property management
services to the Trust. Currently, Carmel, Ltd. provides such property
management services for a fee of 5% or less of the monthly gross rents
collected on the properties under its management. Carmel, Ltd. subcontracts
with other entities for the property-level management services to the Trust at
various rates. The general partner of Carmel, Ltd. is BCM. The limited
partners of Carmel, Ltd. are (i) Syntek West, Inc. ("SWI"), of which Mr.
Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust for the
benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the
property-level management and leasing of one of the Trust's office buildings
and the commercial properties owned by Tri-City in which the Trust and TCI are
partners to Carmel Realty which is a company owned by SWI. Carmel Realty is
entitled to receive property and construction management fees and leasing
commissions in accordance with the terms of its property-level management
agreement with Carmel, Ltd.
NOTE 11. REAL ESTATE BROKERAGE
Prior to December 1, 1992, affiliates of BCM provided brokerage services to the
Trust and received brokerage commissions in accordance with the terms of the
advisory agreement. Effective December 1, 1992, the Trust's Board of Trustees
approved the non-exclusive engagement by the
F-20
<PAGE> 118
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. REAL ESTATE BROKERAGE (Continued)
Trust of Carmel Realty to perform brokerage services for the Trust. Carmel
Realty is entitled to receive a real estate sales commission for the sale of
each Trust property in accordance with the following sliding scale of total
fees to be paid by the Trust: (i) maximum fee of 5% on the first $2.0 million
of any sales transaction of which no more than 4% would be paid to Carmel
Realty or affiliates; (ii) maximum fee of 4% on transaction amounts between
$2.0 million - $5.0 million of which no more than 3% would be paid to Carmel
Realty or affiliates; (iii) maximum fee of 3% on transaction amounts between
$5.0 million - $10.0 million of which no more than 2% would be paid to Carmel
Realty or affiliates; and, (iv) maximum fee of 2% on transaction amounts in
excess of $10.0 million of which no more than 1 1/2% would be paid to Carmel
Realty or affiliates.
NOTE 12. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
Fees and cost reimbursements to BCM, the Trust's advisor, and its affiliates:
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------ --------------
<S> <C> <C> <C>
Fees
Advisory........................ $ 367 $ 447 $ 327
Brokerage commissions........... - - 39
Property and construction
management fees and leasing
commissions*................. 146 133 64
------------- ------------ -------------
$ 513 $ 580 $ 430
============= ============ =============
Cost reimbursements............... $ 158 $ 160 $ 145
============= ============ =============
</TABLE>
- ---------------------------
* Net of property management fees paid to subcontractors, other than Carmel
Realty.
NOTE 13. INCOME TAXES
For the years 1994, 1993 and 1992, the Trust has elected and qualified to be
treated as a Real Estate Investment Trust ("REIT"), as defined in Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and
as such, will not be taxed for federal income tax purposes on that portion of
its taxable income which is distributed to shareholders, provided that at least
95% of its REIT taxable income, plus 95% of its taxable income from foreclosure
property as defined in Section 857 of the Code, is distributed. See NOTE 7.
"DISTRIBUTIONS."
The Trust had a net loss for federal income tax purposes in 1994, 1993 and
1992; therefore, the Trust recorded no provision for income taxes.
The Trust's tax basis in its net assets differs from the amount at which its
net assets are reported for financial statement purposes, princi-
F-21
<PAGE> 119
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. INCOME TAXES (Continued)
pally due to the accounting for gains and losses on property sales, the
difference in the allowance for estimated losses, depreciation on owned
properties and investments in joint venture partnerships. At December 31,
1994, the Trust's tax basis in its net assets exceeded its basis for financial
statement purposes by $4.8 million. As a result, aggregate future income for
income tax purposes will be less than such amount for financial statement
purposes and the Trust would be able to maintain its REIT status without
distributing 95% of its financial statement income. Additionally, at December
31, 1994, the Trust had a tax net operating loss carryforward of $18.0 million
expiring through 2007.
As a result of the Trust's election to be treated as a REIT for income tax
purposes and of its intention to distribute its taxable income, if any, in
future years, no deferred tax asset, liability or valuation allowance was
recorded.
NOTE 14. EXTRAORDINARY GAIN
In November 1993, the Trust recognized an extraordinary gain of $806,000 on the
early payoff of mortgage debt secured by the Porticos Apartments. See NOTE 6.
"NOTES AND INTEREST PAYABLE."
NOTE 15. COMMITMENTS AND CONTINGENCIES
OLIVE LITIGATION. In February 1990, the Trust, together with Continental
Mortgage and Equity Trust ("CMET"), National Income Realty Trust ("NIRT") and
TCI, three real estate entities with, at the time, the same officers, directors
or trustees and advisor as the Trust, entered into a settlement of a class and
derivative action entitled Olive et al. v. National Income Realty Trust et
al., relating to the operation and management of each of the entities. On
April 23, 1990, the Court granted final approval of the terms of the
settlement.
On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Modification") which settled subsequent
claims of breaches of the settlement which were asserted by the plaintiffs and
modified certain provisions of April 1990 settlement. The Modification was
preliminarily approved by the court July 1, 1994 and final court approval was
entered on December 12, 1994. The effective date of the Modification was
January 11, 1995.
The Modification, among other things, provided for the addition of three new
unaffiliated members to the Trust's Board of Trustees and set forth new
requirements for the approval of any transactions with affiliates over the next
five years. In addition, BCM, the Trust's advisor, Mr. Phillips and William S.
Friedman, who served as the President and Trustee of the Trust until February
24, 1994, President of BCM until May 1, 1993 and director of BCM until December
22, 1989, agreed to pay a
F-22
<PAGE> 120
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued)
total of $1.2 million to the Trust, CMET, NIRT and TCI, of which the Trust's
share is $150,000. The Trust received $12,300 in May 1994. The remaining
$137,700 is to be paid in 18 monthly installments which began February 1, 1995.
Under the Modification, the Trust, CMET, NIRT, TCI and their shareholders
released the defendants from any claims relating to the plaintiffs'
allegations. The Trust, CMET, NIRT and TCI also agreed to waive any demand
requirement for the plaintiffs to pursue claims on behalf of each of them
against certain persons or entities. The Modification also requires that any
shares of the Trust held by Messrs. Phillips, Friedman or their affiliates
shall be (i) voted in favor of the reelection of all current members of the
Trust's Board of Trustees that stand for reelection during the two calendar
years following the effective date of the Modification and (ii) voted in favor
of all new members of the Trust's Board of Trustees appointed pursuant to the
terms of the Modification that stand for reelection during the three calendar
years following the effective date of the Modification.
Pursuant to the terms of the Modification, any related party transaction which
the Trust may enter into prior to April 27, 1999, will require the unanimous
approval of the Trust's Board of Trustees. In addition, related party
transactions may only be entered into in exceptional circumstances and after a
determination by the Trust's Board of Trustees that the transaction is in the
best interests of the Trust and that no other opportunity exists that is as
good as the opportunity presented by such transaction.
The Modification also terminated a number of the provisions of the settlement,
including the requirement that the Trust, CMET, NIRT and TCI maintain a Related
Party Transaction Committee and a Litigation Committee of their respective
Boards. The court retained jurisdiction to enforce the Modification.
Other Litigation. The Trust is also involved in various other lawsuits arising
in the ordinary course of business. The Trust's management is of the opinion
that the outcome of these lawsuits will have no material impact on the Trust's
financial condition.
F-23
<PAGE> 121
SCHEDULE III
INCOME OPPORTUNITY REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Cost
Capitalized
Subsequent to Gross Amounts of Which Carried
Initial Cost to Trust Acquisition at End of Year
----------------------- --------------- --------------------------------------
Building & Building & (1)
Property/Location Encumbrances Land Improvements Improvements Land Improvements Total
- ---------------------- ------------ --------- ------------ --------------- ----------- ------------ -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Properties Held For Sale
- ------------------------
APARTMENTS
- ----------
Cedars................. $ - $ 198 $ 792 $ - $ 198 $ 792 $ 990
Irving, Texas
Eastpoint.............. 1,922 1,181 2,749 321 1,181 3,070 4,251
Mesquite, Texas
Plumtree............... 5,875 1,751 5,038 824 1,751 5,862 7,613
Martinez, California
Treehouse.............. 1,886 375 2,124 185 375 2,309 2,684
San Antonio, Texas
Porticos............... 10,084 2,897 11,588 50 2,897 11,638 14,535
Milwaukee, Wisconsin
OFFICE BUILDINGS
- ----------------
Saratoga............... - 2,577 10,306 388 2,583 10,688 13,271
Saratoga, California
Town Center Plaza...... - 554 2,214 99 554 2,313 2,867
Boca Raton, Florida
----------- -------- -------- ------------- ----------- ------------ ----------
$ 19,767 $ 9,533 $ 34,811 $ 1,867 $ 9,539 $ 36,672 46,211
=========== ======== ======== ============= =========== ============
Allowance for estimated
losses............... (121)
----------
46,090
==========
</TABLE>
<TABLE>
<CAPTION>
Life on Which
Depreciation
In Latest
Statement
Accumulated Date of Date of Operation
Depreciation Construction Acquired is Computed
------------ ------------ -------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Properties Held For Sale
- ------------------------
APARTMENTS
- ----------
Cedars................. $ - 1964 12/94 40 years
Irving, Texas
Eastpoint.............. 998 1985 01/86 5 - 40 years
Mesquite, Texas
Plumtree............... 1,642 1986 02/86 5 - 40 years
Martinez, California
Treehouse.............. 358 1975 09/89 5 - 40 years
San Antonio, Texas
Porticos............... 929 1973 11/91 40 years
Milwaukee, Wisconsin
OFFICE BUILDINGS
- ----------------
Saratoga............... 886 1986 12/91 3 - 40 years
Saratoga, California
Town Center Plaza...... 242 1985 03/91 5 - 40 yea
Boca Raton, Florida --------
$ 5,055
========
Allowance for estimated
losses...............
</TABLE>
- --------------------------
(1) The aggregate cost for Federal income tax purposes is $45,587.
F-24
<PAGE> 122
SCHEDULE III
(Continued)
INCOME OPPORTUNITY REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
1994 1993 1992
-------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of Real Estate
Balance at January 1,.................... $ 45,040 $ 44,906 $ 46,681
Additions
Improvements.................. 184 134 191
Foreclosure................... 990 - -
Other......................... (3) - 31
Deductions
Sale of real estate........... - - (1,997)
-------------- ------------- --------------
Balance at December 31,.................. $ 46,211 $ 45,040 $ 44,906
============== ============= ==============
Reconciliation of Accumulated
Depreciation
Balance at January 1,.................... $ 4,088 $ 3,139 $ 2,370
Additions
Depreciation.................. 967 949 910
Deductions
Sale of real estate........... - - (141)
-------------- ------------- --------------
Balance at December 31,.................. $ 5,055 $ 4,088 $ 3,139
============== ============= ==============
</TABLE>
F-25
<PAGE> 123
SCHEDULE IV
INCOME OPPORTUNITY REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
December 31, 1994
<TABLE>
<CAPTION>
Final Carrying
Interest maturity Prior Face amount amounts
Description rate date Periodic payment terms liens of mortgage of mortgage (1)
- ------------------------- -------- -------- ----------------------------- ---------- ----------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
WRAPAROUND MORTGAGE NOTE
Twin Oaks................ 10.00% 08/98 Monthly interest - only payments $ 813 $ 2,000 $ 2,000
Secured by shopping due through maturity, at which ======= ========== ========
center in Joliet, IL. time the entire principal balance
and all accrued and unpaid
interest are due.
Interest Receivable 17
Discount on Notes
Receivable (43)
--------
1,974
Allowance for Estimated
Losses -
--------
$ 1,974
========
</TABLE>
<TABLE>
<CAPTION>
Principal amount of
loans subject to
delinquent principal
Description or interest
- ------------------------- -------------------
<S> <C>
WRAPAROUND MORTGAGE NOTE
Twin Oaks................ $ -
Secured by shopping =============
center in Joliet, IL.
Interest Receivable
Discount on Notes
Receivable
Allowance for Estimated
Losses
</TABLE>
- ------------------------
(1) The aggregate cost for Federal income tax purposes is $3,135.
F-26
<PAGE> 124
SCHEDULE IV
(Continued)
INCOME OPPORTUNITY REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Balance at January 1,.......... $ 3,050 $ 3,050 $ 2,000
Additions
New mortgage loans....... - - 1,050
Deductions
Foreclosure.............. (1,050) - -
--------- --------- -----------
Balance at December 31,........ $ 2,000 $ 3,050 $ 3,050
========= ========= ===========
</TABLE>
F-27
<PAGE> 125
The accompanying Consolidated Financial Statements have not been examined by
independent certified public accountants, but in the opinion of the management
of Income Opportunity Realty Trust (the "Trust"), all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the Trust's
consolidated financial position, consolidated results of operations and
consolidated cash flows at the dates and for the periods indicated, have been
included.
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
----------- -------------
Assets (dollars in thousands)
<S> <C> <C>
Notes and interest receivable
Performing . . . . . . . . . . . . . . . . . . . . . $ 1,980 $ 1,974
Real estate held for sale, net of accumulated
depreciation ($5,576 in 1995 and $5,055 in 1994) . . 40,756 41,156
Less - allowance for estimated losses . . . . . . . . . (121) (121)
---------- ---------
42,615 43,009
Investment in partnerships . . . . . . . . . . . . . . 3,300 3,980
Cash and cash equivalents . . . . . . . . . . . . . . . 447 232
Other assets (including $215 in 1995 and $44 in
1994 from affiliates) . . . . . . . . . . . . . . . 1,498 1,814
---------- ---------
$ 47,860 $ 49,035
========== =========
Liabilities and Shareholders' Equity
Liabilities
Notes and interest payable . . . . . . . . . . . . . . $ 20,413 $ 20,717
Other liabilities (including $805 in 1995 and $407
in 1994 to affiliates) . . . . . . . . . . . . . . . 2,985 2,746
---------- ---------
23,398 23,463
Commitments and contingencies
Shareholders, equity
Shares of beneficial interest, no par value;
authorized shares, unlimited; issued and
outstanding, 791,444 shares . . . . . . . . . . . . 3,347 3,347
Paid-in capital . . . . . . . . . . . . . . . . . . . . 62,093 62,093
Accumulated distributions in excess of accumulated
earnings . . . . . . . . . . . . . . . . . . . . . . (40,978) (39,868)
---------- ---------
24,462 25,572
---------- ---------
$ 47,860 $ 49,035
========== =========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-28
<PAGE> 126
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1995 1994 1995 1994
--------- --------- --------- ---------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
INCOME
Rents . . . . . . . . . . . . . . . $ 1,950 $ 1,722 $ 3,700 $ 3,252
Interest . . . . . . . . . . . . . . 51 69 113 141
Equity in income (loss) of
partnerships . . . . . . . . . . . (729) (22) (644) 29
-------- -------- -------- --------
1,272 1,769 3,169 3,422
EXPENSES
Property operations . . . . . . . . 1,068 691 2,003 1,523
Interest . . . . . . . . . . . . . 466 479 936 962
Depreciation . . . . . . . . . . . . 264 240 521 478
Advisory fee to affiliate . . . . . 91 84 183 182
General and administrative . . . . . 263 138 398 279
-------- -------- -------- --------
2,152 1,632 4,041 3,424
-------- -------- -------- --------
Net income (loss) . . . . . . . . . . $ (880) $ 137 $ (872) $ (2)
======== ======== ======== ========
Earnings Per Share
Net income (loss) . . . . . . . . . $ (1.11) $ .17 $ (1.10) $ -
======== ======== ======== ========
Shares of beneficial interest
used in computing earnings
per share . . . . . . . . . . . . . 791,444 791,444 791,444 791,444
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-29
<PAGE> 127
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Months Ended June 30, 1995
<TABLE>
<CAPTION>
Accumulated
Shares of Beneficial Distributions
Interest in Excess of
-------------------------- Paid-In Accumulated Shareholders'
Shares Amount Capital Earnings Equity
---------- ---------- ------------- ---------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1995 . . . . . . . . . 791,444 $ 3,347 $ 62,093 $ (39,868) $ 25,572
Distributions ($.30 per
share) . . . . . . . . - - - (238) (238)
Net loss . . . . . . . . - - - (872) (872)
-------- ------- -------- --------- --------
Balance, June 30, 1995 . 791,444 $ 3,347 $ 62,093 $ (40,978) $ 24,462
======== ======= ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-30
<PAGE> 128
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
---------------------------
1995 1994
--------- ---------
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Rents collected . . . . . . . . . . . . . . . . . . . . $ 3,687 $ 3,389
Interest collected . . . . . . . . . . . . . . . . . . . 107 135
Interest paid . . . . . . . . . . . . . . . . . . . . . (896) (920)
Payments for property operations . . . . . . . . . . . . (1,743) (1,595)
Advisory fee paid to affiliate . . . . . . . . . . . . . (183) (178)
General and administrative expenses paid . . . . . . . . (551) (508)
Distribution from equity partnerships' operating
cash flow . . . . . . . . . . . . . . . . . . . . . . . 39 20
Other . . . . . . . . . . . . . . . . . . . . . . . . . (328) (52)
-------- -------
Net cash provided by operating activities . . . . . . 132 291
Cash Flows from Investing Activities
Real estate improvements . . . . . . . . . . . . . . . . (120) (65)
-------- -------
Net cash (used in) investing activities . . . . . . . (120) (65)
Cash Flows from Financing Activities
Payments on notes payable . . . . . . . . . . . . . . . (302) (339)
Distributions to shareholders . . . . . . . . . . . . . (238) (231)
Advances from advisor . . . . . . . . . . . . . . . . . 743 -
-------- -------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . . . . 203 (570)
Net increase (decrease) in cash and cash equivalents . . 215 (344)
Cash and cash equivalents, beginning of period . . . . . 232 582
-------- -------
Cash and cash equivalents, end of period . . . . . . . . $ 447 $ 238
======== =======
Reconciliation of net (loss) to net cash provided
by operating activities
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . $ (872) $ (2)
Adjustments to reconcile net (loss) to net cash
provided by operating activities
Depreciation and amortization . . . . . . . . . . . . . 558 515
Funding of equity partnerships . . . . . . . . . . . . . (5) (85)
Equity in (income) losses of partnerships . . . . . . . 644 (29)
Distributions from partnerships in excess of
current period earnings . . . . . . . . . . . . . . . . 39 107
(Increase) decrease in other assets . . . . . . . . . . (199) 65
(Decrease) in interest payable . . . . . . . . . . . . (2) (2)
(Decrease) in other liabilities . . . . . . . . . . . . (31) (278)
-------- -------
Net cash provided by operating activities . . . . . . . $ 132 $ 291
======== =======
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-31
<PAGE> 129
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete financial
statements. Operating results for the three month period ended June 30, 1995
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1995. For further information, refer to the Consolidated
Financial Statements and notes thereto included in the Trust's Annual Report on
Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K").
NOTE 2. NOTES AND INTEREST RECEIVABLE
In November 1993, the Trust placed the $1.1 million wraparound mortgage note,
secured by the Cedars Apartments in Irving, Texas on nonperforming, nonaccrual
status. The Trust had sold the property securing the mortgage in 1992 providing
purchase money financing in conjunction with the sale. In December 1993, the
borrower filed for bankruptcy protection. The Trust recorded the property as an
insubstance foreclosure as of December 31, 1994 and accepted a deed in lieu of
foreclosure on March 2, 1995. The Trust did not incur a loss on foreclosure as
the fair value of the property, less estimated costs of sale, exceeded the
principal balance of the note receivable.
NOTE 3. REAL ESTATE AND DEPRECIATION
As discussed in NOTE 2. "NOTES AND INTEREST RECEIVABLE," as of December 31,
1994, the Trust recorded the insubstance foreclosure of the Cedars Apartments.
Upon foreclosure, the property was renamed the Spanish Trace Apartments.
NOTE 4. INVESTMENT IN EQUITY METHOD PARTNERSHIPS
In September 1989, the Trust purchased a 40% general partner interest in
Nakash Income Associates ("NIA") for a total of $2.6 million in cash, assets
and shares of beneficial interest. NIA owns two wraparound mortgage notes
receivable, one of which is secured by the Green Hills Shopping Center ("Green
Hills") in Onandaga, New York. The shopping center in turn is owned by Green
Hills Associates ("GHA"). In July 1995, GHA determined that further investment
in Green Hills was not justified and further that it intends to deed the
property back to the first lien holder in lieu of foreclosure. As GHA has no
other assets, the wraparound note receivable held by NIA will become
uncollectible, and therefore, at June 30, 1995, NIA recorded a provision for
loss of $1.5 million to write its wraparound note receivable down to the
balance of the first lien mortgage. The Trust's equity portion of the loss is
$792,000.
F-32
<PAGE> 130
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Trust is involved in various lawsuits arising in the ordinary course of
business. The Trust's management is of the opinion that the outcome of these
lawsuits will have no material impact on the Trust's financial condition.
F-33
<PAGE> 131
APPENDIX A
Index of Defined Terms
<TABLE>
<CAPTION>
Pages
Where
Term Defined
- ---- -------
<S> <C>
ACC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Acquisition Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Advisory Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38, 49
Agreement and Plan of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
AMEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 10, 68
ART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Articles of Incorporation Amendment Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
BCM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Beacon Hill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Brokerage Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Business Combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56, 58, 59
Business Judgment Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Bylaw Amendment Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
California Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 26
Carmel Realty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 74
Carmel, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
CCEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
CMET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 62
Declaration of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Director Removal Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Eldercare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Evaluation Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Incorporation Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 9, 24
Interested Stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56, 58, 59
IORI Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Lincoln . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Liquidation Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 11, 26
Nevada Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
NIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
A-1
<PAGE> 132
<TABLE>
<S> <C>
NIRT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
NOLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Nomination Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Non-Stockholder Constituencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
NRLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
NRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Olive Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21, 79
Olive Modification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
One-for-One Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
OTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
REIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27, 4
RICO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
RTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
SAMI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SAMLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SFAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 24
SJSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Southmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Stockholder Proposal Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
TCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Tri-City . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Trustees' Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Voting Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
</TABLE>
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APPENDIX B
AGREEMENT AND PLAN OF MERGER
OF
INCOME OPPORTUNITY REALTY CORPORATION
(a California corporation)
AND
INCOME OPPORTUNITY REALTY INVESTORS, INC.
(a Nevada corporation)
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of
____________, 1995, is by and between Income Opportunity Realty Corporation, a
California corporation ("IORT California"), and Income Opportunity Realty
Investors, Inc., a Nevada corporation ("IORI Nevada").
WHEREAS, IORT California is a California corporation with its resident
agent therein located at CT Corporation System, 818 West Seventh Street, Los
Angeles, California 90017; and
WHEREAS, the shares of stock that IORT California has authority to
issue are 11,000,000 shares of which 10,000,000 shares, par value $0.01 per
share, are designated Common Stock (the "California Common Stock") and
1,000,000 shares, par value $0.01 per share, are designated Preferred Stock;
and
WHEREAS, IORI Nevada is a Nevada corporation with its registered
office therein located at CT Corporation System, One East First Street, County
of Washoe, Reno, Nevada 89501; and
WHEREAS, the total number of shares of stock which IORI Nevada has
authority to issue is 11,000,000 shares, of which 10,000,000 shares, par value
$0.01 per share, are designated Common Stock ("Nevada Common Stock"), and
1,000,000 shares, par value $0.01 per share, are designated Preferred Stock;
and
WHEREAS, the General Corporation Law of the State of Nevada permits
the merger of one or more foreign corporations with one or more domestic
corporations into a single corporation; and
WHEREAS, IORT California and IORI Nevada and the respective Boards of
Directors thereof deem it advisable and to the advantage, welfare, and best
interests of said corporations and their respective stockholders to merge IORT
California with and into IORI Nevada pursuant to the provisions of the Nevada
Law upon the conditions hereinafter set forth;
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NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. The Merger. Upon the terms and subject to the conditions
hereof, the Merger shall be consummated in accordance with the General
Corporation Law of Nevada (the "Nevada Law") and the General Corporation Law of
California (the "California Law") on ____________, 1995 or as soon thereafter
as is reasonably practicable. At the Effective Time (as hereinafter defined)
and subject to and upon the terms and conditions of this Agreement, the Nevada
Law and the California Law, IORT California shall be merged with and into IORI
Nevada (the "Merger"), the separate corporate existence of IORT California
shall cease, and IORI Nevada shall continue as the surviving corporation.
2. Effective Time. On ____________, 1995 or as soon thereafter
as is reasonably practicable, the parties hereto shall cause the Merger to be
consummated by filing articles of merger with the Secretary of State of the
State of Nevada and the documents required by Section 1108 of the California
Law with the Secretary of State of the State of California, in such form as
required by, and executed in accordance with, the relevant provisions of the
Nevada Law and the California Law. The Merger shall become effective upon the
filing of such articles of merger with the Secretary of State of the State of
Nevada (the "Effective Time").
3. Effect of the Merger. At the Effective Time, the effect of
the Merger shall be as provided in Section 78.459 of the Nevada Law.
4. Articles of Incorporation. At the Effective Time, the
Articles of Incorporation of IORI Nevada, as in effect immediately prior to the
Effective Time, shall remain the Articles of Incorporation of IORI Nevada as
the surviving corporation until thereafter further amended as provided by law.
5. Bylaws. The Bylaws of IORI Nevada, as in effect immediately
prior to the Effective Time, shall remain the Bylaws of IORI Nevada as the
surviving corporation until thereafter amended as provided by law.
6. Directors. The directors of IORI Nevada immediately prior to
the Effective Time shall remain the directors of IORI Nevada and will hold
office from the Effective Time until their successors are duly elected or
appointed and qualified in the manner provided in the Articles of Incorporation
and the Bylaws of IORI Nevada, or as otherwise provided by law.
7. Officers. The officers of IORI Nevada immediately prior to
the Effective Time shall remain the officers of IORI Nevada and will hold
office from the Effective Time until their successors are duly elected or
appointed and qualified in the manner provided in the Articles of Incorporation
and the Bylaws of IORI Nevada, or as otherwise provided by law.
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<PAGE> 135
8. Additional Actions. If, at any time after the Effective Time,
IORI Nevada shall consider or be advised that any deeds, bills of sale,
assignments, assurances, or any other actions or things are necessary or
desirable to vest, perfect or confirm, of record or otherwise, in IORI Nevada
its right, title or interest in, to or under any of the rights, properties or
assets of IORT California acquired or to be acquired by IORI Nevada as a result
of, or in connection with, the Merger or otherwise to carry out this Agreement,
the officers and directors of IORI Nevada shall be authorized to execute and
deliver, in the name and on behalf of IORT California, all such deeds, bills of
sale, assignments and assurances and to take and do, in the name and on behalf
of IORT California, all such other actions and things as may be necessary or
desirable to vest, perfect or confirm any and all right, title and interest in,
to and under such rights, properties or assets in IORI Nevada or otherwise to
carry out this Agreement.
9. Conversion of Securities. At the Effective Time, by virtue of
the Merger and without any action on the part of IORI Nevada, IORT California
or the holder of any of the following securities
(a) each of the shares of IORT California Common Stock
issued and outstanding immediately prior to the
Effective Time, other than any shares of IORT
California Common Stock to be cancelled pursuant to
Section 9(b) hereof, shall be converted into one
validly issued, fully paid and nonassessable share of
IORI Nevada Common stock, upon surrender of the
certificate representing such share;
(b) each share of IORT California Common Stock held in
the treasury of IORT California immediately prior to
the Effective Time shall be cancelled and
extinguished and no payment or other consideration
shall be made with respect thereto;
(c) each share of IORI Nevada Common Stock issued and
outstanding immediately prior to the Effective Time
shall be cancelled; and
(d) from and after the Effective Time, holders of
certificates formerly evidencing shares of IORT
California Common Stock shall have rights as
stockholders of IORI Nevada (and not IORT California)
in accordance with applicable law.
10. Surrender of Shares; Stock Transfer Books.
(a) Each holder of a certificate or certificates formerly
representing any shares of IORT California Common
Stock converted in the Merger pursuant to Section
9(a) shall surrender such certificate or certificates
to IORI Nevada as promptly as practicable. Upon
surrender by such holder to IORI Nevada of a
certificate, together with such other instruments and
acknowledgments
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as IORI Nevada may require, the holder of such
certificate shall be entitled to receive in exchange
therefor an equal number of shares of Nevada Common
Stock represented by such certificate, and such
former certificate shall forthwith be cancelled.
(b) At the Effective Time, the stock transfer books of
IORT California shall be closed and there shall be no
further registration of transfers of shares of IORT
California Common Stock thereafter on the records of
IORT California. No interest shall accrue or be paid
on any cash payable upon the surrender of a
certificate or certificates which immediately prior
to the Effective Time represented outstanding shares
of IORT California Common Stock.
11. Certain Changes.
(a) The Boards of Directors of IORI Nevada and IORT
California may amend this Agreement at any time prior
to the filing of the articles of merger with the
Secretary of State of the State of Nevada, provided
that an amendment made subsequent to the adoption of
the Merger by the stockholders of IORI Nevada and
IORT California shall not (1) alter or change the
amount of consideration to be received in exchange
for or on conversion of the shares of any class or
series thereof of IORT California, (2) further alter
or change any term of the Articles of Incorporation
of IORI Nevada, or (3) alter or change any of the
terms and conditions of this Agreement if such
alteration or change would adversely affect the
holders of the shares of any class or series of IORI
Nevada or IORT California.
(b) This Agreement may be terminated and the Merger
abandoned at any time prior to the filing of the
articles of merger with the Secretary of State of the
State of Nevada, notwithstanding approval hereof by
the stockholders of IORI Nevada or IORT California or
by the Board of Directors of IORI Nevada or IORT
California.
12. Tax Effect. The parties hereby agree to treat the Merger for
federal income tax purposes as a reorganization within the meaning of Section
368(a)(1)(f) of the Internal Revenue Code, with no gain or loss recognized by
IORI Nevada or its stockholders or by IORT California or its shareholders.
13. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Nevada.
14. Counterparts. This Agreement may be executed in counterparts.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement of
Merger to be executed by their respective officers as of the ________ day of
_________________, 1995.
INCOME OPPORTUNITY REALTY
CORPORATION
By:
----------------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
ATTEST:
-------------------------------------------------
Its Secretary
INCOME OPPORTUNITY REALTY INVESTORS, INC.
By:
----------------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
ATTEST:
-------------------------------------------------
Its Secretary
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<PAGE> 138
The undersigned, being the Secretary of Income Opportunity Realty
Corporation, does hereby certify that (a) the holders of 100% of the
outstanding stock of said corporation were entitled to vote on the foregoing
Agreement and Plan of Merger, (b) the principal terms of the agreement in the
form attached were approved by ___% of the outstanding shares and (c) such vote
exceeded the majority vote required to approve the foregoing Agreement and Plan
of Merger.
-------------------------------------
Robert A. Waldman, Secretary
Income Opportunity Realty Corporation
The undersigned, being the Secretary of Income Opportunity Realty
Investors, Inc., does hereby certify that the holder of all of the outstanding
stock of said corporation dispensed with a meeting and vote of stockholders,
and such sole stockholder consented in writing, pursuant to the provisions of
Section 78.320 of the General Corporation Law of the State of Nevada, to the
adoption of the foregoing Agreement and Plan of Merger.
-------------------------------------
Robert A. Waldman, Secretary
Income Opportunity Realty Investors, Inc.
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<PAGE> 139
APPENDIX C
ARTICLES OF INCORPORATION
OF
INCOME OPPORTUNITY REALTY INVESTORS, INC.
I, THE UNDERSIGNED, in order to form a corporation for the purposes
hereinafter stated, under and pursuant to the provisions of Chapter 78 of the
Nevada Revised Statutes (the "NRS"), do hereby certify as follows:
FIRST: The name of the Corporation is Income Opportunity Realty
Investors, Inc. (hereinafter the "Corporation").
SECOND: The address of the principal office of the Corporation in the
State of Nevada is c/o CT Corporation System, One East First Street, County of
Washoe, Reno, Nevada 89501. The name of the registered agent of the
Corporation at such address is CT Corporation System.
THIRD: The Corporation may engage in any lawful activity.
FOURTH: A. The total number of shares of all classes which the
Corporation shall have authority to issue is 11,000,000 shares, of which
10,000,000 shares, par value $0.01 per share, shall be of a class designated
"Common Stock" and 1,000,000 shares, par value $0.01 per share, shall be of a
class designated "Preferred Stock".
B. 1. The Board of Directors of the Corporation (the "Board of
Directors") is authorized, subject to applicable law and the provisions of this
Article FOURTH, to provide for the issuance from time to time in one or more
series of any number of shares of Preferred Stock, and, by filing a certificate
pursuant to the NRS, to establish the number of shares to be included in each
such series, and to fix the designation, relative rights, preferences,
qualifications and limitations of the shares of each such series. The
authority of the Board of Directors with respect to each series shall include,
but not be limited to, determination of the following:
(a) the distinctive designation and number of shares
comprising such series, which number may (except where otherwise
provided by the Board of Directors in creating such series) be
increased or decreased (but not below the number of shares then
outstanding) from time to time by like action of the Board of
Directors;
(b) the dividend rate or rates on the shares of such
series and the preferences, if any, over any other series (or of any
other series over such series) with respect to dividends, the terms
and conditions upon which and the periods in respect of which
dividends shall be payable, whether and upon what conditions such
dividends shall be cumulative and, if cumulative, the date or dates
from which dividends shall accumulate;
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<PAGE> 140
(c) the voting powers, full or limited, if any, of shares
of such series, and under what conditions, if any, the shares of such
series (alone or together with the shares of one or more other series
having similar provisions) shall be entitled to vote separately as a
class for the election of one or more directors of the Corporation in
case of dividend arrearages or other specified events or upon other
matters;
(d) whether the shares of such series shall be
redeemable, the limitations and restrictions with respect to such
redemptions, the time or times when, the price or prices at which and
the manner in which such shares shall be redeemable, including, but
not limited to, the manner of selecting shares of such series for
redemption if less than all shares are to be redeemed;
(e) the rights to which the holders of shares of such
series shall be entitled, and the preferences, if any, over any other
series (or of any other series over such series), upon the voluntary
or involuntary liquidation, dissolution, distribution of assets or
winding up of the Corporation, which rights may vary depending on
whether such liquidation, dissolution, distribution or winding up is
voluntary or involuntary, and, if voluntary, may vary at different
dates;
(f) whether the shares of such series shall be subject to
the operation of a purchase, retirement or sinking fund, and, if so,
whether and upon what conditions such purchase, retirement or sinking
fund shall be cumulative or noncumulative, the extent to which and the
manner in which such fund shall be applied to the purchase or
redemption of the shares of such series, including, but not limited
to, the price or prices at which the shares may be purchased or
redeemed, or to other corporate purposes and the terms and provisions
relative to the operation thereof;
(g) whether the shares of such series shall be
convertible into or exchangeable for shares of stock of any other
class or classes, or of any other series of the same class, and, if so
convertible or exchangeable, the price or prices or the rate or rates
of conversion or exchange and the method, if any, of adjusting the
same, and any other terms and conditions of such conversion or
exchange;
(h) whether the issuance of additional shares of
Preferred Stock shall be subject to restrictions as to issuance, or as
to the powers, preferences or other rights of any other series;
(i) the right of the shares of such series to the benefit
of conditions and restrictions upon the creation of indebtedness of
the Corporation or any subsidiary, upon the issue of any additional
stock (including additional shares of such series or any other series)
and upon the payment of dividends or the making of other distributions
on, and the purchase, redemption or other acquisition by the
Corporation or any subsidiary of, any outstanding stock of the
Corporation; and
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<PAGE> 141
(j) any other preferences, privileges and powers, and
relative participating, optional or other special rights, and
qualifications, limitations or restrictions of such series, as the
Board of Directors may deem advisable and as shall not be inconsistent
with applicable law or the provisions of these Articles of
Incorporation, as amended from time to time.
2. Shares of Preferred Stock which have been issued and
reacquired in any manner by the Corporation (excluding until the Corporation
elects to retire them, shares which are held as treasury shares, but including
shares redeemed, shares purchased and retired and shares which have been
converted into shares of Common Stock) shall have the status of authorized but
unissued shares of Preferred Stock and may be reissued as a part of the series
of which they were originally a part or may be reissued as a part of another
series of Preferred Stock, all subject to the conditions or restrictions on
issuance set forth in the resolution or resolutions adopted by the Board of
Directors providing for the issuance of any series of Preferred Stock.
3. Except as otherwise provided by the resolution or resolutions
providing for the issuance of any series of Preferred Stock, after payment
shall have been made to the holders of Preferred Stock of the full amount of
dividends to which they shall be entitled pursuant to the resolution or
resolutions providing for the issuance of any series of Preferred Stock, the
holders of Common Stock shall be entitled, to the exclusion of the holders of
Preferred Stock of any and all series, to receive such dividends as from time
to time may be declared by the Board of Directors.
4. Except as otherwise provided by the resolution or resolutions
providing for the issuance of any series of Preferred Stock, in the event of
any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, after payment shall have been made to the holders of
Preferred Stock of the full amounts to which they shall be entitled pursuant to
such resolution or resolutions, the holders of Common Stock shall be entitled,
to the exclusion of the holders of Preferred Stock of any and all series, to
share, ratably according to the number of shares of Common Stock held by them,
in all remaining assets of the Corporation available for distribution to its
stockholders.
5. The holders of Preferred Stock shall not have any preemptive
rights except to the extent such rights shall be specifically provided for in
the resolution or resolutions providing for the issuance thereof adopted by the
Board of Directors.
C. Except as otherwise specifically required by law or as
specifically provided in any resolution of the Board of Directors providing for
the issuance of any particular series of Preferred Stock, the exclusive voting
power of the Corporation shall be vested in the Common Stock of the
Corporation. Except as otherwise provided in these Articles of Incorporation,
each share of Common Stock shall entitle the holder thereof to one vote at all
meetings of the stockholders of the Corporation.
D. The capital stock of the Corporation, after the amount of the
subscription price has been paid, in money, property or services, as the Board
of Directors shall determine, shall not be subject to assessment to pay the
debts of the Corporation, nor for any other purpose, and no stock
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<PAGE> 142
issued as fully paid up shall ever be assessable or assessed, and these
Articles of Incorporation shall not be amended in this particular.
FIFTH: The name and address of the incorporator are as follows:
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
J. Gregory Holloway 4400 Thanksgiving Tower
Dallas, TX 75201
</TABLE>
SIXTH: The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors, which shall consist of not
fewer than three (3) nor more than twelve (12) directors, the exact number of
directors to be determined from time to time by resolution adopted by the
affirmative vote of a majority of the entire Board of Directors. Initially,
the number of directors of the Corporation shall be six (6), and their names
shall be as follows:
Geoffrey C. Etnire
John P. Parsons
Bennett B. Sims
Ted P. Stokely
Martin L. White
Edward G. Zampa
Each of the above directors can be reached c/o the Corporation at 10670 North
Central Expressway, Dallas, Texas 75231. Such directors are hereby elected for
a term to expire at the first annual meeting of stockholders. At each
succeeding annual meeting of stockholders beginning with the first, successors
to directors shall be elected. A director shall hold office until the annual
meeting for the year in which such director's term expires and until such
director's successor shall be elected, subject, however, to prior death,
resignation, retirement or removal from office. Except as provided by
applicable law, any vacancy in the Board of Directors shall be filled by a
majority of the directors then in office or by a sole remaining director. Any
director elected to fill a vacancy not resulting from an increase in the number
of directors shall have the same remaining term as that of such director's
predecessor.
Whenever the holders of any one or more series of Preferred Stock
issued by the Corporation shall have the right, voting separately or by class
or series, to elect directors at an annual or special meeting of stockholders,
the election, term of office, filling of vacancies and other features of such
directorships shall be governed by the terms of these Articles of Incorporation
or the resolution or resolutions adopted by the Board of Directors pursuant to
Article FOURTH applicable thereto.
SEVENTH: In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, adopt,
alter, amend, change or repeal the Bylaws of the Corporation. The stockholders
of the Corporation may not make, adopt, alter, amend, change or repeal the
Bylaws of the Corporation except upon the affirmative vote of not less than
seventy five percent (75%) of the outstanding stock of the Corporation entitled
to vote thereon; provided,
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<PAGE> 143
however, that the power of the stockholders to make, adopt, alter, amend,
change or repeal the Bylaws of the Corporation is further subject to the
provisions of Article TENTH of these Articles of Incorporation. In addition to
the powers and authority expressly conferred upon them herein or by statute,
the directors of the Corporation are hereby empowered to exercise all such
powers and do all such acts and things as may be exercised or done by the
Corporation, subject, nevertheless, to applicable provisions of the statutes of
Nevada, these Articles of Incorporation and any Bylaws adopted by the
stockholders; provided, however, that no Bylaws hereafter adopted by the
stockholders or otherwise shall invalidate any prior act of the directors which
would have been valid if such Bylaws had not been adopted.
EIGHTH: Notwithstanding any other provision of these Articles of
Incorporation or the Bylaws of the Corporation to the contrary, no action
required to be taken or which may be taken at any annual or special meeting of
stockholders of the Corporation may be taken by written consent without such a
meeting except any action taken upon the signing of a consent in writing by all
stockholders of the Corporation entitled to vote thereon setting forth the
action to be taken. Subject to the rights of the holders of any series of
Preferred Stock, special meetings of stockholders of the Corporation may be
called only by the Board of Directors, the Chairman of the Board or the
President of the Corporation and not by any other person or persons.
NINTH: A. A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for any
breach of fiduciary duty as a director, except that this part A of Article
NINTH shall not eliminate or limit a director's liability (i) for acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law, or (ii) for the payment of dividends in violation of NRS 78.300. If the
NRS is amended after the date these Articles of Incorporation became effective
under the NRS to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the NRS, as so amended from time to time.
Any repeal or modification of this part A of Article NINTH shall not
increase the personal liability of any director of the Corporation for any act
or occurrence taking place prior to such repeal or modification, or otherwise
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
The provisions of this part A of Article NINTH shall not be deemed to
limit or preclude indemnification of a director by the Corporation for any
liability of a director which has not been eliminated by the provisions of this
part A of Article NINTH.
B. The Corporation shall indemnify to the fullest extent
authorized or permitted by law (as now or hereafter in effect) and shall
advance expenses, to the fullest extent authorized or permitted by law (as now
or hereinafter in effect), to any person made or threatened to be made a party
or witness to any action, suit or proceeding (whether civil or criminal or
otherwise) by reason of the fact that such person is or was a director,
officer, employee or agent of the Corporation or by reason of the fact that
such person, at the request of the Corporation, is or was serving any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, in any capacity. Nothing contained herein shall affect any rights
to indemnification to which employees
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<PAGE> 144
other than directors and officers may be entitled by law. No amendment to or
repeal of this part B of Article NINTH shall apply to or have any effect on any
right to indemnification provided hereunder with respect to any acts or
omissions occurring prior to such amendment or repeal.
C. The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise against any such expense, liability or loss, whether
or not the Corporation would have the power to indemnify such person against
such expense, liability or loss under the NRS. The Board of Directors, without
the approval of the stockholders of the Corporation, may also create a trust
fund, grant a security interest or use other means (including, but not limited
to, letters of credit, surety bonds or other similar arrangements), as well as
enter into contracts providing indemnification to the fullest extent authorized
or permitted by law and including as part thereof provisions with respect to
any or all of the foregoing, to ensure the payment of such amounts as may
become necessary to effect indemnification as provided therein, or elsewhere.
TENTH: A. The Corporation expressly elects not to be governed by
the Nevada "Combinations with Interested Stockholders" statutes contained in
NRS 78.411 to 78.444 and the Nevada "Acquisition of Controlling Interest"
statutes contained in NRS 78.378-78.3793.
B. In addition to any affirmative vote required by law, these
Articles of Incorporation or the Bylaws of the Corporation, and except as
otherwise expressly provided in part C of this Article TENTH, a Business
Combination (as hereinafter defined) with, or proposed by or on behalf of, any
Interested Stockholder (as hereinafter defined) or any Affiliate or Associate
(as such terms are hereinafter defined) of any Interested Stockholder or any
Person (as hereinafter defined) who thereafter would be an Affiliate or
Associate of any Interested Stockholder shall require the affirmative vote of
not less than sixty-six and two-thirds percent (66-2/3%) of the votes entitled
to be cast by the holders of all the shares of Voting Stock (as hereinafter
defined) then outstanding, voting together as a single class, excluding Voting
Stock Beneficially Owned (as hereinafter defined) by such Interested
Stockholder. Such affirmative vote shall be required notwithstanding the fact
that no vote may be required, or that a lesser percentage or separate class
vote may be specified, by applicable law or in any agreement with any national
securities exchange or otherwise.
C. The provisions of part B of this Article TENTH shall not be
applicable to any particular Business Combination, and such Business
Combination shall require only such affirmative vote, if any, as is required by
applicable law or by any other provision of these Articles of Incorporation or
the Bylaws of the Corporation, or any agreement with any national securities
exchange, if such Business Combination shall have been approved, either
specifically or as a transaction which is within an approved category of
transactions, by a majority of the Board of Directors or, in the case of such a
Business Combination involving any Person (as hereinafter defined) that is an
Affiliate (as hereinafter defined) of the Corporation, by a majority of the
Board of Directors including a majority of the members of the Board of
Directors who at the time are neither officers or employees of the Corporation
nor directors, officers or employees of any Advisor (as defined in Article
THIRTEENTH), prior to the Acquisition Date (as hereinafter defined) with
respect to any Person involved in such Business Combination.
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<PAGE> 145
D. The following definitions shall apply with respect to this
Article TENTH and, when noted therein, to Articles TWELFTH, FOURTEENTH and
SEVENTEENTH:
1. The terms "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") as in effect on the date these Articles of Incorporation became
effective under the NRS (the term "registrant" in such Rule meaning in
this case the Corporation).
2. The term "Acquisition Date", with respect to any
Person, shall mean the date on which such Person becomes the
Beneficial Owner of Voting Stock representing twenty percent (20%) or
more of the votes entitled to be cast by the holders of all the shares
of Voting Stock then outstanding.
3. A Person shall be deemed the "Beneficial Owner" of,
and shall be deemed to "Beneficially Own", shares of Capital Stock:
(a) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has the sole
or shared right to vote or dispose of or has beneficial
ownership of (as determined pursuant to Rule 13d-3 promulgated
under the Exchange Act or pursuant to any successor
provision), including, but not limited to, pursuant to any
agreement, arrangement or understanding, whether or not in
writing; provided, however, that a Person shall not be deemed
the Beneficial Owner of, or to Beneficially Own, any security
under this clause (a) as a result of an agreement, arrangement
or understanding to vote such security that both (i) arises
solely from a revocable proxy given in response to a public
proxy or consent solicitation made pursuant to, and in
accordance with, the applicable provisions of the rules and
regulations under the Exchange Act and (ii) is not reportable
by such person on Schedule 13D under the Exchange Act (or any
comparable or successor report or schedule) without giving
effect to any applicable waiting period; or
(b) which are Beneficially Owned, directly or
indirectly, by any other Person (or any Affiliate or Associate
thereof) with which such Person (or any of such Person's
Affiliates or Associates) has any agreement, arrangement or
understanding, whether or not in writing, for the purpose of
acquiring, holding, voting (except pursuant to a revocable
proxy as described in the proviso to clause (a) above) or
disposing of any shares of Capital Stock; provided, however,
that (i) no director or officer of the Corporation (nor any
Affiliate or Associate of any such director or officer) shall,
solely by reason of any or all of such directors or officers
acting in their capacities as such, be deemed the Beneficial
Owner of or to Beneficially Own any shares of Capital Stock
that are Beneficially Owned by any other such director or
officer; and (ii) no Person shall be deemed the Beneficial
Owner of or to Beneficially Own any shares of Voting Stock
held in any voting trust, any employee stock ownership plan or
any similar plan or trust if such Person does not possess the
right
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to vote, to direct the voting of or to be consulted with
respect to the voting of such shares.
4. The term "Business Combination" shall mean:
(a) any merger or consolidation of the
Corporation or any Subsidiary (as hereinafter defined) with
(i) any Interested Stockholder or (ii) any other company
(whether or not itself an Interested Stockholder) which is or
after such merger or consolidation would be an Affiliate or
Associate of an Interested Stockholder;
(b) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition or security arrangement,
investment, loan, advance, guarantee, agreement to purchase,
agreement to pay, extension of credit, joint venture
participation or other arrangement (in one transaction or a
series of transactions) with or for the benefit of any
Interested Stockholder or any Affiliate or Associate of any
Interested Stockholder involving the Corporation or any
Subsidiary and any assets, securities or commitments of the
Corporation, any Subsidiary or any Interested Stockholder or
any Affiliate or Associate of any Interested Stockholder that
(except for any arrangement, whether as employee, consultant
or otherwise, other than as a director, pursuant to which any
Interested Stockholder or any Affiliate or Associate thereof
shall, directly or indirectly, have any control over or
responsibility for the management of any aspect of the
business or affairs of the Corporation, with respect to which
arrangements the value tests set forth below shall not apply),
together with all other such arrangements (including all
contemplated future events), has an aggregate fair market
value or involves aggregate commitments of $5,000,000 or more
or constitutes more than five percent (5%) of the book value
of the total assets (in the case of transactions involving
assets or commitments other than shares of Capital Stock) or
five percent (5%) of the stockholders' equity (in the case of
transactions in shares of Capital Stock) of the entity in
question (a "Substantial Part"), as reflected in the most
recent fiscal year-end consolidated balance sheet of such
entity existing at the time the stockholders of the
Corporation would be required to approve or authorize the
Business Combination involving the assets, securities or
commitments constituting any Substantial Part;
(c) the adoption of any plan or proposal for the
liquidation or dissolution of the Corporation;
(d) any reclassification of securities of the
Corporation (including any reverse stock split), or
recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries
or any other transaction (whether or not with or otherwise
involving an Interested Stockholder) that has the effect,
directly or indirectly, of increasing the proportionate share
of any class or series of Capital Stock, or any securities
convertible into Capital Stock or into equity securities of
any Subsidiary, that is Beneficially Owned by any Interested
Stockholder or any Affiliate or Associate of any Interested
Stockholder; or
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(e) any agreement, contract or other arrangement
providing for any one or more of the actions specified in the
foregoing clauses (a) through (d).
5. The term "Capital Stock" shall mean all capital stock
of the Corporation authorized to be issued from time to time under
Article FOURTH of these Articles of Incorporation, and, with respect
to any particular Business Combination, the term "Voting Stock" shall
mean all Capital Stock which by its terms may be voted on all matters
submitted to stockholders of the Corporation generally or which by its
terms may be voted on such Business Combination.
6. The term "Interested Stockholder" shall mean any
Person (other than the Corporation or any Subsidiary and other than
any profit-sharing, employee stock ownership or other employee plan of
the Corporation or any Subsidiary or any trustee of or fiduciary with
respect to any such plan when acting in such capacity and other than
Income Opportunity Realty Trust, a California business trust, or any
successor thereof, which remains the record owner of all the
outstanding shares of Common Stock) who (a) is or has announced or
publicly disclosed a plan or intention to become the Beneficial Owner
of Common Stock representing twenty percent (20%) or more of the votes
entitled to be cast by the holders of all then outstanding shares of
Common Stock or (b) is an Affiliate or Associate of the Corporation
and at any time within the two-year period immediately prior to the
date in question was the Beneficial Owner of Common Stock representing
twenty percent (20%) or more of the votes entitled to be cast by the
holders of all shares of Common Stock then outstanding.
7. The term "Person" shall mean any individual, firm,
corporation, partnership or other entity and shall include any group
comprised of any Person and any other Person with whom such Person or
any Affiliate or Associate of such Person has any agreement,
arrangement or understanding, directly or indirectly, for the purpose
of acquiring, holding, voting or disposing of shares of Capital Stock.
8. The term "Subsidiary" means any entity of which a
majority of any class of equity security is beneficially owned by the
Corporation; provided, however, that for the purposes of the
definition of Interested Stockholder set forth in sub-part 6 of this
part D, the term Subsidiary shall mean only a company of which a
majority of each class of equity securities is Beneficially Owned by
the Corporation.
E. 1. A majority of the Board of Directors shall have the power to
determine all questions arising under this Article TENTH, including, without
limitation, (a) whether a Person is an Interested Stockholder, (b) the number
of shares of Capital Stock or other securities Beneficially Owned by any
Person, (c) whether a Person is an Affiliate or Associate of another, (d)
whether a Business Combination is with, or proposed by, or on behalf of an
Interested Stockholder or an Affiliate or Associate of an Interested
Stockholder, (e) whether the assets that are the subject of any Business
Combination have, or the consideration to be received for the issuance or
transfer of securities by the Corporation or any Subsidiary in any Business
Combination has, an aggregate fair market value of
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$5,000,000 or more or constitutes more than five percent (5%) of the book value
of the total assets or five percent (5%) of the stockholders' equity of the
entity in question, (f) whether the assets or securities that are the subject
of any Business Combination constitute a Substantial Part, (g) the date on
which an Interested Stockholder became an Interested Stockholder, (h) the
occurrence and time of any Acquisition Date and (i) any other matter relating
to the applicability or effect of this Article TENTH. Any such determination
shall be binding and conclusive on all parties.
2. The Board of Directors shall have the right to demand that any
Person who it believes is or may be an Interested Stockholder (or who holds of
record shares of Capital Stock that are Beneficially Owned by any Person that
the Board of Directors believes is or may be an Interested Stockholder) supply
the Corporation with complete information as to (a) the record holders of all
shares of Capital Stock that are Beneficially Owned by such Person, (b) the
number of shares of each class or series of Capital Stock that are Beneficially
Owned by such Person and held of record by each such record holder and the
numbers of the stock certificates evidencing such shares and (c) any other
matter relating to the applicability or effect of this Article TENTH as the
Board of Directors may reasonably request. Each such Person shall furnish such
information within ten (10) days after the receipt of such demand.
F. Nothing contained in this Article TENTH shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by law
or to be in derogation of any action, past or future, which has been or may be
taken by the Board of Directors or the stockholders with respect to the subject
matter contained herein.
G. For the purposes of this Article TENTH, a Business Combination
is presumed to have been proposed by, or on behalf of, an Interested
Stockholder or an Affiliate or Associate of an Interested Stockholder or a
Person who thereafter would become such if such Interested Stockholder,
Affiliate, Associate or Person votes for or consents to the adoption of any
such Business Combination, unless as to such Interested Stockholder, Affiliate,
Associate or Person a majority of the Board of Directors makes a determination
that such Business Combination is not proposed by or on behalf of such
Interested Stockholder, Affiliate, Associate or Person.
ELEVENTH: Any director of the Corporation may be removed from office
at any time by the vote of stockholders representing not less than two-thirds
of the voting power of the issued and outstanding stock entitled to voting
power.
TWELFTH: The Board of Directors, when evaluating any (a) tender offer
or invitation for tenders, or proposal to make a tender offer or request or
invitation for tenders, by another party, for any equity security of the
Corporation or (b) proposal or offer by another party to (i) merge or
consolidate the Corporation or any Subsidiary (as defined in part C of Article
TENTH) with another corporation, (ii) purchase or otherwise acquire all or a
substantial portion of the properties or assets of the Corporation or any
Subsidiary, or sell or otherwise dispose of to the Corporation or any
Subsidiary all or a substantial portion of the properties or assets of such
other party or (iii) liquidate, dissolve, reclassify the securities of, declare
an extraordinary dividend of, recapitalize or reorganize the Corporation, shall
take into account all factors which the Board of Directors deems relevant,
including, without limitation, to the extent so deemed relevant, the continuing
status of the
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Corporation as a "real estate investment trust", as defined in Section 856 of
the Internal Revenue Code of 1986, as amended, the potential impact on
creditors, partners, joint venturers and other constituents of the Corporation
and the communities in which the Corporation's offices, other establishments or
investments are located.
THIRTEENTH: Subject to Article FOURTEENTH and applicable law, the
Board of Directors may authorize the Corporation to enter into and perform one
or more agreements with any person whereby, subject to the supervision and
control of the Board of Directors, any such person shall render or make
available to the Corporation managerial, investment, advisory or related
services, office space and other services and facilities, including, if deemed
advisable by the Board of Directors, the management or supervision of the
investments or the day-to-day operations of the Corporation (any such person
being referred to herein as an "Advisor"), upon such terms and conditions as
may be provided in such agreement or agreements, including, if deemed fair and
equitable by the Board of Directors, the compensation payable thereunder by the
Corporation.
FOURTEENTH: The Corporation shall not, directly or indirectly,
contract or engage in any transaction with (a) any director, officer or
employee of the Corporation, (b) any director, officer or employee of any
Advisor, (c) any Advisor or (d) any Affiliate or Associate (as such terms are
defined in part D of Article TENTH) of the Corporation or of any person
identified in the foregoing clauses (a) through (c) unless the material facts
as to the relationship among or financial interest of the relevant individuals
or persons and as to the contract or transaction are disclosed or are known to
the Board of Directors or committee thereof, as the case may be, and the Board
of Directors or committee thereof, as the case may be, determines that such
contract or transaction is fair as to the Corporation and simultaneously
authorizes or ratifies such contract or transaction by the affirmative vote of
a majority of independent directors (as hereinafter defined) entitled to vote
thereon. For purposes of this Article FOURTEENTH, a director of the
Corporation shall be deemed "independent" if such director is neither an
officer or employee of the Corporation nor a director, officer or employee of
any Advisor.
FIFTEENTH: Meetings of stockholders may be held within or without the
State of Nevada, as the Bylaws of the Corporation may provide. The books of
the Corporation may be kept (subject to any provision contained in the NRS)
outside the State of Nevada at such place or places as may be designated from
time to time by the Board of Directors or in the Bylaws of the Corporation.
SIXTEENTH: Whenever a compromise or arrangement is proposed between
this Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Nevada may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of NRS 78.635 or on the application of trustees in dissolution
or of any receiver or receivers appointed for this Corporation under the
provisions of NRS 78.600 order a meeting of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as the said
court directs. If a majority in number representing three-fourths in value of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise
or
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arrangement and to any reorganization of this Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this Corporation, as the case
may be, and also on this Corporation.
SEVENTEENTH: A. Notwithstanding any other provision of these
Articles of Incorporation or the Bylaws of the Corporation, any agreement with
any national securities exchange or any provision of law which might otherwise
permit a lesser vote or no vote, but in addition to any affirmative vote of the
holders of any particular class or series of the Voting Stock (as defined in
part D of Article TENTH) required by any other provision of these Articles of
Incorporation, any agreement with any national securities exchange or any
provision of law, the affirmative vote of the holders of record of shares of
Voting Stock representing at least seventy five percent (75%) of the votes cast
by such holders voting thereon shall be required to alter, amend or repeal
Article SIXTH, Article SEVENTH, Article EIGHTH, Article TENTH, Article
ELEVENTH, Article TWELFTH or this Article SEVENTEENTH or to adopt any provision
inconsistent therewith; provided, however, that this part A shall not apply to,
and such seventy five percent (75%) vote shall not be required for, any
alteration, amendment, repeal or adoption recommended by more than fifty
percent (50%) of the entire Board of Directors.
B. Except as provided in part D of Article FOURTH the Corporation
reserves the right to amend, alter, change or repeal any provision contained in
these Articles of Incorporation, or any amendment hereof, in the manner now or
hereafter prescribed by the laws of the State of Nevada and these Articles of
Incorporation, and all rights and powers conferred herein on stockholders,
directors and officers are subject to such reservation.
If any provision of these Articles of Incorporation is determined to
be invalid, void, illegal or unenforceable, the remaining provisions of these
Articles of Incorporation shall continue to be valid and enforceable and shall
in no way be affected, impaired or invalidated.
IN WITNESS WHEREOF, I have executed these Articles of Incorporation
this 22nd day of August, 1995.
/s/ J. Gregory Holloway
-----------------------------------
J. Gregory Holloway, Incorporator
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APPENDIX D
BYLAWS OF
INCOME OPPORTUNITY REALTY INVESTORS, INC.
ARTICLE ARTICLE I
OFFICES
SECTION 1.1 Registered Office in Nevada. The registered
office of Income Opportunity Realty Investors, Inc. (the "Corporation") in the
State of Nevada shall be in the City of Carson City, or such other place as the
Board of Directors may from time to time authorize by resolution.
SECTION 1.2 Principal Office. The principal office for the
transaction of the business of the Corporation is located at 10670 North
Central Expressway, Suite 300, Dallas, Texas 75231. The Board of Directors of
the Corporation (the "Board of Directors") is hereby granted full power and
authority to change the location of the principal office.
SECTION 1.3 Other Offices. The Corporation may also have
offices at such other places inside or outside the State of Nevada as the Board
of Directors may from time to time determine or the business of the Corporation
may require.
ARTICLE ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.1 Annual Meetings. Annual meetings of stockholders
shall be held within the first eight months of each calendar year, or as soon
as practicable thereafter, commencing with the calendar year 1996.
SECTION 2.2 Special Meetings. Special meetings of the
stockholders of the Corporation may be called by resolution of the Board of
Directors, the Chairman of the Board or the President.
SECTION 2.3 Time and Place of Meetings. Each meeting of
stockholders shall be held at such place within the United States, and at such
hour on such date, as shall be designated by the Board of Directors and stated
in the notice of meeting delivered pursuant to Section 2.4.
SECTION 2.4 Notice of Meetings. Except as otherwise provided
by law, written or printed notice of each meeting of stockholders, whether
annual or special, shall be given not less than 10 nor more than 60 days before
the date of such meeting to each stockholder entitled to vote at such meeting
or, in the event that the stockholders are to vote upon any proposal to merge
or consolidate the Corporation or to sell, lease or exchange all or
substantially all of its property and
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assets, not less than 20 nor more than 60 days before the date of such meeting.
Such notice shall be delivered either personally or by mail or at the direction
of the Chairman of the Board, the President or the Secretary. Each notice of
meeting shall state the place, date and hour of the meeting.
SECTION 2.5 Nature of Business. At any meeting of
stockholders, only such business shall be conducted as shall have been brought
before such meeting by or at the direction of the Board of Directors, the
Chairman of the Board or the President, as applicable, or by any stockholder
who complies with the procedures set forth in this Section 2.5.
Except as otherwise provided by Section 3.6 of these Bylaws or by law,
the only business which shall be conducted at any meeting of stockholders shall
(i) have been specified in the written notice of meeting (or any supplement
thereto) given as provided in Section 2.4, (ii) be brought before the meeting
at the direction of the Board of Directors or the chairman of the meeting or
(iii) have been specified in a written notice (a "Stockholder Meeting Notice")
given to the Corporation, in accordance with all of the following requirements,
by or on behalf of any stockholder who shall have been a stockholder of record
on the record date for such meeting and who shall continue to be entitled to
vote at such meeting. Each Stockholder Meeting Notice must be delivered
personally to, or be mailed to and received by, the Secretary at the principal
office of the Corporation not less than 35 days nor more than 60 days prior to
such meeting; provided, however, that in the event that less than 45 days'
notice or prior public disclosure of the date of the meeting is given or made
to stockholders, notice by the stockholder to be timely must be received not
later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. Each Stockholder Meeting Notice shall set forth (a) a description of
each item of business proposed to be brought before the meeting, (b) the name
and address of the stockholder proposing to bring such item of business before
the meeting, (c) the class and number of shares of stock held of record, owned
beneficially and represented by proxy by such stockholder as of the record date
for the meeting (if such date shall then have been made publicly available) and
as of the date of such Stockholder Meeting Notice and (d) all other information
which would be required to be included in a proxy statement filed with the
Securities and Exchange Commission (the "Commission") if, with respect to any
such item of business, such stockholder were a participant in a solicitation
subject to Section 14 of the Securities Exchange Act of 1934. No business
shall be brought before any meeting of stockholders otherwise than as provided
in this Section 2.5 or in Section 3.6.
When a meeting is adjourned to another time or place, notice of the
adjourned meeting need not be given if the time and place thereof are announced
at the meeting at which the adjournment is taken, unless the adjournment is for
more than 30 days, or unless after the adjournment a new record date is fixed
for the adjourned meeting, in which case notice of the adjourned meeting shall
be given to each stockholder of record entitled to vote at the adjourned
meeting. At the adjourned meeting, any business may be transacted that might
have been transacted at the original meeting.
SECTION 2.6 Quorum. Subject to the provisions of the
Articles of Incorporation of the Corporation (the "Articles") and any
applicable statute, the presence in person or by proxy of holders of a majority
of the outstanding shares of the Corporation's voting stock shall constitute a
quorum.
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SECTION 2.7 Voting. Subject to the provisions of the
Articles and any applicable statute, a majority of the votes cast at a meeting
of stockholders, duly called and at which a quorum is present, shall be
sufficient to take or authorize action upon any matter which may properly come
before the meeting, unless more than a majority of the votes cast is required
by law or by the Articles.
Subject to the Articles and any applicable statute, each stockholder
of record shall be entitled to one vote for each share registered in such
stockholder's name as of the record date determined pursuant to Section 6.5
below or applicable law. A stockholder entitled to vote may do so either in
person or by proxy executed in writing by such stockholder or by such
stockholder's duly authorized attorney-in-fact. No proxy shall be valid after
eleven months from its date, unless otherwise provided in the proxy. At all
meetings of stockholders, unless the voting is conducted by inspectors, all
questions relating to the qualification of voters and the validity of proxies
and the acceptance or rejection of votes shall be decided by the chairman of
the meeting.
SECTION 2.8 Organization and Order of Business. At each
meeting of stockholders, the Chairman of the Board or, if the Chairman of the
Board is absent or unable to act, the President or, in the absence or inability
to act of both the Chairman of the Board and the President, the Treasurer shall
act as chairman of the meeting. The Secretary or, if the secretary is absent
or unable to act, any other person appointed by the chairman of the meeting
shall act as secretary of the meeting and keep the minutes thereof. The order
of business at all meetings of the stockholders shall be as determined by the
chairman of the meeting.
SECTION 2.9 Inspectors of Election. The Board of Directors
may, in advance of any meeting of stockholders, appoint one or more inspectors
to act at such meeting or any adjournment thereof. If the inspectors shall not
be so appointed or if any of them shall fail to appear or act, the chairman of
the meeting may, and on the request of any stockholder entitled to vote at such
meeting shall, appoint inspectors. The number of inspectors shall be either
one or three. The inspectors shall determine the number of shares represented
at the meeting, the existence of a quorum and the validity and effect of
proxies, and shall receive votes, ballots or consents, hear and determine all
challenges and questions arising in connection with the right to vote, count
and tabulate all votes, ballots or consents, determine the result and do such
acts as are proper to conduct the election or vote with fairness to all
stockholders. On request of the chairman of the meeting or any stockholder
entitled to vote at such meeting, the inspectors shall make a report in writing
of any challenge, request or matter determined by them and shall execute a
certificate of any fact found by them. No director or candidate for the office
of director shall act as inspector of an election of directors. Inspectors
need not be stockholders.
SECTION 2.10 Action Without Meeting. Except as otherwise provided
by statute or the Articles, any action required or permitted to be taken at any
meeting of stockholders may be taken without a meeting, without prior notice
and without a vote, if a consent in writing, setting forth such action, is
signed by all the stockholders entitled to vote on the subject matter thereof
and if any other stockholders entitled to notice of a meeting of stockholders
but not to vote at such meeting have waived in writing any rights which they
may have to dissent from such action, and such consent and
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waiver shall be delivered to the registered office of the Corporation in the
State of Nevada, its principal office or an officer or agent of the Corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the Corporation's registered office shall be by
hand or by certified or registered mail, return receipt requested. Every
consent or waiver shall bear the date of signature of each stockholder who
signs such consent or waiver.
ARTICLE ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1 Number, Election and Term of Directors. The
Board of Directors shall consist of not fewer than 3 nor more than 12
directors. Subject to the foregoing limits, the Board of Directors may
increase or decrease the number of directors from time to time by resolution
adopted by the affirmative vote of a majority of the entire Board of Directors;
provided, however, that the tenure of office of an incumbent director shall not
be affected by any such increase or decrease. Initially, the names of the
directors shall be as specified in the Articles. A director shall hold office
until the annual meeting of stockholders for the year in which such director's
term expires and until such director's successor shall be elected, subject,
however, to prior death, resignation, retirement or removal from office in
accordance with the Articles and these Bylaws. Any director elected to fill a
vacancy not resulting from an increase in the number of directors shall have
the same remaining term as that of such director's predecessor.
Notwithstanding the foregoing, whenever the holder of any one or more
series of Preferred Stock shall have the right, voting separately by class or
series, to elect directors at an annual or special meeting of stockholders, the
election and term of office of such directorships shall be governed by the
terms of the Articles.
Directors need not be stockholders.
SECTION 3.2 Powers. The business and affairs of the
Corporation shall be managed in accordance with the Articles by its Board of
Directors, which may exercise all of the powers of the Corporation, except such
as are by law, the Articles or these Bylaws conferred upon or reserved to the
stockholders. As provided in the Articles, the Board of Directors may delegate
certain duties, including the duty of management of the Corporation's
day-to-day operations or investments, to one or more persons.
SECTION 3.3 Vacancies. Except as provided by applicable law,
any vacancy in the Board of Directors shall be filled by a majority of the
directors then in office or by a sole remaining director.
SECTION 3.4 Resignation of Directors. Any director or member
of a committee may resign at any time. Such resignation shall be made in
writing and shall take effect at the time specified therein or, if no time is
specified, at the time of receipt thereof by the Chairman of the
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Board, the President or the Secretary. The acceptance of a resignation, unless
otherwise stated therein, shall not be necessary to make it effective.
SECTION 3.5 Removal of Directors. Any director of the
Corporation may be removed from office at any time by the vote of stockholders
representing not less than two-thirds of the voting power of the issued and
outstanding stock entitled to voting power.
SECTION 3.6 Nomination of Directors. Except as otherwise
fixed pursuant to Article FOURTH of the Articles relating to the rights of the
holders of any one or more classes or series of Preferred Stock, acting
separately by class or series, to elect, under specified circumstances,
directors at a meeting of stockholders, nominations for the election of
directors may be made by the Board of Directors or a committee appointed by the
Board of Directors or by any stockholder entitled to vote in the election of
directors generally. However, any stockholder entitled to vote in the election
of directors generally may nominate one or more persons for election as
directors at a meeting only if written notice of such stockholders' intent to
make such nomination or nominations has been delivered personally to, or been
mailed to and received by the Secretary at, the principal office of the
Corporation not less than 35 days nor more than 60 days prior to the meeting;
provided, however, that, in the event that less than 45 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders
notice by the stockholder to be timely must be so received not later than the
close of business on the tenth day following the day on which such notice of
the date of the meeting was mailed or such public disclosure was made. Each
such notice shall set forth (i) the name and address of the stockholder who
intends to make the nomination and of the person or persons to be nominated,
(ii) the class and number of shares of stock held of record, owned beneficially
and represented by proxy by such stockholder as of the record date for the
meeting (if such date shall then have been made publicly available) and as of
the date of such notice, (iii) a representation that the stockholder intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice, (iv) a description of all arrangements or
understandings between such stockholder and each nominee and any other person
or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by such stockholder, (v) such other information
regarding each nominee proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Commission and (vi) the consent of each nominee to serve as a director of the
Corporation if so elected. The chairman of the meeting may refuse to
acknowledge the nomination of any person not made in compliance with the
foregoing procedure.
SECTION 3.7 Committees. The Board of Directors shall appoint
from among its members an Audit Committee and may appoint other committees,
each to be composed of three or more directors. None of the members of the
Audit Committee shall be employees of the Corporation or any Advisor (as
defined in Article THIRTEENTH of the Articles). Subject to any provisions of
the Articles calling for action by the entire Board of Directors, the Board of
Directors may delegate to any committee any of the powers of the Board of
Directors except the power to determine the number of directors constituting
the Board of Directors, to fill vacancies in the Board of Directors, to take
any action pursuant to Articles TENTH and SEVENTEENTH of the Articles, to
declare dividends or distributions on stock, to recommend to the stockholders
any action which requires
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stockholder approval, to amend the Bylaws, to approve any merger or share
exchange which does not require stockholder approval and to issue stock.
Notice of committee meetings shall be given in the same manner as
notice for special meetings of the Board of Directors.
One-third, but not less than two, of the members of any committee
shall be present in person or by telephone at any meeting of such committee in
order to constitute a quorum for the transaction of business at such meeting,
and the act of a majority present shall be the act of such committee. The
Board of Directors may designate a chairman of any committee and such chairman
or any two members of any committee may fix the time and place of its meetings,
unless the Board of Directors shall otherwise provide. In the absence or
disqualification of any member of any such committee, the members thereof
present at any meeting and not disqualified from voting, whether or not they
constitute a quorum, may unanimously appoint another director to act at the
meeting in the place absent or disqualified member.
The committees shall keep minutes of their proceedings and shall
report the same to the Board of Directors at the meeting next succeeding, and
any action by the committees shall be subject to revision and alteration by the
Board of Directors, provided that no rights of third persons shall be affected
by any such revision or alteration.
The Board of Directors shall have the power at any time to change the
membership of any committee, to fill all vacancies, to designate alternate
members to replace any absent or disqualified member or to dissolve any such
committee.
SECTION 3.8 Meetings. The first meeting of each newly
elected Board of Directors shall be held as soon as practicable after each
annual meeting of stockholders. The meeting may be held at such time and place
as shall be specified in a notice given as hereinafter provided for special
meetings of the Board of Directors, or as shall be specified in a written
waiver as provided in Section 4.1, except that no notice or waiver shall be
necessary if such meeting is held immediately after the adjournment, and at the
site, of the annual meeting of stockholders.
Regular meetings of the Board of Directors may be held without notice
at such time and place as shall from time to time be designated by the Board of
Directors.
Special meetings of the Board of Directors may be called at any time
by two or more directors, or in writing by a majority of the members of the
Executive Committee, if one is constituted, or by the Chairman of the Board or
the President. Special meetings may be held at such place or places inside or
outside the State of Nevada as may be designated from time to time by the Board
of Directors; in the absence of such designation, such meetings shall be held
at such places as may be designated in the notice of meeting.
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Notice of the place and time of every special meeting of the Board of
Directors shall be delivered by the Secretary to each director either
personally or by telephone, facsimile, telegram or telegraph, or by leaving the
same at his residence or usual place of business at least twenty-four hours
before the time at which such meeting is to be held, or by first-class mail, at
least four days before the day on which such meeting is to be held. If mailed,
such notice shall be deemed to be given when deposited in the United States
mail addressed to the director at his post-office address as it appears on the
records of the Corporation, with postage thereon prepaid.
SECTION 3.9 Quorum and Voting. At any meeting of the Board,
a majority of directors shall constitute a quorum for the transaction of
business and the action of a majority of the directors present at any meeting
at which a quorum is present shall be the action of the Board of Directors,
unless the concurrence of a greater proportion is required for such action by
law, the Articles or these Bylaws. If a quorum shall not be present at any
meeting of directors, the directors present at such meeting may, by a majority
vote, adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
SECTION 3.10 Organization. At each meeting of the Board of
Directors, the Chairman of the Board or, if the Chairman of the Board is absent
or unable to act, the President or, in the absence or inability to act of both
the Chairman of the board and the President, another director chosen by a
majority of the directors present shall act as chairman of and preside at the
meeting. The Secretary or, if the Secretary is absent or unable to act, any
person appointed by the chairman of the meeting shall act as secretary of the
meeting and keep the minutes thereof.
SECTION 3.11 Meeting by Conference Telephone. Members of the
Board of Directors may participate in a meeting of the Board of Directors or
any committee thereof by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time. Participation in a meeting by these means
constitutes presence in person at a meeting.
SECTION 3.12 Action Without Meeting. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if a written consent to such
action is signed by all members of the Board or of such committee, as the case
may be, and such written consent is filed with the minutes of proceedings of
the Board of Directors or such committee.
SECTION 3.13 Compensation of Directors. Directors, as such, shall
not receive any stated salary for their services. Directors deemed
"independent" pursuant to the terms of Article FOURTEENTH of the Articles shall
receive compensation of (i) $15,000 per year plus expenses for serving on the
Board of Directors and (ii) up to $1,000 per day for any special services
rendered by such director to the Corporation outside of ordinary duties as
director, plus reimbursement for expenses. The Chairman of the Board shall
receive additional compensation of $15,000 per year. By resolution, the Board
of Directors may change or eliminate such compensation or eliminate
reimbursement for expenses. Nothing contained herein shall be construed to
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor.
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ARTICLE IV
WAIVERS OF NOTICE
SECTION 4.1 Waivers of Notice. Notice of the time, place or
purpose of any meeting of stockholders, directors or committee required to be
given under law or under the provisions of the Articles or these Bylaws need
not be given to a person who shall have signed a written waiver, whether before
or after the relevant meeting, or who shall attend such meeting in person (or,
in the case of a meeting of stockholders, in person or by proxy). All such
waivers shall be filed with the records of the relevant meeting.
ARTICLE V
OFFICERS
SECTION 5.1 Officers. The executive officers of the
Corporation shall be chosen by the Board of Directors and shall consist of a
President, one or more Vice Presidents, a Secretary and a Treasurer. The Board
of Directors may from time to time choose other officers or agents of the
Corporation, including in its discretion a Chairman of the Board or one or more
Assistant Secretaries or Assistant Treasurers. Two or more offices, except
those of (i) President and Vice President, (ii) Secretary and Assistant
Secretary and (iii) Treasurer and Assistant Treasurer, may be held by the same
person, but no officer shall execute, acknowledge or verify an instrument in
more than one capacity if such instrument is required by law, the Articles or
these Bylaws to be executed, acknowledged or verified by two or more officers.
Any officer or agent may be, but need not be, a director of the
Corporation.
SECTION 5.2 Compensation. The salaries of all officers and
agents of the Corporation shall be fixed from time to time by the Board of
Directors.
SECTION 5.3 Term; Removal; Resignation. An officer of the
Corporation shall hold office until the first meeting of the Board of Directors
to occur after the next succeeding annual meeting of stockholders and until
such officer's successor is chosen and qualifies, subject, however, to prior
death, resignation, retirement or removal from office in accordance with these
Bylaws. Any officer or agent may be removed by the Board of Directors
whenever, in its judgment, the best interests of the Corporation will be served
thereby, but such removal shall be without prejudice to the contractual rights,
if any, of the person so removed. Any officer may resign at any time. Such
resignation shall be made in writing and shall take effect at the time
specified therein or, if no such time is specified, at the time of receipt
thereof by the Chairman of the Board, the President or the Secretary. The
acceptance of a resignation, unless otherwise stated therein, shall not be
necessary to make it effective. If any office becomes vacant for any reason,
the vacancy may be filled by the Board of Directors.
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SECTION 5.4 Chairman of the Board. The Chairman of the
Board, if one shall be elected, shall have the power to preside at all meetings
of the Board of Directors and stockholders and exercise and perform such other
powers and duties as are specified in these Bylaws and as may from time to time
be prescribed by the Board of Directors.
SECTION 5.5 President. The President shall be the Chief
Executive Officer of the Corporation. The President shall have general control
of the business, finances and affairs of the Corporation, subject to the
control of the Board of Directors. Except as may otherwise be provided by the
Board of Directors from time to time, the President shall have the general
power to execute bonds, deeds, contracts, conveyances and other instruments in
the name of the Corporation and to affix the Corporate Seal, to appoint all
employees and agents of the Corporation whose appointment is not otherwise
provided for and to fix their compensation subject to the provisions of these
Bylaws and subject to the approval of the Board of Directors, to remove or
suspend any employee or agent who shall not have been appointed by the Board of
Directors and to suspend for cause, pending final action by the Board of
Directors, any employee or agent who shall have been appointed by the Board of
Directors. The President shall exercise and perform such other powers and
duties as are specified in these Bylaws and as may from time to time be
prescribed by the Board of Directors.
SECTION 5.6 Vice President. The Vice President, if one shall
be elected, or, if there shall be more than one, the Vice Presidents in the
order specified by the Board of Directors shall in the absence or disability of
the President perform the duties and exercise the powers of the President, and
shall exercise and perform such other powers and duties as are specified in
these Bylaws and as may from time to time be prescribed by the Board of
Directors.
SECTION 5.7 Secretary. The Secretary shall keep a minute
book of all meetings of stockholders and of the Board of Directors. The
Secretary shall keep in safe custody the Corporate Seal and, when authorized by
the Board of Directors, affix the same to any instrument requiring it and shall
exercise and perform such other powers and duties as are specified in these
Bylaws and as may from time to time be prescribed by the Board of Directors.
SECTION 5.8 Treasurer. The Treasurer shall have the custody
of corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Treasurer.
The Treasurer shall disburse the funds of the Corporation as ordered by the
Board of Directors, taking proper vouchers for such disbursements, and shall
render to the President and the Board of Directors at its regular meetings, or
when the Board of Directors so requires, an account of all transactions and of
the financial condition of the Corporation.
If required by the Board of Directors, the Treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of that office and for the restoration to the Corporation, in case of
the death, resignation, retirement or removal of the Treasurer from office, of
all books, papers, vouchers, money and other property of whatever kind in the
possession or under the control of the Treasurer
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and belonging to the Corporation. The Treasurer shall exercise and perform
such other powers and duties as are specified in these Bylaws and as may from
time to time be prescribed by the Board of Directors.
SECTION 5.9 Delegation of Duties. In the case of the absence
of any officer of the Corporation, or for any other reason that the Board of
Directors may deem sufficient, the Board of Directors may confer for the time
being the powers or duties, or any of them, of such officer upon any director.
SECTION 5.10 Indemnification. Each officer, director or employee
of the Corporation shall be indemnified by the Corporation to the full extent
permitted under Chapter 78 of the Nevada Revised Statutes and other applicable
law.
ARTICLE ARTICLE VI
CERTIFICATES OF STOCK
SECTION 6.1 Certificates. Records shall be kept by or on
behalf of the Corporation which shall contain the names and addresses of
stockholders, the number and class of shares held by them respectively and the
number of certificates, if any, representing the shares, and in which there
shall be recorded all transfers of shares. Each stockholder shall be entitled
to a certificate or certificates which shall certify the number and class of
shares owned by such stockholder in the corporation. Each certificate shall be
signed by the Chairman of the Board, the President or a Vice President and
countersigned by the Secretary, an Assistant Secretary, the Treasurer or an
Assistant Treasurer and may be sealed with the Corporate Seal; provided,
however, that such signatures may be either manual or facsimile signatures and
the Corporate Seal may be either a facsimile or any other form of Corporate
Seal. In case any officer who has signed any certificate ceases to hold the
office in question before such certificate is issued, such certificate may
nevertheless be issued by the Corporation with the same effect as if the
officer had not ceased to hold such office as of the date of its issue. Each
stock certificate shall include on its face the name of the Corporation, the
name of the stockholder and the class of stock and number of shares represented
by the certificate. If the Corporation has authority to issue stock of more
than one class, each stock certificate shall contain on its face or back a full
statement or summary of the designations and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the stock of each
class which the Corporation is authorized to issue and, if the Corporation is
authorized to issue any preferred or special class in series, the differences
in the relative rights and preferences between the shares of each series to the
extent they have been set and the authority of the Board of Directors to set
the relative rights and preferences of subsequent series. In lieu of such full
statement or summary, there may be set forth upon the face or back of the
certificate a statement that the Corporation will furnish to any stockholder
upon request and without charge a full statement of such information. A
summary of such information included in a registration statement permitted to
become effective under the federal Securities Act of 1933, as now or hereafter
amended, shall be an acceptable summary for the purposes of this Section 6.1.
Every
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stock certificate representing shares of stock which are restricted as to
transferability by the Corporation shall contain a full statement of the
restriction or state that the Corporation will furnish information about the
restriction to the stockholder on request and without charge. A stock
certificate may not be issued until the stock represented by it is fully paid,
except in the case of stock purchased under an option plan as permitted by law.
SECTION 6.2 Lost Certificates. In case any certificate for
shares of the Corporation shall be lost, stolen, mutilated or destroyed, the
Board of Directors, in its discretion, or any transfer agent thereunto duly
authorized by the Board, may authorize the issue of a substitute certificate in
place of the certificate so lost, stolen, mutilated or destroyed, and may cause
such substitute certificate to be countersigned by the appropriate transfer
agent (if any); provided, however, that in each such case the applicant for a
substitute certificate shall furnish to the Corporation and to such of its
transfer agents and registrars as may require the same, evidence to their
satisfaction, in their discretion, of the loss, theft, mutilation or
destruction of such certificate and of the ownership thereof, and also such
security or indemnity as may by them be required. The Board of Directors may
adopt such other provisions and restrictions with reference to lost, stolen,
mutilated or destroyed certificates, not inconsistent with applicable law, as
it shall in its discretion deem appropriate.
SECTION 6.3 Transfer Agents and Registrars. The Board of
Directors may in its discretion appoint one or more banks or trust companies in
such city or cities as the Board of Directors may deem advisable, from time to
time, to act as transfer agents or registrars of the Corporation's shares, and
upon such appointments being made, no certificate representing shares shall be
valid until countersigned by one of such transfer agents (if any) and
registered by one of such registrars (if any).
SECTION 6.4 Transfer of Stock. Subject to the restrictions
contained in the Articles, upon surrender to the Corporation or its transfer
agent of a stock certificate duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
SECTION 6.5 Fixing of Record Dates; Closing of Transfer
Books. The Board of Directors may fix in advance a date as the record date for
the purpose of determining stockholders entitled to notice of or to vote at any
meeting of stockholders, or stockholders entitled to receive payment of any
dividend or other distribution or allotment of any rights, or in order to make
a determination of stockholders for any other proper purpose. Such date, in
any case, shall not be more than sixty (60) days, and in case of meeting of
stockholders not less than ten (10) days, prior to the date on which the
particular action requiring such determination of stockholders is to be taken.
In lieu of fixing a record date, the Board of Directors may provide that the
stock transfer books shall be closed for a stated period not to exceed, in any
case, twenty (20) days. If the stock transfer books are closed for the purpose
of determining stockholders entitled to notice of or to vote at a meeting of
stockholders, such books shall be closed for at least ten (10) days immediately
preceding such meeting.
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SECTION 6.6 Registered Stockholders. The Corporation shall
be entitled to recognize the exclusive right of a person registered on its
books as the owner of shares to receive dividends and to vote as such owner,
and to hold liable for calls and assessments, if any, a person registered on
its books as the owner of shares, and shall not be bound to recognize any
equitable or other claim to or interest in such shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by law.
SECTION 6.7 Regulations. The Board of Directors may make
such additional rules and regulations, not inconsistent with these Bylaws, as
it may deem expedient concerning the issue, transfer and registration of
certificates for the Corporation's shares.
ARTICLE VII
GENERAL PROVISIONS
SECTION 7.1 Dividends. Dividends, if any, upon the capital
stock of the Corporation, subject to the provisions of the Articles, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to applicable law. Dividends may be paid in cash, property or the
Corporation's shares, subject to the provisions of applicable law and of the
Articles. Before payment of any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sums as the directors
from time to time, in their absolute discretion, think proper as a reserve fund
to meet contingencies, for equalizing dividends or for repairing or maintain
any property of the Corporation, and the Board of Directors may modify or
abolish any such reserve in the manner in which it was created.
SECTION 7.2 Annual Report. The Chairman of the Board, the
President, a Vice President or the Treasurer shall prepare or cause to be
prepared annually a full and correct statement of the affairs of the
Corporation, including a balance sheet and a financial statement of operations
for the preceding fiscal year. Such balance sheet and financial statement may
be, but are not required by these Bylaws to be, certified by independent
certified public accountants. Such report shall also be submitted at the
annual meeting and shall be filed within twenty (20) days thereafter at the
principal office of the Corporation.
SECTION 7.3 Checks. All checks, drafts and orders for the
payment of money, notes and other evidences of indebtedness issued in the name
of the Corporation shall be signed by the President or the Treasurer or by such
officer or officers as the Board of Directors may from time to time designate.
SECTION 7.4 Depositories and Custodians. The funds of the
Corporation shall be deposited with such banks or other depositories as the
Treasurer may from time to time designate. All securities and other
investments shall be deposited in the safekeeping of such banks or other
companies as the Board of Directors may from time to time designate.
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SECTION 7.5 Books of Account and Records. The Corporation
shall maintain at its principal office correct and complete books and records
of account of all the business and transactions of the Corporation. Upon
request of any stockholder, there shall be made available in accordance with
the provisions of Nevada law a record containing the number of shares of stock
issued during a specified period not to exceed twelve months and the
consideration received by the Corporation for each such share.
SECTION 7.6 Information for Inspection. Any stockholder of
the Corporation, or any agent thereof, may inspect and copy during usual
business hours these Bylaws, minutes of the proceedings of meetings of
stockholders, annual statements of its affairs and voting trust agreements on
file at its principal office.
SECTION 7.7 Fiscal Year. The fiscal year of the Corporation
shall be the calendar year.
SECTION 7.8 Corporate Seal. The Corporate Seal shall have
inscribed thereon the name of the Corporation, the year of its organization and
the words "Corporate Seal, Nevada." The Corporate Seal may be used by causing
it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
ARTICLE VIII
AMENDMENTS
SECTION 8.1 Directors. In furtherance and not in limitation
of the powers conferred by statute, the Board of Directors is expressly
authorized to make, adopt, alter, amend, change or repeal the Bylaws of the
Corporation.
SECTION 8.2 Stockholders. The stockholders of the
Corporation may not make, adopt, alter, amend, change or repeal the Bylaws of
the Corporation except upon the affirmative vote of not less than seventy five
percent (75%) of the outstanding stock of the Corporation entitled to vote
thereon; provided, however, that the power of the stockholders to make, adopt,
alter, amend, change or repeal the Bylaws of the Corporation is further subject
to the provisions of the Articles of Incorporation.
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APPENDIX E
SECOND AMENDED AND RESTATED
DECLARATION OF TRUST
OF
INCOME OPPORTUNITY REALTY TRUST
(Formerly Consolidated Capital Income Opportunity Trust/2)
This second amended Declaration of Trust is made and entered into as
of April 1, 1987 and will be recorded in Alameda County, California, as soon as
reasonably possible after execution. The original Declaration of Trust was
entered into on December 14, 1984 and was first amended on April 24, 1985.
This Declaration of Trust supercedes and overrides all prior Declaration of
Trust of Income Opportunity Realty Trust (the "Trust") formerly known as
Consolidated Capital Income Opportunity Trust/2.
Robert J. Blake, Fred H. Field, Albert H. Schaaf, and Douglas M.
Temple, Thomas J. Fitzmyers, David V. John, Betty Hood-Gibson and Robert J.
Thiebaut do hereby agree to hold in trust, as Trustees, any and all property,
real, personal, or otherwise, tangible or intangible, of every type and
description, which is transferred, conveyed, or paid to them as such Trustees,
and all rents, income, profits, and gains therefrom for the benefit of the
Shareholders hereunder, subject to the terms and conditions and for the uses
and purposes hereinafter set forth.
ARTICLE I
The Trust: Definitions
1.1. Name. The name of the Trust shall be "Income Opportunity
Realty Trust." As far as practicable and except as otherwise provided in this
Declaration, the Trustees shall conduct the Trust's activities, execute all
documents, and sue or be sued in the name of Income Opportunity Realty Trust,
or in their names as Trustees of Income Opportunity Realty Trust. If the
Trustees determine that the use of such name is not practicable, legal or
convenient, they may use such other designation or may adopt another name under
which the Trust may hold property or conduct its activities.
If Consolidated Capital Equities Corporation, a Colorado corporation,
or any subsidiary, affiliate, or successor of such corporation shall cease, for
any reason, to render to the Trust the services of Advisor (as defined in
Section 1.4 hereof) pursuant to the contract referred to in
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Article IV hereof and any renewal or extension of such contract, then the
Trustees shall, upon request of Consolidated Capital Equities Corporation or
its successors, and without any vote or consent of the Shareholders of this
Trust being required, promptly amend this Declaration of Trust to change the
name of the Trust to one which does not include any reference to "Consolidated
Capital," "Johnstown/Consolidated" or any approximation thereof.
1.2. Place of Business. The principal office of the Trust shall be
2000 Powell Street, Emeryville, California 94608. However, the Trustees may,
from time to time, change such location and maintain other offices or places of
business.
1.3. Nature of Trust. The Trust is a real estate investment trust
(also known as a business trust for real estate purposes) organized under the
laws of the state of California. It is intended that the Trust shall carry on
business as a "real estate investment trust" ("REIT") as described in the REIT
Provisions of the Code. The Trust is not a general partnership, limited
partnership, joint venture, corporation, or joint stock company or association
(but nothing herein shall preclude the Trust from being taxed as an association
under the REIT Provisions of the Code), nor shall the Trustees or Shareholders
or any of them for any purpose be, nor be deemed to be, nor treated in any way
whatsoever to be, liable or responsible hereunder as partners or joint
venturers. The relationship of the Shareholders to the Trustees shall be
solely that of beneficiaries of the Trust, and their rights shall be limited to
those conferred upon them by this Declaration.
1.4. Definitions. The terms defined in this Section 1.4, whenever
used in this Declaration, shall, unless the context otherwise requires, have
the respective meanings hereinafter specified in this Section 1.4. In this
Declaration, words in the singular number include the plural, and words in the
plural number include the singular.
(a) Advisor. "Advisor" shall mean any Person appointed,
employed, or contracted with by the Trustees under the provisions of
Article IV hereof.
(b) Affiliate. "Affiliate" shall mean, as to any person,
any other person who owns beneficially, directly, or indirectly, 1% or
more of the outstanding capital stock, shares, or equity interests of
such person or of any other person which controls, is controlled by,
or is under common control with, such person or is an officer, retired
officer, director, employee, partner, or trustee (excluding
non-interested trustees not otherwise affiliated with the entity) of
such person or of any other person which controls, is controlled by,
or is under common control with, such person.
(c) Annual Meeting of Shareholders. "Annual Meeting of
Shareholders" shall mean the meeting of Shareholders held once a year,
at the time and place designated by the Trustees, for the purpose of
electing Trustees, conducting a vote on other issues appropriate for
Shareholder vote, and discussing appropriate issues concerning the
business of the Trust.
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(d) Annual Report. "Annual Report" shall mean the report
to Shareholders distributed annually concerning the business and
financial operations of the Trust for such year, containing the report
of the Trust's auditors and audited financial statements.
(e) Appraisal. "Appraisal" shall mean the value, as of
the date of the appraisal, of real property (in its existing state or
in a state to be created) as determined by (i) the Trustees, (ii) the
Advisor, or (iii) a disinterested person having no economic interest
in the real property and who is a member in good standing of the
American Institute of Real Estate Appraisers (MAI), or who in the sole
judgment of the Trustees is properly qualified to make such
determination. The Trustees may in good faith rely on a previous
Appraisal made on behalf of other persons, provided (i) it meets the
aforesaid standard, and was made in connection with an investment in
which the Trust acquires an interest or (ii) it was prepared not
earlier than two years prior to the acquisition by the Trust of its
interest in the real property. In appraising such properties,
appraisers may take into consideration each of the specific terms and
conditions of a purchase, including any leaseback or other guarantee
arrangement contained therein. An appraisal may not necessarily
represent the cash value of the property but may consider the value of
the income stream from such property plus the discounted value of the
fee interest and other terms of the purchase.
(f) Appraised Value. "Appraised Value" shall mean the
value stated in the most recent appraisal of the real property owned
by the Trust.
(g) Average Net Invested Capital. "Average Net Invested
Capital" for a period shall mean the average of the Net Invested
Capital at the end of each calendar month during the period in respect
to which such computation is being made.
(h) Book Value. "Book Value" shall mean the value of an
asset or assets of the Trust on the books of the Trust, before
provision for amortization, depreciation, or depletion, and before
deducting any indebtedness or other liability in respect thereto,
except that no asset shall be valued at more than its fair value as
determined by the Trustees.
(i) Book Value of Invested Assets. "Book Value of
Invested Assets" shall mean the Book Value of the Trust's total assets
(without deduction of any liabilities) but excluding (i) goodwill and
other intangible assets; (ii) cash; and (iii) cash-equivalent
investments with terms which mature in one year or less.
(j) Code. "Code" shall mean the Internal Revenue Code of
1954, as amended through the date hereof.
(k) Declaration. "Declaration" shall mean this
Declaration of Trust and all amendments, restatements or modifications
thereof. References in this Declaration to "herein," "hereof," and
"hereunder" shall be deemed to refer to this Declaration and shall not
be limited to the particular text, article, or section in which such
words appear.
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(l) Mortgage Loans. "Mortgage Loans" shall mean notes,
debentures, bonds, and other evidences of indebtedness or obligations
which are negotiable or non-negotiable and which are secured or
collateralized by mortgages, including first, wraparound, development
and construction, and junior mortgages.
(m) Mortgages. "Mortgages" shall mean mortgages, deeds
of trust, or other security deeds on real property or rights or
interests in real property.
(n) Net Asset Value. "Net Asset Value" shall mean the
Book Value of all the assets of the Trust minus all the liabilities of
the Trust.
(o) Net Contributed Capital. "Net Contributed Capital"
shall mean the total initial investments and contributions to the
capital of the Trust by all investors after deduction of the expenses
of organization and registration.
(p) Net Income. "Net Income" for any period shall mean
the Net Income of the Trust for such period computed on the basis of
its results of operations for such period, after deduction of all
expenses other than the Advisory Fee payable to the Advisor,
extraordinary items, gains, and losses from the disposition of assets
of the Trust and amortization, and depreciation or depletion of the
assets of the Trust.
(q) Non-Interested Trustee. "Non-Interested Trustee"
shall mean a Trustee who is not affiliated, directly or indirectly,
with the Advisor, whether by ownership of, ownership interest in,
employment by, any business or professional relationship with, or
serves as an officer or director of, the Advisor or an affiliated
business entity of the Advisor. A Non-Interested Trustee shall also
mean one who performs no other services for the Trust, except as
Trustee. An indirect relationship shall include circumstances in
which a member of the immediate family of a Trustee has one of the
foregoing relationships with the Advisor or the Trust for which he
serves as Trustee. A Non-Interested Trustee may also serve as a
Non-Interested Trustee of other independent REITs sponsored by
Consolidated Capital.
(r) Operating Expenses. "Operating Expenses" shall mean
the aggregate annual expenses regarded as operating expenses in
accordance with generally accepted accounting principles, as
determined by the independent auditors selected by the Trustees and
including the Advisory Fee payable to the Advisor and the fees and
expenses paid to the Trustees who are not employees or affiliates of
the Advisor. The operating expenses shall exclude, however, the
following:
(i) the cost of money borrowed by the Trust;
(ii) income taxes, taxes and assessments on real
property and all other taxes applicable to the Trust;
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(iii) expenses and taxes incurred in connection
with the issuance, distribution, transfer, registration, and
stock exchange listing of the Trust's securities (including
legal, auditing, accounting, underwriting, brokerage,
printing, engraving, and other fees);
(iv) fees and expenses paid to independent
mortgage servicers, contractors, consultants, managers, and
other agents retained by or on behalf of the Trust;
(v) expenses directly connected with the purchase
origination, ownership, and disposition of real properties or
mortgage loans (including the costs of foreclosure, insurance,
legal, protective, brokerage, maintenance, repair, and
property improvement services) other than expenses with
respect thereto of employees of the Advisor, except legal,
internal auditing, mortgage servicing, foreclosure and
computer costs and transfer agent services performed by
employees of the Advisor;
(vi) expenses of maintaining and managing real
estate equity interests and processing and servicing mortgage
and other loans;
(vii) expenses connected with payments of
dividends, interest or distributions by the Trust to
Shareholders;
(viii) expenses connected with communications to
Shareholders and bookkeeping and clerical expenses for
maintaining Shareholder relations, including the cost of
printing and mailing share certificates, proxy solicitation
materials and reports;
(ix) transfer agent's, registrar's and indenture
trustee's fees and charges;
(x) the cost of any accounting, statistical,
bookkeeping, or computer equipment necessary for the
maintenance of books and records of the Trust.
(xi) reserves for depletion, depreciation and
amortization and losses and provisions for losses.
The following direct expenses of the Advisor shall be excluded from
the Trust's operating expenses and shall be borne by the Advisor:
(i) employment expenses of the Advisor's
personnel (including Trustees, officers, and employees of the
Trust who are directors, officers, or employees of the Advisor
or its affiliates), other than the expenses of those employee
services listed at (v) above;
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(ii) rent, telephone, utilities, and office
furnishings and other office expenses of the Advisor (except
those relating to a separate office, if any, maintained solely
for the Trust); and
(iii) the Advisor's overhead directly related to
performance of its functions under the Advisory Agreement.
(s) Person. "Person" shall mean and include individuals,
corporations, limited partnerships, general partnerships, joint stock
companies or associations, joint ventures, associations, companies,
trusts, banks, trust companies, land trusts, business trusts, or other
entities and governments and agencies and political subdivisions
thereof.
(t) Real Property. "Real Property" shall mean and
include land, rights in land, leasehold interests (including, but not
limited to, interests of a lessor or lessee therein), and any
buildings, structures, improvements, fixtures, and equipment located
on or used in connection with land, leasehold interests, and rights in
land or interests therein, but shall not include mortgages, mortgage
loans, or interests therein.
(u) REIT. "REIT" shall mean Real Estate Investment Trust.
(v) REIT Provisions of the Code. "REIT Provisions of the
Internal Revenue Code" shall mean Part II, Subchapter M of Chapter 1,
of the Internal Revenue Code of 1954, as now enacted or hereafter
amended, or successor statutes, and regulations and rulings
promulgated thereunder.
(w) Securities. "Securities" shall mean any stock,
shares, voting trust certificates, bonds, debentures, notes, or other
evidences of indebtedness, secured or unsecured, convertible,
subordinated or otherwise, or in general any instruments commonly
known as "securities," or any certificates of interest, shares, or
participations in temporary or interim certificates for, receipts for,
guarantees of, or warrants, options (except non-tradeable options
relating to the purchase of a particular parcel of real estate), or
rights to subscribe to, purchase, or acquire any of the foregoing.
(x) Shares. "Shares" shall mean the shares of beneficial
interest of the Trust as described in Section 6.1.
(y) Shareholders. "Shareholders" shall mean, as of any
particular time, all holders of record of outstanding Shares at such
time.
(z) Sponsor. "Sponsor" shall mean Consolidated Capital
Equities Corporation, a Colorado corporation, or any successor entity.
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(aa) Taxable Income. "Taxable Income" shall have the same
meaning as "Taxable Income" has in the REIT Provisions of the Code.
(bb) Total Assets of the Trust Estate. "Total Assets of
the Trust Estate" shall mean the value of all the assets of the Trust
Estate as shown on the books of the Trust.
(cc) Trust Estate. "Trust Estate" shall mean, as of any
particular time, any and all property, real, personal, or otherwise,
tangible or intangible, which is owned or held by the Trust or the
Trustees, including, but not limited to, property which is
transferred, conveyed, or paid to the Trust or Trustees, and all
rents, income, profits, and gains therefrom.
(dd) Trustees. "Trustees" shall mean, as of any
particular time, Trustees holding office under this Declaration at
such time, whether they be the Trustees named herein or additional or
successor Trustees, and shall not include the officers,
representatives or agents of the Trust, or the Shareholders, but
nothing herein shall be deemed to preclude the Trustees from also
serving as officers, representatives, or agents of the Trust, or from
owning Shares.
(ee) Trustees' Regulations. "Trustees' Regulations" shall
mean the regulations adopted pursuant to Section 3.3.
ARTICLE II
Trustees
2.1. Number, Term of Office, and Qualifications of Trustees. There
shall be no less than five nor more than 15 Trustees. Within the limits set
forth in this Section 2.1, the number of Trustees may be increased or decreased
from time to time by the Trustees or by the Shareholders. Subject to the
provisions of Section 2.3, each Trustee shall hold office until the expiration
of his term and until the election and qualification of his successor. The
terms of the Trustees executing this Declaration, or of any successor or
successors to them, duly appointed hereunder prior to the first Annual Meeting
of the Shareholders, to be held in the next calendar year following the year in
which the close of the Trust's initial public offering of its shares occurs or
by June of 1988, whichever later occurs, shall expire at such first Annual
Meeting of the Shareholders. Thereafter, the term of each Trustee shall expire
at the Annual Meeting of the Shareholders following the election and
qualification of Trustees. Trustees may be re-elected.
A Trustee shall be an individual at least 21 years of age who is not
under legal disability. A Trustee shall qualify as such when he has either
signed this Declaration or agreed in writing to be bound by it. Unless
otherwise required by law or by action of the Trustees, no Trustee shall be
required to give bond, surety or security in any jurisdiction for the
performance of any duties or obligations hereunder. A Trustee, in the capacity
as Trustee, shall not be required to devote his entire time to the business and
affairs of the Trust. A majority of the Trustees shall at all times be persons
who are not affiliates of the Sponsor or any of its affiliates or successor
entities; provided,
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however, that upon a failure to comply with this requirement because of the
death, resignation, or removal of a Non- Interested Trustee who is not such an
affiliate, such requirement shall not be applicable for a period of 60 days.
2.2. Compensation and Other Remuneration. The Trustees shall be
entitled to receive such reasonable compensation for their services as Trustees
as they may determine from time to time; provided, however, that Trustees and
officers of the Trust who are affiliated with the Advisor or any of its
affiliates shall not receive compensation from the Trust for their services as
Trustees or officers of the Trust. The Trustees, either directly or
indirectly, shall also be entitled to receive remuneration for services
rendered to the Trust in any other capacity. Such services may include,
without limitation, services as an officer of the Trust, legal, accounting, or
other professional services, or services as a broker, transfer agent, or
underwriter, whether performed by a Trustee or by any person affiliated with a
Trustee.
2.3. Resignation, Removal and Death of Trustees. The term of
office of a Trustee shall terminate and vacancy shall occur in the event of the
death, resignation, bankruptcy, adjudicated incompetence or other incapacity to
exercise the duties of the office, or removal of a Trustee. A Trustee may
resign at any time by giving written notice in recordable form to the remaining
Trustees at the principal office of the Trust. Such resignation shall take
effect on the date such notice is given, or at any later time specified in the
notice, without need for prior or subsequent accounting. A Trustee may be
removed at any time, with or without cause by vote or consent of holders of a
majority of the outstanding Shares entitled to vote thereon, or by a majority
of the remaining Trustees. A Trustee judged incompetent or bankrupt, or for
whom a guardian or conservator has been appointed, shall be deemed to have
signed as of the date of such adjudication or appointment. Upon the
resignation or removal of any Trustee, or upon his otherwise ceasing to be a
Trustee, he shall execute and deliver such documents as the remaining Trustees
shall require for the conveyance of any Trust property held in his name and
shall account to the remaining Trustee or Trustees, as they require, for all
property which he holds as Trustee and shall thereupon be discharged as
Trustee. Upon the incapacity or death of any Trustee, his legal representative
shall perform the acts set forth in the preceding sentence, and the discharge
mentioned therein shall run to such legal representative and to the
incapacitated Trustee or the estate of the deceased Trustee, as the case may
be.
2.4. Vacancies. If any or all of the Trustees cease to be Trustees
hereunder, whether by reason of resignation, removal, incapacity, death, or
otherwise, such event shall not terminate the Trust or affect its continuity.
Until vacancies are filled, the remaining Trustees (even though less than five)
may exercise the powers of the Trustees hereunder. Vacancies (including
vacancies created by increases in number) may be filled by the remaining
Trustees, or by the vote or consent of holders of a majority of the outstanding
Shares entitled to vote thereon. The Non-Interested Trustees shall nominate
replacements for vacancies among the independent Trustees on the Board. If at
any time there shall be no Trustees in office, successor Trustees shall be
elected by the Shareholders as provided in Section 6.7.
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2.5. Successor and Additional Trustees. The right, title, and
interest of the Trustees in and to the Trust Estate shall also vest for the
benefit of the Shareholders in successor and additional Trustees upon their
qualification, and they shall thereupon have all the rights and obligations of
Trustees hereunder. Such right, title, and interest shall vest in the
Trustees, whether or not conveyance documents have been executed and delivered
pursuant to Section 2.3; or otherwise.
2.6. Actions by Trustees. A quorum for all meetings of the
Trustees shall be a majority of the Trustees. Interested or affiliated
Trustees may be counted in determining the presence of a quorum at a meeting of
the Trustees. Unless specifically provided otherwise in this Declaration, the
Trustees may act (i) by a vote or resolution at a meeting at which a quorum is
present, or (ii) without a meeting by a written vote, resolution, or other
writing consenting to said action, signed by a majority of the Trustees. Every
act or decision done or made by a majority of the Trustees present at a meeting
duly held at which a quorum is present is the act of the Trustees and is
binding on the Trust. Any agreement, deed, mortgage, lease, or other
instrument or writing executed by one or more of the Trustees, or by any person
specifically authorized by resolution or in the Trustees' Regulations, shall be
valid and binding upon the Trustees and upon the Trust when (i) authorized by a
majority of the Trustees at a meeting by resolution, without a meeting, by
consent of all of the Trustees, or in the Trustees' Regulations, or (ii)
ratified by action of the Trustees at a later meeting or by written consent.
No commitment to invest or sell the Trust's funds or assets can be made by
anyone other than the Trustees acting by a majority vote at a meeting or by
unanimous written consent, except that (i) the Trustees may delegate authority
to the Advisor to commit the Trust to certain investments or sales within
guidelines established by the Trustees and entered into the minute book of the
Trust; and (ii) actions by officers of the Trust related to the management and
investment of reserves and initial capital raised during a public offering of
shares. Authority to sign documents on behalf of the Trust shall be set forth
in the Trustees' Regulations or in the minute book of the Trust.
Notwithstanding anything to the contrary contained herein, a majority of the
independent Trustees shall:
(i) frequently and at least annually review the
investment policies of the Trust to determine that the investment
policies are in the best interest of the shareholders;
(ii) take all reasonable steps to insure that annual
reports are delivered to shareholders and that annual meetings are
held;
(iii) require that any Advisory Contract entered into by
the Trust be terminable by the majority of the independent Trustees or
the Advisor upon 60 days' written notice without cause;
(iv) determine at least annually that the compensation
which the Trust pays to the Advisor under an Advisory Contract is
reasonable in relation to the nature and quality of services
performed; and supervise the performance of the Advisor and the
compensation paid to it by the Trust;
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(v) determine at least annually that the total fees and
expenses of the Trust are reasonable in light of the investment
experience of the Trust, its net assets, net income and the fees and
expenses of other comparable Advisors in real estate; and
(vi) select, when necessary in their opinion, a qualified
independent real estate appraiser to appraise properties purchased by
the Trust.
2.7. Executive Committee. The Trustees may appoint from among
their own number an Executive Committee of three or more persons to whom they
may delegate from time to time such of the powers herein given to the Trustees
as they may deem advisable. A majority of the Executive Committee shall at all
times be Non-Interested Trustees; provided, however, that upon a failure to
comply with this requirement because of the death, resignation, or removal of a
Trustee who is not such an Affiliate, such requirement shall not be applicable
for a period of 60 days.
2.8. Audit Committee. The Trustees may appoint from among their
number an Audit Committee of three or more persons to review the Trust's
operating and accounting procedures. A majority of the Audit Committee shall
at all times be Non-Interested Trustees; provided, however, that upon a failure
to comply with this requirement because of the death, resignation, or removal
of a Trustee who is not such an Affiliate, such requirement shall not be
applicable for a period of 60 days.
ARTICLE III
Trustees' Powers
3.1. Power and Authority of Trustees. The Trustees, subject only
to the specific limitations contained in this Declaration, shall have, without
further or other authorization and free from any power or control on the part
of the Shareholders, full, absolute, and exclusive power, control, and
authority over the Trust Estate and over the business and affairs of the Trust
to the same extent as if the Trustees were the sole owners thereof in their own
right, and may do all such acts and things as in their sole judgment and
discretion are necessary for or incidental to or desirable for the carrying out
of any of the purposes of the Trust or the conducting of the business of the
Trust. Any determination made in good faith by the Trustees of the purposes of
the Trust or the existence of any power or authority hereunder shall be
conclusive. In construing the provisions of this Declaration, a presumption
shall favor of the grant of powers and authority to the Trustees. The
enumeration of any specific power or authority herein shall not be construed as
limiting the general powers or authority or any other specified power or
authority conferred herein upon the Trustees.
3.2. Specific Powers and Authorities. Subject only to the express
limitations contained in this Declaration and in addition to any powers and
authorities conferred by this Declaration or which the Trustees may have by
virtue of any present or future statute or rule or law, the Trustees, without
any action or consent by the Shareholders, shall have and may exercise at any
time and from time to time the following powers and authorities which may or
may not be exercised by them in
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their sole judgment and discretion and in such manner and upon such terms and
conditions as they may from time to time deem proper:
(a) To retain, invest, and reinvest the capital or other
funds of the Trust in equity, leasehold and/or mortgage interests in
real or personal property of any kind, all without regard to whether
any such property is authorized by law for the investment of Trust
funds or whether any investments may mature before the possible
termination of the Trust, and to possess and exercise all the rights,
powers, and privileges pertaining to the ownership of the Trust Estate
and to increase the capital of the Trust at any time by the issuance
of additional Shares for such consideration as they deem appropriate.
(b) For such consideration as they deem proper, to invest
in, develop, and purchase or otherwise acquire for cash or other
property or through the issuance of Shares through a public and/or
private offering or through the issuance of notes, debentures, bonds,
or other obligations of the Trust and hold for investment real,
personal or mixed, tangible or intangible, property of any kind
wherever located in the world, including without limitation, (i) the
entire or any participating interest in rents, lease payments, or
other income from, or the entire or any participating interest in the
profits from, or the entire or any participating interest in the
equity or ownership of, real property; (ii) the entire or any
participating interest in notes, bonds, or other obligations which are
secured by mortgages; (iii) in connection with any such investment,
purchase, or acquisition, a share of rents, lease payments, or other
gross income from or a share of the profits from or a share in the
equity or ownership of real property, either directly or through joint
venture, general or limited partnership, or other lawful combinations
or associations; (iv) loans secured by the pledge or transfer of
mortgages; and (v) securities of every nature, whether or not secured
by mortgage loans. The Trustees shall have the power to pay fees and
commissions in connection with such investments, including fees and
commissions payable to the Sponsor or its affiliates.
(c) To sell, rent, lease, hire, exchange, release,
partition, assign, mortgage, pledge, hypothecate, grant security
interests in, encumber, negotiate, convey, transfer, or otherwise
dispose of any and all of the Trust Estate or interests, including
security interests, in the Trust Estate, by deeds, trust deeds,
assignments, bills of sale, transfers, leases, mortgages, financing
statements, security agreements, and other instruments for any of
such purposes.
(d) To issue Shares, bonds, debentures, notes, or other
evidences of indebtedness which may be secured or unsecured and may be
subordinated to any indebtedness of the Trust and may be convertible
into Shares and which include options, warrants, and rights to
subscribe to, purchase, or acquire any of the foregoing, all without
vote of or other action by the Shareholders to such persons for such
cash, property, or other consideration (including securities issued or
created by, or interests in any person) at such time or times and on
such terms as the Trustees in their sole discretion and in good faith
may deem advisable and to list any of the foregoing securities issued
by the Trust on any securities exchange and to
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purchase, repurchase at fair market value, or otherwise acquire, hold,
cancel, reissue, sell, and transfer any of such securities.
(e) To enter into leases, contracts, obligations, and
other agreements for a term extending beyond the term of office of the
Trustees and beyond the possible termination of the Trust or for a
lesser term.
(f) To borrow money from independent third parties or
affiliates of the Sponsor and give negotiable or non-negotiable
instruments therefor; to guarantee, indemnify, or act as surety with
respect to payment or performance of obligations of third parties; to
enter into other obligations on behalf of the Trust; and to assign,
convey, transfer, mortgage, subordinate, pledge, grant security
interests in, encumber or hypothecate the Trust Estate or interests,
including security interests, in the Trust Estate to secure any of the
foregoing; provided that upon and after giving effect to any proposed
borrowing the amount of outstanding, secured and unsecured
indebtedness of the Trust for money borrowed from or guaranteed to
others, including mortgages on acquired real property, would not
exceed 300% of the Net Asset Value of the Trust.
(g) To lend money, whether secured or unsecured.
(h) To create reserve funds for any purpose.
(i) To incur and pay out of the Trust Estate any charges
or expenses, and disburse any funds of the Trust, which charges,
expenses, or disbursements are, in the opinion of the Trustees,
necessary for or incidental to or desirable for the carrying out of
any of the purposes of the Trust or the conducting of the business of
the Trust, including, without limitation, taxes and other governmental
levies, charges, and assessments of whatever kind or nature, imposed
upon or against the Trustees in connection with the Trust or the Trust
Estate or upon or against the Trust Estate or any part thereof, and
for any of the purposes herein.
(j) To deposit funds or securities held by the Trust in
banks, trust companies, savings and loan associations and other
depositories, whether or not such deposits will draw interest, the
same to be subject to withdrawal on such terms and in such manner and
by such person or persons (including any one or more Trustees,
officers, agents, or representatives) as the Trustees may determine
and set forth by resolution from time to time.
(k) To possess and exercise all the rights, powers, and
privileges appertaining to the ownership of all or any interests in,
mortgages or securities issued or created by, any person, forming part
of the Trust estate, to the same extent that an individual might, and,
without limiting the generality of the foregoing, to vote or give any
consent, request or notice, or waive any notice, either in person or by
proxy or power of attorney, with or without power of substitution, to
one or more Persons, which proxies and powers of attorney may be for
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meetings or actions generally, or for any particular meeting or
action, and may include the exercise of discretionary powers.
(l) To enter, with affiliates or non-affiliates, into
joint ventures, general or limited partnerships, leaseback agreements,
and any other lawful combinations or associations for any purpose,
including but not limited to the development of raw land.
(m) To elect, appoint, engage, or employ such officers
for the Trust as the Trustees may determine, who may be removed or
discharged at the discretion of the Trustees, such officers to have
such powers and duties, and to serve such terms and at such
compensation as may be prescribed by the Trustees or by the Trustees'
Regulations; to engage or employ any persons (including, subject to
the provisions of Sections 7.5 and 7.6, any Trustee or officer and any
person with which any Trustee or officer is directly or indirectly
connected) as agents, representatives, employees, or independent
contractors (including, without limitation, real estate advisors,
investment advisors, transfer agents, registrars, underwriters,
accountants, attorneys at law, real estate agents, managers,
appraisers, brokers, architects, engineers, construction managers,
general contractors or otherwise) in one or more capacities, and to
pay compensation from the Trust for services in as many capabilities
as such person may be so engaged or employed; and, except as
prohibited by law, to delegate any of the powers and duties of the
Trustees to any one or more Trustees, agents, representatives,
officers, employees, independent contractors, or other persons.
(n) To determine whether monies, Securities or other
assets received by the Trust shall be charged or credited to income or
capital or allocated between income and capital, such determination
including the power to amortize or fail to amortize any part or all of
any premium or discount, to treat any part or all of the profit
resulting from the maturity or sale of any asset, whether purchased at
a premium or at a discount, as income or capital or to apportion the
same between income and capital; to apportion the sale price of any
asset between income and capital, and to determine in what manner any
expenses or disbursements are to be borne as between income and
capital, whether or not in the absence of the power and authority
conferred by this subsection such monies, Securities, or other assets
would be regarded as income or as capital or such expense or
disbursement would be charged to income or to capital; to treat any
dividend or other distribution on any investment as income or capital
or apportion the same between income and capital; to provide or fail
to provide reserves for depreciation, amortization, or obsolescence in
respect of all or any part of the Trust Estate subject to
depreciation, amortization, or obsolescence in such amounts and by
such methods as they shall determine; to allocate to the share of
beneficial interest account less than all of the consideration
received for Shares and to allocate the balance thereof to paid-in
capital; and to determine the method or form in which the accounts and
records of the Trust shall be kept and to change from time to time
such method or form.
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(o) To determine from time to time the value of all or
any part of the Trust Estate and of any services, securities, assets,
or other consideration to be furnished to or acquired by the Trust,
and from time to time to revalue all or any part of the Trust Estate
in accordance with such appraisals or other information as are, in the
Trustees' sole judgment, necessary and/or satisfactory.
(p) To collect, sue for, and receive all sums of money or
other assets coming due to the Trust, and to engage in, intervene in,
prosecute, join, defend, compound, compromise, abandon, or adjust, by
arbitration or otherwise, any actions, suits, proceedings, disputes,
claims, controversies, demands, or other litigation relating to the
Trust, the Trust Estate or the Trust's affairs; to enter into
agreements therefor, whether or not any suit is commenced or claim
accrued or asserted and, in advance of any controversy, to enter into
agreements regarding arbitration, adjudication, or settlement thereof.
(q) To renew, modify, release, compromise, extend,
consolidate, or cancel, in whole or in part, any obligation to or of
the Trust.
(r) To purchase and pay for out of the Trust Estate
insurance contracts and policies insuring the Trust Estate against any
and all risks and insuring the Trust and/or any or all of the
Trustees, the Shareholders, officers, employees, agents, investment
advisors, or independent contractors of the Trust against any and all
claims and liabilities of every nature asserted by any person arising
by reason of any action alleged to have been taken or omitted by the
Trust or by any such Person as Trustee, Shareholder, officer,
employee, agent, investment advisor or independent contractor, whether
or not the Trust would have the power to indemnify such person against
such liability.
(s) To cause legal title to any of the Trust Estate to be
held by and/or in the name of the Trustees, or except as prohibited by
law, by and/or in the name of the Trust or one or more of the Trustees
or any other person, on such terms, in such manner, with such powers
in such person as the Trustees may determine, and with or without
disclosure that the Trust or Trustees are interested therein.
(t) To adopt a fiscal year for the Trust, and from time
to time to change such fiscal year without the approval of the
Shareholders.
(u) To adopt and use a seal (but the use of a seal shall
not be required for the execution of instruments or obligations of the
Trust).
(v) To make, perform, and carry out, or cancel and
rescind, contracts of every kind for any lawful purpose without limit
as to amount, with any person, firm, trust, association, corporation,
municipality, county, parish, state, territory, government, or other
municipal or governmental subdivision. These contracts shall be for
such duration and upon such terms as the Trustees in their sole
discretion shall determine.
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(w) To do all other such acts and things as are
incidental to the foregoing, and to exercise all powers which are
necessary or useful to carry on the business of the Trust; to promote
any of the purposes for which the Trust is formed, and to carry out
the provisions of this Declaration.
3.3. Trustees' Regulations. The Trustees may make, adopt, amend,
or repeal regulations containing provisions relating to the business of the
Trust, the conduct of its affairs, its rights or powers and the rights or
powers of its Shareholders, Trustees, or officers not inconsistent with law or
with this Declaration.
3.4. Additional Powers. The Trustees shall additionally have and
exercise all the powers conferred by the laws of California upon business
trusts or real estate investment trusts formed under such laws, insofar as such
laws are not in conflict with the provisions of this Declaration.
3.5. Incorporation. Upon a vote of two-thirds of the Trustees, and
with the approval of the holders of a majority of the Shares voting at a
meeting called for such a purpose, the Trustees shall have the power to cause
to be organized or to assist in organizing a corporation or corporations under
the laws of any jurisdiction or any other trust, partnership, association, or
other organization to take over the Trust Estate or any part or parts thereof
or to carry on any business in which the Trust shall directly or indirectly
have any interest, and to sell, convey, and transfer the Trust Estate or any
part or parts thereof to any such corporation, trust, partnership, association,
or organization in exchange for the Shares or Securities thereof or otherwise,
and to lend money to, subscribe for the Shares or Securities of, and enter into
any contracts with any such corporation, trust, partnership, association, or
organization, or any corporation, trust, partnership, association, or
organization in which the Trust holds or is about to acquire Shares or any
other interest. The Trustees may also cause a merger or consolidation between
the Trust or any successor thereto and any such corporation if and to the
extent permitted by law, provided that under the law then in effect, the
federal income tax benefits available to qualified real estate investment
trusts and their shareholders, or substantially similar benefits, are also
available to such corporation, trust, partnership, association, or organization
and its stockholders or members, and provided that the resulting investment
would be substantially equal in quality and substantially the same in type as
an investment in the Shares.
ARTICLE IV
Advisor: Limitation on Operating Expense
4.1. Employment of Advisor. The Trustees are responsible for the
general policies of the Trust and for such general supervision of the business
of the Trust conducted by all officers, agents, employees, advisors, managers,
or independent contractors of the Trust as may be necessary to ensure that such
business conforms to the provisions of this Declaration. However, the Trustees
shall not be required personally to conduct all the business of the Trust, and
consistent with their ultimate responsibility as stated above, the Trustees
shall have the power to appoint, employ, or contract with any person (including
one or more of themselves or any corporation, partnership, or
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trust in which one or more of them may be directors, officers, stockholders,
partners, or trustees) as the Trustees may deem necessary or proper for the
transaction of the business of the Trust. The Trustees may therefor employ or
contract with such person (herein referred to as the "Advisor"), and the
Trustees may grant or delegate such authority to the Advisor as the Trustees
may in their sole discretion deem necessary or desirable without regard to
whether such authority is normally granted or delegated by Trustees. Any such
delegated authority shall be entered into the minute book of the Trust.
The Trustees (subject to the provisions of Sections 4.2 and 4.4) shall
have the power to determine the terms and compensation of the Advisor or any
other person whom they may employ or with whom they may contract; provided,
however, that any determination to employ or contract with any Trustee or any
Person of which a Trustee is an affiliate, shall be valid only if made,
approved, or ratified by a majority of the Trustees who are not affiliates of
such person. The Trustees may exercise broad discretion in allowing the
Advisor to administer and regulate the operations of the Trust, to act as agent
for the Trust, to execute documents on behalf of the Trustees, and to make
executive decisions which conform to general policies and general principles
previously established by the Trustees.
4.2. Term. The Trustees shall not enter into any contract with the
Advisor unless such contract has an initial term of no more than two years and
provides for annual renewal or extension thereafter, subject to approval by the
Shareholders of the Trust. However, the first such term shall extend from the
date of its execution to the date of the first annual meeting of the
Shareholders. The Trustees shall not enter into such a contract with any
person of which a Trustee is an affiliate unless such contract provides for
renewal or extension thereof by the affirmative vote of a majority of the
Non-Interested Trustees. The contract with the Advisor may be terminated
without penalty by the Advisor upon 120 days' written notice, or by action of
holders of a majority of the outstanding Shares of the Trust without penalty,
or by the Trust without penalty by action of a majority of the Trustees,
including a majority of the Non-Interested Trustees upon 60 days' written
notice, in a manner to be set forth in the contract with the Advisor.
4.3. Other Activities of Advisor. The Advisor shall not be
required to administer the investment activities of the Trust as its sole and
exclusive function and may have other business interests and may engage in
other activities similar or in addition to those relating to the Trust,
including the rendering of services and advice to other persons (including
other real estate investment trusts) and the management of other investments
(including investments of the Advisor and its affiliates). The Trustees pay
request the Advisor to engage in other activities which complement the Trust's
investments and to provide services requested by the borrowers or prospective
borrowers from the Trust, and the Advisor may receive compensation or
commissions therefor from the Trust or other persons.
The Advisor shall be required to use its best efforts to present to
the Trust a continuing and suitable investment program which is consistent with
the investment policies and objectives of the Trust, but neither the Advisor
nor any of its affiliates (subject to any applicable provisions of Section
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7.6) shall be obligated to present any particular investment opportunity to the
Trust even if such opportunity is of a character which, if presented to the
Trust, could be taken by the Trust, and, subject to the foregoing, shall be
protected in taking for its own account or recommending to others any such
particular investment opportunity.
Upon request of any Trustee, the Advisor and any person who controls,
is controlled by, or is under common control with the Advisor, shall from time
to time promptly furnish the Trustees with information on a confidential basis
as to any investments within the Trust's investment policies made by the
Advisor or such other person for its own account.
4.4. Limitation on Operating Expenses. The Operating Expenses of
the Trust for any fiscal year shall not exceed the lesser of (a) 1.5% of the
average of the Book Values of Invested Assets of the Trust at the end of each
calendar month of such fiscal year, or (b) the greater of 1.5% of the average
of the Net Asset Value of the Trust at the end of each calendar month of such
fiscal year or 25% of the Trust's Taxable Income, and each contract made with
the Advisor shall specifically provide for a refund to the Trust of the amount,
if any, by which the Operating Expenses so exceed the applicable amount;
provided, however, that the Advisor shall not be required to refund to the
Trust, with respect to any fiscal year, any amount which exceeds the aggregate
of the Advisory Fee paid to the Advisor under such contract with respect to
such fiscal year.
ARTICLE V
Investment Policy
5.1. General Statement of Policy. The Trustees intend initially,
and to the extent funds are not fully invested in real property and mortgages
as described below, to invest the Trust Estate in investments such as: (a)
short-term government securities, (b) securities of government agencies, (c)
bankers' acceptances, (d) certificates of deposit, (e) deposits in commercial
banks, (f) participations in pools of mortgages or bonds and notes (including
but not limited to Federal Home Loan Mortgage Corporation participation sale
certificates ("FHLMCs"), Government National Mortgage Association modified
pass-through certificates ("GNMAs") and Federal National Mortgage Association
bonds and notes ("FNMAs")), and/or (g) obligations of municipal, state and
federal governments and government agencies.
The Trustees intend to invest the major portion of the Trust Estate to
acquire and/or develop real property, and to acquire and/or fund all types of
mortgage loans, to participate in joint venture or leasehold interests in real
property with affiliated or unaffiliated persons, and to pay expenses
reasonably related to the development of real property. The Trustees may also
invest in ownership or other interests in real property and mortgages or in
persons involved in owning, operating, leasing, developing, financing, or
dealing in real property or mortgages (which investments shall ordinarily be
made in connection with properties having income-producing capabilities). The
Trustees may make commitments to make investments consistent with the
foregoing policies. The Trustees may also participate in investments with
other investors, including investors affiliated with the Advisor
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and investors having investment policies similar to those of the Trust, on the
same or different terms. The Advisor may act as advisor to such other
investors, including investors who have the same investment policies.
The Trustees may retain, as permanent reserves, amounts, if any, which
they deem reasonable in cash and in the types of investments described above at
items (a)-(g) and at Section 5.2 (a)-(c). The amount of the reserves shall be
set from time to time by resolution and entered into the minute book. The
amount of the reserve may be changed by Trustee action at any time the Trustees
deem such a change appropriate.
Subject to the investment restrictions in Section 5.2 below, the
Trustees may alter any or all of the above- described investment policies if
they should determine such change to be in the best interest of the Trust.
Subject to the preceding terms, the Trustees shall endeavor to invest the
Trust's assets in accordance with the investment policies set forth in this
Article V, but the failure so to invest its assets shall not affect the
validity of any investment made or action taken by the Trustees.
The general purpose of the Trust is to seek income which qualifies
under the REIT Provisions of the Code. The Trustees intend to make investments
in such a manner as to comply with the requirements of the REIT Provisions of
the Code with respect to the composition of the Trust's investments and the
derivation of its income; provided, however, that no Trustee, officer,
employee, agent, investment advisor, or independent contractor of the Trust
shall be liable for any act or omission resulting in the loss of tax benefits
under the Code, except for that arising from his own bad faith, willful
misconduct, gross negligence or reckless disregard of his duties; and provided
further that for a period of time as the portfolio of investments is developed,
the Trust's assets may be invested in investments producing income which does
not qualify under the REIT Provisions of the Code.
5.2. Restrictions. The Trustees shall not:
(a) invest in any foreign currency, bullion or
commodities; for the purposes hereof, the reserve investments
described in Section 5.1 or hedges or futures related to those
investments shall be deemed not to be commodities;
(b) invest in contracts of sale for real estate, except
temporarily to facilitate acquisition or sale of a particular parcel
of real property in which the Trust otherwise intends to invest or
when held as security for mortgages made or acquired by the Trust;
(c) Engage in any short sale, or borrow, on an unsecured
basis, if such borrowing will result in an asset coverage of less than
300%, except that such borrowing limitation shall not apply to a first
mortgage trust. "Asset coverage," for the purpose of this section,
means the ratio which the value of the total assets of an issuer, less
all liabilities and indebtedness except indebtedness for unsecured
borrowings, bears to the aggregate amount of all unsecured borrowings
of such issuer.
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(d) Issue warrants, options, or rights to buy Shares,
except as part of a ratable issue to Shareholders or as part of a
public offering or as part of a financing arrangement with parties
other than the Advisor or directors, Trustees, officers, or employees
of the Trust or the Advisor or as part of a ratable distribution to
Shareholders;
(e) Invest in excess of 10% of the assets of the Trust
Estate in equity ownership of unimproved, non-income-producing real
property, or in participations in the ownership of unimproved,
non-income-producing real property, or in mortgage loans on unimproved
non-income-producing real property, except pursuant to an agreement
for the development of the land within a reasonable time.
(f) issue equity securities of more than one class (other
than convertible obligations, warrants, rights, and options);
(g) invest in any equity security including the shares of
other REITs;
(h) make any loan to the Sponsor of the Trust, or its
affiliates except as to loans, which have been approved by a majority
of the independent trustees and reviewed and determined to be
commercially reasonable by an independent expert;
(i) engage in trading as compared with investment
activities, or engage in the business of underwriting or agency
distribution of securities issued by others but this prohibition shall
not prevent the Trust from selling participations or interests in real
property or mortgage loans or from selling or pledging a pool of notes
receivable from property sales;
(j) hold property primarily for sale to customers in the
ordinary course of the trade or business of the Trust, but this
prohibition shall not be construed to deprive the Trust of the power
to sell any property at any time;
(k) invest more than 10% of total Trust assets in junior
mortgage loans, excluding wraparound loans;
(l) acquire securities in any company holding investments
or engaging in activities prohibited by this section;
(m) issue "redeemable securities " as defined in Section
2(a)(32) of the Investment Company Act of 1940, face-amount
certificates of the installment type," as defined in Section 2(a)15
thereof, and "periodic payment plan certificates," as defined in
Section 2(a)(27) thereof;
(n) purchase, sell, or lease any real properties to or
from the Sponsor or its affiliates, including any investor program in
or of which the Sponsor may also be a general
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partner or sponsor; notwithstanding the foregoing, the Trust may form
joint ventures or partnerships with affiliates for the acquisition,
development, or lease of real property or the funding of mortgage
loans;
(o) issue convertible or non-convertible debt securities
to the public unless the historical cash flow of the Trust or the
substantiated future cash flow of the Trust, excluding extraordinary
items, is sufficient to cover the interest on the debt securities; or
(p) invest any of the assets of the Trust Estate in
single-family homes.
ARTICLE VI
The Shares and Shareholders
6.1. Shares. The units into which the beneficial interest in the
Trust will be divided shall be designated as Shares, which Shares shall be all
of one class. All Shares shall have equal non-cumulative voting, distribution,
liquidation and other rights. All Shares shall be without par value. The
certificates evidencing the Shares shall be in such form and signed (manually
or by facsimile) on behalf of the Trust in such manner as the Trustees may from
time to time prescribe or as may be prescribed in the Trustees' Regulations.
The certificates shall be negotiable, and title thereto and to the Shares
presented thereby shall be transferred by assignment and delivery thereof to
the same extent and in all respects as a Share certificate of a California
corporation. There shall be no limit upon the number of Shares to be issued.
The Shares may be issued for such consideration as the Trustees in their sole
discretion and in good faith shall determine or by way of Share dividend or
Share split in the discretion of the Trustees. Shares reacquired by the Trust
shall no longer be deemed outstanding and shall have no voting or other rights
unless and until re-issued. Shares reacquired by the Trust may be cancelled
and restored to the status of authorized and unissued Shares by action of the
Trustees. All Shares shall be fully paid and non-assessable by or on behalf of
the Trust upon receipt of full consideration for which they have been issued or
without additional consideration if issued by way of Share dividend or Share
split. The Shares shall not entitle the holder to preference, preemptive,
appraisal, conversion, or exchange rights of any kind.
6.2. Legal Ownership of Trust Estate. The legal ownership of the
Trust Estate and the right to conduct the business of the Trust are vested
exclusively in the Trustees, and the Shareholders shall have no interest
therein other than beneficial interest in the Trust conferred by their Shares
issued hereunder, and they shall have no right to compel any partition,
division, dividend or distribution of the Trust or any of the Trust Estate.
6.3. Shares Deemed Personal Property. The Shares shall be deemed
personal property and shall confer upon the holders thereof only the interest
and rights specifically set forth in this Declaration. The death, insolvency
or incapacity of a Shareholder shall not dissolve or terminate the Trust or
affect its continuity nor give his legal representative any rights whatsoever,
whether against or in respect of other Shareholders, the Trustees or the Trust
Estate or otherwise except the
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sole right to demand and, subject to the provisions of this Declaration, the
Trustees' Regulations and any requirements of law, to receive a new certificate
for Shares registered in the name of such legal representative, in exchange for
the certificate held by such Shareholder.
6.4. Share Record; Issuance and Transferability of Shares. Records
shall be kept by or on behalf of and under the direction of the Trustees, which
records shall contain the names and addresses of the Shareholders the number of
Shares held by them respectively, and the numbers of the certificates
representing the Shares, and in which there shall be recorded all transfers of
Shares. Certificates shall be issued, listed and transferred in accordance
with the Trustees' Regulations. The persons in whose names certificates are
registered on the records of the Trust shall be deemed the absolute owners of
the Shares represented thereby for all purposes of this Trust; but nothing
herein shall be deemed to preclude the Trustees or officers, or their agents or
representatives, from inquiring as to the actual ownership of Shares. Until a
transfer is duly effected on the records of the Trust, the Trustees shall not
be affected by any notice of such transfer, either actual or constructive. The
receipt by the person in whose name any Shares are registered on the records of
the Trust or by the duly authorized agent of such person, or if such Shares are
so registered in the names of more than one person, the receipt by any one of
such persons, or by the duly authorized agent of such persons, shall be a
sufficient discharge for all dividends or distributions payable or deliverable
in respect of such Shares and from all liability to see the application
thereof.
Shares shall be transferable on the records of the Trust only by the
record holder thereof or by his agent, thereunto duly authorized in writing
upon delivery to the Trustees or a transfer agent of the certificate or
certificates therefor, properly endorsed or accompanied by duly executed
instruments of transfer and accompanied by all necessary documentary stamps
together with such evidence of the genuineness of each such endorsement,
execution, or authorization and of other matters as may reasonably be required
by the Trustees or such transfer agent. Upon such delivery, the transfer shall
be recorded in the records of the Trust and a new certificate for the Shares so
transferred shall be issued to the transferee, and in case of a transfer of
only a part of the Shares represented by any certificate, a new certificate for
the balance shall be issued to the transferor. Any person becoming entitled to
any Shares in consequence of the death of a Shareholder or otherwise by
operation of law shall be recorded as the holder of such Shares and shall
receive a new certificate therefor but only upon delivery to the Trustees or a
transfer agent of instruments and other evidence required by the Trustees or
the transfer agent to demonstrate such entitlement, the existing certificate
for such Shares and such necessary releases from applicable government
authorities.
In case of loss, mutilation, or destruction of any certificates for
Shares, the Trustees may issue or cause to be issued a replacement certificate
on such terms and subject to such rules and regulations as the Trustees may
from time to time prescribe. Nothing in this Declaration shall impose upon the
Trustee or a transfer agent a duty or limit his or its rights to inquire into
adverse claims.
6.5. Dividends or Distributions to Shareholders. The Trustees may
from time to time declare and pay to Shareholders such dividends or
distributions in cash or other form, out of current
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or accumulated income, capital, capital gains, principal, surplus, proceeds
from the increase or financing of Trust obligations, or from the sale of
portions of the Trust Estate or from any other source as the Trustees in their
discretion shall determine. Shareholders shall have no right to any dividend
or distribution unless and until such dividend or distribution is declared by
the Trustees. The Trustees shall furnish the Shareholders with a statement in
writing advising as to the source of the funds so distributed or, if the source
thereof has not then been determined, the communication shall so state and in
such event the statement as to such source shall be sent to the Shareholders
not later than 60 days after the close of the fiscal year in which the
distribution was made.
The Trust intends to begin liquidating its assets in the normal course
of business. The Trust may reinvest the net proceeds from liquidated assets;
however, net cash proceeds from the sale or refinancing of equity investments
received by the Trust five years or more from the termination of the initial
public offering, or from the satisfaction of mortgage loan investments received
10 years or more from the termination of this offering are intended to be
distributed to Shareholders. The Trustees may elect, however, to begin such
self-liquidating distributions earlier.
6.6. Transfer Agent, Dividend Disbursing Agent and Registrar. The
Trustees shall have power to employ one or more transfer agents, dividend
disbursing agents, warrant agents and registrars and to authorize them on
behalf of the Trust to keep records, to hold and disburse any dividends and
distributions, and to have and perform, in respect to all original issues and
transfers of Shares, warrants, dividends and distributions and reports and
communications to Shareholders, the powers and duties usually had and performed
by transfer agents, dividend disbursing agents, warrant agents and registrars
of a California corporation.
6.7. Restrictions on Acquisitions of Shares. Notwithstanding any
other provision of this Declaration of Trust, to protect its status as an REIT,
no Shareholder shall be permitted, absent the consent of a majority of the
Trustees of the Trust, to acquire Shares in an amount such that immediately
following the acquisition such Shareholder would directly or indirectly own
more than 5% of the Shares outstanding. These limitations shall apply to all
Shares issued, including Shares issued upon the exercise of warrants.
6.8. Shareholders' Meetings. There shall be an annual meeting of
the Shareholders at such time and place as the Trustees' Regulations shall
prescribe, at which the Trustees shall be elected and any other proper business
may be conducted. The Annual Meeting of Shareholders shall be held after
delivery to the Shareholders of the Annual Report and within six months after
the end of each fiscal year, except that the first annual meeting shall be held
in 1988 or in the fiscal year following the close of the initial public
offering of Shares, whichever occurs later. Special meetings of Shareholders
may be called upon the written request of Shareholders holding not less than
10% of the outstanding Shares of the Trust entitled to vote in the manner
provided in the Trustees' Regulations. If there shall be no Trustees, the
officers of the Trust shall promptly call a special meeting of the Shareholders
for the election of successor Trustees. Upon receipt of a written request,
either in person or by registered mail, stating the purpose(s) of the meeting
requested by Shareholders, the Trust shall provide all Shareholders, within ten
business days after receipt of said
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request, written notice (either in person or by mail) of a meeting and the
purpose of such meeting to be held on a date not less than 20 nor more than 60
days after receipt of said request, at a time and place convenient to
Shareholders. A majority of the outstanding Shares entitled to vote at any
meeting represented in person or by proxy shall constitute a quorum at any such
meeting. Whenever any action is to be taken by the Shareholders, it shall,
except as otherwise required by this Declaration or by law, be authorized by a
majority of the votes cast at a meeting of Shareholders by holders of Shares
entitled to vote thereon, which Shares are not entitled to cumulative voting.
The affirmative vote at a meeting of Shareholders of the holders of a majority
of all outstanding Shares shall be required to approve the principal terms of
the transaction and the nature and amount of the consideration involving any
sale, lease, exchange, or other disposition of 50% or more of the Trust Estate
in a single sale. Whenever Shareholders are required or permitted to take any
action, such action may be taken without a meeting on written consent setting
forth the action so taken, signed by the holders of a majority of all
outstanding Shares entitled to vote thereon, or such larger proportion thereof
as would be required for a vote of Shareholders if acting at a meeting on the
particular issue. The vote or consent of Shareholders shall not be required
for the pledging, hypothecating, granting security interests in, mortgaging, or
encumbering of all or any of the Trust Estate, or for the sale, lease exchange,
or other disposition of less than 50% of the Trust Estate in a single sale.
6.9. Proxies. Whenever the vote or consent of Shareholders is
required or permitted under this Declaration, such vote or consent may be given
either directly by the Shareholders or to proxies in the form prescribed in the
Trustees' Regulations. The Trustees may solicit such proxies from the
Shareholders or any of them in any matter requiring or permitting the
Shareholders' vote or consent.
6.10. Reports to Shareholders.
(a) Not later than 120 days after the close of each
fiscal year of the Trust, except that the first annual report shall be
mailed in 1987 or in the fiscal year following the close of the
initial two-year public offering of Shares, the Trustees shall mail a
report of the business and operation of the Trust during such fiscal
year to the Shareholders, which report shall constitute the accounting
of the Trustees for such fiscal year. The report (hereinafter "Annual
Report") shall be in such form and have such content as the Trustees
deem proper. The Annual Report shall include a statement of assets
and liabilities and a statement of income and expenses of the Trust,
prepared in accordance with generally accepted accounting principles.
Such financial statements shall be accompanied by the report of an
independent certified public accountant thereon. A manually signed
copy of the accountant's report shall be filed with the Trustees.
(b) At least quarterly the Trustees shall send to the
Shareholders interim reports having such form and content as the
Trustees deem proper.
6.11. Fixing Record Date. The Trustees' Regulations may provide for
fixing, or, in the absence of such provision, the Trustees may fix, in advance,
a date as the record date for determining
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the Shareholders entitled to notice of or to vote at any meeting of
Shareholders or to express consent to any proposal without a meeting, or for
the purpose of determining Shareholders entitled to receive payment of any
dividend or distribution (whether before or after termination of the Trust) or
any Annual Report or other communication from the Trustees, or for any other
purpose. The record date so fixed shall be not less than five days nor more
than 50 days prior to the date of the meeting or event for purposes for which
it is fixed.
6.12. Notice to Shareholders. Any notice of meeting or other
notice, communication or report to any Shareholder shall be deemed duly
delivered to such Shareholder when such notice, communication, or report is
deposited, with postage thereon prepaid, in the United States mail, addressed
to such Shareholder at his address as it appears on the records of the Trust or
is delivered in person to such Shareholder.
6.13. Shareholders' Disclosures: Redemption of Shares. The
Shareholders shall, upon demand, disclose to the Trustees in writing such
information with respect to direct and indirect ownership of the Shares as the
Trustees deem necessary to comply with the REIT Provisions of the Code and the
regulations thereunder, as the same shall be from time to time amended, or to
comply with the requirements of any other taxing authority. If the Trustees
shall at any time and in good faith be of the opinion that direct or indirect
ownership of Shares of the Trust has or may become concentrated to an extent
which would prevent the Trust from qualifying as a REIT under the REIT
Provisions of the Code, the Trustees shall have the power by lot or other means
deemed equitable by them to prevent the transfer of and/or call for redemption
a number of such Shares sufficient in the opinion of the Trustees to maintain
or bring the direct or indirect ownership of Shares of the Trust into
conformity with the requirements for such a REIT. The redemption price shall
be (i) the last reported sale price of the Shares on the last business day
prior to the redemption date on the principal national securities exchange on
which the Shares are listed or admitted to trading; or (ii) if the Shares are
not so listed or admitted to trading, the average of the highest bid and lowest
asked prices on such last business day as reported by the NASDAQ or a similar
organization selected by the Trust for such purpose; or (iii) if not determined
as aforesaid, as determined in good faith by the Trustees. From and after the
date fixed for redemption by the Trustees, the holder of any Shares so called
for redemption shall cease to be entitled to dividends, distributions, voting
rights, and other benefits with respect to such Shares, excepting only to the
right to payment of the redemption price fixed as aforesaid. For the purpose
of this Section 6.12, the term "individual" shall be construed as provided in
Section 542 (a) (2) of the Code or any successor provision, and "ownership" of
Shares shall be determined as provided in Section 544 of the Code or any
successor provision.
6.14. Right to Refuse to Transfer Shares. Whenever it is deemed by
them to be reasonably necessary to protect the tax status of the Trust, the
Trustees may require a statement or affidavit from each Shareholder or proposed
transferee of Shares setting forth the number of Shares already owned by him
and any related person specified in the form prescribed by the Trustees for
that purpose. If, in the opinion of the Trustees, which shall be conclusive
upon any proposed transferor or proposed transferee of Shares, any proposed
transfer would jeopardize the status of the Trust as a REIT under the Code, as
now enacted or as hereafter amended, the Trustees may refuse to permit such
transfer.
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Any attempted transfer for which the Trustees have refused their permission
shall be void and of no effect to transfer any legal or beneficial interest in
the Shares. All contracts for the sale or other transfer of Shares shall be
subject to this provision.
6.15. Issuance of Shares. Notwithstanding any other provision of
this Declaration, the Trust may issue an unlimited number of Shares from time
to time in the Trustees sole discretion and in good faith. Any Share or
security shall have the same characteristics and entitle the registered holder
thereof to the same rights as any identical securities of the same class or
series issued separately by the Trust.
ARTICLE VII
Liabilities of Trustees, Shareholders and Officers, and Other Matters
7.1. Exculpation of Trustees, Officers, and Others. No Trustee,
officer, employee, or agent of the Trust shall be liable for obligations or
contracts of the Trust or liable in tort or otherwise in connection with the
affairs of this Trust, to the Trust, or to any Shareholder, Trustee, officer,
employee, or agent of the Trust or to any other person for any action or
failure to act (including without limitation the failure to compel in any way
any former or acting Trustee to redress any breach of trust), except only that
of liability arising from his own willful misfeasance, bad faith, gross
negligence, or reckless disregard of duty.
7.2. Limitation of Liability of Shareholders, Trustees, and
Officers. The Trustees' officers, employees, and agents of the Trust, in
incurring any debts, liabilities, or obligations or in taking or omitting any
other actions for or in connection with the Trust are, and shall be deemed to
be, acting as Trustees, officers, employees or agents of the Trust and not in
their own individual capabilities. Except to the extent of liability arising
from his own willful misfeasance, bad faith, gross negligence, or reckless
disregard of duty, no Trustee, officer, employee or agent shall, nor shall any
Shareholder, be liable for any debt, claim, demand, judgment, decree, liability
or obligation of any kind, against or with respect to the Trust, arising out of
any action taken or omitted for or on behalf of the Trust, and the Trust shall
be solely liable therefor, and resort shall be had solely to the Trust Estate
for the payment or performance thereof. Each Shareholder shall be entitled to
pro rata indemnity from the Trust Estate if, contrary to the provisions hereof,
such Shareholder shall be held to any personal liability.
7.3. Express Exculpatory Clauses and Instruments. In all
agreements, obligations, instruments, and actions in regard to the affairs of
this Trust, this Trust and not the Shareholders, officers, employees, or agents
shall be the principal and entitled as such to enforce the same, collect
damages, and take all other action. All such agreements, obligations,
instruments, and actions shall be made, executed, incurred, or taken by or in
the name and on behalf of this Trust or by the trustees as Trustees hereunder,
but not personally. All such agreements, obligations, and instruments shall
acknowledge notice of this paragraph or shall refer to this Declaration and
contain a statement to the effect that the name of this Trust refers to the
Trustees as Trustees but not personally, and that no
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Trustee, Shareholder, officer, employee, or agent shall be held to any personal
liability thereunder; and neither the Trustees nor any officer, employee, or
agent shall have any power or authority to make, execute, incur, or take any
agreement, obligation, instrument, or action unless the requirements of this
paragraph are met; however, the omission of such provisions from any such
instrument shall not render the Shareholders or any Trustee or any officer,
employee, or agent liable, nor shall the Trustees or any officer, employee, or
agent of the Trust be liable to anyone for such omission.
7.4. Indemnification and Reimbursement of Trustees and Officers.
Any person made a party to any action, suit, or proceeding or against whom a
claim or liability is asserted by reason of the fact that he, his testator, or
intestate was or is a Trustee or officer, employee, or agent or active in such
capacity on behalf of the Trust shall be indemnified and held harmless by the
Trust against judgments, fines, amounts paid on account thereof (whether in
settlement or otherwise) and reasonable expenses, including attorneys' fees,
actually and reasonably incurred by him in connection with the defense of such
action, suit, proceeding, claim, or alleged liability or in connection with any
appeal therein, whether or not the same proceeds to judgment or is settled or
otherwise brought to a conclusion; provided, however, that no such person shall
be so indemnified or reimbursed for any claim, obligation, or liability which
arose out of such Person's willful misfeasance, bad faith, gross negligence, or
reckless disregard of duty; and provided further that such person gives prompt
notice thereof, executes such documents, and takes such action as will permit
the Trust to conduct the defense or settlement thereof and cooperates therein.
In the event of a settlement approved by the Trustees of any such claim,
alleged liability, action, suit, or proceeding indemnification and
reimbursement shall be provided except as to such matters covered by the
settlement which the Trust is advised by its counsel arose from such person's
willful misfeasance, bad faith, gross negligence, or reckless disregard of
duty. Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the Trust in advance of the final disposition of such
action, suit or proceeding as authorized by the Trust in the specification upon
receipt of an undertaking by or on behalf of a person indemnified to pay over
such amount unless it shall ultimately be determined he is entitled to be
indemnified by the Trust as authorized herein. Such rights of indemnification
and reimbursement shall be satisfied only out of the Trust Estate. The rights
accruing to any person under these provisions shall not exclude any other right
to which he may be lawfully entitled, nor shall anything contained herein
restrict the right of the Trust to indemnify or reimburse such person in any
proper case even though not specifically provided for herein, nor shall
anything contained herein restrict such person's right to contribution as may
be available under applicable law. The Trust shall have power to purchase and
maintain insurance on behalf of any person entitled to indemnity hereunder
against any liability asserted against him and incurred by him in a capacity
mentioned above, or arising out of his status as such, whether or not the Trust
would have the power to indemnify him against such liability under the
provisions hereof.
7.5. Right of Trustees, Officers, and Others to Own Shares or Other
Property and to Engage in Other Business. Any Trustee, officer, employee, or
agent of the Trust may acquire, own, hold, and dispose of Shares in the Trust,
for his individual account, and may exercise all rights of a Shareholder to the
same extent and in the same manner as if he were not a Trustee, officer,
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employee, or agent of the Trust. Any Trustee, officer, employee, or agent of
the Trust may have personal business interests and may engage in personal
business activities, which interests and activities may include the
acquisition, syndication, holding, management, operation, or disposition, for
his own account or for the account of others, of interests in mortgages,
interests in real property, or interests in persons engaged in real estate
business. Subject to the provisions of Article IV, any Trustee, officer,
employee, or agent may be interested as trustee, officer, director,
stockholder, partner, member, advisor or employee, or otherwise have a direct
or indirect interest in any person who may be engaged to render advice or
services to the Trust, and may receive compensation from such person as well as
compensation as Trustee, officer, or otherwise hereunder. None of these
activities shall be deemed to conflict with his duties and powers as Trustee or
officer, provided, however, that any such relationship shall preclude that
Trustee from serving as a Non-Interested Trustee.
7.6. Transactions Between the Trust and Affiliated Persons. Except
as prohibited by this Declaration, and in the absence of fraud, a contract,
act, or other transaction between the Trust and any other person, or in which
the Trust is interested, shall be valid even though (i) one or more of the
Trustees or officers are directly or indirectly interested in, or connected
with, or are trustees, partners, directors, officers, or retired officers of
such other person; or (ii) one or more of the Trustees or officers of the
Trust, individually or jointly with others, is a party or are parties to or
directly or indirectly interested in, or connected with, such contract, act, or
transaction. No Trustee or officer shall be under any disability from or have
any liability as a result of entering into any such contract, act, or
transaction, provided that (i) such interest or connection is disclosed or
known to the Trustees and thereafter the Trustees authorize such contract, act,
or other transaction by vote sufficient for such purpose by an affirmative vote
of the Trustees not so interested; (ii) such interest or connection is
disclosed or known to the Shareholders, and thereafter such contract, act, or
transaction is approved by the Shareholders; and (iii) such contract, act, or
transaction is fair and reasonable to the Trust at the time it is authorized by
the Trustees or by the Shareholders. Further, any such interest shall cause an
otherwise noninterested Trustee to be deemed an interested Trustee solely for
the purpose of this transaction.
The Trust shall not purchase or lease, directly or indirectly, any
real property or purchase any mortgage from the Advisor or any affiliated
person, or from any partnership in which any of the foregoing may also be a
general partner or sponsor. The Trust will not sell or lease, directly or
indirectly, any of its real property or sell any mortgages to any of the
foregoing persons. The Sponsor or the Advisor may make mortgage loans,
purchase real property, and assume loans in connection therewith in its own
name and temporarily hold title thereto for the purpose of facilitating the
acquisition of such real property or mortgage loans or the borrowing of money
or obtaining of financing for the Trust, or for any other purpose related to
the business of the Trust, provided that such real property or mortgage loan is
purchased by the Trust for a price no greater than the cost of such real
property or mortgage loan to the Sponsor or Advisor and provided there is no
difference in interest rates of the loans related thereto at the time acquired
by the Sponsor or Advisor and the time acquired by the Trust, nor any other
benefit to the Sponsor or Advisor arising out of such
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transaction apart from compensation otherwise permitted by the prospectus
describing the initial public offering of Shares.
Notwithstanding any other provisions of this Declaration, the Trust
shall not, directly or indirectly, engage in any transaction with any Trustee,
officer, or employee of the Trust or any director, officer, or employee of the
Advisor, or of any company or other organization of which any of the foregoing
is an affiliate, except for (i) the execution and performance of the agreements
contemplated by Article IV hereof; (ii) transactions involving the option to
purchase or the purchase of securities of the Trust on the same terms on which
such securities are then being offered to all holders of any class of
securities of the Trust or to the public; (iii) entering into joint ventures or
partnerships with the Advisor or its affiliates including other programs
sponsored by the Advisor; and (iv) transactions with the Advisor or Affiliates
thereof involving loans, real estate brokerage services, mortgage brokerage
services, real property management services, the servicing of mortgages, the
leasing of real or personal property, or other services, provided such
transactions are on terms not less favorable to the Trust than the terms on
which non-affiliated parties are then making similar loans or performing
similar services for comparable entities in the same area and are not entered
into on an exclusive basis with such person; provided, however, that any
transaction referred to in clause (iv) may be entertained into only upon
approval by affirmative vote or consent of a majority of the Trustees who are
not interested in or affiliates of any person who is interested in the
transaction. Real estate brokerage commissions may be paid by the seller or
buyer of the property or by the Trust, and in the case of purchases the
aggregate of the total purchase price of the investment property and such real
estate brokerage commission shall not exceed the Appraised Value of such
property. The simultaneous acquisition by the Trust and the Advisor or any
affiliate of the Advisor of participations in any investment shall not be
deemed to constitute the purchase or sale of property by one of them to the
other. This Section 7.6 shall not prevent the payment to any person of
commissions or fees for the so-called "private placement" of such securities
with investors. The Trustees are not restricted by this Section 7.6 from
forming a corporation, partnership trust, or other business association owned
by the Trustees or by their nominees for the purpose of holding title to
property of the Trust, providing the Trustees' motive for the formation of such
business association is not for their own enrichment.
7.7. Restriction of Duties and Liabilities. To the extent that the
nature of this Trust (that is, as business trust) will permit, the duties and
liabilities of Shareholders, Trustees, and officers shall in no event be
greater than the duties and liabilities of shareholders, directors, and
officers of a California corporation. The Shareholders, Trustees, and officers
shall in no event have any greater duties or liabilities than those imposed by
applicable laws as shall be in effect from time to time.
7.8. Persons Dealing with Trustees or Officers. The Trustees may
authorize any officer or officers or agent or agents to enter into any contract
or execute any instrument in the name and on behalf of the Trust and/or
Trustees. See Section 2.6 hereof.
No person dealing in good faith with the Trustees or any of them or
with the authorized officers, employees, agents, or representatives of the
Trust shall be bound to see to the application
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of any funds or property passing into their hands or control. The receipt of
the Trustees, or any of them, or of authorized officers, employees, agents, or
representatives of the Trust for monies or other consideration, shall be
binding upon the Trust.
7.9. Reliance. The Trustees and officers may consult with counsel,
and the advice or opinion of such counsel shall be full and complete personal
protection to all of the Trustees and officers, in respect to any action taken
or suffered by them in good faith and in reliance on and in accordance with
such advice or opinion. In discharging their duties, Trustees and officers,
when acting in good faith, may rely upon financial statements of the Trust
represented to them to be correct by the chairman or the officer of the Trust
having charge of its books of account, or stated in a written report by an
independent certified public accountant fairly to present the financial
position of the Trust. The Trustees may rely, and shall be personally
protected in acting, upon any instrument or other document believed by them to
be genuine.
7.10. Income Tax Status. Anything to the contrary herein
notwithstanding and without limitation of any rights of indemnification or
non-liability of the Trustees herein, said Trustees by this Declaration make no
commitment or representation that the Trust will qualify for the dividends paid
deduction permitted by the Code and by the Rules and Regulations thereunder
pertaining to REITs in any given year. The failure of the Trust to qualify as
a real estate investment trust under the Internal Revenue Code shall not render
the Trustees liable to the Shareholders or to any other person or in any manner
operate to annul the Trust.
ARTICLE VIII
Duration, Amendment, Termination, and Qualification of Trust
8.1. Duration of Trust. Unless the Trust is sooner terminated as
otherwise provided herein, the Trust shall continue in such manner that the
Trustees shall have all the powers and discretions, express and implied,
conferred upon them by law or by this Declaration, until the expiration of 20
years after the death of the last survivor of the following persons:
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<TABLE>
<CAPTION>
Date of
Name Birth Parents and Present Residence
---- ----- -----------------------------
<S> <C> <C>
Michael Paul McGinnis 4/20/78 Mr. & Mrs. Steven K. McGinnis
205 Carol Court
Danville, CA 94526
Dana Morgan Silverman 12/15/83 Mr. & Mrs. Donald Silverman
70 Bates Boulevard
Orinda, CA 94563
Scott Jay Kaplan 4/16/80 Mr. & Mrs. Jay Kaplan
167 Avenida Miraflores
Tiburon, CA 94920
Christopher Daniel Karlin 7/23/84 Mr. & Mrs. Jeffrey H. Karlin
135 Donald Drive
Moraga, CA 94536
Ryan G. W. Barnes 4/22/80 Mr. & Mrs. G. W. Barnes
1322 E. Gadsden
Pensacola, FL 32501
</TABLE>
8.2. Termination of Trust.
(a) The Trustees intend to begin to liquidate the assets
of the Trust within ten years of the termination of its first public
offering of Shares to the public by making liquidating distributions
to Shareholders. The Trustees shall have full discretion, in their
best judgment, however, to hold on to investments beyond ten years,
should market conditions or other circumstances so dictate. The
Trustees shall have full authority to direct such liquidation in such
a manner as to protect the value of the assets of the Trust.
(b) The Trust may be terminated by the affirmative vote
or written consent of the holders of a majority of all outstanding
Shares entitled to vote thereon.
Upon the termination of the Trust or as part of the process of
intended self-liquidation:
(i) The Trust shall carry on no business except
for the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the
affairs of the Trust, and all of the powers of the Trustees
under this Declaration shall continue until the affairs of the
Trust shall have been wound up, including the power to fulfill
or discharge the contracts of the Trust, collect its assets,
sell, convey, assign, exchange, transfer, or
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otherwise dispose of all or any part of the remaining Trust
Estate to one or more Persons at public or private sale for
consideration which may consist in whole or in part of cash,
securities, or other property of any kind, discharge or pay
its liabilities, and do all other acts appropriate to
liquidate its business; provided, that any sale, conveyance,
assignment, exchange, transfer, or other disposition of 50% or
more of the Trust Estate in a single transaction prior to
seven years from the termination of the initial public
offering shall require approval of the principal terms of the
transaction and the nature and amount of the consideration by
vote or consent of the holders of a majority of all the
outstanding Shares entitled to vote thereon.
(iii) After paying or adequately providing for the
payment of all liabilities, and upon receipt of such releases,
indemnities, and refunding agreements as they deem necessary
for their protection, the Trustees may distribute the
remaining Trust Estate, in cash or in kind, or partly in each,
among the Shareholders according to their respective rights.
(c) After termination of the Trust and distribution to
the Shareholders as herein provided, the Trustees shall execute and
lodge among the records of the Trust an instrument in writing setting
forth the facts of such termination, and the Trustees shall thereupon
be discharged from all further liabilities and duties hereunder, and
the rights and interests of all Shareholders shall thereupon cease.
8.3. Amendment Procedure.
(a) This Declaration may be amended by Shareholders
holding a majority of the outstanding Shares entitled to vote thereon.
The Trustees may also amend this Declaration without the vote or
consent of Shareholders to the extent they deem it necessary to cure
any ambiguity or correct any inconsistency herein or to conform this
Declaration to the requirements of the REIT Provisions of the Code or
to other applicable federal or state laws, rulings, or regulations
(including tax and securities laws, rulings or regulations), but the
Trustees shall not be liable for failing to do so.
(b) No amendment may be made, under Section 8.3(a) above,
which would change any rights with respect to any outstanding
securities of the Trust by reducing the amount payable thereon upon
liquidation of the Trust, or by diminishing or eliminating any voting
rights pertaining thereto, except with the vote or consent of the
holders of two-thirds of the outstanding Shares entitled to vote
thereon.
(c) A certification, in recordable form, signed by a
majority of the Trustees, setting forth an amendment and reciting
that it was duly adopted by the Shareholders or by the Trustees as
aforesaid, or a copy of the Declaration, as amended, in recordable
form, and executed by a majority of the Trustees, shall be conclusive
evidence of such amendment when lodged among the records of the Trust.
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<PAGE> 195
(d) Nothing contained in this Declaration shall permit
the amendment of this Declaration to impair the exception from
personal liability of the Shareholders, Trustees, officers, employees,
and agents of this Trust.
8.4. Qualification Under the REIT Provisions of the Internal
Revenue Code. It is intended that the Trust shall qualify as a "REIT" under
the REIT Provisions of the Code during such period as the Trustees shall deem
it advisable so to qualify the Trust.
ARTICLE IX
Miscellaneous
9.1. Applicable Law. This Declaration is executed and acknowledged
by the Trustees in the state of California and with reference to the statutes
and laws thereof and the rights of all parties and the construction and effect
of every provision hereof shall be subject to and construed according to the
statutes and laws of said state.
9.2. Index and Headings for Reference Only. The index and headings
preceding the text, articles and sections hereof have been inserted for
convenience and reference only and shall not be construed to affect the
meaning, construction, or effect of this Declaration. References to the
masculine are intended to include feminine in the use of pronouns.
9.3. Successors in Interest. This Declaration and the Trustees'
Regulations shall be binding upon and inure to the benefit of the undersigned
Trustees and their successors, assigns, heirs, distributees, and legal
representatives and to the benefit of every Shareholder and his successors,
assigns, heirs, distributees, and legal representatives.
9.4. Inspection of Records. Trust records shall be available for
inspection and copying by Shareholders at the same time and in the same manner
and to the extent that comparable records of a California corporation would be
available for inspection by shareholders under the laws of the state of
California. Except as specifically provided for in this Declaration,
Shareholders shall have no greater right than shareholders of a California
corporation to require financial or other information from the Trust, Trustees,
or officers. Any federal or state securities administration or other similar
authority shall have the right, at reasonable times during business hours and
for proper purposes, to inspect the books and records of the Trust.
9.5. Counterparts. This Declaration may be simultaneously executed
in several counterparts, each of which when so executed shall be deemed to be
an original, and such counterparts together shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.
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<PAGE> 196
9.6. Provisions of the Trust in Conflict with Law or Regulations.
(a) The Provisions of this Declaration are severable,
and if the Trustees shall determine, with the advice of counsel, that
any one or more of such provisions (the "Conflicting Provisions") are
in conflict with the REIT Provisions of the Code or with other
applicable laws or regulations, the Conflicting Provisions shall be
deemed never to have constituted a part of the Declaration; provided,
however, that such determination by the Trustees shall not affect or
impair any of the remaining provisions of this Declaration or render
invalid or improper any action taken or omitted (including, but not
limited to, the election of Trustees) prior to such determination. A
certification in recordable form signed by a majority of the Trustees
setting forth any such determination and reciting that it was duly
adopted by the Trustees, or a copy of this Declaration, with the
Conflicting Provisions removed pursuant to such determination, in
recordable form, signed by a majority of the Trustees, shall be
conclusive evidence of such determination when lodged in the records
of the Trust. The Trustees shall not be liable for failure to make
any determination under this Section 9.6(a). Nothing in this Section
9.6(a) shall in any way limit or affect the right of the Trustees to
amend this Declaration as provided in Section 8.3(a).
(b) If any provisions of this Declaration shall be held
invalid or unenforceable, such invalidity or unenforceability shall
attach only to such provision and shall not in any manner affect or
render invalid or unenforceable any other provision of this
Declaration, and this Declaration shall be carried out as if any such
invalid or unenforceable provision were not contained herein.
9.7. Certifications. The following certifications shall be final
and conclusive as to any persons dealing with the Trust:
(a) A certification of a vacancy among the Trustees by
reason of resignation, removal, increase in the number of Trustees,
incapacity, death or otherwise, when made in writing by a majority of
the remaining Trustees;
(b) A certification as to the persons holding office as
Trustees or officers at any particular time, when made in writing by
the Secretary or Assistant Secretary of the Trust or by any Trustee;
(c) A certification that a copy of this Declaration or of
the Trustees' Regulations is a true and correct copy thereof as then
in force, when made in writing by the Secretary or Assistant Secretary
of the Trust or by any Trustee;
(d) The certifications referred to in Sections 8.3(c) and
9.6(a) hereof; and
(e) A certification as to any actions by Trustees, other
than the above when made in writing by the Secretary or Assistant
Secretary of Trust, or by any Trustee.
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<PAGE> 197
9.8. Recording and Filing. A copy of this Declaration and any
amendments shall be recorded in the office of the County Recorder of the County
of Alameda, California, and in the office of the County Recorder or its
equivalent in every county where the Trust is or the Trustees are the record
owner(s) of real property; provided, however, that provision is made in such
local jurisdiction for such recording, and further provided that this
Declaration is accepted for recording. This Declaration and any amendments may
also be filed or recorded in such other places as the Trustees deem
appropriate.
IN WITNESS WHEREOF, the undersigned have executed this Declaration of
Trust as of the date first hereinabove set forth.
/s/ DAVID V. JOHN /s/ BETTY L. HOOD-GIBSON
- ----------------------------------- -----------------------------------
David V. John, Trustee Betty L. Hood-Gibson, Trustee
/s/ THOMAS J. FITZMYERS /s/ ROBERT J. THIEBAUT
- ----------------------------------- -----------------------------------
Thomas J. Fitzmyers, Trustee Robert J. Thiebaut, Trustee
/s/ FRED H. FIELD /s/ ROBERT J. BLAKE
- ----------------------------------- -----------------------------------
Fred H. Field, Trustee Robert J. Blake, Trustee
/s/ DOUGLAS M. TEMPLE /s/ ALBERT H. SCHAAF
- ----------------------------------- -----------------------------------
Douglas M. Temple, Trustee Albert H. Schaaf, Trustee
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<PAGE> 198
State of California )
: ss.
County of Alameda )
On this _____ day of April, 1987, before me, ____________________, a
notary public for the state of California, duly commissioned and sworn,
personally appeared Thomas J. Fitzmyers, David V. John, Betty L. Hood-Gibson,
Robert J. Thiebaut, Robert J. Blaker, Fred H. Field, Albert H. Schaaf, and
Douglas M. Temple, known to me to be the persons whose names are subscribed to
the within instrument, and acknowledged to me that they executed the same.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal in the county of Alameda, state of California, the day and year
in this certificate first above written.
-----------------------------------
Notary Public, State of California
My Commission Expires ________, 19__
(Seal)
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<PAGE> 199
I N D E X
Page
----
ARTICLE I: The Trust: Definitions E-1
ARTICLE II: Trustees E-7
ARTICLE III: Trustees' Powers E-10
ARTICLE IV: Advisor: Limitation on Operating Expenses E-15
ARTICLE V: Investment Policy E-17
ARTICLE VI: The Shares and Shareholders E-20
ARTICLE VII: Liability of Trustees, Shareholders and Officers and Other
Matters E-25
ARTICLE VIII: Duration, Amendment, Termination, and Qualification of Trust E-29
ARTICLE IX: Miscellaneous E-32
E-36
<PAGE> 200
AMENDED DECLARATION OF TRUST
AMENDMENT NUMBER 1 TO THE SECOND AMENDED AND RESTATED
DECLARATION OF TRUST OF INCOME OPPORTUNITY REALTY TRUST
(FORMERLY CONSOLIDATED CAPITAL INCOME OPPORTUNITY TRUST/2)
The Second Amended and Restated Declaration of Trust for Income
Opportunity Realty Trust (the "Declaration of Trust") is hereby amended as
follows:
The following language shall be added to Section 6.1 of the
Declaration of Trust, Recorded on April 20, 1987, instrument No. 87-107217 in
the Alameda County Records, following the seventh sentence of such Section:
The Trustees shall also have the power, in their sole
discretion, to effect reverse share splits on a pro-rata basis
and to redeem for cash any fractional Shares outstanding as a
result thereof.
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<PAGE> 201
IN WITNESS WHEREOF, I have executed this Amendment this 18th day of
September, 1991.
INCOME OPPORTUNITY REALTY TRUST
/s/ William S. Friedman
-----------------------------------
William S. Friedman
President and Trustee
STATE OF TEXAS
COUNTY OF DALLAS
On this 18th day of September, 1991, before me, the undersigned a
Notary Public, for the State of Texas duly commissioned and sworn, personally
appeared William S. Friedman, known to me to be the person whose name is
subscribed to the within instrument, and acknowledged to me that he executed
the same.
IN WITNESS WHEREOF, I have hereunto set by hand and affixed my
official seal in the County of Dallas, State of Texas, the day and year in this
certificate first above written.
-----------------------------------
Notary Public, State of Texas
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<PAGE> 202
AMENDED DECLARATION OF TRUST
AMENDMENT NUMBER 2 TO THE SECOND AMENDED AND RESTATED
DECLARATION OF TRUST OF INCOME OPPORTUNITY REALTY TRUST
(FORMERLY CONSOLIDATED CAPITAL INCOME OPPORTUNITY TRUST/2)
The Second Amended and Restated Declaration of Trust for Income
Opportunity Realty Trust (the "Declaration of Trust") is hereby amended as
follows:
The second paragraph of the Declaration of Trust, Recorded on April
20, 1987, instrument No. 87-107217 in Alameda County Records, shall be deleted
and replaced in its entirety with the following:
William S. Friedman, Willie K. Davis, Raymond V. J. Schrag,
Randall K. Gonzales, Bennett B. Sims, Ted P. Stokely, Dan L.
Johnston, A. Bob Jordan and Geoffrey C. Etnire do hereby agree
to hold in trust, as Trustees, any and all property, real
personal, or otherwise, tangible or intangible, of every type
and description, which is transferred, conveyed, or paid to
them as such Trustees, and all rents, income, profits, and
gains therefrom for the benefit of the Shareholders hereunder,
subject to the terms and conditions and for the uses and
purposes set forth.
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<PAGE> 203
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
August 6, 1993.
/s/ WILLIAM S. FRIEDMAN /s/ WILLIE K. DAVIS
- ----------------------------------- -----------------------------------
William S. Friedman Willie K. Davis
/s/ RAYMOND V. J. SCHRAG /s/ BENNETT B. SIMS
- ----------------------------------- -----------------------------------
Raymond V. J. Schrag Bennett B. Sims
/s/ RANDALL K. GONZALEZ /s/ TED P. STOKELY
- ----------------------------------- -----------------------------------
Randall K. Gonzalez Ted P. Stokely
/s/ DAN L. JOHNSTON /s/ A. BOB JORDAN
- ----------------------------------- -----------------------------------
Dan L. Johnston A. Bob Jordan
/s/ GEOFFREY C. ETNIRE
- -----------------------------------
Geoffrey C. Etnire
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<PAGE> 204
On this 6th day of August, 1993 before me _______________________, a
Notary Public, for the State of Texas duly commissioned and sworn, personally
appeared William S. Friedman, Willie K. Davis, Randall K. Gonzalez, Raymond V.
J. Schrag, Bennett B. Sims, Ted P. Stokely, Dan L. Johnston, A. Bob Jordan and
Geoffrey C. Etnire, known to me to be the persons whose names are subscribed to
the written instrument, and acknowledged to me that they executed the same.
IN WITNESS WHEREOF, I have hereunder set my hand and affixed my
official seal in the County of Dallas, State of Texas, the day and year in this
Amendment first above written.
-----------------------------------
Notary Public, State of Texas
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<PAGE> 205
STATE OF NEW YORK
COUNTY OF NEW YORK ss.:
On this ____ day of August, 1993, before me, the undersigned Notary
Public in and for the County and State of New York, duly commissioned and
sworn, personally appeared William S. Friedman, known to me to be the person
whose name is subscribed to the foregoing written instrument, and acknowledged
to me that he executed the same.
IN WITNESS WHEREOF, I have hereto set my hand and affixed my official
seal in the County and State of New York, the day and year above written.
----------------------------------------------
Mary Elizabeth Montagino,
Notary Public in and for the State of New York
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<PAGE> 206
AMENDED DECLARATION OF TRUST
AMENDMENT NUMBER 2 TO THE SECOND AMENDED
AND RESTATED DECLARATION OF TRUST OF
INCOME OPPORTUNITY REALTY TRUST
(FORMERLY CONSOLIDATED CAPITAL INCOME OPPORTUNITY TRUST/2)
The Second Amended and Restated Declaration of Trust for Income
Opportunity Realty Trust (the "Declaration of Trust") is hereby amended as
follows:
The second paragraph of the Declaration of Trust, Recorded on April
20, 1987, instrument No. 87-107217 in Alameda County Records, shall be deleted
and replaced in its entirety with the following:
William S. Friedman, Willie K. Davis, Raymond V. J. Schrag,
Randall K. Gonzalez, Bennett B. Sims, Ted P. Stokely, Dan L.
Johnson, A. Bob Jordan and Geoffrey C. Etnire do hereby agree
to hold in trust, as Trustees, any and all property, real
personal, or otherwise, tangible or intangible, of every type
and description, which is transferred, conveyed, or paid to
them as such Trustees, and all rents, income, profits, and
gains therefrom for the benefit of the Shareholders hereunder,
subject to the terms and conditions and for the uses and
purposes hereinafter set forth.
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IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
August 6, 1933.
/s/ WILLIAM S. FRIEDMAN /s/ WILLIE K. DAVIS
- ----------------------------------- -----------------------------------
William S. Friedman Willie K. Davis
/s/ RAYMOND V. J. SCHRAG /s/ BENNETT B. SIMS
- ----------------------------------- -----------------------------------
Raymond V. J. Schrag Bennett B. Sims
/s/ RANDALL K. GONZALEZ /s/ TED P. STOKELY
- ----------------------------------- -----------------------------------
Randall K. Gonzalez Ted P. Stokely
/s/ DAN L. JOHNSTON /s/ A. BOB JORDAN
- ----------------------------------- -----------------------------------
Dan L. Johnston A. Bob Jordan
/s/ GEOFFREY C. ETNIRE
- -----------------------------------
Geoffrey C. Etnire
On this 6th day of August, 1993 before me Sheri L. Hall, a Notary
Public, for the State of Texas duly commissioned and sworn, personally appeared
William S. Friedman, Willie K. Davis, Randall K. Gonzalez, Raymond V. J.
Schrag, Bennett B. Sims, Ted P. Stokely, Dan L. Johnson, A. Bob Jordan and
Geoffrey C. Etnire, known to me to be the persons whose names are subscribed to
the written instrument, and acknowledged to me that they executed the same.
IN WITNESS WHEREOF, I have hereto set my hand and affixed my official
seal in the County of Dallas, State of Texas, the day and year in this
Amendment first above written.
-----------------------------------
Notary Public, State of Texas
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STATE OF NEW YORK
COUNTY OF NEW YORK ss.:
On this ____ day of August, 1993, before me, the undersigned Notary
Public in and for the County and State of New York, duly commissioned and
sworn, personally appeared William S. Friedman, known to me to be the person
whose name is subscribed to the foregoing written instrument, and acknowledged
to me that he executed the same.
IN WITNESS WHEREOF, I have hereto set my hand and affixed my official
seal in the County and State of New York, the day and year above written.
----------------------------------------------
Mary Elizabeth Montagino,
Notary Public in and for the State of New York
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APPENDIX F
RESTATED TRUSTEES' REGULATIONS
OF INCOME OPPORTUNITY REALTY TRUST
As of April 21, 1989
ARTICLE I
Officers
Section 1. Enumeration. The officers of the Trust shall be a
President, one or more Vice Presidents, a Secretary, a Treasurer, and such
other officers as are elected by the Trustees, including in their discretion a
Chairman of the Board. Officers shall be elected by, and shall hold office at
the pleasure of the Trustees. When the duties do not conflict, any two or more
offices, except those of President and Secretary, or President and Assistant
Secretary, may be held by the same person.
Section 2. Powers and Duties of the Chairman of the Board. The
Chairman of the Board, if there shall be such an officer, shall, if present,
preside at all meetings of the Trustees and exercise and perform such other
powers and duties as may be from time to time assigned to him by the Trustees.
Section 3. Powers and Duties of the President. Subject to such
supervisory powers, if any, as may be given by the Trustees to the Chairman of
the Board, if there be such an officer, the President shall be the chief
executive officer of the Trust and, subject to the control of the Trustees,
shall have general supervision, direction and control of the business of the
Trust and shall exercise such general powers of management as are usually
vested in the office of president of a corporation. The President shall
preside at all meetings of the Shareholders and in the absence of the Chairman
of the Board, or if there is none, at all meetings of the Trustees. The
President shall be, ex officio, a member of all standing committees.
Section 4. Powers and Duties of the Vice President. In the absence
or disability of the President, the Vice Presidents in order of their rank as
fixed by the Trustees or, if not ranked, the Vice President designated by the
Trustees, shall perform all of the duties of the President and when so acting
shall have all the powers of and be subject to all the restrictions upon the
President. The Vice Presidents shall have such other powers and perform such
other duties as are prescribed for them from time to time by the Trustees.
Section 5. Duties of the Secretary. The Secretary shall:
(a) Minutes. Keep all and complete minutes of the meetings of
the Trustees and of the meetings of the Shareholders and give notice, as
required, of all such meetings;
(b) Trust Seal. Keep the seal of the Trust, if any, and affix
the same to all instruments executed by the Trust which require it;
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(c) Books and Other Records. Maintain custody of and keep the
books of account and other records of the Trust except such as are in
the custody of the Treasurer;
(d) Share Register. Keep at the principal office of the Trust
a share register, or duplicate share register if a transfer agent is
employed to keep the original share register, showing the ownership and
transfers of ownership of all Shares; and
(e) General Duties. Generally, perform all duties which
pertain to his office and which are required by the Trustees.
Section 6. Duties of the Treasurer. The Treasurer shall:
(a) Books and Other Records. Maintain custody of and keep
books of account and other records of the Trust except such as are in
the custody of the Secretary;
(b) Receipt, Deposit, and Disbursement of Funds. Receive,
deposit, and disburse funds belonging to the Trust; and
(c) General Duties. Generally, perform all duties which
pertain to his office and which are required by the Trustees.
ARTICLE II
Trustees
Section 1. Number. Until changed by amendment of this Section 1
adopted by the Trustees or the Shareholders, the authorized number of Trustees
shall be no less than 5 nor more than 15.
Section 2. Qualifying Shares Not Required. Trustees need not be
Shareholders of the Trust.
Section 3. Quorum. A majority of the Trustees shall constitute a
quorum.
Section 4. Election. Trustees shall be elected at each Annual
Meeting of Shareholders and shall continue in office until the election of
their successors. If Trustees are not elected at an annual meeting or if such
meeting is not held, Trustees may be elected at a special meeting of
Shareholders.
Section 5. Vacancies. Vacancies occurring among the Trustees (except
in case of the removal of one or more Trustees under provisions of section 2.3
of the Declaration) shall be filled by appointment by a majority of the
remaining Trustees, though less than a quorum, or by a sole remaining Trustee,
and the person so appointed shall hold office until his successor is elected at
an annual, regular, or special meeting of the Shareholders.
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Section 6. Place of Meeting. Meetings of the Trustees shall be held
at the principal office of the Trust or at such place within or without the
state of California as is fixed from time to time by resolution of the Trustees
or by written consent of all Trustees. Whenever a place other than the
principal office is fixed by resolution as the place at which future meetings
are to be held, written notice thereof shall be sent not later than the
following business day to all Trustees who are absent from the meeting at which
the resolution was adopted.
Section 7. Organization Meeting. Immediately following each Annual
Meeting of Shareholders, a regular meeting of the Trustees shall be hold for
the purposes of organizing, electing officers, and transacting other business.
Notice of such meetings need not be given.
Section 8. Regular Meetings. Regular meetings of the Trustees shall
be hold at the principal office of the Trust or at any other place within the
state of California which has been designated by the Trustees' Regulations or
from time to time by resolution of the Trustees or by written consent of all of
the Trustees on the first Wednesday, every month, at 8:00 a.m., or such other
time as may be designated by the Trustees, and notice of such regular meetings
of the Trustees is hereby dispensed with.
Section 9. Special Meetings. Special meetings of the Trustees may be
called at any time by the President or the Secretary or Assistant Secretary,
and the President shall call a special meeting at any time upon the oral
request of one Trustee. Notice of the time and place of a meeting shall be
given to each Trustee, either by telephone or by sending notice by mail or by
telegraph, charges prepaid, to his address appearing on the books of the Trust.
In case of personal service, such notice shall be so delivered at least 24
hours prior to the time fixed for the meeting. If notice is not so given by the
Secretary, it may be given by the President, or the Trustees requesting the
meeting may issue the call and give the notice.
Section 10. Adjourned Meetings A quorum of the Trustees may adjourn
any Trustees' meeting to meet again at a stated day and hour. In the absence
of a quorum, a majority of the Trustees present may adjourn from time to time
to meet again at a stated day and hour prior to the time fixed for the next
regular meeting of the Trustees. The motion for adjournment shall be noted in
the records of the Trust. Notice of the time and place of an adjourned meeting
need not be given to any Trustee if the time and place is fixed at the meeting
adjourned.
Section 11. Waiver of Notice. The transactions of any meeting of the
Trustees, however called and noticed or wherever held, shall be as valid as
though conducted at a meeting duly held after regular call and notice if a
quorum is present, and no consent, waiver or notification is necessary to
support the validity of such meetings.
Section 12. Action Without Meeting. Any action required or permitted
to be taken by the Trustees may be taken by the Trustees without a meeting, if
a majority of the Trustees shall individually or collectively consent in
writing to such action. Such written consent or consents shall be lodged with
the records of the Trust. Such action by written consent shall have the same
force and effect as if the action had been taken at a regular meeting.
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Section 13. Powers and Duties. The powers and duties of the Trustees,
in addition to the powers and duties set forth in the Declaration, are:
(a) Selection and Removal of Officers, Agents and Employees.
To select all the other officers, agents, and employees of the Trust, to
remove them at pleasure, either with or without cause, to prescribe for
them duties consistent with the Declaration and the Trustees'
Regulations, and to fix their compensation.
(b) Authorization of Signatures. From time to time by
resolution entered in the minute book of the Trust to designate the
person or persons authorized to sign or endorse contracts, documents or
other agreements on behalf of the Trust and checks, drafts, or other
orders for the payment of money, issued in the name of or payable to the
Trust. As to any action approved by resolution by the Board of Trustees
or any action within the Advisor's authority to act for the Trust, as
delegated by the Board of Trustees by resolution, any one Trustee can
execute and deliver documents on behalf of the Trust in his capacity as
Trustee and such documents shall be binding on the Trust. Further, as
to any action within the Advisor's authority to act for the Trust, as
delegated by the Board of Trustees by resolution, the Advisor, by a duly
authorized officer or officers as reflected in the corporate minutes of
the Advisor, can execute and deliver documents on behalf of the Trust
and such documents shall be binding on the Trust. No other person or
agent shall have authority to sign on behalf of the Trust.
(c) Fixing Principal Office and Place of Meetings. From time
to time to change the location of the principal office of the Trust and
from time to time to designate any place within or without the state of
California as the place at which meetings of the Trustees or of the
Shareholders shall be held.
(d) Committees. To appoint an executive committee, an audit
committee, and other committees, and to delegate to the executive
committee any of the powers and authority of the Trustees over the
business and affairs of the Trustees except the power to declare
dividends and to adopt, amend, or repeal Trustees' Regulations. The
Trustees shall have the power to prescribe the manner in which
proceedings of the executive committee, the audit committee and other
committees shall be conducted. The executive committee and the audit
committee shall be composed of three or more Trustees who are
Non-Interested Trustees.
(e) Audit Committee. An audit committee consisting of not
less than three non-interested Trustees shall meet at such times the
Trustees deem appropriate, but at least twice annually, to review the
operating expenses and procedures of the Trust with the Trust's internal
auditors and such persons as the Trustees deem appropriate. The audit
committee shall meet at least once annually with the Trust's independent
auditors to review the annual results, of the Trust's operations.
Interested Trustees are not eligible to be a member of the Audit
Committee.
(f) General Powers. Generally to exercise such other powers
as are usually vested in directors of corporations organized under the
laws of the state of California.
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Section 14. Trustees' Compensation. Non-Interested Trustees shall
receive reasonable compensation for their services as determined by the
Trustees from time to time. Such compensation shall be $400 for each regular
meeting and for each special meeting attended. Non-Interested Trustees shall,
in addition, be reimbursed for expenses incurred in attending meetings of the
Trustees. Interested Trustees shall not receive any direct compensation for
serving as a Trustee or attending meetings.
ARTICLE III
Advisory Trustees
Section 1. Appointment. The Trustees may at their option appoint not
more than 15 individuals to serve as Advisory Trustees for the Trust, whose
duties will be to review the Trust operations, investments, and policies and
make recommendations in connection therewith to the Trustees. The Trustees,
however, shall not be bound by the recommendations of the Advisory Trustees,
and the Advisory Trustees shall have no power or authority to, and no action
taken by them shall, bind or restrict the Trustees of the Trust.
Section 2. Election and Term of Office. The Advisory Trustees shall
be elected annually by the Trustees at their organization meeting. Each
Advisory Trustee shall hold office until his death, resignation, removal, or
until his successor shall be elected and qualified.
Section 3. Compensation to Advisory Trustees. The amount of
compensation to be paid to Advisory Trustees shall be fixed from time to time
by the Trustees provided that such compensation shall initially be the sum of
$400 for each quarterly meeting attended by an Advisory Trustee, or $100 per
meeting in the event the Trustees' meetings are held on a monthly basis. In
addition to the foregoing, the Trustees may authorize the payment of expenses
incurred by an Advisory Trustee to attend any meeting and may also authorize
the payment of additional compensation to any Advisory Trustee for services
actually rendered the Trust in addition to attending meetings.
Section 4. Limitation of Liability. No Advisory Trustee shall be
liable to the Trust, the Trustees hereunder, or the Shareholders in any amount
except for disclosure or use of confidential information obtained by such
Advisory Trustee in connection with his duties as an Advisory Trustee.
ARTICLE IV
Shareholders
Section 1. Quorum. The presence in person or by proxy of persons
entitled to vote a majority of the voting shares at any meeting of Shareholders
shall constitute a quorum for Shareholder action. The Shareholders present at
a duly called or held meeting at which a quorum is present may continue to do
business until adjournment notwithstanding the withdrawal of enough
Shareholders to leave less than a quorum.
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Section 2. Place of Meeting. Meetings of the Shareholders shall be
held at the principal office of the Trust or at such place within or without
the state of California as is designated by the Trustees or by the written
consent of all Shareholders entitled to vote thereat, given either before or
after the meeting and filed with the Secretary of the Trust.
Section 3. Annual Meeting. A regular annual meeting of the
Shareholders shall be held on such date and at such place to be designated in
the notice of meeting sent to Shareholders. If the day so designated is a
legal holiday the meeting shall be held at the same hour on the next succeeding
business day. The regular time and place of the regular annual meeting may be
changed by a majority of the Trustees upon reasonable notice to Shareholders.
Section 4. Special Meetings. Special meetings of the Shareholders
may be held at any time for any purpose or purposes. Such special meetings may
be called at any time by the President or by the Trustees or by any two or more
Trustees, or by one or more Shareholders holding not less than 66-2/3% of the
outstanding Shares of the Trust.
Section 5. Adjourned Meetings. Any meetings of Shareholders, whether
or not a quorum is present, may be adjourned from day to day or from time to
time by the vote of a majority of the Shares, the holders of which are either
present at the meeting or represented by proxy. The motion for adjournment
shall be lodged with the records of the Trust.
Section 6. Notice of Regular or Special Meetings. Written notice
specifying the place, day, and hour of any regular or special meeting, the
general nature of the business to be transacted, and all other matters required
by law, shall be given to each Shareholder of record entitled to vote, either
personally or by sending a copy thereof by mail or telegraph, charges prepaid,
to his address appearing on the books of the Trust. It shall be the duty of
the Secretary to give notice of each Annual Meeting of the Shareholders at
least ten days and not more than 120 days before the date on which it is to be
held. If notice is not so given by the Secretary, it may be given by any other
officer not less than seven days before such date. Whenever an officer has
been duly requested to call a special meeting of Shareholders, it shall be his
duty to fix the date and the hour thereof, which date shall be not less than
ten days and not more than 60 days after the receipt of such request, if the
request has been delivered in person, or after the date of mailing the request,
as the case may be, and to give notice of such special meeting not less than
seven days before the date on which the meeting is to be held. If the date of
such special meeting in not so fixed and notice thereof given within seven days
after the date of mailing the request, the date and hour of such meeting may be
fixed by the person or persons calling or requesting the meeting and notice
thereof shall be given by such person or persons not less than seven nor more
than 60 days before the date on which the meeting is to be held.
Section 7. Notice of Adjourned Meetings. It shall not be necessary
to give any notice of the time and place of any adjourned meeting or of the
business to be transacted thereat other than by announcement at the meeting at
which such adjournment is taken, except that when a meeting is adjourned for 30
days or more notice of the adjourned meeting shall be given as in the case of
an original meeting.
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Section 8. Proxies. The appointment of a proxy, or proxies shall be
made by an instrument in writing executed by the Shareholder or his duly
authorized agent and filed with the Registrar or Secretary of the Trust. No
proxy shall be valid after the expiration of 11 months from the date of its
execution unless the Shareholder executing it specified therein the length of
time for which it was to continue in force, which in no case shall exceed seven
years from the date of its execution. At a meeting of Shareholders all
questions concerning the qualification of voters, the validity of proxies, and
the acceptance or rejection of votes shall be decided by the Secretary of the
meeting unless inspectors of election are appointed pursuant to Section 11 of
this Article IV, in which event such inspectors shall pass upon all questions
and shall have all other duties specified in said section.
Section 9. Action Without Meeting.
(a) Action by Written Consent. Any action which is required
to be or may be taken at any annual or special meeting of Shareholders
of the Trust may be taken without a meeting, without prior notice and
without a vote, if consents in writing, setting forth the action so
taken, shall have been signed by the holders of outstanding Shares
having not less than the minimum number of votes that would be necessary
to authorize or to take such action at a meeting at which all Shares
entitled to vote thereon were present and voted; provided, however, that
prompt notice of the taking of the action without a meeting and by less
than unanimous written consent shall be given to those Shareholders who
have not consented in writing.
(b) Record Date. The record date for determining Shareholders
entitled to express consent to action in writing without a meeting shall
be fixed by the Board of Trustees of the Trust (the "Board"). Any
Shareholder seeking to have the Shareholders authorize or take action by
written consent without a meeting shall, by Written notice, request the
Board of Trustees to fix a record date. The Board shall, upon receipt
of such a request, fix the record date as the 15th day following receipt
of the request or such later date as may be specified by such
Shareholder. If the record date falls on a Saturday, Sunday or legal
holiday, the record date shall be the day next following which is not a
Saturday, Sunday or legal holiday.
(c) Date of Consent. The date for determining if an action
has been consented to by the holder or holders of Shares having the
requisite voting power to authorize or take the action specified therein
(the "Consent Date") shall be the close of business on the 31st day after
the later of (x) the record date fixed pursuant to paragraph (b) of this
Section 9 and (y) the date on which materials soliciting consents are
mailed to Shareholders if such materials are required to be mailed under
applicable law. If the Consent Date falls on a Saturday, Sunday or
legal holiday, the Consent Date shall be the day next following which is
not a Saturday, Sunday or legal holiday. On or prior to the Consent
Date, consents may be revoked by written notice (i) to the Trust, (ii)
to the Shareholder or Shareholders soliciting consents or soliciting
revocations in opposition to action by consent proposed by the Trust
(the "Soliciting Shareholders"), or (iii) to a proxy solicitor or other
agent designated by the Trust or the Soliciting Shareholder(s).
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(d) Procedures. In the event of the delivery to the Trust of
a written consent or consents purporting to authorize or take action
and/or related revocations (each such written consent and related
revocation being referred to in this Section 9 as a "Consent"), the
Secretary of the Trust shall provide for the safekeeping of such Consent
and, as soon as practicable after the Consent Date, shall conduct such
reasonable investigation as he deems necessary or appropriate for the
purpose of ascertaining the validity of such Consent and all matters
incident thereto, including, without limitation, whether the holders of
Shares having the requisite voting power to authorize or take the action
specified in the Consent have given consent; provided, however, that if
the action to which the Consent relates is the removal or replacement of
one or more members of the Board, the Secretary of the Trust shall
designate two persons, who may not be members of the Board or otherwise
affiliated with the Trust, or a firm of nationally recognized
independent inspectors of election, to serve as Inspectors with respect
to such Consent and such Inspectors shall discharge the functions of the
Secretary of the Trust under this paragraph (d). If after such
investigation the Secretary or the Inspectors (as the case may be) shall
determine that the Consent is valid, that fact shall be certified on the
records of the Trust kept for the purpose of recording the proceedings
of meeting of Shareholders, and the Consent shall be filed in such
records, at which time the Consent shall become effective as Shareholder
action as of the fifth business day following such certification.
Section 10. Voting Rights. If no future date is fixed for the
determination of the Shareholders entitled to vote at any meeting of
Shareholders, only persons in whose names Shares entitled to vote stand on the
share records of the Trust on the day of any meeting of Shareholders shall be
entitled to vote at such meeting.
Section 11. Inspectors of Election. In advance of any meeting of
Shareholders the Trustees may appoint inspectors of election to act at the
meeting or any adjournment thereof. If inspectors of election are not so
appointed, the chairman of any meeting of Shareholders may and, on the request
of any Shareholder or his proxy, shall appoint inspectors of election at the
meeting. The number of inspectors shall be either one or three. If appointed
at the meeting on the request of one or more Shareholders or proxies, a
majority of Shares present shall determine whether one or three inspectors are
to be appointed. In case any person appointed as inspector fails to appear or
fails or refuses to act, the vacancy may be filled by appointment made by the
Trustees in advance of the convening of the meeting or at the meeting by the
person acting as Chairman. The inspectors of election shall determine the
number of Shares outstanding, the Shares represented at the meeting, the
existence of a quorum, the authenticity, validity, and effect of proxies,
receive votes, ballots, or consents, hear and determine all challenges and
questions in any way arising in connection with the right to vote, count, and
tabulate all votes or consents determine the results, and do such acts as may
be proper to conduct the election or vote with fairness to all Shareholders.
If there are three inspectors of election, the decision, act, or certificate of
a majority is effective in all respects as the decision, act, or certificate of
all. On request of the Chairman of the meeting or of any Shareholder or his
proxy, the inspector shall make a report in writing of any challenge or
question or matter determined by them and execute a certificate of any facts
found by them.
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Section 12. Excess Shares. No person shall at any time be or become
the owner of more than 9.8% of the outstanding shares of the Trust. Any shares
held in excess of this limit shall be "Excess Shares" which shall not be
entitled to voting rights or dividends (until they cease to become Excess
Shares) and are subject to redemption by the Trustees. This provision can be
waived or suspended at any time by the formal action of the Trustees acting in
accordance with these Regulations.
ARTICLE V
Miscellaneous
Section 1. Record Dates and Closing of Transfer Books. From time to
time the Trustees may fix a future date, not exceeding 50 days preceding: (i)
the date of any meeting of Shareholders; (ii) the date fixed for the payment of
any dividend or distribution or for the allotment of rights; or (iii) the date
any change or conversion or exchange of Shares is to go into effect, as the
record date for the determination of the Shareholders entitled to notice of and
to vote at any such meeting or to receive any such dividend or distribution or
any allotment of rights or to exercise the rights with respect to any such
change, conversion or exchange of Shares. If a time is so fixed, only
Shareholders of record on the date so fixed shall be entitled to notice of and
to vote at such meeting or to receive such dividend or distribution or
allotment of rights or to exercise such rights, as the case may be,
notwithstanding any transfer of Shares on the books of the Trust after the
record date so fixed. The Trustees may close the books of the Trust against
transfers of Shares during the whole or any part of the period between the
record date and the date so fixed for the meeting, payment, distribution,
allotment, change or exercise of rights.
Section 2. Inspection of Trust Records. The share register or
duplicate share register, the books of account, and the minutes of the
proceedings of the Shareholders and Trustees shall be open to inspection upon
the written demand of any Shareholder at any reasonable time and for a purpose
reasonably related to his interests as a Shareholder and shall be exhibited at
any time when required by the demand of 10% or more of the Shares represented
at any Shareholders' meeting. Such inspection may be made in person or by an
agent or attorney and shall include the right to make extracts. Demand of
inspection other than at a Shareholders' meeting shall be made in writing to
the President, Secretary, or Assistant Secretary of the Trust.
Section 3. Inspection of Trustees' Regulations. The Trustees shall
keep at the principal office for the transaction of business of the Trust
the original or a copy of the Trustees' Regulations as amended to date,
certified by the Secretary, which Regulations shall be open to inspection by
the Shareholders at all reasonable times during office hours.
Section 4. Representation of Shares of Corporations. The President
or any Vice President and the Secretary or Assistant Secretary of the Trust,
acting either in person or by a proxy or proxies designated in a written
instrument duly executed by said officers, are authorized to vote, represent,
and exercise on behalf of the Trust all rights incident to any shares of any
corporation standing in the name of the Trust.
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ARTICLE VI
Seal
The Trust may elect to have a seal containing the words: "INCOME
OPPORTUNITY REALTY TRUST, a California business trust, organized December 14,
1984, California." However, no seal is necessary to effect contracts,
transfers or other documents on behalf of the Trust.
ARTICLE VII
Amendments
Section 1. By Shareholders. Except for any change for which a
larger number is specifically required, these Trustees' Regulations may be
amended or repealed, or new or additional Trustees' Regulations may be adopted
by the vote or written consent or Shareholders entitled to exercise a majority
of the voting power of the Trust.
Section 2. By Trustees. These Trustees, Regulations may be amended
or repealed, or new or additional Trustees, Regulations may be adopted by the
vote or written consent of the Trustees, but the Trustees may not decrease the
authorized number of Trustees below five or increase the authorized number of
Trustees above 15 without the vote or written consent of Shareholders entitled
to exercise a majority of the voting power of the Trust. The power hereby
delegated may be revoked by the vote or written consent of Shareholders
entitled to exercise a majority of the voting power of the Trust.
ARTICLE VIII
Definitions
All terms defined in the Declaration of Trust dated December 14, 1984,
as amended to date, shall have the same meaning when used in these Trustees'
Regulations.
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<TABLE>
<S> <C>
No person is authorized to give any information or
to make any representation not contained in this
Proxy Statement/Prospectus and, if given or made,
such information or representation should not be
relied upon as having been authorized. This Proxy
Statement/Prospectus constitutes neither an offer
to sell, nor a solicitation of an offer to
purchase, the securities offered by this Proxy
Statement/Prospectus, nor the solicitation of a
proxy, in any jurisdiction to or from any person
to or from whom it is unlawful to make such offer
or solicitation of an offer or proxy solicitation INCOME OPPORTUNITY REALTY
in such jurisdiction. TRUST
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PROXY STATEMENT
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TABLE OF CONTENTS
INCOME OPPORTUNITY REALTY
Page INVESTORS, INC.
----
Summary . . . . . . . . . . . . . . . . . . . 9 ___________________
Certain Risk Factors . . . . . . . . . . . . 17 PROSPECTUS
General Shareholder ___________________
Information . . . . . . . . . . . . . . . 23
Proposed Incorporation Procedure . . . . . . 26
Market Prices of the Shares; Dividends . . . 63
Business and Properties of IORI Nevada . . . 66 791,444 Shares
Business and Properties of the Trust . . . . 68
Selected Historical Consolidated of Common Stock
Financial Information . . . . . . . . . . 82
Management's Discussion and Analysis of (par value $0.01 per share)
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . 84
Legal Matters . . . . . . . . . . . . . . . . 89
Experts . . . . . . . . . . . . . . . . . . . 89 ___________, 1995
</TABLE>
_________________
During the 25-day period following the effective time of the Merger, all
dealers effecting transactions in the shares of Common Stock of IORI Nevada,
whether or not participating in this distribution, may be required to deliver a
copy of this Proxy Statement/Prospectus.
<PAGE> 220
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation and By-Laws of IORI Nevada
provide, in substance, that IORI Nevada shall indemnify its directors,
officers, and employees to the fullest extent permitted by the Nevada Revised
Statutes (the "NRS") and other applicable law. See "The Management Liability
Provision" above. Section 78.751 of the Nevada Revised Statutes permits
indemnification of officers, directors, employees and agents under certain
conditions and subject to certain limitations. Pursuant to the NRS, a
corporation may indemnify persons for expenses related to an action, suit or
proceeding, except an action by or in the right of the corporation, by reason
of the fact that such person is or was a director, officer, employee or agent,
if such person acted in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the corporation, and with
respect to any criminal action or proceeding, if such person had no reasonable
cause to believe his conduct was unlawful. The expenses indemnified against in
this provision include attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with the action, suit
or proceeding. The NRS further provides that a corporation may indemnify
persons for attorneys' fees related to an action, suit or proceeding by or in
the right of the corporation to procure a judgment in its favor by reason of
the fact that such person is or was a director, officer, employee or agent, if
such person acted in good faith and in a manner which he reasonably believed to
be in or not opposed to the best interests of the corporation. The corporation
may also indemnify directors for amounts paid in judgments and settlements in
such a suit, but only if ordered by a court after determining that the person
is "fairly and reasonably" entitled to indemnity.
Currently, each of the Trustees of the Trust has been offered
contractual indemnification to the fullest extent permitted by the Declaration
of Trust or to the fullest extent not prohibited under applicable law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
The following exhibits are filed as part of this Registration Statement:
Exhibit
Number Description of Document
------- -----------------------
2.1 Form of Agreement and Plan of Merger by and between Income
Opportunity Realty Corporation and Income Opportunity Realty
Investors, Inc. (included herewith as Appendix B)
II-1
<PAGE> 221
3.1 Articles of Incorporation of Income Opportunity Realty
Investors, Inc. (included herewith as Appendix C)
3.2 By-Laws of Income Opportunity Realty Investors, Inc. (included
herewith as Appendix D)
*5.1 Opinion of Andrews & Kurth L.L.P., counsel to the Registrant,
regarding legality of the Common Stock being offered
*5.2 Opinion of Kummer Kaempfler Bonner & Renshaw regarding
legality of the Common Stock being offered
*8.1 Opinion of Andrews & Kurth L.L.P. regarding tax matters
10.1 Advisory Agreement dated as of March 7, 1995 between Income
Opportunity Realty Trust and Basic Capital Management, Inc.
(incorporated by reference to Appendix A of Income Opportunity
Realty Trust's Proxy Statement dated January 18, 1995 for the
Annual Meeting of Shareholders To Be Held on March 7, 1995).
10.2 Brokerage Agreement dated December 1, 1992 between Income
Opportunity Realty Trust and Carmel Realty, Inc. (incorporated
by reference to Exhibit No. 10.5 to Income Opportunity Realty
Trust's Annual Report on Form 10-K for the year ended December
31, 1992).
10.3 Brokerage Agreement dated as of February 11, 1994, between
Income Opportunity Realty Trust and Carmel Realty, Inc.
(incorporated by reference to Exhibit No. 10.3 to Income
Opportunity Realty Trust's Annual Report on Form 10-K for the
year ended December 31, 1993).
10.4 Brokerage Agreement dated as of February 11, 1995, between
Income Opportunity Realty Trust and Carmel Realty, Inc.
(incorporated by reference to Exhibit No. 10.4 to Income
Opportunity Realty Trust's Annual Report on Form 10-K for the
year ended December 31, 1994).
23.1 Consent of BDO Seidman, LLP, independent accountants (Pages
S-1 and S-2 hereto)
23.2 Consent of Andrews & Kurth L.L.P. (included as part of Exhibit
5.1 and Exhibit 8.1)
23.3 Consent of Kummer Kaempfler Bonner & Renshaw (included as part
of Exhibit 5.2)
24.1 Power of Attorney (included with signature pages, pages II - 5
and II - 6 hereto)
27.0 Financial Data Schedule
99.1 Form of Proxy Card
_______________
*To be filed by Amendment
(b) Financial Statement Schedules:
II-2
<PAGE> 222
Schedule
Number Description of Schedule
- -------- -----------------------
III Real Estate and Accumulated Depreciation
IV Mortgage Loans on Real Estate
(c) Not applicable
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration
Statement:
(1) To include any Prospectus required by Section
10(a)(3) of the Securities Act of 1933 (the "Act");
(2) To reflect in the Prospectus any facts or events
arising after the effective date of the Registration
Statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
and
(3) To include any material information with respect to
the plan of distribution not previously disclosed in
the Registration Statement or any material change to
such information in the Registration Statement;
(b) That, for the purpose of determining any liability under the
Act, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof;
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering (in the event the
Incorporation Procedure is not approved by the shareholders of
the Trust);
(d) That, prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a
part of this Registration Statement by any person or party who
is deemed to be an underwriter within the meaning of Rule
145(c), such reoffering prospectus will contain the
information called for by the applicable registration form
with respect to reofferings by persons who may be deemed
II-3
<PAGE> 223
underwriters, in addition to the information called for by the
other Items of the applicable form;
(e) That every Prospectus (i) that is filed pursuant to paragraph
(d) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the Registration
Statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability
under the Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof;
(f) Insofar as indemnification for liabilities arising under the
Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by
a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(g) To respond to requests for information that is incorporated by
reference into the Prospectus pursuant to Items 4, 10(b), 11
or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first-class
mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date
of the Registration Statement through the date of responding
to the request; and
(h) To supply by means of a post-effective amendment all
information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and
included in the registration statement when it became
effective.
II-4
<PAGE> 224
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on August 28, 1995.
INCOME OPPORTUNITY REALTY INVESTORS,
INC.
By:
------------------------------------
Randall M. Paulson, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Randall M. Paulson his attorney-in-fact
and agent, with full power of substitution, for him in any and all capacities,
to sign any amendments (including, without limitation, post-effective
amendments) to this Registration Statement on Form S-4, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, and hereby ratifying
and confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ RANDALL M. PAULSON President (Principal Executive August 28, 1995
- ------------------------------ Officer)
Randall M. Paulson
/s/ THOMAS A. HOLLAND Executive Vice President and August 28, 1995
- ------------------------------ Chief Financial Officer
Thomas A. Holland (Principal Financial and
Accounting Officer)
</TABLE>
DAL02:3882.1 II-5
<PAGE> 225
<TABLE>
<S> <C> <C>
Director
- -----------------------------------
Geoffrey C. Etnire
/s/ JOHN P. PARSONS Director August 28, 1995
- -----------------------------------
John P. Parsons
/s/ BENNETT B. SIMS Director August 28, 1995
- -----------------------------------
Bennett B. Sims
/s/ TED P. STOKELY Director August 28, 1995
- -----------------------------------
Ted P. Stokely
/s/ MARTIN L. WHITE Director August 28, 1995
- -----------------------------------
Martin L. White
/s/ EDWARD G. ZAMPA Director August 28, 1995
- -----------------------------------
Edward G. Zampa
</TABLE>
II-6
<PAGE> 226
SCHEDULE III
INCOME OPPORTUNITY REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Cost
Capitalized
Subsequent to Gross Amounts of Which Carried
Initial Cost to Trust Acquisition at End of Year
----------------------- --------------- --------------------------------------
Building & Building & (1)
Property/Location Encumbrances Land Improvements Improvements Land Improvements Total
- ---------------------- ------------ --------- ------------ --------------- ----------- ------------ -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Properties Held For Sale
- ------------------------
APARTMENTS
- ----------
Cedars................. $ - $ 198 $ 792 $ - $ 198 $ 792 $ 990
Irving, Texas
Eastpoint.............. 1,922 1,181 2,749 321 1,181 3,070 4,251
Mesquite, Texas
Plumtree............... 5,875 1,751 5,038 824 1,751 5,862 7,613
Martinez, California
Treehouse.............. 1,886 375 2,124 185 375 2,309 2,684
San Antonio, Texas
Porticos............... 10,084 2,897 11,588 50 2,897 11,638 14,535
Milwaukee, Wisconsin
OFFICE BUILDINGS
- ----------------
Saratoga............... - 2,577 10,306 388 2,583 10,688 13,271
Saratoga, California
Town Center Plaza...... - 554 2,214 99 554 2,313 2,867
Boca Raton, Florida
----------- -------- -------- ------------- ----------- ------------ ----------
$ 19,767 $ 9,533 $ 34,811 $ 1,867 $ 9,539 $ 36,672 46,211
=========== ======== ======== ============= =========== ============
Allowance for estimated
losses............... (121)
----------
46,090
==========
</TABLE>
<TABLE>
<CAPTION>
Life on Which
Depreciation
In Latest
Statement
Accumulated Date of Date of Operation
Depreciation Construction Acquired is Computed
------------ ------------ -------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Properties Held For Sale
- ------------------------
APARTMENTS
- ----------
Cedars................. $ - 1964 12/94 40 years
Irving, Texas
Eastpoint.............. 998 1985 01/86 5 - 40 years
Mesquite, Texas
Plumtree............... 1,642 1986 02/86 5 - 40 years
Martinez, California
Treehouse.............. 358 1975 09/89 5 - 40 years
San Antonio, Texas
Porticos............... 929 1973 11/91 40 years
Milwaukee, Wisconsin
OFFICE BUILDINGS
- ----------------
Saratoga............... 886 1986 12/91 3 - 40 years
Saratoga, California
Town Center Plaza...... 242 1985 03/91 5 - 40 yea
Boca Raton, Florida --------
$ 5,055
========
Allowance for estimated
losses...............
</TABLE>
- --------------------------
(1) The aggregate cost for Federal income tax purposes is $45,587.
II-7
<PAGE> 227
SCHEDULE III
(Continued)
INCOME OPPORTUNITY REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
1994 1993 1992
-------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of Real Estate
Balance at January 1,.................... $ 45,040 $ 44,906 $ 46,681
Additions
Improvements.................. 184 134 191
Foreclosure................... 990 - -
Other......................... (3) - 31
Deductions
Sale of real estate........... - - (1,997)
-------------- ------------- --------------
Balance at December 31,.................. $ 46,211 $ 45,040 $ 44,906
============== ============= ==============
Reconciliation of Accumulated
Depreciation
Balance at January 1,.................... $ 4,088 $ 3,139 $ 2,370
Additions
Depreciation.................. 967 949 910
Deductions
Sale of real estate........... - - (141)
-------------- ------------- --------------
Balance at December 31,.................. $ 5,055 $ 4,088 $ 3,139
============== ============= ==============
</TABLE>
II-8
<PAGE> 228
SCHEDULE IV
INCOME OPPORTUNITY REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
December 31, 1994
<TABLE>
<CAPTION>
Final Carrying
Interest maturity Prior Face amount amounts
Description rate date Periodic payment terms liens of mortgage of mortgage (1)
- ------------------------- -------- -------- ----------------------------- ---------- ----------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
WRAPAROUND MORTGAGE NOTE
Twin Oaks................ 10.00% 08/98 Monthly interest - only payments $ 813 $ 2,000 $ 2,000
Secured by shopping due through maturity, at which ======= ========== ========
center in Joliet, IL. time the entire principal balance
and all accrued and unpaid
interest are due.
Interest Receivable 17
Discount on Notes
Receivable (43)
--------
1,974
Allowance for Estimated
Losses -
--------
$ 1,974
========
</TABLE>
<TABLE>
<CAPTION>
Principal amount of
loans subject to
delinquent principal
Description or interest
- ------------------------- -------------------
<S> <C>
WRAPAROUND MORTGAGE NOTE
Twin Oaks................ $ -
Secured by shopping =============
center in Joliet, IL.
Interest Receivable
Discount on Notes
Receivable
Allowance for Estimated
Losses
</TABLE>
- ------------------------
(1) The aggregate cost for Federal income tax purposes is $3,135.
II-9
<PAGE> 229
SCHEDULE IV
(Continued)
INCOME OPPORTUNITY REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Balance at January 1,.......... $ 3,050 $ 3,050 $ 2,000
Additions
New mortgage loans....... - - 1,050
Deductions
Foreclosure.............. (1,050) - -
--------- --------- -----------
Balance at December 31,........ $ 2,000 $ 3,050 $ 3,050
========= ========= ===========
</TABLE>
II-10
<PAGE> 230
Consent of Independent Certified Public Accountants
Board of Directors of
Income Opportunity Realty Investors, Inc.
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated August 25, 1995, relating to the
financial statements of Income Opportunity Realty Investors, Inc. which is
contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
Dallas, Texas
August 28, 1995
S-1
<PAGE> 231
Consent of Independent Certified Public Accountants
Board of Trustees of
Income Opportunity Realty Trust
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated February 28, 1995, relating to the
consolidated financial statements and schedules of Income Opportunity Realty
Trust, which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
Dallas, Texas
August 28, 1995
S-2
<PAGE> 232
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
2.1 Form of Agreement and Plan of Merger by and between Income Opportunity
Realty Corporation and Income Opportunity Realty Investors, Inc. (included
herewith as Appendix B)
3.1 Articles of Incorporation of Income Opportunity Realty Investors, Inc. (included
herewith as Appendix C)
3.2 By-Laws of Income Opportunity Realty Investors, Inc. (included herewith as Appendix D)
*5.1 Opinion of Andrews & Kurth L.L.P., counsel to the Registrant, regarding
legality of the Common Stock being offered
*5.2 Opinion of Kummer Kaempfler Bonner & Renshaw regarding legality of
the Common Stock being offered
*8.1 Opinion of Andrews & Kurth L.L.P. regarding tax matters
10.1 Advisory Agreement dated as of March 7, 1995 between Income
Opportunity Realty Trust and Basic Capital Management, Inc.
(incorporated by reference to Appendix A of Income Opportunity
Realty Trust's Proxy Statement dated January 18, 1995 for the
Annual Meeting of Shareholders To Be Held on March 7, 1995).
10.2 Brokerage Agreement dated December 1, 1992 between Income Opportunity
Realty Trust and Carmel Realty, Inc. (incorporated by reference to Exhibit
No. 10.5 to Income Opportunity Realty Trust's Annual Report on Form 10-K
for the year ended December 31, 1992)
10.3 Brokerage Agreement dated as of February 11, 1994, between Income
Opportunity Realty Trust and Carmel Realty, Inc. (incorporated by
reference to Exhibit No. 10.3 to Income Opportunity Realty Trust's
Annual Report on Form 10-K for the year ended December 31, 1993)
10.4 Brokerage Agreement dated as of February 11, 1995, between Income
Opportunity Realty Trust and Carmel Realty, Inc. (incorporated by
reference to Exhibit No. 10.4 to Income Opportunity Realty Trust's
Annual Report on Form 10-K for the year ended December 31, 1994)
23.1 Consent of BDO Seidman, LLP, independent accountants
(Pages S-1 and S-2 hereto)
23.2 Consent of Andrews & Kurth L.L.P. (included as part of Exhibit 5.1
and Exhibit 8.1)
</TABLE>
* To be filed by Amendment
<PAGE> 233
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
23.3 Consent of Kummer Kaempfler Bonner & Renshaw (included as part of
Exhibit 5.2)
24.1 Power of Attorney (included with signature pages,
pages II - 5 and II - 6 hereto)
27.0 Financial Data Schedule
99.1 Form of Proxy Card
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1995
<PERIOD-START> JAN-01-1994 JAN-01-1995
<PERIOD-END> DEC-31-1994 JUN-30-1995
<CASH> 232 447
<SECURITIES> 0 0
<RECEIVABLES> 1,974 1,980
<ALLOWANCES> 121 121
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 46,211 46,332
<DEPRECIATION> 5,055 5,576
<TOTAL-ASSETS> 49,035 47,860
<CURRENT-LIABILITIES> 0 0
<BONDS> 20,717 20,413
<COMMON> 0 0
0 0
0 0
<OTHER-SE> 25,572 24,462
<TOTAL-LIABILITY-AND-EQUITY> 49,035 47,860
<SALES> 0 0
<TOTAL-REVENUES> 6,558 1,950
<CGS> 0 0
<TOTAL-COSTS> 3,425 1,068
<OTHER-EXPENSES> 967 264
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,911 466
<INCOME-PRETAX> (287) (880)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (287) (880)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (287) (880)
<EPS-PRIMARY> (.36) (1.11)
<EPS-DILUTED> (.36) (1.11)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
SOLICITATION OF PROXIES
THIS PROXY STATEMENT/PROSPECTUS IS FURNISHED TO SHAREHOLDERS TO
SOLICIT PROXIES ON BEHALF OF THE TRUSTEES OF THE TRUST. The cost of soliciting
proxies will be borne by the Trust. Trustees and officers of the Trust may,
without additional compensation, solicit by mail, in person or by
telecommunication. In addition, the Trust has retained [Beacon Hill Partners
("Beacon Hill")] to assist in the solicitation of proxies. An agreement with
[Beacon Hill] provides that [Beacon Hill] will distribute materials relating to
the solicitation of proxies, contact Shareholders to confirm receipt of such
materials and answer questions relating thereto. [Beacon Hill] is to be paid a
base fee of [$2,000] plus out-of-pocket expenses and is to be indemnified
against all liability incurred as a result of any material omission or
misstatement in any of the materials so distributed.
By Order of the Board of Trustees
By: ______________________________
Randall M. Paulson, President
THE BOARD OF TRUSTEES OF THE TRUST RECOMMENDS THAT YOU VOTE FOR THE
APPROVAL OF THE INCORPORATION PROCEDURE AND RATIFICATION OF CERTAIN COMPONENTS
THEREOF BY VOTING FOR THE INCORPORATION PROPOSAL ON THE ENCLOSED PROXY.
REGARDLESS OF HOW YOU WISH TO VOTE YOUR SHARES, YOUR BOARD OF TRUSTEES URGES
YOU TO PROMPTLY SIGN, DATE AND MAIL THE ENCLOSED PROXY.
<PAGE> 2
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER _____, 1995
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
TRUSTEES OF INCOME OPPORTUNITY REALTY TRUST
The undersigned hereby appoints Thomas A. Holland and Robert A.
Waldman, and each of them, Proxies, with full power of substitution in each of
them, in the name, place and stead of the undersigned, to vote at the Special
Meeting of Shareholders of INCOME OPPORTUNITY REALTY TRUST, to be held on
October ____, 1995, at 2:00 p.m. (Dallas time), or at any adjournments thereof,
according to the number of votes that the undersigned would be entitled to vote
if personally present, upon the following matter:
APPROVAL OF THE PROPOSED INCORPORATION PROCEDURE TO CONVERT THE TRUST
FROM A SELF-LIQUIDATING CALIFORNIA BUSINESS TRUST TO A NEVADA
CORPORATION WITH PERPETUAL DURATION (AND RATIFICATION OF THE
INCORPORATION OF A SUBSIDIARY OF THE TRUST IN CONNECTION THEREWITH):
FOR AGAINST ABSTAIN
------- ------- -------
- --------------------------------------------------------------------------------
(continued and to be signed and dated on the other side)
<PAGE> 3
[reverse]
(continued from other side)
THE BOARD OF TRUSTEES OF INCOME OPPORTUNITY
REALTY TRUST RECOMMENDS A VOTE FOR THE PROPOSED INCORPORATION PROCEDURE.
YOUR PROXY IS IMPORTANT. PLEASE INDICATE YOUR SUPPORT FOR THE
PROPOSED INCORPORATION PROCEDURE ABOVE AND SIGNING, DATING AND MAILING
THIS CARD TODAY IN THE ENCLOSED ENVELOPE. IF NOT OTHERWISE MARKED
ABOVE, YOUR PROXY WILL BE VOTED FOR THE PROPOSED INCORPORATION
PROCEDURE. THIS PROXY REVOKES ANY AND ALL PREVIOUS PROXIES.
Dated _________________________, 1995
X_________________________________________
Signature
X_________________________________________
Signature
__________________________________________
Title
Please sign exactly as name appears herein.
When Shares are held by joint tenants, both
should sign. When signing as attorney,
executor, administrator, trustee or guardian
please give full title as such. When signing
for a corporation please sign full corporate
name by an authorized officer. When signing
for a partnership please sign partnership
name by an authorized person. If Shares are
held in more than one capacity, this proxy
shall be deemed valid for all Shares held in
all capacities.
PLEASE SIGN, DATE AND MAIL THIS PROXY IMMEDIATELY
