<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1996
REGISTRATION STATEMENT NO. 33-62211
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 4
TO
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 75-2615944
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
</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. / /
---------------------
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> <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;
PROPOSED INCORPORATION
PROCEDURE -- 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, -- Amendment Provisions;
Material 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.................................. PROPOSED INCORPORATION
PROCEDURE -- 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............................... PROPOSED INCORPORATION
PROCEDURE -- 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; PROPOSED INCORPORATION
PROCEDURE -- Comparison of the Securities
of IORI Nevada and the Trust -- Listing
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
LOCATION IN
ITEM NUMBER AND CAPTION PROXY STATEMENT/PROSPECTUS
------------------------------------------ ------------------------------------------
<S> <C> <C> <C>
13. Incorporation of Certain Information by
Reference................................. INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE
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................................. PROPOSED INCORPORATION
PROCEDURE -- Replacement of the Fixed-Life
Trust with a Perpetual-Life
Corporation, -- Management after
Incorporation Procedure; BUSINESS AND
PROPERTIES OF THE TRUST -- The Advisor;
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
INFORMATION; MARKET PRICES OF THE SHARE;
DIVIDENDS; MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS --
Introduction, -- Liquidity and Capital
Resources, -- 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; CERTAIN
RISK FACTORS -- 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;
BUSINESS AND PROPERTIES OF THE TRUST --
Involvement in Certain Legal
Proceedings, -- Certain Business
Relationships and Related Party
Transactions; PROPOSED INCORPORATION
PROCEDURE -- Comparison of the Securities
of IORI Nevada and the
Trust -- 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
INCOME OPPORTUNITY REALTY TRUST
10670 NORTH CENTRAL EXPRESSWAY
SUITE 300
DALLAS, TEXAS 75231
February 14, 1996
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
March 15, 1996, 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 into a Nevada
corporation (the "Incorporation Procedure"). The Incorporation Procedure, if
approved, will result in a fundamental change to Shareholders in the nature of
their investment. The new corporation, unlike the Trust, would not be subject to
significant restrictions on new investments and would not be subject to
mandatory liquidation provisions.
The Incorporation Procedure will also have the following effects: (a) more
transactions with insiders will be permitted and, as a result, insiders may
receive an increase in fees and commissions payable to them; (b) the directors
will be indemnified for liability arising from gross negligence or reckless
disregard of duty; (c) certain anti-takeover defenses permitted pursuant to
Nevada law will be adopted; and (d) certain protections available under
California law will be eliminated. As discussed more fully in the attached Proxy
Statement/Prospectus, the anti-takeover defenses to be adopted 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 terms of its Declaration of Trust subject the Trust to certain
limitations on its ability to make new investments. Since October 24, 1991, the
Trust has been constrained from reinvesting proceeds received from sales or
refinancings of its existing properties into new properties. Beginning on
October 24, 1996, the Trust will be similarly prevented from reinvesting amounts
of principal and interest received from the Trust's lone mortgage note
receivable. As a result of such limitations and the original intention of the
Trust's Board of Trustees to liquidate the assets of the Trust by the end of
1996, the current Board of Trustees has been, and will continue to be,
considering the sale or other disposition of the Trust's assets. In the event of
such liquidating sales, the Shareholders might begin to receive, over time,
diminishing distributions from operating activities and, occasionally,
substantial distributions of liquidation proceeds.
The Declaration of Trust, however, specifically allows the Board of
Trustees to hold on to the Trust's investments beyond 1996 if, in their best
judgment, market conditions or other circumstances so dictate.
Based on current market conditions, the Board of Trustees does not
anticipate the liquidation of the Trust's assets in the foreseeable future.
Although the Board of Trustees has neither performed nor had performed a formal
liquidation analysis (due primarily to the expense required) and has not
identified potential acquisition possibilities (due to the Trust's limitations
on acquiring new properties), the Board believes that it would be beneficial to
the Shareholders for the Trust to forego mandatory liquidation in favor of the
flexibility to buy and sell properties (and make distributions) as market
conditions indicate.
Consequently, the Board of Trustees recommends that (i) the current charter
of the Trust be changed to eliminate restrictions on new investments and
provisions regarding mandatory liquidation and (ii) the Trust do business as a
corporation rather than a trust. As stockholders of a Nevada corporation that is
not constrained by mandatory liquidation provisions, it is unlikely in the near
term that you would receive liquidating distributions, since corporations,
unlike the current Trust, generally have no predetermined lifespan. The Board of
Trustees nonetheless believes, although it cannot provide you with assurance,
that the Incorporation Procedure will allow Shareholders the opportunity to
receive greater total distributions over the long term than Shareholders would
receive under the current provisions of the Declaration of Trust.
<PAGE> 5
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.
Except as discussed above, 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" in the Proxy
Statement/Prospectus attached hereto), 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) introduction of more
clearly defined guidelines and extensive coverage regarding director liability
and indemnification, (ii) inclusion of more extensive safeguards for
stockholders in connection with a hostile acquisition or change in control of
IORI Nevada and (iii) 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. The
attached Proxy Statement/Prospectus provides a detailed description of the
Incorporation Procedure. Please give this information your careful attention.
The Trustees have 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,
/s/ RANDALL M. PAULSON,
---------------------------
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 March 15, 1996, 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, pursuant to the terms of its Declaration of Trust, is subject to certain
restrictions on its ability to make new investments and is subject to certain
self-liquidating provisions, as described under "Proposed Incorporation
Procedure -- Replacement of the Fixed-Life Trust with a Perpetual-Life
Corporation") 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.
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, (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.
<PAGE> 7
Only Shareholders of record at the close of business on February 7, 1996
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: February 14, 1996.
BY ORDER OF THE BOARD OF TRUSTEES OF
INCOME OPPORTUNITY REALTY TRUST
/S/ Robert A. Waldman
------------------------------------
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.
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.
2
<PAGE> 8
PROXY STATEMENT/PROSPECTUS
<TABLE>
<CAPTION>
PROXY STATEMENT PROSPECTUS
- ------------------------------------------ ------------------------------------------
<S> <C>
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 Be Held 791,444 Shares of Common Stock, par value
on March 15, 1996 $.01 per share
</TABLE>
---------------------
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 into a
Nevada corporation (the "Incorporation Procedure"). The Trust's Declaration of
Trust subjects the Trust to certain limitations regarding new investments and
contemplates the liquidation of the Trust by the end of 1996. The Board of
Trustees, which has the ability to postpone the liquidation of the Trust if, in
its best judgment, market conditions or other circumstances dictate otherwise,
proposes to eliminate the Trust's limitations regarding new investments and
mandatory liquidation.
The elimination of the limitations on new investments and mandatory
liquidation provisions, coupled with the change in form of the Trust from a
trust to a corporation, will result in significant changes to Shareholders.
Although there can be no assurance when the liquidation of the Trust would be
begun or completed. Shareholders of the Trust would probably receive
distributions from the Trust of the net liquidation proceeds together with
diminishing distributions (following liquidation sales) from operating
activities. Following the Incorporation Procedure, stockholders of the Nevada
corporation would probably receive only distributions based on operating
activities, since the corporation will not have a predetermined lifespan.
The Incorporation Procedure will also have the following effects: (a) more
transactions with insiders will be permitted and, as a result, insiders may
receive an increase in fees and commissions payable to them; (b) the directors
of the Nevada corporation, unlike the Trustees of the Trust, will be indemnified
for liability arising from gross negligence or reckless disregard of duty; (c)
certain anti-takeover defenses permitted pursuant to Nevada law will be adopted;
and (d) certain protections available under California law will be eliminated.
As discussed more fully herein, the anti-takeover defenses to be adopted could
have the effect of rendering more difficult or discouraging a future attempt to
acquire control of the Nevada corporation 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 the Nevada corporation might
desire such a change in control. The Incorporation Procedure, therefore, might
be viewed as limiting Shareholders' rights.
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. ("IORI NEVADA"), SEE
"SUMMARY -- CERTAIN RISK FACTORS" BEGINNING ON PAGE 5 AND "CERTAIN RISK FACTORS"
BEGINNING ON PAGE 14 HEREIN. IN PARTICULAR, SHAREHOLDERS SHOULD CONSIDER THE
FOLLOWING FACTORS:
- - THE ELIMINATION OF THE LIQUIDATION PROVISIONS IN THE DECLARATION OF TRUST
COULD CAUSE A REDUCTION IN DISTRIBUTIONS TO SHAREHOLDERS.
- - THE ELIMINATION OF THE LIQUIDATION PROVISIONS IN THE DECLARATION OF TRUST AND
AMENDMENTS TO THE CURRENT ADVISORY AGREEMENT IS LIKELY TO INCREASE FEES AND
COMMISSIONS PAID TO AFFILIATES OF THE TRUST.
- - THE INCORPORATION PROCEDURE WILL RESULT IN A FUNDAMENTAL CHANGE TO
SHAREHOLDERS IN THE NATURE OF THEIR INVESTMENT.
---------------------
THE COMMON STOCK OF IORI NEVADA 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
<PAGE> 9
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The Special Meeting to vote on the Incorporation Procedure will be held at
2:00 p.m., Dallas time, on March 15, 1996, 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
February 14, 1996.
Although it has not sought to identify potential property acquisition
candidates and has not performed or had performed a liquidation analysis, the
Board of Trustees believes, based on discussions with management and on its
knowledge of the general economic and financial conditions to which the Trust
and its assets are subject, that the proceeds that might be realized from the
reinvestment of sales proceeds in new properties by IORI Nevada could, in the
long term, be more valuable to Shareholders than the proceeds that could be
realized from an immediate liquidation of the Trust's assets or mandatory
liquidation over time of such assets. No assurances, however, can be given to
such effect.
THE BOARD OF TRUSTEES RECOMMENDS THAT YOU VOTE FOR THE INCORPORATION
PROCEDURE.
---------------------
The date of this Proxy Statement/Prospectus is February 14, 1996.
2
<PAGE> 10
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
SUMMARY............................................................................... 5
CERTAIN RISK FACTORS.................................................................. 14
Potential Reductions in Distributions to Shareholders............................... 14
Elimination of the Trust's Liquidation Provisions................................... 14
Fees to Affiliates.................................................................. 14
Effect of Certain Super-Majority Voting Provisions of IORI Nevada................... 15
Interests of Certain Persons in the Incorporation Procedure......................... 15
Elimination of Charter Limitation on Operating Expenses............................. 15
Certain Anti-takeover Effects....................................................... 16
Authorization to Issue Preferred Stock.............................................. 17
Other Potential Conflicts of Interest............................................... 17
Transactions with Related Parties................................................... 17
Market Price of IORI Nevada Stock................................................... 18
Certain Risk Factors Associated with Real Estate.................................... 18
Potential Need for Cash............................................................. 19
GENERAL SHAREHOLDER INFORMATION....................................................... 19
Shareholders Entitled to Vote....................................................... 19
Voting of Proxies................................................................... 20
Vote Required for Approval.......................................................... 20
Revocation of Proxies............................................................... 20
PROPOSED INCORPORATION PROCEDURE...................................................... 21
General Discussion.................................................................. 21
Principal Reasons for the Incorporation Procedure................................... 23
Greater Legal Certainty............................................................. 23
Replacement of the Fixed-Life Trust with a Perpetual-Life Corporation............... 24
Acquisition Safeguards.............................................................. 26
Certain Potential Conflicts of Interest............................................. 29
The One-for-One Exchange of Shares.................................................. 30
Comparison of Principal Differences Between the Trust and IORI Nevada............... 30
Management after Incorporation Procedure............................................ 31
Liability of Certain Persons........................................................ 33
Business Activities After Incorporation Procedure................................... 36
Comparison of the Securities of IORI Nevada and the Trust........................... 41
Stockholder-Management Relations.................................................... 44
Establishment of Subsidiaries....................................................... 50
Amendment Provisions................................................................ 50
Material Federal Income Tax Consequences............................................ 51
Certain Foreign, State and Local Taxes.............................................. 52
MARKET PRICES OF THE SHARES; DIVIDENDS................................................ 52
BUSINESS AND PROPERTIES OF IORI NEVADA................................................ 53
IORI Nevada's Policy With Respect to Certain Activities............................. 53
BUSINESS AND PROPERTIES OF THE TRUST.................................................. 54
General............................................................................. 54
Business Plan and Investment Policies............................................... 54
Trust Assets........................................................................ 55
Certain Factors Associated with Real Estate and Related Investments................. 59
Method of Operating and Financing................................................... 59
Officers............................................................................ 60
The Advisor......................................................................... 60
</TABLE>
3
<PAGE> 11
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Property Management................................................................. 60
Real Estate Brokerage............................................................... 60
The Advisory Agreement.............................................................. 61
Involvement in Certain Legal Proceedings............................................ 63
Certain Business Relationships and Related Party Transactions....................... 65
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 66
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION................................ 67
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 68
Introduction........................................................................ 68
Liquidity and Capital Resources..................................................... 68
Results of Operations............................................................... 69
Environmental Matters............................................................... 71
Inflation........................................................................... 71
Taxation as a REIT.................................................................. 71
Recent Accounting Pronouncement..................................................... 72
LEGAL MATTERS......................................................................... 72
EXPERTS............................................................................... 72
AVAILABLE INFORMATION................................................................. 73
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 73
SOLICITATION OF PROXIES............................................................... 74
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
</TABLE>
<TABLE>
<S> <C>
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
Second Amended and Restated Declaration of Trust of Income Opportunity
Realty Trust.............................................................. Appendix E
Restated Trustees' Regulations of Income Opportunity Realty Trust............ Appendix F
Proposed Advisory Agreement between Income Opportunity Realty Investors, Inc.
and
Basic Capital Management, Inc............................................. Appendix G
EXHIBITS
</TABLE>
4
<PAGE> 12
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.
CERTAIN RISK FACTORS
In evaluating the proposed Incorporation Procedure, Shareholders should
consider, among other things, risk factors such as:
(1) The elimination of the liquidation provisions in the Declaration
of Trust could cause a reduction in distributions to Shareholders.
(2) The elimination of the liquidation provisions in the Declaration
of Trust and amendments to the current Advisory Agreement is likely to
increase fees and commissions paid to affiliates of the Trust.
(3) The Incorporation Procedure will result in a fundamental change to
Shareholders in the nature of their investment.
(4) It is possible that IORI Nevada's ability to invest funds (as well
as liquidate assets) will result in higher operating expenses and thereby
reduce cash available for distribution to stockholders from levels that
would be distributed to Shareholders of the Trust if the Incorporation
Procedure was not effected;
(5) The Trust's liquidation provisions are not included in the charter
of IORI Nevada;
(6) Affiliates of Basic Capital Management, Inc. ("BCM") effectively
will have a veto power over certain corporate actions of IORI Nevada due to
the existence of certain super-majority voting provisions;
(7) Shareholders should be aware that certain of the Trust's (and,
IORI Nevada's) executive officers have interests that may present them with
conflicts of interest in the Incorporation Procedure;
(8) IORI Nevada will not be subject to the Trust's charter provision
that mandates a limit on annual operating expenses;
(9) The acquisition safeguards provided by the Nevada corporate
structure of IORI Nevada could discourage future attempts to acquire IORI
Nevada;
(10) The ability of IORI Nevada to issue preferred stock could, in the
future, discourage parties from acquiring IORI Nevada and/or dilute the
ownership of the stockholders of IORI Nevada;
(11) The officers and trustees of the Trust (as well as the officers
and directors of IORI Nevada), as representatives of other real
estate-related companies (including other affiliates of BCM), may be
subject to certain conflicts of interests in selling and buying properties
for the Trust and IORI Nevada, respectively;
(12) IORI Nevada may continue to engage in transactions with related
parties;
(13) There can be no assurance that the market price of Nevada Common
Stock after the Incorporation Procedure will be equal to that of the shares
in the Trust prior to the Incorporation Procedure;
(14) The Trust is, and IORI Nevada will be, subject to all the risks
incident to ownership and financing of real estate and interests therein;
and
(15) There can be no assurance that the Trust (or IORI Nevada) will
continue to have sufficient cash to manage its operations.
5
<PAGE> 13
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 March 15, 1996, 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, pursuant to the terms of the Declaration of
Trust, is subject to certain self-liquidating provisions, as described under
"Proposed Incorporation Procedure -- Replacement of the Fixed-Life Trust with a
Perpetual-Life Corporation") 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, February 7, 1996, are entitled to vote at
the Special Meeting.
As of February 1, 1996, 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 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".
BACKGROUND
The terms of its Second Amended and Restated Declaration of Trust dated as
of April 1, 1987 (the "Declaration of Trust") subject the Trust to certain
limitations on its ability to make new investments. Since October 24, 1991, the
Trust has been constrained from reinvesting proceeds received from sales or
refinancings of its existing properties into new properties. Beginning on
October 24, 1996, the Trust will be similarly prevented from reinvesting amounts
of principal and interest received from the Trust's lone mortgage note
receivable. As a result of such limitations and the original intention of the
Trust's Board of Trustees to liquidate the assets of the Trust by the end of
1996, the current Board of Trustees has been, and will continue to be,
considering the sale or other disposition of the Trust's assets. In the event of
such liquidating sales, the Shareholders might begin to receive, over time,
diminishing distributions from operating activities and, occasionally,
substantial distributions of liquidation proceeds.
The Declaration of Trust, however, specifically allows the Board of
Trustees to hold on to the Trust's investments beyond 1996 if, in their best
judgment, market conditions or other circumstances so dictate.
Based on current market conditions, the Board of Trustees does not
anticipate the liquidation of the Trust's assets in the foreseeable future.
Although the Board of Trustees has neither performed nor had performed a formal
liquidation analysis (due primarily to the expense required) and has not
identified potential acquisition possibilities (due to the Trust's limitations
on acquiring new properties), the Board believes that it would be beneficial to
the Shareholders for the Trust to forego mandatory liquidation in favor of the
flexibility to buy and sell properties (and make distributions) as market
conditions indicate.
6
<PAGE> 14
Consequently, the Board of Trustees recommends the Incorporation Procedure in
order to (i) change the current charter of the Trust to eliminate restrictions
on new investments and provisions regarding mandatory liquidation and (ii) cause
the Trust to do business as a corporation rather than a trust.
The Incorporation Procedure, if approved, will result in a fundamental
change to Shareholders in the nature of their investment. As stockholders of a
Nevada corporation that is not constrained by mandatory liquidation provisions,
it is unlikely in the near term that Shareholders would receive liquidating
distributions, since corporations, unlike the current Trust, generally have no
predetermined lifespan. In addition, the Incorporation Procedure may have the
following effects, each of which could be viewed as limiting Shareholders'
rights: (i) As set forth in more detail in the following paragraph, affiliates
of the Trust may realize an increase in fees and commissions over time. (ii) The
directors of the Nevada corporation, unlike the Trustees of the Trust, will be
entitled to be indemnified for liability arising from gross negligence and
reckless disregard of duty. (iii) The Nevada corporation will adopt certain
anti-takeover defenses that have not been adopted by the Trust. The
anti-takeover defenses to be adopted 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. See "Proposed Incorporation
Procedure -- Acquisition safeguards -- Possible Negative Considerations". (iv)
Certain protections available under California law will be eliminated.
The Incorporation Procedure is 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, Inc.) 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 (as defined herein) 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 nonetheless believes, although it cannot provide
assurance, that the Incorporation Procedure will allow Shareholders the
opportunity to receive greater total distributions over the long term than
Shareholders would receive under the current provisions of the Declaration of
Trust.
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.
7
<PAGE> 15
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 (the "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 (the "Brokerage Agreement") with Carmel
Realty, Inc. ("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 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 elimination of the
Trust's liquidation provisions, together with the incorporation of the Trust,
have been under consideration by the management of the Trust since 1990. Current
market conditions and the approaching self-imposed goal for liquidation of the
Trust's properties (October 24, 1996) caused management to intensify its
consideration of the Incorporation Procedure in 1995. The members of the Board
of Trustees have, in August 1995, approved the Incorporation Procedure as in the
best interest of the Trust and its Shareholders. At September 30, 1995,
8
<PAGE> 16
the book value of the Trust's assets was $30.58 per Share, compared to the
market price per Share on such date of $19.625. The market price per Share at
February 7, 1996 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 Board of Trustees believes the elimination of the Trust's liquidation
provisions and the change from a finite life entity to an infinite life entity
will afford IORI Nevada 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 finite-life business trust. As an infinite
life entity, IORI Nevada will not be limited by the terms of the Declaration of
Trust, and may invest in long-term growth assets designed to maximize return to
investors. The Board of Trustees believes the liquidation provisions of the
Declaration of Trust have not maximized current or long-term return to investors
because, even if it is presented with potentially beneficial investment
opportunities, the Trust's ability to invest in additional properties is
currently prohibited by the self-liquidating provisions of the Declaration of
Trust. The Trust is limited to maintaining its current investments or
liquidating, and liquidation at the present time would not, in the opinion of
the Board of Trustees, maximize return to investors. Although it has not sought
to identify potential property acquisition candidates and has not performed or
had performed a liquidation analysis, the Board believes, based on discussions
with management and on its knowledge of the general economic and financial
conditions to which the Trust and its assets are subject, that the proceeds that
might be realized from the reinvestment of sales proceeds in new properties by
IORI Nevada could, in the long term, be more valuable to Shareholders than the
proceeds that could be realized from an immediate liquidation of the Trust's
assets or mandatory liquidation over time of such assets. No assurances,
however, can be given to such effect. Since the Board of Trustees believes that
liquidation at the present time is not in the best interest of the Shareholders
and since the Board of Trustees has full discretion to continue to hold and
maintain the Trust's assets, no attempts to sell its assets have been
undertaken.
The Board of Trustees also believes the change from a California business
trust to a Nevada corporation will be beneficial in that certain safeguards
regarding acquisition of IORI Nevada not available to the Trust will be
available to IORI Nevada. Such 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. Other changes will be beneficial in attracting and
retaining qualified management and in defining management's relationship to
stockholders and IORI Nevada. As a Nevada corporation, IORI Nevada will have
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".
9
<PAGE> 17
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.
The Incorporation Procedure would result in certain other changes affecting
Shareholders, including, among other things, the existence of certain legal and
procedural differences caused by the Trust's change from a business trust
governed by California law and by the Declaration of Trust and the Restated
Trustees' 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.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES. The following discussion of the
material 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: (i) the Incorporation Procedure will constitute a
reorganization within the meaning of Section 368(a)(1)(F) of the Internal
Revenue Code of 1986, as amended (the "Code"); (ii) upon consummation of the
Incorporation Procedure, IORI Nevada will be treated as the same taxpayer as the
Trust for federal income tax purposes; (iii) thus, the conversion of the Trust
into IORI Nevada essentially will be irrelevant for federal income tax purposes
and the operations of the Trust and IORI Nevada will be combined for purposes of
determining whether IORI Nevada qualifies as a real estate investment trust for
the taxable year in which the Incorporation Procedure is consummated; and (iv)
the Incorporation Procedure will not, in and of itself, adversely affect the
ability of the Trust or IORI Nevada to qualify as a real estate investment trust
for federal income tax purposes. It should be noted that an opinion of counsel
is not binding on the Internal Revenue Service or on the courts.
No gain or loss will be recognized by the Trust as a result of the
Incorporation Procedure. Similarly, no gain or loss will be recognized by
Shareholders. 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 could
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.
10
<PAGE> 18
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". For detail on the nature of affiliation among members
of management of BCM, Carmel Realty and the Trust, see "Certain Business
Relationships and Related Party Transactions -- Certain Business Relationships."
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.
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 February 1, 1996, 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
Fourth Quarter, 1995................................................. 20 19 1/8
</TABLE>
As of January 31, 1996, there were 2,177 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 February 1, 1996, the Trust had repurchased 67,952
shares pursuant to such program. None of such shares were purchased in 1995 or
1996.
On February 7, 1996, 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
11
<PAGE> 19
changes similar to the Incorporation Procedure to Shareholders. Shareholders
should obtain current market quotations for Shares.
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
11/29/95 12/15/95 12/31/95 .15
</TABLE>
The Trust reported to the Internal Revenue Service that 100% of the
distributions paid in 1994 represented a return of capital, and 100% of the
distributions paid in 1993 represented ordinary income. The Trust has determined
that 100% of the distributions paid in 1995 represented a return on capital.
12
<PAGE> 20
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table summarizes selected historical consolidated financial
information of the Trust for the nine months ended September 30, 1995 and the
nine months ended September 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, the assets, liabilities and stockholder's equity of IORI
Nevada would be accounted for, on a carry-over basis, as the continuing entity
which would be the successor to the Trust. The Incorporation Procedure, if
adopted, will have no effect on the book value of the assets, liabilities or
Shareholder's equity of 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.
INCOME OPPORTUNITY REALTY TRUST
SELECTED FINANCIAL DATA (HISTORICAL)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS DATA:
Income.......................................... $ 5,852 $ 5,141 $ 6,852 $ 7,113 $ 6,593 $ 6,750 $ 8,922
Expense......................................... 6,863 5,213 7,139 7,044 7,063 15,803 18,011
-------- -------- -------- -------- -------- -------- --------
Income (loss) before (loss) on sale of real
estate and extraordinary gain................. (1,011) (72) (287) 69 (470) (9,053) (9,089)
(Loss) on sale of real estate................... -- -- -- -- (81) -- --
Extraordinary gain.............................. -- -- -- 806 -- 4,765 --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....................... $ (1,011) $ (72) $ (287) $ 875 $ (551) $ (4,288) $ (9,089)
======== ======== ======== ======== ======== ======== ========
PER SHARE DATA:
Income (loss) before extraordinary gain......... $ (1.28) $ (.09) $ (.36) $ .09 $ (.64) $ (9.97) $ (9.79)
Extraordinary gain.............................. -- -- -- 1.00 -- 5.25 --
-------- -------- -------- -------- -------- -------- --------
Net Income (loss)....................... $ (1.28) $ (.09) $ (.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......................... $ .45 $ .45 $ .60 $ .50 $ -- $ 1.44 $ .88
</TABLE>
The Trust reported to the Internal Revenue Service that 100% of the
distributions paid in 1990, 1991 and 1994 represented a return of capital and
that 100% of the distributions paid in 1993 represented ordinary income.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPT. 30, -----------------------------------------------
1995 1994 1993 1992 1991 1990
--------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Notes and interest receivable................................. $ 1,983 $ 1,974 $ 2,983 $ 2,922 $ 2,583 $28,850
Foreclosed real estate held for sale.......................... 15,656 15,878 15,121 15,387 16,946 9,428
Real estate held for sale..................................... 24,748 25,157 25,710 26,259 26,833 24,903
Total assets.......................................... 46,938 49,035 50,127 51,275 52,401 75,631
Notes and interest payable.................................... 20,284 20,717 21,354 22,447 22,651 40,798
Redeemable shares of beneficial interest...................... -- -- -- -- 6,062 6,062
Shareholders' equity.......................................... 24,205 25,572 26,334 26,380 20,904 25,574
Book value per share.......................................... $ 30.58 $ 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.
13
<PAGE> 21
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."
POTENTIAL REDUCTIONS IN DISTRIBUTIONS TO SHAREHOLDERS
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 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 than
under a liquidation policy. See "Replacement of the Fixed-Life Trust with a
Perpetual Life Corporation." 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.
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 in the short term 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).
ELIMINATION OF THE TRUST'S LIQUIDATION PROVISIONS
The Incorporation Procedure will replace the limited duration Trust with a
perpetual-life corporation which the Board of Trustees believes will have more
flexibility in holding and selling assets. The Self-liquidating provisions of
the Trust included in its Declaration of Trust reflect an intention of the
original Trustees to liquidate the Trust's assets by October 24, 1996, and the
Declaration of Trust contemplates that no additional investments will be made
beyond such date. The Trustees, however, have full discretion, in their best
judgment, to hold current investments beyond this date should market conditions
or other circumstances so dictate. Although the Trustees have made no
determination of such matter, there can be no assurance that the Trustees will
choose to liquidate any of the Trust's assets in the foreseeable future.
FEES TO AFFILIATES
Eliminating the liquidation provisions to which the Trust is subject will
enable IORI Nevada to make new investments (although the Board of Directors of
IORI Nevada has not yet identified any potential new investments) and is likely
to reduce the amount and rate of asset dispositions and result in IORI Nevada
having greater reported assets than would be the case under such liquidation
provisions. The current Advisory Agreement provides for fees based in part on
gross assets, and if the Incorporation Procedure is approved, the Advisory
Agreement will be amended to provide for certain fees on property acquisitions.
As a result of the elimination of the liquidation provisions to which the Trust
is subject and the amendments to the Advisory Agreement, such fees paid to BCM
are likely to be higher over time. 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 commissions in the event
that IORI Nevada acquires, as well as sells, properties.
Actual fees and commissions payable by the Trust to affiliates in 1994 were
$367,000. If the Incorporation Procedure had been in place in 1994, such fees
and expenses would have been approximately $981,000. Actual fees and expenses
payable by the Trust to affiliates for the first nine months of 1995 were
14
<PAGE> 22
$271,000. If the Incorporation Procedure had been in place in 1995, such fees
and expenses would have been approximately $447,000.
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.
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. See "Business and
Properties of the Trust -- Certain Business Relationships and Related Party
Transactions," "-- The Advisory Agreement" and "Involvement in Certain Legal
Proceedings."
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".
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 Activi-
15
<PAGE> 23
ties 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".
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 if certain stockholders of IORI Nevada might desire
such a change in control and even if such a change in control would be
beneficial to the stockholders generally. 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 October 27, 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".
16
<PAGE> 24
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 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.
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.
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 Activi-
17
<PAGE> 25
ties 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 Declaration of Trust currently permits between the
Trust and certain related parties (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 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 Chapter 78 of the Nevada Revised
Statutes, 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.
MARKET PRICE OF IORI NEVADA STOCK
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. However, 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.
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 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
18
<PAGE> 26
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 September 30, 1995, 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.
POTENTIAL NEED FOR CASH
The Trust's cash and cash equivalents at December 31, 1994 were $232,000.
As of September 30, 1995, the Trust's cash and cash equivalents had increased to
$297,000. 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. Unless the Trust's Trustees make
the determination to sell properties in early 1996, it is anticipated that one
or more of the Trust's properties would have to be financed or refinanced in
early 1996 for the Trust's continued payment of dividends, payment of debt
service on the Trust's properties, property maintenance and required operating
cash reserves. There can be no assurance that such financing or refinancing will
be available to the Trust on attractive terms. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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, pursuant to the terms of the
Declaration of Trust, is subject to certain self-liquidating provisions, as
described under "Proposed Incorporation Procedure -- Replacement of the
Fixed-Life Trust with a Perpetual-Life Corporation") 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 March 15, 1996, 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 February 14, 1996.
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 February 7,
1996 (the "Record Date"), are entitled to vote at the Special Meeting and at any
adjournments thereof. At the close of business on February 1, 1996, there were
791,444 Shares outstanding. Each holder is entitled to one vote for each Share
held on the Record Date.
19
<PAGE> 27
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
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.
20
<PAGE> 28
PROPOSED INCORPORATION PROCEDURE
GENERAL DISCUSSION
In accordance with the terms of the Declaration of Trust, since October 24,
1991, the Trust has distributed to Shareholders net cash proceeds received by
the Trust from sales or refinancing of equity investments, to the extent such
proceeds exceeded cash reserves necessary for maintenance and improvement of the
Trusts' properties. To provide the Trust with an enhanced opportunity for
long-term planning, flexibility and long-term growth, 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 into a Nevada corporation
that would have perpetual duration. The alternatives considered by the Board of
Trustees included (i) continuing as a finite life business trust, holding its
properties until the Trust's termination; (ii) liquidating the assets of the
Trust; and (iii) the Incorporation Procedure. Based on discussions with
management and on the Trustees' knowledge of the general economic and financial
conditions to which the Trust and its assets are subject, the Board of Trustees
adopted the Incorporation Procedure as the option most likely to maximize
returns to Shareholders.
Shareholders should recognize that the Incorporation Procedure will result
in fundamental changes in the nature of their investment. The Incorporation
Procedure will make it less likely in the near term that Shareholders will
receive liquidating distributions. Furthermore, the following effects of the
Incorporation Procedure could be viewed as limiting Shareholders' rights: (i)
Affiliates of the Trust may realize an increase in fees and commissions over
time. (ii) The directors of IORI Nevada will be entitled to indemnification for
gross negligence and reckless disregard of duty. (iii) IORI Nevada will adopt
certain anti-takeover defenses. (iv) Certain protections available under
California law will be eliminated. See "-- Acquisition Safeguards -- Possible
Negative Considerations". "-- Certain Potential Conflicts of Interest" and
"-- Comparison of Principal Difference Between the Trust and IORI Nevada".
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.
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SHAREHOLDERS OF THE TRUST WILL NOT HAVE ANY DISSENTERS' RIGHTS OF APPRAISAL
WITH RESPECT TO THE INCORPORATION PROCEDURE.
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 (which, pursuant to the terms of the
Declaration of Trust, is subject to certain self-liquidating provisions, as
described under "Proposed Incorporation Procedure -- Replacement of the
Fixed-Life Trust with a Perpetual-Life Corporation"), (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".
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.
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<PAGE> 30
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 (which, pursuant to the terms of the Declaration of Trust, is
subject to certain self-liquidating provisions, as described under "Proposed
Incorporation Procedure -- Replacement of the Fixed-Life Trust with a
Perpetual-Life Corporation"), (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. For the purpose of
carrying on a business enterprise, the business trust is an adaptation 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.
Unlike a corporation, many basic legal issues affecting a business trust
are not determined by a body of statutory law, but must be spelled out in the
declaration of trust. Subject to overriding principles of common law, the
declaration of trust serves as a substitute for a corporate statute. Thus,
management and shareholders of business trusts must look to the trust instrument
or common law to determine questions which would usually be answered by a
corporation statute if that form were selected. On the other hand, state
corporation statutes generally provide detailed and comprehensive rules
concerning corporate organization, the composition, election, and duties of
boards of directors and corporate officers, the form and issuance of equity
shares (including voting, dividend, and merger rights), rules on meetings,
mergers, reorganizations, dissolutions, and derivative actions. Moreover, many
matters not detailed in the statutes are usually covered by a well developed
body of case law.
Although the business trust form is regarded as legal and valid in
California, the jurisdiction of organization of the Trust, 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 California. 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
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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 believes
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. This certainty and predictability could be beneficial in attracting and
retaining qualified management for IORI Nevada, in part because Nevada corporate
law provides, among other things, for a greater degree (and greater clarity) of
indemnification of directors and officers than is found with respect to
California business trusts. Incorporating in Nevada will also enable the Trust
to avoid significant annual franchise taxes assessed in certain other states of
incorporation. Further, IORI Nevada, as a corporation incorporated in Nevada,
will not be required to pay annual franchise or income taxes. The only annual
corporate fee in Nevada which IORI Nevada will be required to pay is an $85.00
filing fee.
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 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.
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. In
accordance with the terms of the Declaration of Trust, the Trust is subject to
certain self-liquidating provisions (the "Liquidation Provisions"). Pursuant to
the Liquidation Provisions, since October 24, 1991, the Trust has distributed to
Shareholders net cash proceeds received by the Trust from sales or refinancing
of equity investments, to the extent such proceeds have exceeded cash reserves
necessary for maintenance and improvement of the Trust's properties (which
proceeds have totaled $211,000 through September 30, 1995). Further, the
Liquidation Provisions contemplate that, as of October 24, 1996, the Trust will
begin to distribute to Shareholders net cash proceeds received by the Trust from
the satisfaction of mortgage loan investments. These self-liquidating
distributions reflect an intention of the original Trustees to begin liquidation
of the Trust's assets by October 24, 1996, and the Declaration of Trust
contemplates that no additional investments will be made beyond such date. The
Trustees, however, have full discretion, in their best judgment, to hold
investments beyond this date should market conditions or other circumstances so
dictate. Although the Trustees have made no determination of such matter, there
can be no assurance that the Trustees will choose to liquidate any of the
Trust's assets in the foreseeable future. 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".
Although the original Board of Trustees of the Trust had originally
intended to begin liquidation of the Trust's assets as early as October 24,
1996, the current Board of Trustees believes that existing market conditions and
the substantial debt that exists regarding some of the Trust's real estate
investments, together with the other factors discussed below, will not allow the
Trust to maximize return to Shareholders if it
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pursued a liquidation strategy at this time. Moreover, there can be no assurance
that liquidation of the Trust's assets will become an attractive alternative at
any time in the future.
For these reasons, the Board of Trustees has determined it to be in the
best interests of the Trust and its Shareholders to modify the Trust's initial
intended course of operations to allow the possibility of acquiring additional
assets in addition to permitting the holding and disposition of assets. The
Incorporation Procedure is designed to achieve such end.
The Board of Trustees believes that the Liquidation Provisions it
inherited, which impose 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. Although it has not performed a liquidation analysis, the Trust's Board
of Trustees believes that, based on discussions with management and on the
Trustees' knowledge of the general economic and financial conditions to which
the Trust and its assets are subject, a current liquidation of the Trust's real
estate portfolio is likely to minimize the Trust's return on such investments
partially because some of the Trust's real estate investments are held subject
to substantial debt. Additionally, 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. Further, the restrictions in the
Trustees' ability 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 by potentially impairing a lender's position.
Consequently, the Trust might be required in the future to maintain much greater
cash reserves if the Liquidation Provisions are continued. The Trust will have
to expend funds to maintain its properties regardless of whether the
Incorporation Procedure is adopted. Although the amount of such expenditures
might be less in the short term and is expected to be greater over the long term
if the Incorporation Procedure is adopted, 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 future renovations and improvements. A combination of
the expected increased costs of maintaining 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 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 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 make new investments
and is likely to reduce the amount and rate of asset dispositions (although it
will probably reduce the number of dispositions in the near term) 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". 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
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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 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, the Board of Trustees, based upon discussions with management
and the Trustees' knowledge of the general economic and financial conditions to
which the Trust and its assets are subject, 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 (although it has not yet identified any potential acquisitions). 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 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, and, further, there can be no assurance that attractive
acquisition opportunities will be available after consummation of the
Incorporation Procedure.
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
Taking into account the negative considerations set forth below under
"Possible Negative Considerations", 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
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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 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.
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
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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.
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 February 1, 1996) 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
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Trust and would hold more than 20% of the outstanding common stock of IORI
Nevada if the Incorporation Procedure is effected. As of February 1, 1996, TCI
owned approximately 22% of the outstanding shares of the Trust, and ART owned
approximately 26% of the outstanding shares of the Trust.
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 "Business and Properties of the Trust -- The Advisory
Agreement" and "Proposed Incorporation Procedure -- 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, 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.
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. See "Business and Properties of the Trust -- Certain Business
Relationships and Related Party Transactions," "-- The Advisory Agreement" and
"Involvement in Certain Legal Proceedings."
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" above. 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
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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.
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 February 1, 1996, 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.
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
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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 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, compa-
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nies, 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 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
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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 more fully in
"Proposed Incorporation Procedure -- Business Activities after Incorporation
Procedure -- The Restrictions on Related-Party Transactions Provision" and
pursuant to the Olive Modification, until April 28, 1999, prior to entering
certain related party transactions, except certain specified contracts including
the Advisory Agreement, 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, such as the Advisory
Agreement between IORI Nevada and BCM or one of its affiliates, 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.
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
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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 may 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 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).
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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) 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 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. 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
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<PAGE> 43
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 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, it appears
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 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".
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<PAGE> 44
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 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
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<PAGE> 45
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 following table summarizes the fees and commissions payable to
affiliates by the Trust currently and the fees and commissions that will be
payable to affiliates by IORI Nevada if the Incorporation Procedure is approved:
<TABLE>
<CAPTION>
TRUST IORI NEVADA
------------------------------------- -------------------------------------
<S> <C> <C>
Gross Asset Fee(1).................. .75% of Gross Asset Value .75% of Gross Asset Value
Net Income Fee(1)................... 7.5% of Net Income 7.5% of Net Income
Acquisition Commission(1)........... None(3) 1% of Acquisition Cost
Incentive Sales Compensation(1)..... 10% of Amount by which Sales Price 10% of Amount by which Sales Price
exceeds Cost plus Capital exceeds Cost plus Capital
Improvements plus Closing Costs Improvements plus Closing Costs
Mortgage Brokerage & Equity
Refinancing Fee(1)................ 1% of Amount of Loan 1% of Amount of Loan
Sales Brokerage Commission(2)....... 1 1/2 - 4% Variable, depending on 1 1/2 - 4% Variable, depending on
Amount of Sales Transaction Amount of Sales Transaction
Acquisition Brokerage
Commission(2)..................... None(3) 1 1/2 - 4% Variable, depending on
Amount of Sales Transaction
</TABLE>
- ---------------
(1) Fees payable to BCM pursuant to the applicable Advisory Agreement; however,
each Advisory Agreement provides that the total of such expenses cannot
exceed a specified amount.
(2) Commissions payable to Carmel Realty pursuant to the applicable Brokerage
Agreement.
(3) These commissions are not currently incurred by the Trust because the
Liquidation Provisions of the Declaration of Trust prohibit the Trust from
acquiring additional assets.
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<PAGE> 46
The table appearing below shows the actual fees and commissions payable by
the Trust to affiliates of the Trust as well as a proforma presentation that
shows the fees and commissions that would have been payable by the Trust to such
affiliates if the Incorporation Procedure had been completed as of January 1,
1994. The 1994 and 1995 proformas assume that mortgage financing was obtained on
January 1, 1994, secured by the Saratoga Office Center and Town Center Plaza,
resulting in net cash of $8.0 million to the Trust. Such cash is assumed to have
been immediately invested in real estate. The proformas further assume the
purchase of four properties at a purchase price of $8.0 million each, composed
of a cash payment of $2.0 million (25%), with the remainder financed by mortgage
debt. At January 1, 1994, the remaining properties owned by the Trust could not
be refinanced due to prohibitive debt covenants.
<TABLE>
<CAPTION>
1995
ACTUAL
(9 MONTHS
1995 ENDED 1994 1994 1993 1992
PROFORMA 9/30/95) PROFORMA ACTUAL ACTUAL ACTUAL
-------- --------- -------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gross Asset Fee.......................... $447 $ 271 $581 $367 $447 $327
Net Income Fee........................... 0 0 0 0 0 0
Acquisition Commission................... 0 0 320 0 0 0
Incentive Sales Commission............... 0 0 0 0 0 0
Mortgage Brokerage & Equity
Refinancing Fee........................ 0 0 80 0 0 0
Sales Brokerage Commission............... 0 0 0 0 0 39
Acquisition Brokerage Commission......... 0 0 0 0 0 0
---- ---- ------ ---- ---- ----
Total.......................... $447 $ 271 $981 $367 $447 $366
==== ==== ====== ==== ==== ====
</TABLE>
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 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, certain
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 such 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 Article FOURTEENTH does not supplant Nevada
law regarding related-party transactions; rather, Article FOURTEENTH provides
additional protection against the possibility of
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<PAGE> 47
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 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 of 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 of 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.
(iii) The fact of 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. See "Involvement in
Certain Legal Proceedings -- Olive Litigation". 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.
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<PAGE> 48
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 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.
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
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<PAGE> 49
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 equal or exceed
the sum of its total liabilities plus the amount that would be needed, if IORI
Nevada were to be dissolved at 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
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<PAGE> 50
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 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.
In August 1994, Mr. Phillips and his affiliates, primarily ART and TCI,
owned approximately 39.8% of the Trust's outstanding shares of beneficial
interest. Mr. Phillips and his affiliates desired to purchase additional shares
of the Trust and requested that the Trust's Board of Trustees consider the
elimination of the limitations on the percentage of shares which may be acquired
by them. The Board of Trustees reviewed the limitation and determined that, due
to the fact that Mr. Friedman was no longer affiliated with Mr. Phillips or his
affiliates, and had disposed of any shares of the Trust which Mr. Friedman or
his affiliates may have owned, the limitation should no longer apply to Mr.
Friedman or his affiliates. The Board of Trustees also determined that there was
no reason to object to the purchase of additional shares of the Trust by Mr.
Phillips and his affiliates and, on August 23, 1994 the Trust's Board of
Trustees adopted a resolution 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 October 27, 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.
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.
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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 Article EIGHTH 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 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
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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 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.
An "Interested Stockholder" is defined in the Business Combination
Provision to include any Person who (i) is or 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
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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.
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 contains a provision expressly electing not to be governed by NRS
statutes governing business combinations with interested
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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 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 interests of Non-Stockholders Constituencies
including (i) the interests of the corporation's employees, suppliers, 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.
49
<PAGE> 57
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 October 27, 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.
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.
50
<PAGE> 58
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.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL. The following is a general discussion of the anticipated material
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 Andrews & Kurth L.L.P., securities
and tax counsel to the Trust, to the effect that: (i) the Incorporation
Procedure will constitute a reorganization within the meaning of Section
368(a)(1)(F) of the Code; (ii) upon consummation of the Incorporation Procedure,
IORI Nevada will be treated as the same taxpayer as the Trust for federal income
tax purposes; (iii) thus, the conversion of the Trust into IORI Nevada
essentially will be irrelevant for federal income tax purposes and the
operations of the Trust and IORI Nevada will be combined for purposes of
determining whether IORI Nevada qualifies as a real estate investment trust for
the taxable year in which the Incorporation Procedure is consummated; (iv) the
Incorporation Procedure will not, in and of itself, adversely affect the ability
of the Trust or IORI Nevada to qualify as a real estate investment trust for
federal income tax purposes; and (v) the information in this Proxy
Statement/Prospectus under the caption "Material Federal Income Tax
Consequences," to the extent it constitutes matters of law or legal conclusions,
is correct in all material respects. It should be noted that an opinion of
counsel is not binding on the Internal Revenue Service or on the courts.
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.
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 could have adverse federal income tax consequences to the Trust
and to Shareholders.
51
<PAGE> 59
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 February 1, 1996, 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
Fourth Quarter, 1995............................................... 20 19 1/8
</TABLE>
As of January 31, 1996 there were 2,177 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 February 1, 1996, the Trust had repurchased 67,952
shares pursuant to such program.
On February 7, 1996, 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.
52
<PAGE> 60
Distributions were declared and paid by the Trust 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 06/03/95 .15
08/24/95 09/15/95 09/30/95 .15
11/29/95 12/15/95 12/31/95 .15
</TABLE>
The Trust reported to the Internal Revenue Service that 100% of the
distributions paid in 1994 represented a return of capital, and 100% of the
distributions paid in 1993 represented ordinary income. The Trust has determined
that 100% of the distributions paid in 1995 represented a return on capital.
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
53
<PAGE> 61
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 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.
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 September 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".
54
<PAGE> 62
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. Pursuant to the terms of 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 when 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
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 September 30,
1995, 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 September 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. The property has been renamed the Spanish Trace Apartments.
At September 30, 1995, 86% of the Trust assets consisted of real estate
held for sale, 4% consisted of mortgage notes and interest receivable and 6%
consisted of investments in partnerships. The remaining 4% of the Trust's assets
at September 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".
55
<PAGE> 63
At September 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.
Plumtree Apartments. Plumtree is a 116 unit apartment complex located in
Martinez, California, north of Oakland. Plumtree was built in 1986 and consists
of eight two-story stucco/wood trim buildings containing approximately 87,684
square feet. There are 64 one bedroom/one bath units ranging from 605 to 701
square feet. The remaining 52 units include 28 two bedroom/one bath units and 24
two bedroom/two bath units ranging from 808 to 901 square feet. At September 30,
1995, Plumtree was 95% occupied with an average monthly market rent of $775 per
unit.
Porticos Apartments. Porticos, a 256 unit apartment complex located in Fox
Point, Wisconsin, a suburb of Milwaukee, was purchased by the Trust in 1991.
Porticos was built in 1973 and consists of three classically designed
three-story buildings on 20.02 acres. The units constitute 269,036 square feet.
The unit mix ranges from studio apartments to three bedroom/three bath floor
plans. The average unit size is 1,051 square feet. At September 30, 1995,
Porticos was 98% occupied with an average monthly market rent of $908 per unit.
Saratoga Office Building. The Trust purchased the Saratoga Office Building,
located in Saratoga, California, out of foreclosure in April 1992. The Saratoga
Office Building was constructed in 1987 and consists of 89,825 square feet. At
September 30, 1995, the Saratoga Office Building was 95% occupied. Sixteen
tenants occupy the office building and pay an average annual base rent equal to
approximately $1.58 per square foot per month.
The following table sets out a schedule of lease expirations for Saratoga
leases in place as of September 30, 1995 for the ten year period beginning 1995
(assuming that none of the tenants exercise renewal options):
<TABLE>
<CAPTION>
PERCENT OF TOTAL
GROSS LEASABLE LEASED SQUARE
NUMBER OF AREA SUBJECT TO ANNUAL BASE RENT FOOTAGE
YEAR OF LEASE TENANTS WITH EXPIRING LEASES UNDER EXPIRING REPRESENTED BY
EXPIRATION EXPIRING LEASES (SQUARE FEET) LEASES EXPIRING LEASES
- ----------------- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1995 1 3,678 $ 72,685 4.09%
1996 6 14,270 22,962 15.89
1997 6 59,528 1,048,878 66.27
1998 1 4,000 79,200 4.45
1999 2 4,011 86,083 4.47
2000 0 0 0 0
2001 0 0 0 0
2002 0 0 0 0
2003 0 0 0 0
2004 0 0 0 0
2005 & beyond 0 0 0 0
Totals 16 85,487(1) $1,309,808 95.17%
</TABLE>
- ---------------
(1) 4,338 square feet vacant as of September 30, 1995.
56
<PAGE> 64
The following table sets forth the occupancy, rent and square footage
statistics for the three properties listed below for the last five years or
since they were acquired by the Trust:
<TABLE>
<CAPTION>
UNIT/
SQUARE DATE OF
PROPERTY LOCATION FOOTAGE CONSTRUCTION RENT PER SQUARE FOOT OCCUPANCY
- ---------- ----------- --------------- ------------ ---------------------------------------------- -------------
1994 1993 1992 1991 1990 1994 1993
------- ------- ------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
APARTMENTS
Plumtree Martinez, 116 units/ 1986 $ .90 $ .90 $ .90 $.92 $.92 92% 92%
California 87,684 sq. ft.
Porticos Fox Point, 256 units/ 1973 $ .86 $ .84 $ .82 $.82 (1) 91% 94%
Wisconsin 269,036 sq. ft.
OFFICE BUILDINGS
Saratoga Saratoga, 89,825 sq. ft. 1987 $ 18.11 $ 17.92 $ 16.89 (2) (2) 92% 85%
California
<CAPTION>
OCCUPANCY
----------------------
PROPERTY 1992 1991 1990
- ---------- ---- ---- ----
<S> <C> <C> <C>
APARTMENTS
Plumtree 96% 93% 97%
Porticos 94% 87% (1)
OFFICE BUI
Saratoga 88% (2) (2)
</TABLE>
- ---------------
(1) Property acquired in November 1991.
(2) Recorded as a foreclosure in April 1992.
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 September 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 not reinvested the cash proceeds from the
sale or refinancing of any of its properties and has distributed to its
shareholders such net cash proceeds, to the extent such proceeds have exceeded
amounts required for renovations and improvements to its properties. Consistent
with the Liquidation Provisions of the Declaration of Trust, since October 24,
1991, the Trust has classified all of its properties as held for sale in the
accompanying Consolidated Balance Sheets included in "Index to Financial
Statements".
57
<PAGE> 65
At September 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
September 30, 1995.
<TABLE>
<CAPTION>
COMMERCIAL
REGION APARTMENTS 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 SEPT. 30, 1995
------------------------------------ ---------------- -------------- -----------------
<S> <C> <C> <C>
APARTMENTS
Spanish Trace..................... Irving, TX 136 units 94%
Eastpoint......................... Mesquite, TX 126 units 97%
Plumtree.......................... Martinez, CA 116 units 92%
Porticos.......................... Milwaukee, WI 256 units 94%
Treehouse......................... San Antonio, TX 106 units 93%
OFFICE BUILDINGS
Saratoga.......................... Saratoga, CA 89,825 sq. ft. 95%
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.
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 September 30, 1995:
<TABLE>
<CAPTION>
UNITS/ OCCUPANCY
PROPERTY LOCATION SQUARE FOOTAGE AT SEPT. 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>
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<PAGE> 66
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
("Tri-City") which in turn owns the five properties listed above. Four of the
five properties are unencumbered by mortgage debt. In July 1995, Tri-City
obtained first mortgage financing of $1.4 million, secured by the previously
unencumbered MacArthur Mills Office Building. The Trust received $485,000 of the
net financing proceeds.
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, the Trust made no advances to Tri-City as the tenant
improvements and leasing commissions were funded by Tri-City, and through
September 30, 1995, the Trust has contributed $21,000 to Tri-City. The Trust
received distributions of $254,000 and $613,000 (including $486,000 of financing
proceeds) from Tri-City during 1994 and through September 30, 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 September 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, 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 September 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".
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<PAGE> 67
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.
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"), ART 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 February 7, 1996, 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 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.
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<PAGE> 68
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 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.
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<PAGE> 69
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 nonexclusive 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 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.
<TABLE>
<S> <C>
M. Ned Phillips......................... Director
Ryan T. Phillips........................ Director
Randall M. Paulson...................... President
Oscar W. Cashwell....................... Executive Vice President
Mark Branigan........................... Executive Vice President
Bruce A. Endendyk....................... Executive Vice President
Thomas A. Holland....................... Executive Vice President and Chief
Financial Officer
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
</TABLE>
M. Ned Phillips is Gene E. Phillips' brother, and Ryan T. Phillips is Gene
E. Phillips' son. Gene E. 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 Gene E. 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, Gene E. 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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<PAGE> 70
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 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.
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<PAGE> 71
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. pending before the United States District
Court for the Northern District of California and relating to the operation and
management of each of the entities (the "Olive Litigation"). The Olive
Litigation was originally filed on December 8, 1989, and alleged, among other
things, a breach of the terms of the Declaration of Trust, a breach of trust,
and a breach of the fiduciary duty owed by the Trustees to the Trust. These
allegations were based in part on the Trustees' actions in retaining BCM as the
advisor to the Trust without Shareholder approval. The plaintiffs in the case
originally sought injunctive and other equitable relief. 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 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 February 1, 1996, 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
transactions 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
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<PAGE> 72
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.
For purposes of the Olive Modification requirements, the term "related
party transaction" means and includes "(i) any transaction between or among the
Trust and CMET, NIRT or TCI or any of their affiliates or subsidiaries; (ii) any
transaction between or among the Trust, its affiliates or subsidiaries and the
Advisor, Mr. Phillips, Mr. Friedman or any of their affiliates; and (iii) any
transaction between or among the Trust or any of its affiliates or subsidiaries
and a third party with whom the Advisor, Mr. Phillips, Mr. Friedman or any of
their affiliates has an ongoing or contemplated business or financial
transaction or relationship of any kind, whether direct or indirect, or has had
such a transaction or relationship in the preceding one year."
The Olive Modification requirements for related party transactions do not
apply to direct contractual agreements for services between the Trust and BCM or
one of its affiliates, including the Advisory Agreement, the Brokerage Agreement
and property management contracts. These agreements, pursuant to the specific
terms of the Olive Modification, require the prior approval by two-thirds of the
Trustees of the Trust and, pursuant to the terms of the Declaration of Trust,
approval by a majority of the shareholders. The Olive Modification requirements
for related party transactions also do not apply to joint ventures between or
among the Trust and CMET, NIRT or TCI or any of their affiliates or subsidiaries
and a third party having no prior or intended future business or financial
relationship with Mr. Phillips, Mr. Friedman, the Advisor, or any affiliate of
such parties. Such joint ventures may be entered into on the affirmative vote of
a majority of the Trustees of the Trust.
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.
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
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<PAGE> 73
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
("Tri-City").
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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. The following table sets
forth the ownership of the Trust's shares of beneficial interest, both
beneficially and of record, both individually and in the aggregate for those
persons or entities known by the Trust to be beneficial owners of more than 5%
of its shares of beneficial interest as of the close of business on February 1,
1996.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER OWNERSHIP CLASS(1)
------------------------------------------------------- ----------------- ----------
<S> <C> <C>
Transcontinental Realty Investors, Inc................. 170,750 21.6%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231
American Realty Trust, Inc............................. 205,151 25.9%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231
</TABLE>
- ---------------
(1) Percentages are based upon 791,444 shares of beneficial interest outstanding
at February 1, 1996.
SECURITY OWNERSHIP OF MANAGEMENT. The following table sets forth the
ownership of the Trust's shares of beneficial interest, both beneficially and of
record, both individually and in the aggregate for the Trustees and executive
officers of the Trust as of the close of business on February 1, 1996.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP CLASS(1)
------------------------------------------------------- ----------------- ----------
<S> <C> <C>
All Trustees and Executive Officers as a group
(9 individuals)...................................... 383,226(2) 48.4%
</TABLE>
- ---------------
(1) Percentage is based upon 791,444 shares of beneficial interest outstanding
at February 1, 1996.
(2) Includes 170,750 shares owned by TCI of which the Trustees may be deemed to
be beneficial owners by virtue of their positions as directors of TCI and
205,151 shares owned by ART and 7,325 shares owned by BCM, of which the
executive officers of the Trust may be deemed to be beneficial owners by
virtue of their positions as executive officers or directors of ART and
BCM. The Trust's Trustees and executive officers disclaim beneficial
ownership of such shares.
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<PAGE> 74
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table summarizes selected historical consolidated financial
information of the Trust for the nine months ended September 30, 1995 and the
nine months ended September 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, the assets, liabilities and stockholder's equity of IORI Nevada would
be accounted for, on a carry-over basis, as the continuing entity which would be
the successor to the Trust. The Incorporation Procedure, if adopted, will have
no effect on the book value of the assets, liabilities or Shareholder's equity
of 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.
INCOME OPPORTUNITY REALTY TRUST
SELECTED FINANCIAL DATA (HISTORICAL)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS
ENDED SEPTEMBER
30, FOR THE YEARS ENDED DECEMBER 31,
------------------ ---------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS DATA:
Income.............................. $ 5,852 $ 5,141 $ 6,852 $ 7,113 $ 6,593 $ 6,750 $ 8,922
Expense............................. 6,863 5,213 7,139 7,044 7,063 15,803 18,011
------- ------- ------- ------- ------- ------- -------
Income (loss) before (loss) on sale
of real estate and extraordinary
gain.............................. (1,011) (72) (287) 69 (470) (9,053) (9,089)
(Loss) on sale of real estate....... -- -- -- -- (81) -- --
Extraordinary gain.................. -- -- -- 806 -- 4,765 --
------- ------- ------- ------- ------- ------- -------
Net income (loss)............... $(1,011) $ (72) $ (287) $ 875 $ (551) $(4,288) $(9,089)
======= ======= ======= ======= ======= ======= =======
PER SHARE DATA:
Income (loss) before extraordinary
gain.............................. $ (1.28) $ (.09) $ (.36) $ .09 $ (.64) $ (9.97) $ (9.79)
Extraordinary gain.................. -- -- -- 1.00 -- 5.25 --
------- ------- ------- ------- ------- ------- -------
Net Income (loss)............... $ (1.28) $ (.09) $ (.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............. $ .45 $ .45 $ .60 $ .50 $ -- $ 1.44 $ .88
</TABLE>
The Trust reported to the Internal Revenue Service that 100% of the
distributions paid in 1990, 1991 and 1994 represented a return of capital and
that 100% of the distributions paid in 1993 represented ordinary income.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------------------------------
1995 1994 1993 1992 1991 1990
------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Notes and interest receivable............. $ 1,983 $ 1,974 $ 2,983 $ 2,922 $ 2,583 $28,850
Foreclosed real estate held for sale...... 15,656 15,878 15,121 15,387 16,946 9,428
Real estate held for sale................. 24,748 25,157 25,710 26,259 26,833 24,903
Total assets..................... 46,938 49,035 50,127 51,275 52,401 75,631
Notes and interest payable................ 20,284 20,717 21,354 22,447 22,651 40,798
Redeemable shares of beneficial
interest................................ -- -- -- -- 6,062 6,062
Shareholders' equity...................... 24,205 25,572 26,334 26,380 20,904 25,574
Book value per share...................... $ 30.58 $ 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> 75
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. The
Declaration of Trust currently contemplates 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.
Additionally, the Declaration of Trust contemplates that no additional
investments will be made after October 24, 1996; however, the Board of Trustees
has discretionary authority to hold any current investment past such date,
should circumstances so dictate. Although the Trustees have made no
determination of such matter, there can be no assurance that the Trustees will
choose to liquidate any of the Trust's assets in the foreseeable future. The
Trust's management does not believe that the Trust's status as a
self-liquidating Trust has impaired the carrying value of the Trust's assets
because liquidation is expected to be carried out in an orderly fashion.
If the Incorporation Procedure is approved, the liquidation provisions of
the Trust will be eliminated, and IORI Nevada will maintain the properties and
consider possible future sales as each of the markets in which the properties
are located so dictate. It is anticipated that the Incorporation Procedure will
have no adverse effect on the financial condition of IORI Nevada. The
Incorporation Procedure could increase the results of operations if IORI Nevada
acquires additional properties and the liquidity of IORI Nevada could be
enhanced by retaining rather than distributing refinancing proceeds. However,
there can be no assurance that the market price per share of IORI 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 IORI
Nevada common stock will remain consistent with the marketability of the shares.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at September 30, 1995 aggregated $297,000,
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.
Unless the Trust's Trustees make the determination to sell properties in early
1996, it is anticipated that one or more of the Trust's properties would have to
be financed or refinanced in early 1996 for the Trust's continued payment of
dividends, payment of debt service on the Trust's properties, property
maintenance and required operating cash reserves. Financing would provide the
Trust with available cash, and refinancing, if done at a more attractive rate
than existing financing or at an extended term, would also provide the Trust
with added financial flexibility and additional available cash. If the Trust
were able to pursue new investments, such additional available cash could also
be used to pursue investments that might produce returns in excess of the new or
refinanced debt service. There can be no assurance that such financing or
refinancing will be available to the Trust on attractive terms.
In the first nine months of 1995, the Trust paid quarterly distributions
aggregating $0.45 per share or a total of $356,000. The Trust's distribution
policy previously provided for an annual determination of distributions after
the Trust's year end until such time as property 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. 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 November 3, 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
68
<PAGE> 76
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.
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
received $254,000 in distributions from the Tri-City property. As of September
30, 1995, the Trust has received distributions in 1995 totaling $613,000 from
Tri-City and has made contributions totalling $21,000 to Tri-City. The Trust
also owns a 40% general partner interest and TCI owns a 60% general partner
interest in the Nakash Income Associates ("NIA"). In 1994, the Trust received
$154,000 in distributions from and made $145,000 in contributions to NIA. As of
September 30, 1995, the Trust had received distributions of $57,000 from 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 NINE MONTHS OF 1995 COMPARED TO FIRST NINE MONTHS OF 1994. For the
nine months ended September 30, 1995, the Trust incurred a net loss of $1.0
million, as compared with a net loss of $72,000 in the corresponding period in
1994. For the three months ended September 30, 1995, the Trust had a net loss of
$139,000 as compared with a net loss of $70,000 in the corresponding period in
1994. The primary factor contributing to the Trust's net loss in the three and
nine months ended September 30, 1995 was an increase in equity in losses of
partnerships of $79,000 and $752,000, respectively, as discussed in detail
below.
Rents for the first nine months of 1995 were $5.7 million as compared to
$4.9 million in the corresponding period in 1994. $360,000 of the increase is
attributable to the Trust having obtained the Spanish Trace Apartments through
foreclosure, which was completed in March 1995, and an additional $261,000 is
due to an increase in occupancy at Saratoga Office Center from an average of 84%
in 1994 to an average of 95% in 1995.
Property operations expense for the first nine months of 1995 was $3.2
million as compared to $2.4 million in the corresponding period in 1994. The
increase is primarily due to an increase of $458,000 due to obtaining the
Spanish Trace Apartments through foreclosure. The remainder of the increase is
comprised of $108,000 increase in real estate tax expense, $46,000 increase in
insurance expense and $41,000 increase in replacements expense.
Equity in loss of partnerships was a loss of $54,000 and $698,000 for the
three and nine months ended September 30, 1995 compared to income of $25,000 and
$54,000 in the corresponding periods in 1994, respectively. The increased equity
loss for the three months is primarily due to a modification of a wraparound
mortgage note receivable and underlying note payable by NIA, a partnership in
which the Trust has a 40% general partner interest. NIA owns two wraparound
mortgage notes receivable, the debtor on one of which informed NIA that it
intends to deed the property securing the NIA's wraparound mortgage back to the
underlying lienholder in lieu of foreclosure. As the debtor has no other assets,
NIA recorded a provision for loss of $1.5 million at June 30, 1995. Accordingly,
the increased equity loss for the nine months is primarily due to the write down
of the wraparound mortgage note receivable to the balance of the underlying
mortgage payable also by NIA and the note modification discussed above. The
Trust's equity share of the note modification was $85,000 and its equity share
of the note writedown was $601,000.
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<PAGE> 77
Interest income, interest expense, depreciation and advisory fee expense
for the three and nine months ended September 30, 1995 all approximated that of
the corresponding periods in 1994.
General and administrative expenses for the three months ended September
30, 1995 and 1994 were comparable at $168,000 and $163,000, respectively;
however, the general and administrative expenses for the nine months ended
September 30, 1995 and 1994 increased from $442,000 in 1994 to $566,000 in the
corresponding period in 1995. The increase is primarily due to higher
communications and legal fees relating to the Trust's 1994 annual meeting of
shareholders, which meeting was held in March 1995. There was no annual meeting
held in 1994.
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.
Rental income for the year ended December 31, 1994 was $6.6 million, as
compared to $6.8 million in 1993. Of this decrease, $137,000 is due to reduced
common area maintenance recovery at the Saratoga Office Center due to a decrease
in occupancy from an average of 87% in 1993 to an average of 84% in 1994.
Property operations expense for the year ended December 31, 1994 was $3.4
million, comparable to the $3.4 million for 1993. Increases of $192,000
attributable to increased personnel, cleaning and replacement expenses at two of
the Trust's apartments complexes were offset by a decrease of $133,000 at the
Trust's office buildings due to decreases in real estate taxes, cleaning and
leasing expenses.
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 repair expenses
representing the deductible portion of a fire loss 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.
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.
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<PAGE> 78
Rental income for the year ended December 31, 1993 was $6.8 million, as
compared to $6.3 million in 1992. The increase is primarily attributable to an
increase of $525,000 due to obtaining the Saratoga Office Center through
foreclosure, which was completed in April 1992.
Property operations expense for the year ended December 31, 1993 was $3.4
million, as compared to $3.3 million in 1992. The increase is primarily
attributable to an increase of $135,000 due to obtaining the Saratoga Office
Center through foreclosure, which was completed 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.
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.
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<PAGE> 79
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.
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 three and
nine months ended September 30, 1995, the Trust's reported net loss for the
three and nine months ended September 30, 1995 would have decreased by $263,000
and $784,000, respectively, and a provision for loss to reduce any property's
carrying amount to its fair value less cost to sell would not have been required
in either period.
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 financial statements and schedules included in this Proxy
Statement/Prospectus have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein and in the Registration Statement, and
such reports are included herein in reliance upon the authority of said firm as
experts in auditing and accounting.
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<PAGE> 80
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 (File No. 1-9525), 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, filed with the Commission on March 8, 1995, as amended
by Form 10-K/A, filed with the Commission on November 20, 1995, and Form
10-K/A-2 thereto, filed with the Commission on December 20, 1995;
(ii) the Trust's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995, filed with the Commission on May 11, 1995, as amended by
Form 10-Q/A, filed with the Commission on November 20, 1995, and Form
10-Q/A-2 thereto, filed with the Commission on December 20, 1995;
(iii) the Trust's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995, filed with the Commission on August 9, 1995, as amended by
Form 10-Q/A, filed with the Commission on November 20, 1995, and Form
10-Q/A-2 thereto, filed with the Commission on December 20, 1995; and
(iv) the Trust's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, as filed with the Commission on November 13, 1995, as
amended by Form 10-Q/A thereto, as filed with the Commission on December
20, 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 FEBRUARY 26, 1996.
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
or superseded shall not be deemed to constitute a part of this Proxy
Statement/Prospectus, except as so modified or superseded.
IORI Nevada has filed a registration statement on Form S-4, No. 33-62211
(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.
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<PAGE> 81
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 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.
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: /S/ RANDALL M. PAULSON
------------------------------
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.
74
<PAGE> 82
INDEX TO FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS:
Income Opportunity Realty Investors, Inc.:
Report of Independent Certified Public Accountants -- BDO Seidman, LLP
Balance Sheet at September 30, 1995
Notes to Balance Sheet September 30, 1995
Income Opportunity Realty Trust:
Report of Independent Certified Public Accountants -- BDO Seidman
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 September 30, 1995
Consolidated Statements of Operations -- Nine months ended September 30, 1995
and 1994
Consolidated Statements of Shareholder's Equity -- Nine months ended September
30, 1995 and 1994
Consolidated Statements of Cash Flows -- Nine months ended September 30, 1995
and 1994
Notes to Consolidated Financial Statements -- Nine months ended September 30,
1995
Tri-City Limited Partnership
Report of Independent Certified Public Accountants -- BDO Seidman
Balance Sheets at December 31, 1994 and 1993
Statements of Operations -- Years ended December 31, 1994, 1993 and 1992
Statements of Partner's Equity -- Years ended December 31, 1994, 1993 and 1992
Statements of Cash Flows -- Years ended December 31, 1994, 1993 and 1992
Notes to Financial Statements -- Years ended December 31, 1994, 1993 and 1992
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
Income Opportunity Realty Trust
III -- Real Estate and Accumulated Depreciation
IV -- Mortgage Loans on Real Estate
Tri-City Limited Partnership
III -- Real Estate and Accumulated Depreciation
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> 83
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 September 30, 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 September 30, 1995 in conformity with generally accepted
accounting principles.
/s/ BDO SEIDMAN, LLP
January 31, 1996
Dallas, Texas
F-2
<PAGE> 84
INCOME OPPORTUNITY REALTY INVESTORS, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995
-------------
<S> <C>
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 share issued....... --
Additional paid-in capital.................................................... 999
-------
Total stockholder's equity............................................ $ 1,000
=======
</TABLE>
F-3
<PAGE> 85
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO BALANCE SHEET
<TABLE>
<S> <C>
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 IORI Nevada to complete this
reorganization.
3. INCOME The Company intends to qualify as a real estate investment
trust ("REIT"), as defined TAXES 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.
</TABLE>
F-4
<PAGE> 86
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-5
<PAGE> 87
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Notes and interest receivable, performing.............................. $ 1,974 $ 1,962
Nonperforming, nonaccruing............................................. -- 1,021
-------- --------
1,974 2,983
Foreclosed real estate held for sale, net of accumulated depreciation
($1,128 in 1994 and $738 in 1993).................................... 15,999 15,242
Real estate held for sale, net of accumulated depreciation ($3,927 in
1994 and $3,350 in 1993)............................................. 25,157 25,710
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-6
<PAGE> 88
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
----------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
Income
Rentals.................................................. $ 6,558 $ 6,805 $ 6,297
Interest (including $11 in 1992 from affiliates)......... 294 308 296
-------- -------- --------
6,852 7,113 6,593
Expenses
Property operations (including $146 in 1994, $133 in 1993
and $64 in 1992 to affiliates)........................ 3,425 3,382 3,284
Equity in (income) of partnerships....................... (86) (203) (26)
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
-------- -------- --------
7,139 7,044 7,063
-------- -------- --------
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 extraordinary gain.................... $ (.36) $ .09 $ (.64)
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-7
<PAGE> 89
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
DISTRIBUTIONS
IN EXCESS OF
SHARES OF PAID-IN ACCUMULATED SHAREHOLDERS'
BENEFICIAL INTEREST 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-8
<PAGE> 90
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-9
<PAGE> 91
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-10
<PAGE> 92
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 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 held for sale 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
F-11
<PAGE> 93
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 1995
------------------- -------------------
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,
F-12
<PAGE> 94
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 HELD FOR SALE 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>
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
F-13
<PAGE> 95
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<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..................................................... 1,016 307
Notes payable.................................................... (2,634) (2,699)
Other liabilities................................................ (520) (423)
------- -------
Partners' capital................................................ $12,718 $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>
The Trust's equity share of the above net income for 1994, 1993 and 1992
was $102,000, $219,000 and $42,000, respectively, before amortization of
property acquisition cost discussed below.
The Trust's share of the above partnership's capital was $3.6 million in
1994 and $3.8 million in 1993.
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 in 1994 and
$389,000 in 1993. These amounts are being amortized over the remaining estimated
useful lives of the properties.
F-14
<PAGE> 96
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-15
<PAGE> 97
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-16
<PAGE> 98
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 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
F-17
<PAGE> 99
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, principally 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."
F-18
<PAGE> 100
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
For purposes of the Modification requirements, the term "related party
transaction" means and includes (i) any transaction between or among the Trust
or CMET, NIRT or TCI or any of their affiliates or subsidiaries; (ii) any
transaction between or among the Trust, its affiliates or subsidiaries and the
Advisor, Mr. Phillips, Mr. Friedman or any of their affiliates; and (iii) any
transaction between or among the Trust or any of its affiliates or subsidiaries
and a third party with whom the Advisor, Mr. Phillips, Mr. Friedman or any of
their affiliates has an ongoing or contemplated business or financial
transaction or relationship of any kind, whether direct or indirect, or has had
such a transaction or relationship in the preceding one year.
The Modification requirements for related party transactions do not apply
to direct contractual agreements for services between the Trust and the Advisor
or one of its affiliates (i.e. the Advisory Agreement, Property Management
Contracts, etc.). These agreements require the prior approval by two-thirds of
the Trustees of the Trust, and if required, approval by a majority of the
shareholders. The Modification requirements for related party transactions also
do not apply to joint ventures between or among the Trust and CMET, NIRT or TCI
or any of their affiliates or subsidiaries and a third party having no prior or
intended
F-19
<PAGE> 101
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
future business or financial relationship with Mr. Phillips, Mr. Friedman, the
Advisor, or any affiliate of such parties. Such joint ventures may be entered
into on the affirmative vote of a majority of the Trustees of the Trust.
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 or results of operations.
F-20
<PAGE> 102
SCHEDULE III
INCOME OPPORTUNITY REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1994
<TABLE>
<CAPTION>
COST
CAPITALIZED
SUBSEQUENT GROSS AMOUNTS OF WHICH
INITIAL COST TO TRUST TO CARRIED AT END OF YEAR
--------------------- ACQUISITION -------------------------------
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(2)
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
PROPERTY/LOCATION 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 years
Boca Raton, Florida
------
$5,055
======
Allowance for estimated losses...........................
</TABLE>
- ---------------
(1) The aggregate cost for Federal income tax purposes is $45,587.
(2) An allowance for loss has been provided to reduce the carrying value of this
property to the Trust's estimate of fair value minus estimated costs of
sale.
F-21
<PAGE> 103
SCHEDULE III
(CONTINUED)
INCOME OPPORTUNITY REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
1994 1993 1993
------- ------- -------
(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-22
<PAGE> 104
SCHEDULE IV
INCOME OPPORTUNITY REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF
LOANS SUBJECT TO
FINAL CARRYING DELINQUENT
INTEREST MATURITY PRIOR FACE AMOUNT AMOUNTS PRINCIPAL
DESCRIPTION RATE DATE PERIODIC PAYMENT TERMS LIENS OF MORTGAGE OF MORTGAGE(1) OR INTEREST
- ---------------------- -------- -------- ---------------------- ----- ----------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
WRAPAROUND MORTGAGE
NOTE
Twin Oaks............. 10.00% 08/98 Monthly $ 813 $ 2,000 $2,000 $ --
Secured by shopping interest -- only
center in Joliet, IL payments due through
maturity, at which
time the entire
principal balance and
all unpaid interest
are due.
==== ====== ====== ========
Interest Receivable... 17
Discount on Notes (43)
Receivable..........
------
1,974
Allowance for --
Estimated Losses....
------
$1,974
======
</TABLE>
- ---------------
(1) The aggregate cost for Federal income tax purposes is $3,135.
F-23
<PAGE> 105
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-24
<PAGE> 106
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners of
Tri-City Limited Partnership
Dallas, Texas
We have audited the accompanying balance sheets of Tri-City Limited
Partnership as of December 31, 1994 and 1993, and the related statements of
operations, partners equity, and cash flows for the three years in the period
ended December 31, 1994. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tri-City Limited Partnership
at December 31, 1994 and 1993, and the results of its operations and its cash
flows for the three years in the period ended December 31, 1994 in conformity
with generally accepted accounting principles.
BDO Seidman
February 28, 1995
Dallas, Texas
F-25
<PAGE> 107
TRI-CITY LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate held for investment Land..................................... $ 2,076 $ 2,076
Building and improvements.............................................. 11,356 11,077
------- -------
13,432 13,153
Less accumulated depreciation............................................ (2,788) (2,134)
------- -------
10,644 11,019
Cash and cash equivalents................................................ 19 228
Other assets (including $411 in 1994 and $0 in 1993 due from
affiliates)............................................................ 512 187
------- -------
Total assets............................................................. $11,175 $11,434
======= =======
LIABILITIES AND PARTNERS EQUITY
Accounts payable (including $271 in 1994 and $67 in 1993 due to
affiliates)............................................................ $ 791 $ 490
------- -------
Commitments and contingencies
Partners equity
Limited Partners....................................................... 6,698 6,698
General Partners....................................................... 3,686 4,246
------- -------
10,384 10,944
------- -------
Total liabilities and partners equity.................................... $11,175 $11,434
======= =======
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE> 108
TRI-CITY LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1993 1992
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INCOME
Rentals.......................................................... $2,380 $2,483 $2,386
Other............................................................ -- 100 2
------ ------ ------
Total revenue...................................................... 2,380 2,583 2,388
------ ------ ------
EXPENSES
Property operations (including $86 in 1994, $57 in 1993 and $40
in 1992 to affiliates)........................................ 1,572 1,661 1,431
Interest (including $27 in 1993 and $56 in 1992 to affiliates)... -- 27 56
Depreciation..................................................... 654 632 564
General and administrative....................................... 14 28 47
------ ------ ------
Total expenses..................................................... 2,240 2,348 2,098
------ ------ ------
Net income......................................................... $ 140 $ 235 $ 290
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE> 109
TRI-CITY LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS EQUITY
<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNER PARTNERS TOTAL
------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance January 1, 1992.......................................... $ 6,698 $ 4,721 $11,419
Net income....................................................... -- 290 290
------- -------- -------
Balance December 31, 1992........................................ 6,698 5,011 11,709
Distributions.................................................... -- (1,000) (1,000)
Net income....................................................... -- 235 235
------- -------- -------
Balance December 31, 1993........................................ 6,698 4,246 10,944
Distributions.................................................... -- (700) (700)
Net income....................................................... -- 140 140
------- -------- -------
Balance December 31, 1994........................................ $ 6,698 $ 3,686 $10,384
======= ======== =======
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE> 110
TRI-CITY LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1993 1992
----- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 140 $ 235 $ 290
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 654 632 564
Increase (decrease) in due to affiliates...................... (207) 153 (104)
Decrease (increase) in other assets........................... 86 (19) (39)
Increase (decrease) in accrued interest....................... -- (6) 1
Increase (decrease) in accounts payable....................... 97 33 (37)
----- ------- ------
Net cash provided by operating activities.......................... 770 1,060 675
----- ------- ------
NET CASH USED IN INVESTING ACTIVITIES --
Real estate improvements......................................... (279) (274) (328)
----- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable...................................... -- -- 750
Payoffs on notes payable......................................... -- (778) (46)
Distributions.................................................... (700) (1,000) --
----- ------- ------
Net cash provided by (used in) financing activities................ (700) (1,778) 704
----- ------- ------
Net increase (decrease) in cash and cash equivalents............... (209) (986) 1,051
Cash and cash equivalents, beginning of period..................... 228 1,214 163
----- ------- ------
Cash and cash equivalents, end of period........................... $ 19 $ 228 $1,214
===== ======= ======
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE> 111
TRI-CITY LIMITED PARTNERSHIP
SUMMARY OF ACCOUNTING POLICIES
<TABLE>
<S> <C>
ORGANIZATION Tri-City Limited Partnership, a Texas partnership was
AND PURPOSE organized on June 29, 1989. The purpose of the Partnership
is to acquire, hold for investment, improve, lease, operate,
and sell or otherwise dispose of real estate, and to engage
in any and all activities related or incidental thereto.
Income Opportunity Realty Trust (IORT) and Transcontinental
Realty Investors (TCI) are partners in the Partnership. IORT
is a publicly-held real estate investment trust whose shares
are traded on the American Stock Exchange. TCI is a publicly
held real estate investment trust whose shares are traded on
the New York Stock Exchange. Basic Capital Management, Inc.
(BCM) serves as the advisor to IORT and TCI.
The percentages of ownership of the Partnership are as
follows:
</TABLE>
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER TOTAL
------- ------- -----
<S> <C> <C> <C>
TCI................................. 23.59% 40.11% 63.7%
IORT................................ 36.30% -- 36.3%
----- ----- -----
59.89% 40.11% 100.0%
===== ===== =====
Allocations of profits and distributions are made in
accordance with the partnership agreement.
REAL ESTATE AND Land, buildings and improvements are stated at the lower of
DEPRECIATION cost or estimated net realizable value. Depreciation is
provided on buildings and improvements using the
straight-line method over the estimated useful lives of
forty years for buildings and four to forty years for
improvements. Expenditures for renewal and betterments are
capitalized and repairs and maintenance are charged against
operations as incurred.
CASH AND CASH The Partnership considers all highly liquid debt instruments
EQUIVALENTS purchased with a maturity of three months or less to be cash
equivalents.
INCOME TAXES The Partnership is taxed as such for federal income tax
purposes. The Partnership has no current year income tax
expense or deferred taxes. Taxable income is included in the
respective tax returns of the Partners.
</TABLE>
F-30
<PAGE> 112
TRI-CITY LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
1. RELATED PARTY LOAN FROM AFFILIATE -- On July 16, 1992, TCI loaned to the
TRANSACTIONS Partnership $750,000 bearing interest at a rate of 9.5
percent per annum. The loan was paid down to $704,000 at
December 31, 1992. The outstanding loan was paid off during
1993.
PROPERTY MANAGEMENT FEES -- Carmel Realty Service Ltd.
(Carmel), an affiliate of BCM, provides property management
services for a fee of 5 percent of the monthly gross rents
collected on the properties under its management. Carmel
subcontracts with other entities for property level
management services to the Partnership's apartments at
various rates.
LEASING COMMISSIONS -- As compensation for providing leasing
and rent-up services for a Partnership property, Carmel or
its affiliates shall be paid a reasonable leasing
commission.
CONSTRUCTION SUPERVISION -- As compensation for oversight of
major renovations and refurbishments, Carmel or its
affiliates shall be paid a construction supervision fee.
Fees to BCM and its affiliates are as follows:
</TABLE>
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Property management fees*........ $ 75,367 $ 39,196 $ 24,670
Leasing commissions.............. 3,346 17,946 15,060
Construction supervision fees.... 7,780 -- --
-------- -------- --------
$ 86,493 $ 57,142 $ 39,730
======== ======== ========
</TABLE>
---------------------------------------------
* Net of property management fees paid to
subcontractors, other than Carmel.
<TABLE>
<S> <C>
2. FUTURE MINIMUM RENTS Future minimum rentals on noncancellable operating leases,
expiring at various dates, as of December 31, 1994 are as
follows:
</TABLE>
<TABLE>
<CAPTION>
YEAR AMOUNT
------------------------------------------------- ----------
<S> <C>
1995............................................. $1,150,377
1996............................................. 987,967
1997............................................. 696,535
1998............................................. 394,647
1999............................................. 294,427
Thereafter....................................... 931,950
----------
$4,455,903
==========
</TABLE>
F-31
<PAGE> 113
SCHEDULE III
TRI-CITY LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1994
<TABLE>
<CAPTION>
COST
CAPITALIZED GROSS AMOUNTS AT WHICH
INITIAL COST SUBSEQUENT TO CARRIED AT END OF YEAR
------------------------ ACQUISITION ------------------------------------
BUILDING & ------------- BUILDING & ACCUMULATED DATE OF
PROPERTY DESCRIPTION(1) LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL(2) DEPRECIATION CONSTRUCTION
- ----------------------- --------- ------------ ------------- --------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MacArthur Mills S.C..... $ 238,812 $1,353,266 $1,075,527 $ 264,110 $ 2,403,515 $ 2,667,625 $ 824,085 1986
Oaks of Inwood Apts..... 522,157 1,486,137 2,950 522,157 1,344,958 1,867,115 204,743 1979
Inwood Greens Apts...... 318,968 956,904 -- 318,968 789,947 1,108,915 131,580 1980
Summit at Bridgewood
S.C................... 408,430 2,314,436 762,027 408,430 3,076,464 3,484,894 854,637 1985
Chelsea Square S.C...... 562,019 3,184,774 556,925 562,019 3,741,699 4,303,718 772,948 1985
---------- ---------- ---------- ---------- ----------- ----------- ----------
$2,050,386 $9,295,517 $2,397,429 $2,075,684 $11,356,583 $13,432,267 $2,787,993
========== ========== ========== ========== =========== =========== ==========
<CAPTION>
LIFE OF WHICH
DEPRECIATION
IN LATEST
STATEMENT OF
DATE INCOME IS
PROPERTY DESCRIPTION(1) ACQUIRED COMPUTED
- ------------------------ -------- -------------
<S> <C<C> <C>
MacArthur Mills S.C..... 6/89 4-40 years
Oaks of Inwood Apts..... 6/89 40 years
Inwood Greens Apts...... 6/89 40 years
Summit at Bridgewood
S.C................... 6/89 5-40 years
Chelsea Square S.C...... 6/89 5-40 years
</TABLE>
- ---------------
(1) There are no encumbrances on the properties.
(2) The aggregate cost for federal income tax purposes is approximately
$13,100,000.
F-32
<PAGE> 114
SCHEDULE III
(CONTINUED)
TRI-CITY LIMITED PARTNERSHIP
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
RECONCILIATION OF REAL ESTATE
BALANCE at January 1,................................. $13,153,708 $12,879,047 $12,551,048
Additions
Improvements........................................ 278,558 274,661 327,999
----------- ----------- -----------
BALANCE at December 31,............................... $13,432,260 $13,153,708 $12,879,047
=========== =========== ===========
RECONCILIATION OF ACCUMULATED DEPRECIATION
BALANCE at January 1,................................. $ 2,134,465 $ 1,502,140 $ 938,162
Additions
Depreciation........................................ 653,528 632,318 563,985
----------- ----------- -----------
BALANCE at December 31,............................... $ 2,787,993 $ 2,134,465 $ 1,502,147
=========== =========== ===========
</TABLE>
F-33
<PAGE> 115
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
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Notes and interest receivable
Performing....................................................... $ 1,983 $ 1,974
Foreclosed real estate held for sale, net of accumulated
depreciation ($1,481 in 1995 and $1,128 in 1994)................. 15,777 15,999
Real estate held for sale, net of accumulated depreciation ($4,358
in 1995 and $3,927 in 1994)...................................... 24,748 25,157
Less -- allowance for estimated losses............................. (121) (121)
--------- --------
42,387 43,009
Investment in partnerships......................................... 2,632 3,980
Cash and cash equivalents.......................................... 297 232
Other assets (including $215 in 1995 and $44 in 1994 from
affiliates)...................................................... 1,622 1,814
--------- --------
$ 46,938 $ 49,035
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Notes and interest payable......................................... $ 20,284 $ 20,717
Other liabilities (including $805 in 1995 and $407 in 1994 to
affiliates)...................................................... 2,449 2,746
--------- --------
22,733 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........ (41,235) (39,868)
--------- --------
24,205 25,572
--------- --------
$ 46,938 $ 49,035
========= ========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-34
<PAGE> 116
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
1995 1994 1995 1994
-------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C>
INCOME
Rents......................................... $ 1,992 $ 1,677 $ 5,692 $ 4,929
Interest...................................... 57 71 170 212
-------- -------- -------- --------
2,049 1,748 5,862 5,141
EXPENSES
Property operations........................... 1,152 887 3,155 2,410
Equity in (income) loss of partnerships....... 54 (25) 698 (54)
Interest...................................... 463 476 1,399 1,438
Depreciation.................................. 263 242 784 720
Advisory fee to affiliate..................... 88 75 271 257
General and administrative.................... 168 163 566 442
-------- -------- -------- --------
2,188 1,818 6,873 5,213
-------- -------- -------- --------
Net income (loss)............................... $ (139) $ (70) $ (1,011) $ (72)
======== ======== ======== ========
Earnings Per Share
Net income (loss)............................. $ (.18) $ (.09) $ (1.28) $ (.09)
======== ======== ======== ========
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-35
<PAGE> 117
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
SHARES OF ACCUMULATED
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) $25,572
Distributions ($.45 per share)....... -- -- -- (356) (356)
Net loss............................. -- -- -- (1,011) (1,011)
------- ------ ------- -------- -------
Balance, September 30, 1995.......... 791,444 $3,347 $62,093 $ (41,235) $24,205
======= ====== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-36
<PAGE> 118
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1995 1994
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash Flows from Operating Activities
Rents collected........................................................ $ 5,667 $ 5,046
Interest collected..................................................... 162 203
Interest paid.......................................................... (1,337) (1,375)
Payments for property operations....................................... (2,737) (2,279)
Advisory fee paid to affiliate......................................... (272) (215)
General and administrative expenses paid............................... (665) (502)
Distributions from equity partnerships' operating cash flow............ 184 117
Other.................................................................. (463) (413)
------- -------
Net cash provided by operating activities...................... 539 582
Cash Flows from Investing Activities
Funding of equity partnerships......................................... (21) (127)
Real estate improvements............................................... (152) (89)
------- -------
Net cash (used in) investing activities........................ (173) (216)
Cash Flows from Financing Activities
Distributions from equity partnerships' financing cash flow............ 486 --
Payments on notes payable.............................................. (431) (486)
Distributions to shareholders.......................................... (356) (345)
------- -------
Net cash (used in) financing activities........................ (301) (831)
Net increase (decrease) in cash and cash equivalents..................... 65 (465)
Cash and cash equivalents, beginning of period........................... 232 582
------- -------
Cash and cash equivalents, end of period................................. $ 297 $ 117
======= =======
Reconciliation of net (loss) to net cash provided by operating activities
Net (loss)............................................................... $(1,011) $ (72)
Adjustments to reconcile net (loss) to net cash provided by operating
activities
Depreciation and amortization.......................................... 840 776
Equity in loss (income) of partnerships................................ 698 (54)
Distributions from operating cash flow of equity partnerships.......... 184 117
(Increase) in other assets............................................. (548) (295)
(Decrease) in interest payable......................................... (3) (2)
Increase in other liabilities.......................................... 379 112
------- -------
Net cash provided by operating activities...................... $ 539 $ 582
======= =======
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-37
<PAGE> 119
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 nine month period ended September 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 HELD FOR SALE 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.
The property has been renamed the Spanish Trace Apartments.
NOTE 4. INVESTMENT IN EQUITY METHOD PARTNERSHIPS
The Trust's investments in equity method partnerships consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Tri-City Limited Partnership ("Tri-City").......................... $2,370 $3,077
Nakash Income Associates ("NIA")................................... 262 1,144
------ ------
$2,632 $4,221
====== ======
</TABLE>
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 $601,000.
In September 1995, the Trust received notice from NIA that one of its
wraparound notes receivable has been modified in conjunction with the
modification of the underlying note payable. NIA recorded a provision for loss
of $212,000 on such modification of which the Trust's equity share is $85,000.
The Trust is a 36.3% general partner in Tri-City Limited Partnership
("Tri-City"). In July 1995, Tri-City obtained first mortgage financing of $1.4
million, secured by the previously unencumbered MacArthur
F-38
<PAGE> 120
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mills Office Park located in Dallas, Texas. The mortgage bears interest at 9.32%
per annum, requires monthly payments of principal and interest of $12,186 and
matures August 1, 2005. The Trust received $486,000 of the net financing
proceeds. In conjunction with the financing, Tri-City paid a mortgage brokerage
and equity refinancing fee of $14,000 to Basic Capital Management, Inc., the
Trust's advisor, based upon the mortgage of $1.4 million.
Set forth below are summarized financial data for the partnerships the
Trust accounts for using the equity method:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------- -------------
<S> <C> <C>
Notes receivable........................................... $ 2,597 $ 4,099
Real estate, net of accumulated depreciation ($3,008 in
1995 and $2,438 in 1994)................................. 10,421 10,728
Other assets............................................... 392 2,847
Notes payable.............................................. (4,142) (2,650)
Other liabilities.......................................... (339) (316)
------- -------
Partners' capital.......................................... $ 8,929 $14,708
======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------- -------------
<S> <C> <C>
Rental income.............................................. $ 1,887 $ 1,751
Interest income............................................ 310 262
Interest expense........................................... (221) (213)
Property operations........................................ (1,218) (1,223)
Depreciation expense....................................... (422) (456)
Provision for losses....................................... (1,714) --
------- -------
Net income (loss).......................................... $(1,378) $ 121
======= =======
</TABLE>
The Trust's equity share of the above net loss for 1995 was $506,000 and of
net income for 1994 was $66,000, before amortization of property acquisition
cost discussed below.
The Trust's share of the above partnership's capital was $2.4 million in
1995 and $3.8 million in 1994.
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 underlying unamortized property acquisition costs of $181,000 in 1995 and
$377,000 in 1994. These amounts are being amortized over the remaining useful
lives of the properties.
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 or
results of operations or liquidity.
F-39
<PAGE> 121
APPENDIX A
GLOSSARY OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
TERM REFERENCE DEFINITION
- ------------------------------ --------- ---------------------------------------------------
<S> <C> <C>
ACC........................... 63 American Continental Corp., a corporation that
previously owned Lincoln
AMEX.......................... 8,54,73 American Stock Exchange
ART........................... 28 American Realty Trust, Inc., an affiliate of BCM
Acquisition Date.............. 47 The date, if any, on which an Interested
Stockholder becomes the beneficial owner of 20% or
more of the common stock of IORI Nevada
Advisory Agreement............ 8 The advisory agreement between the Trust and BCM
providing for BCM to be responsible for the
day-to-day operations of the Trust in exchange for
an advisory fee
Affiliate..................... 31,41 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
Agreement and Plan of
Merger...................... 21 The proposed agreement and plan of merger of the
California Corporation and IORI Nevada, a form of
which is attached as Appendix B hereto
Articles of Incorporation
Amendment Provision......... 50 The provision found in Article SEVENTEENTH of the
Articles of Incorporation whereby the affirmative
vote of at least 75% of all of the Voting Stock is
required 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
BCM........................... 5 Basic Capital Management, Inc., an affiliate of the
Trust
Beneficial Owner.............. 47 The Person who, individually or through certain
related parties, owns or has the right to acquire,
hold, vote or dispose of Voting Stock
Brokerage Agreement........... 8 The non-exclusive brokerage agreement between the
Trust and Carmel Realty, providing for Carmel
Realty to provide brokerage services in exchange
for commissions
</TABLE>
A-1
<PAGE> 122
<TABLE>
<CAPTION>
PAGE
TERM REFERENCE DEFINITION
- ------------------------------ --------- ---------------------------------------------------
<S> <C> <C>
Business Combination.......... 47 Any of 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)
Bylaw Amendment Provision..... 50 The provision found in Article SEVENTH of the
Articles of Incorporation whereby IORI Nevada's
Board of Directors is authorized to make, adopt,
alter, amend, change or repeal IORI Nevada's Bylaws
CCEC.......................... 31 Consolidated Capital Equities Corporation, the
original sponsor of the Trust and one of the
Trust's former advisors
CMET.......................... 60 Continental Mortgage and Equity Trust
California Corporation........ 7,21 Income Opportunity Realty Corporation, the
California corporation, that the Trust will
incorporate as, pursuant to the Incorporation
Procedure
Carmel Ltd.................... 60 Carmel Realty Services, Ltd, an affiliate of BCM
that provides property management services to the
Trust
Carmel Realty................. 8,60 Carmel Realty, Inc, a corporation that provides
brokerage services to the Trust pursuant to the
Brokerage Agreement and that is owned 100% by SWI
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Code.......................... 10 Internal Revenue Code of 1986, as amended
Commission.................... 73 Securities and Exchange Commission
Counsel....................... 10 Andrews & Kurth L.L.P., securities and tax counsel
to the Trust
Declaration of Trust.......... 6 Second Amended and Restated Declaration of Trust of
Income Opportunity Realty Trust, dated as of April
1, 1987
Director Removal Provision.... 32 The provision found in Article ELEVENTH of the
Articles of Incorporation whereby 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
Eldercare..................... 65 Eldercare Housing Foundation, a nonprofit
corporation engaged in the acquisition of low
income and elderly housing
Evaluation Provision.......... 49 The provision found in Article TWELFTH of the
Articles of Incorporation whereby the Board of
Directors is permitted 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 and on
IORI Nevada's continuing status as a qualified REIT
under the Code
Exchange Act.................. 73 Securities and Exchange Act of 1934, as amended
IORI Nevada................... 1 Income Opportunity Realty Investors, Inc., a Nevada
corporation and a wholly-owned subsidiary of the
Trust
Incorporation Procedure....... 1,6,19 The procedure by which the Trust will be converted
from a California business trust, with certain
self-liquidating provisions, into a Nevada
corporation with a perpetual duration
Interested Stockholder........ 47 With the exception of IORI Nevada, any of its
subsidiaries and certain profit-sharing and
employee benefit plans, any Person who (i) is or
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
Lincoln....................... 63 Lincoln Savings and Loan Association, F.A.
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Liquidation Provisions........ 24 The self-liquidating provisions of the Declaration
of Trust found in Sections 6.5 and 8.2 and pursuant
to which the Trust has distributed to Shareholders
net cash proceeds received by the Trust from any
sales or refinancing of equity investments, to the
extent such proceeds have exceeded cash reserves
necessary for maintenance and improvement of its
properties, since October 24, 1991, and pursuant to
which the Trust intends to distribute to
Shareholders net cash proceeds received by the
Trust from the satisfaction of mortgage loan
investments on or prior to October 24, 1995
satisfaction of mortgage loan investments received
after October 24, 1996
Merger........................ 7,8,21 The merger of the Trust with and into IORI Nevada
NIA........................... 69 Nakash Income Associates a limited partnership in
which the Trust owns a 40% general partnership
NIRT.......................... 64 National Income Realty Trust
NOLP.......................... 65 National Operating, L.P.
NRLP.......................... 65 National Realty, L.P.
NRS........................... 24 The Nevada Revised Statutes
Nevada Common Stock........... 7 The common stock of IORI Nevada, par value $.01 per
share
Nomination Provision.......... 45 Section 3.6 of the Bylaws of IORI Nevada, which
provides 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 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)
Non-Stockholder
Constituencies.............. 49 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
OTS........................... 63 Office of Thrift Supervision
Olive Litigation.............. 17,64 A class and derivative action entitled Olive et al.
v. National Income Realty Trust et al. which has
been settled pursuant to the Olive Modification
Olive Modification............ 17 Modification of Stipulation of Settlement dated
April 28, 1994 with regard to the Olive Litigation
One-for-One Exchange.......... 21 Exchange of shares of the California Corporation
with the common stock of IORI Neveda pursuant to
the Incorporation Procedure
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Person........................ 31 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
REIT.......................... 22 Real estate investment trust as defined in the Code
RICO.......................... 63 Racketeer Influenced and Corrupt Organizations Act
RTC........................... 63 Resolution Trust Corporation
Record Date................... 19 February 7, 1996
Registration Statement........ 73 The registration statement on Form S-4, No.
33-6221, pursuant to the Securities Act of 1933, as
amended, with respect to the shares of Nevada
Common Stock
Related Party Transaction..... 65 Except for direct contractual agreements for
services between the Trust and BCM or one of its
affiliates, including the Advisory Agreement, the
Brokerage Agreement and property management
contracts, (i) any transaction between or among the
Trust and CMET, NIRT or TCI or any of their
affiliates or subsidiaries; (ii) any transaction
between or among the Trust, its affiliates or
subsidiaries and the Advisor, Mr. Phillips, Mr.
Friedman or any of their affiliates; and (iii) any
transaction between or among the Trust or any of
its affiliates or subsidiaries and a third party
with whom the Advisor, Mr. Phillips, Mr. Friedman
or any of their affiliates has an ongoing or
contemplated business or financial transaction or
relationship of any kind, whether direct or
indirect, or has had such a transaction or
relationship in the preceding one year
SAMI.......................... 60 Syntek Asset Management, Inc., the managing general
partner of SAMLP
SAMLP......................... 60 Syntek Asset Management, L.P.
SFAS.......................... 72 Statement of Financial Accounting Standards
SJSA.......................... 63 San Jacinto Savings Association, a savings
institution that was previously owned by Southmark
SWI........................... 65 Syntek West, Inc., a corporation that owns 100% of
Carmel Realty and that is owned 100% by Gene E.
Phillips
Shares........................ 6,19 Issued and outstanding shares of beneficial
interest of the Trust
Southmark..................... 63 Southmark Corporation
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Stockholder Proposal
Provision................... 46 Section 2.5 of the Bylaws of IORI Nevada, which
provides 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)
TCI........................... 28 Transcontinental Realty Investors, Inc., an
affiliate of BCM
Tri-City...................... 59,66 Tri-City Limited Partnership, a limited partnership
in which the Trust owns 36.3% general partnership
interest.
Trust......................... 1 Income Opportunity Realty Trust, a California
business trust
Trustees Regulations.......... 10 Restated Trustees' Regulations of Income
Opportunity Realty Trust, dated as of April 21,
1989
Voting Stock.................. 47 The issued and outstanding common stock of IORI
Nevada
</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
, 1996, 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;
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 , 1996 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 , 1996 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.
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<PAGE> 128
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.
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 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
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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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<PAGE> 130
IN WITNESS WHEREOF, the parties hereto have caused this Agreement of Merger
to be executed by their respective officers as of the day of ,
1996.
INCOME OPPORTUNITY REALTY
CORPORATION
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
ATTEST:
------------------------------------
Its Secretary
INCOME OPPORTUNITY REALTY
INVESTORS, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
ATTEST:
------------------------------------
Its Secretary
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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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;
(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;
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(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
(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
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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 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:
NAME ADDRESS
------------------- ------------------------
J. Gregory Holloway 4400 Thanksgiving Tower
Dallas, TX 75201
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, 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.
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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 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
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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.
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
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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 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
(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
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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 $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.
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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 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 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.
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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 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 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 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
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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.
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,
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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 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 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 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
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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 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.
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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.
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.
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.
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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 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 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
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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 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.
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.
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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.
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.
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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 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
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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.
(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"
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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.
(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;
(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;
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(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;
(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, 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
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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.
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;
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(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;
(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 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.
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(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 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.
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(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 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.
(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
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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.
(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
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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 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 7.6) shall be
obligated to present any particular investment opportunity to the Trust even if
such opportunity is of a character which, if
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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 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
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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.
(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;
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(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 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 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
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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 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
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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 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 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
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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. 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,
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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 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
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the same manner as if he were not a Trustee, officer, 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
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
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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 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.
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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:
<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 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.
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(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.
(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
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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.
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.
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.
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IN WITNESS WHEREOF, the undersigned have executed this Declaration of Trust
as of the date first hereinabove set forth.
<TABLE>
<S> <C>
/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
</TABLE>
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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)
E-25
<PAGE> 175
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I: The Trust: Definitions................................................ E-1
ARTICLE II: Trustees.............................................................. E-5
ARTICLE III: Trustees' Powers...................................................... E-7
ARTICLE IV: Advisor: Limitation on Operating Expenses............................. E-11
ARTICLE V: Investment Policy..................................................... E-12
ARTICLE VI: The Shares and Shareholders........................................... E-14
ARTICLE VII: Liability of Trustees, Shareholders and Officers and Other Matters.... E-17
ARTICLE VIII: Duration, Amendment, Termination, and Qualification of Trust.......... E-21
ARTICLE IX: Miscellaneous......................................................... E-22
</TABLE>
E-26
<PAGE> 176
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.
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
SS.:
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
E-27
<PAGE> 177
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.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
August 6, 1993.
<TABLE>
<S> <C>
/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
</TABLE>
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
E-28
<PAGE> 178
STATE OF NEW YORK
SS.:
COUNTY OF NEW YORK
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
E-29
<PAGE> 179
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.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
August 6, 1933.
<TABLE>
<S> <C>
/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
</TABLE>
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
E-30
<PAGE> 180
STATE OF NEW YORK
SS.:
COUNTY OF NEW YORK
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
E-31
<PAGE> 181
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;
(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.
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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.
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.
F-2
<PAGE> 183
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.
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.
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.
F-3
<PAGE> 184
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.
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.
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<PAGE> 185
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.
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
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<PAGE> 186
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).
(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.
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.
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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.
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
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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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DRAFT
ADVISORY AGREEMENT
BETWEEN
INCOME OPPORTUNITY REALTY INVESTORS, INC.
AND
BASIC CAPITAL MANAGEMENT, INC.
THIS AGREEMENT dated as of , 1996, between Income Opportunity
Realty Investors, Inc., a Nevada corporation (the "Company"), and Basic Capital
Management, Inc. (the "Advisor"), a Nevada corporation.
WITNESSETH:
1. The Company owns a portfolio of real estate and mortgages.
2. The Advisor and its employees have extensive experience in the
administration of real estate assets and the origination, structuring and
evaluation of real estate and mortgage investments.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
herein contained, the parties agree as follows:
1. DUTIES OF THE ADVISOR. Subject to the supervision of the Board of
Directors, the Advisor will be responsible for the day-to-day operations of the
Company and, subject to Section 17 hereof, shall provide such services and
activities relating to the assets, operations and business plan of the Company
as may be appropriate, including:
(a) preparing and submitting an annual budget and business plan for
approval by the Board of the Company (the "Business Plan");
(b) using its best efforts to present to the Company a continuing and
suitable investment program consistent with the investment policies and
objectives of the Company as set forth in the Business Plan;
(c) using its best efforts to present to the Company investment
opportunities consistent with the Business Plan and such investment program
as the Directors may adopt from time to time;
(d) furnishing or obtaining and supervising the performance of the
ministerial functions in connection with the administration of the
day-to-day operations of the Company including the investment of reserve
funds and surplus cash in short-term money market investments;
(e) serving as the Company's investment and financial advisor and
providing research, economic, and statistical data in connection with the
Company's investments and investment and financial policies;
(f) on behalf of the company, investigating, selecting and conducting
relations with borrowers, lenders, mortgagors, brokers, investors,
builders, developers and others; provided however, that the Advisor shall
not retain on the Company's behalf any consultants or third party
professionals, other than legal counsel, without prior Board approval;
(g) consulting with the Directors and furnishing the Directors with
advice and recommendations with respect to the making, acquiring (by
purchase, investment, exchange or otherwise), holding and disposition
(through sale, exchange, or otherwise) of investments consistent with the
Business Plan of the Company;
(h) obtaining for the Directors such services as may be required in
acquiring and disposing of investments, disbursing and collecting the funds
of the Company, paying the debts and fulfilling the obligations of the
Company, and handling, prosecuting, and settling any claims of the Company,
including foreclosing and otherwise enforcing mortgage and other liens
securing investments;
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(i) obtaining for and at the expense of the Company such services as
may be required for property management, loan disbursements, and other
activities relating to the investments of the Company, provided, however,
the compensation for such services shall be agreed to by the Company and
the service provider;
(j) advising the Company in connection with public or private sales of
shares or other securities of the Company, or loans to the Company, but in
no event in such a way that the Advisor could be deemed to be acting as a
broker dealer or underwriter;
(k) quarterly and at any time requested by the Directors, making
reports to the Directors regarding the Company's performance to date in
relation to the Company's approved Business Plan and its various
components, as well as the Advisor's performance of the foregoing services;
(l) making or providing appraisal reports, where appropriate, on
investments or contemplated investments of the Company;
(m) assisting in preparation of reports and other documents necessary
to satisfy the reporting and other requirements of any governmental bodies
or agencies and to maintain effective communications with stockholders of
the Company; and
(n) doing all things necessary to ensure its ability to render the
services contemplated herein, including providing office space and office
furnishings and personnel necessary for the performance of the foregoing
services as Advisor, all at its own expense, except as otherwise expressly
provided for herein.
2. NO PARTNERSHIP OR JOINT VENTURE. The Company and the Advisor are not
partners or joint venturers with each other, and nothing herein shall be
construed so as to make them such partners or joint venturers or impose any
liability as such on either of them.
3. RECORDS. At all times, the Advisor shall keep proper books of account
and records of the Company's affairs which shall be accessible for inspection by
the Company at any time during ordinary business hours.
4. ADDITIONAL OBLIGATIONS OF THE ADVISOR. The Advisor shall refrain from
any action (including, without limitation, furnishing or rendering services to
tenants of property or managing or operating real property) that would (a)
adversely affect the status of the Company as a real estate investment trust, as
defined and limited in Sections 856-860 of the Internal Revenue Code, (b)
violate any law, rule, regulation, or statement of policy of any governmental
body or agency having jurisdiction over the Company or over its securities, (c)
cause the Company to be required to register as an investment company under the
Investment Company Act of 1940, or (d) otherwise not be permitted by the
Articles of Incorporation of the Company.
5. BANK ACCOUNTS. The Advisor may establish and maintain one or more bank
accounts in its own name, and may collect and deposit into any such account or
accounts, and disburse from any such account or accounts, any money on behalf of
the Company, under such terms and conditions as the Directors may approve,
provided that no funds in any such account shall be commingled with funds of the
Advisor; and the Advisor shall from time to time render appropriate accounting
of such collections and payments to the Directors and to the auditors of the
Company.
6. BOND. The Advisor shall maintain a fidelity bond with a responsible
surety company in such amount as may be required by the Directors from time to
time, covering all directors, officers, employees, and agents of the Advisor
handling funds of the Company and any investment documents or records pertaining
to investments of the Company. Such bond shall inure to the benefit of the
Company in respect to losses of any such property from acts of such directors,
officers, employees, and agents through theft, embezzlement, fraud, negligence,
error, or omission or otherwise, the premium for said bond to be at the expense
of the Company.
7. INFORMATION FURNISHED ADVISOR. The Directors shall have the right to
change the Business Plan at any time, effective upon receipt by the Advisor of
notice of such change. The Company shall furnish the Advisor with a certified
copy of all financial statements, a signed copy of each report prepared by
independent certified public accountants, and such other information with regard
to the Company's affairs as the Advisor may from time to time reasonably
request.
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8. CONSULTATION AND ADVICE. In addition to the services described above,
the Advisor shall consult with the Directors, and shall, at the request of the
Directors or the officers of the Company, furnish advice and recommendations
with respect to any aspect of the business and affairs of the Company, including
any factors that in the Advisor's best judgment should influence the policies of
the Company.
9. ANNUAL BUSINESS PLAN AND BUDGET. No later than January 15th of each
year, the Advisor shall submit to the Directors a written Business Plan for the
current Fiscal Year of the Company. Such Business Plan shall include a
twelve-month forecast of operations and cash flow with explicit assumptions and
a general plan for asset sales or acquisitions, lending, foreclosure and
borrowing activity, other investments or ventures and proposed securities
offerings or repurchases or any proposed restructuring of the Company. To the
extent possible, the Business Plan shall set forth the Advisor's recommendations
and the basis therefor with respect to all material investments of the Company.
Upon approval by the Board of Directors, the Advisor shall be authorized to
conduct the business of the Company in accordance with the explicit provisions
of the Business Plan, specifically including the borrowing, leasing,
maintenance, capital improvements, renovations and sale of investments set forth
in the Business Plan. Any transaction or investment not explicitly provided for
in the approved Business Plan shall require the prior approval of the Board of
Directors unless made pursuant to authority expressly delegated to the Advisor.
Within sixty (60) days of the end of each calendar quarter, the Advisor shall
provide the Board of Directors with a report comparing the Company's actual
performance for such quarter against the Business Plan.
10. DEFINITIONS. As used herein, the following terms shall have the
meanings set forth below:
(a) "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 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.
(b) "Appraised Value" shall mean the value of a Real Property
according to an appraisal made by an independent qualified appraiser who is
a member in good standing of the American Institute of Real Estate
Appraisers and is duly licensed to perform such services in accordance with
the applicable state law, or, when pertaining to Mortgage Loans, the value
of the underlying property as determined by the Advisor.
(c) "Book Value" of an asset or assets shall mean the value of such
asset or assets on the books of the Company, before provision for
amortization, depreciation, depletion or valuation reserves and before
deducting any indebtedness or other liability in respect thereof, except
that no asset shall be valued at more than its fair market value as
determined by the Directors.
(d) "Book Value of Invested Assets" shall mean the Book Value of the
Company'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.
(e) "Business Plan" shall mean the Company's investment policies and
objectives and the capital and operating budget based thereon, approved by
the Board as thereafter modified or amended.
(f) "Fiscal Year" shall mean any period for which an income tax return
is submitted to the Internal Revenue Service and which is treated by the
Internal Revenue Service as a reporting period.
(g) "Gross Asset Value" shall mean the total assets of the Company
after deduction of allowance for amortization, depreciation or depletion
and valuation reserves.
(h) "Mortgage Loans" shall mean notes, debentures, bonds, and other
evidences of indebtedness or obligations, whether negotiable or
non-negotiable, and which are secured or collateralized by mortgages,
including first, wraparound, construction and development, and junior
mortgages.
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(i) "Net Asset Value" shall mean the Book Value of all the assets of
the Company minus all the liabilities of the Company.
(j) "Net Income" for any period shall mean the Net Income of the
Company for such period computed in accordance with generally accepted
accounting principles after deduction of the Gross Asset Fee, but before
deduction of the Net Income Fee, as set forth in Sections 11(a) and 11(b),
respectively, herein, and inclusive of gain or loss of the sale of assets.
(k) "Net Operating Income" shall mean rental income less property
operating expenses.
(l) "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 Directors and including the Gross Asset Fee payable to the Advisor and
fees and expenses paid to the Directors who are not employees or Affiliates
of the Advisor.
(m) The operating expenses shall exclude, however, the following:
(i) the cost of money borrowed by the Company;
(ii) income taxes, taxes and assessments on real property and all
other taxes applicable to the Company;
(iii) expenses and taxes incurred in connection with the issuance,
distribution, transfer, registration and stock exchange listing of the
Company'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 Company;
(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, foreclosure 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 Company 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; and
(x) the cost of any accounting, statistical, bookkeeping or
computer equipment necessary for the maintenance of books and records of
the Company.
Additionally, the following expenses of the Advisor shall be excluded:
(i) employment expenses of the Advisor's personnel (including
Directors, officers and employees of the Company who are directors,
officers or employees of the Advisor or its Affiliates), other than the
expenses of those employee services listed at (v) above.
(ii) rent, telephone, utilities and office furnishings and other
office expenses of the Advisor (except those relating to a separate
office, if any, maintained by the Company); and
(iii) the Advisor's overhead directly related to performance of its
functions under this Agreement.
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(n) "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.
(o) "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.
All calculations made pursuant to this Agreement shall be based on
statements (which may be unaudited, except as provided herein) prepared on an
accrual basis consistent with generally accepted accounting principles,
regardless of whether the Company may also prepare statements on a different
basis. All other terms shall have the same meaning as set forth in the Company's
Articles of Incorporation and Bylaws.
11. ADVISORY COMPENSATION.
(a) Gross Asset Fee. On or before the twenty-eighth day of each month
during the term hereof, the Company shall pay to the Advisor, as compensation
for the basic management and advisory services rendered to the Company
hereunder, a fee at the rate of .0625% per month of the average of the Gross
Asset Value of the Company at the beginning and at the end of the next preceding
calendar month. Without negating the provisions of Sections 18, 19, 22 and 23
hereof, the annual rate of the Gross Asset Fee shall be .75% per annum.
(b) Net Income Fee. As an incentive for successful investment and
management of the Company's assets, the Advisor will be entitled to receive a
fee equal to 7.5% per annum of the Company's Net Income for each Fiscal Year or
portion thereof for which the Advisor provides services. To the extent the
Company has Net Income in a quarter, the 7.5% Net Income fee is to be paid
quarterly on or after the third business day following the filing of the report
on Form 10-Q with the Securities and Exchange Commission, except for the payment
for the fourth quarter, ended December 31, which is to be paid on or after the
third business day following the filing of the report on Form 10-K with the
Securities and Exchange Commission.
The 7.5% Net Income Fee is to be cumulative within any Fiscal Year, such
that if the Company has a loss in any quarter during the Fiscal Year, each
subsequent quarter's payment during such Fiscal Year shall be adjusted to
maintain the 7.5% per annum rate, with final settlement being made with the
fourth quarter payment and in accordance with audited results for the Fiscal
Year. The 7.5% Net Income Fee is not cumulative from year to year.
(c) Acquisition Commission. For supervising the acquisition, purchase or
long term lease of Real Property for the Company, the Advisor is to receive an
Acquisition Commission equal to the lesser of (i) up to 1% of the cost of
acquisition, inclusive of commissions, if any, paid to nonaffiliated brokers; of
(ii) the compensation customarily charged in arm's-length transactions by others
rendering similar property acquisition services as an ongoing public activity in
the same geographical location and for comparable property. The aggregate of
each purchase price of each property including the Acquisition Commissions and
all real estate brokerage fees) may not exceed such property's Appraised Value
at acquisition.
(d) Incentive Sales Compensation. To encourage periodic sales of
appreciated Real Property at optimum value and to reward the Advisor for
improved performance of the Company's Real Property, the Company shall pay to
the Advisor, on or before the 45th day after the close of each Fiscal Year, an
incentive fee equal to 10% of the amount, if any, by which the aggregate sales
consideration for all Real Property sold by the Company during such Fiscal Year
exceeds the sum of: (i) the cost of each such Real Property as originally
recorded in the Company'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 Company, and (iii) all
closing costs, (including real estate commissions) incurred in the sale of such
Real Property; provided, however, no incentive fee shall be paid unless (a) such
Real Property sold in such Fiscal Year, in the
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aggregate, has produced an 8% simple annual return on the Company's net
investment, including capital improvements, calculated over the Company's
holding period before depreciation and inclusive of operating income and sales
consideration and (b) the aggregate Net Operating Income from all Real Property
owned by the Company for all of the prior Fiscal Year and the current Fiscal
Year shall be at least 5% higher in the current Fiscal Year than in the prior
Fiscal Year.
(e) Mortgage or Loan Acquisition Fees. For the acquisition or purchase from
an unaffiliated party of any existing mortgage or loan by the Company, the
Advisor or an Affiliate is to receive a Mortgage or Loan Acquisition Fee equal
to the lesser of (a) 1% of the amount of the mortgage or loan purchased by the
Company or (b) a 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 Company of any mortgage loan.
(f) Mortgage Brokerage and Equity Refinancing Fees. For obtaining loans to
the Company or refinancing on Company properties, the Advisor or an Affiliate is
to receive a Mortgage Brokerage and Equity Refinancing Fee equal to the lesser
of (a) 1% of the amount of the loan or the amount refinanced or (b) 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 the Advisor or an
Affiliate without the approval of the Board of Directors. No fee shall be paid
on loan extensions.
12. LIMITATION ON THIRD PARTY MORTGAGE PLACEMENT FEES. The Advisor or any
of its Affiliates shall pay to the Company, one-half of any compensation
received by the Advisor or any such Affiliate from third parties with respect to
the origination, placement or brokerage of any loan made by the Company,
provided, however, the compensation retained by the Advisor or Affiliate shall
not exceed the lesser of (a) 2% of the amount of the loan committed by the
Company or (b) a loan brokerage and commitment fee which is reasonable and fair
under the circumstances.
13. STATEMENTS. The Advisor shall furnish to the Company not later than the
tenth day of each calendar month, beginning with the second calendar month of
the term of this Agreement, a statement showing the computation of the fees, if
any, payable in respect to the next preceding calendar month (or, in the case of
incentive compensation, for the preceding Fiscal Year, as appropriate) under the
Agreement. The final settlement of incentive compensation for each Fiscal Year
shall be subject to adjustment in accordance with, and upon completion of, the
annual audit of the Company's financial statements; any payment by the Company
or repayment by the Advisor that shall be indicated to be necessary in
accordance therewith shall be made promptly after the completion of such audit
and shall be reflected in the audited statements to be published by the Company.
14. COMPENSATION FOR ADDITIONAL SERVICES. If and to the extent that the
Company shall request the Advisor or any director, officer, partner, or employee
of the Advisor to render services for the Company other than those required to
be rendered by the Advisor hereunder, such additional services, if performed,
will be compensated separately on terms to be agreed upon between such party and
the Company from time to time. In particular, but without limitation, if the
Company shall request that the Advisor perform property management, leasing,
loan disbursement or similar functions, the Company and the Advisor shall enter
into a separate agreement specifying the obligations of the parties and
providing for reasonable additional compensation to the Advisor for performing
such services.
15. EXPENSES OF THE ADVISOR. Without regard to the amount of compensation
or reimbursement received hereunder by the Advisor, the Advisor shall bear the
following expenses:
(a) employment expenses of the personnel employed by the Advisor
(including Directors, officers, and employees of the Company who are
directors, officers, or employees of the Advisor or of any company that
controls, is controlled by, or is under common control with the Advisor),
including, but not limited to, fees, salaries, wages, payroll taxes, travel
expenses, and the cost of employee benefit plans and temporary help
expenses except for those personnel expenses described in Sections 16(e)
and (p);
(b) advertising and promotional expenses incurred in seeking
investments for the Company;
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(c) rent, telephone, utilities, office furniture and furnishings, and
other office expenses of the Advisor and the Company, except as any of such
expenses relates to an office maintained by the Company separate from the
office of the Advisor; and
(d) miscellaneous administrative expenses relating to performance by
the Advisor of its functions hereunder.
16. EXPENSES OF THE COMPANY. The Company shall pay all of its expenses not
assumed by the Advisor, including without limitation, the following expenses:
(a) the cost of money borrowed by the Company;
(b) income taxes, taxes and assessments on real property, and all
other taxes applicable to the Company;
(c) legal, auditing, accounting, underwriting, brokerage, listing,
registration and other fees, printing, and engraving and other expenses,
and taxes incurred in connection with the issuance, distribution, transfer,
registration, and stock exchange listing of the Company's securities;
(d) fees, salaries, and expenses paid to officers, and employees of
the Company who are not directors, officers or employees of the Advisor, or
of any company that controls, is controlled by, or is under common control
with the Advisor;
(e) expenses directly connected with the origination or purchase of
Mortgage Loans and with the acquisition, disposition and ownership of real
estate equity interests or other property (including the costs of
foreclosure, insurance, legal, protective, brokerage, maintenance, repair,
and property improvement services) and including all compensation,
traveling expenses, and other direct costs associated with the Advisor's
employees or other personnel engaged in (i) real estate transaction legal
services, (ii) internal auditing, (iii) foreclosure and other mortgage
finance services, (iv) sale or solicitation for sale of mortgages, (v)
engineering and appraisal services, and (vi) transfer agent services;
(f) expenses of maintaining and managing real estate equity interests;
(g) insurance, as required by the Directors (including Directors'
liability insurance);
(h) the expenses of organizing, revising, amending, converting,
modifying, or terminating the Company;
(i) expenses connected with payments of dividends or interest or
distributions in cash or any other form made or caused to be made by the
Directors to holders of securities of the Company;
(j) all expenses connected with communications to holders of
securities of the Company and the other bookkeeping and clerical work
necessary in maintaining relations with holders of securities, including
the cost of printing and mailing certificates for securities and proxy
solicitation materials and reports to holders of the Company's securities;
(k) the cost of any accounting, statistical, bookkeeping or computer
equipment or computer time necessary for maintaining the books and records
of the Company and for preparing and filing Federal, State and Local tax
returns;
(l) transfer agent's, registrar's, and indenture trustee's fees and
charges;
(m) legal, accounting, investment banking, and auditing fees and
expenses charged by independent parties performing these services not
otherwise included in clauses (c) and (e) of this Section 16;
(n) expenses incurred by the Advisor, arising from the sales of
Company properties, including those expenses related to carrying out
foreclosure proceedings;
(o) commercially reasonable fees paid to the Advisor for efforts to
liquidate mortgages before maturity, such as the solicitation of offers and
negotiation of terms of sale;
G-7
<PAGE> 196
(p) costs and expenses connected with computer services, including,
but not limited to, employee or other personnel compensation, hardware and
software costs, and related development and installation costs associated
therewith;
(q) costs and expenses associated with risk management (i.e. insurance
relating to the Company's assets);
(r) loan refinancing compensation; and
(s) expenses associated with special services requested by the
Directors pursuant to Section 14 hereof.
17. OTHER ACTIVITIES OF ADVISOR. The Advisor, its officers, directors, or
employees or any of its Affiliates may engage in other business activities
related to real estate investments or act as advisor to any other person or
entity (including another real estate investment trust), including those with
investment policies similar to the Company, and the Advisor and its officers,
directors, or employees and any of its Affiliates shall be free from any
obligation to present to the Company any particular investment opportunity that
comes to the Advisor or such persons, regardless of whether such opportunity is
in accordance with the Company's Business Plan. However, to minimize any
possible conflict, the Advisor shall consider the respective investment
objectives of, and the appropriateness of a particular investment to each such
entity in determining to which entity a particular investment opportunity should
be presented. If appropriate to more than one entity, the Advisor shall present
the investment opportunity to the entity that has had sufficient uninvested
funds for the longest period of time.
18. LIMITATION ON OPERATING EXPENSES. To the extent that the Operating
Expenses of the Company for any Fiscal Year exceed the lesser of (a) 1.5% of the
average of the book Values of Invested Assets of the Company at the end of each
calendar month of such fiscal year, of (b) the greater of 1.5% of the average of
the Net Asset Value of the Company at the end of each calendar month of such
fiscal year or 25% of the Company's Net Income, the Advisor shall refund to the
Company from the fees paid to the Advisor 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 Company, with respect to any
fiscal year, any amount which exceeds the aggregate of the Gross Asset Fees paid
to the Advisor under this Agreement with respect to such fiscal year.
19. TERM; TERMINATION OF AGREEMENT. This Agreement shall continue in force
until the next Annual Meeting of Stockholders of the Company, and, thereafter,
it may be renewed from year to year, subject to any required approval of the
Stockholders of the Company and, if any Director is an Affiliate of the Advisor,
the approval of a majority of the Directors who are not so affiliated. Notice of
renewal shall be given in writing by the Directors to the Advisor not less than
60 days before the expiration of this Agreement or of any extension thereof.
This Agreement may be terminated for any reason without penalty upon 60 days'
written notice by the Company to the Advisor or 120 days' written notice by the
Advisor to the Company, in the former case by the vote of a majority of the
Directors who are not Affiliates of the Advisor or by the vote of holders of a
majority of the outstanding shares of the Company. Notwithstanding the
foregoing, however, in the event of any material change in the ownership,
control or management of the Advisor, the Company may terminate this Agreement
without penalty and without advance notice to the Advisor.
20. AMENDMENTS. This Agreement shall not be changed, modified, terminated
or discharged in whole or in part except by an instrument in writing signed by
both parties hereto, or their respective successors or assigns, or otherwise as
provided herein.
21. ASSIGNMENT. This Agreement shall not be assigned by the Advisor without
the prior consent of the Company. The Company may terminate this Agreement in
the event of its assignment by the Advisor without the prior consent of the
Company. Such an assignment or any other assignment of this Agreement shall bind
the assignee hereunder in the same manner as the Advisor is bound hereunder.
This Agreement shall not be assignable by the Company without the consent of the
Advisor, except in the case of assignment by the Company to a corporation,
association, trust, or other organization that is a successor to the Company.
Such
G-8
<PAGE> 197
successor shall be bound hereunder and by the terms of said assignment in the
same manner as the Company is bound hereunder.
22. DEFAULT, BANKRUPTCY, ETC. At the option solely of the Directors, this
Agreement shall be and become terminated immediately upon written notice of
termination from the Directors to the Advisor if any of the following events
shall occur:
(a) If the Advisor shall violate any provision of this Agreement, and
after notice of such violation shall not cure such default within 30 days;
or
(b) If the Advisor shall be adjudged bankrupt or insolvent by a court
of competent jurisdiction, or an order shall be made by a court of
competent jurisdiction for the appointment of a receiver, liquidator, or
trustee of the Advisor or of all or substantially all of its property by
reason of the foregoing, or approving any petition filed against the
Advisor for its reorganization, and such adjudication or order shall remain
in force or unstayed for a period of 30 days; or
(c) If the Advisor shall institute proceedings for voluntary
bankruptcy or shall file a petition seeking reorganization under the
Federal bankruptcy laws, or for relief under any law for the relief of
debtors, or shall consent to the appointment of a receiver of itself or of
all or substantially all its property, or shall make a general assignment
for the benefit of its creditors, or shall admit in writing its inability
to pay its debts generally, as they become due.
The Advisor agrees that if any of the events specified in subsections
(b) and (c) of this Section 22 shall occur, it will give written notice
thereof to the Directors within seven days after the occurrence of such
event.
23. ACTION UPON TERMINATION. From and after the effective date of
termination of this Agreement, pursuant to Sections 19, 21 or 22 hereof, the
Advisor shall not be entitled to compensation for further services hereunder but
shall be paid all compensation accruing to the date of termination. The Advisor
shall forthwith upon such termination:
(a) pay over to the Company all monies collected and held for the
account of the Company pursuant to this Agreement;
(b) deliver to the Directors a full accounting, including a statement
showing all payments collected by it and a statement of any monies held by
it, covering the period following the date of the last accounting furnished
to the Directors; and
(c) deliver to the Directors all property and documents of the Company
then in the custody of the Advisor.
24. MISCELLANEOUS. The Advisor shall be deemed to be in a fiduciary
relationship to the stockholders of the Company. The Advisor assumes no
responsibility under this Agreement other than to render the services called for
hereunder in good faith, and shall not be responsible for any action of the
Directors in following or declining to follow any advice or recommendations of
the Advisor. Neither the Advisor nor any of its shareholders, directors,
officers, or employees shall be liable to the Company, the Directors, the
holders of securities of the Company or to any successor or assign of the
Company for any losses arising from the operation of the Company if the Advisor
had determined, in good faith, that the course of conduct which caused the loss
or liability was in the best interests of the Company and the liability or loss
was not the result of negligence or misconduct by the Advisor. However, in no
event will the directors, officers or employees of the Advisor be personally
liable for any act or failure to act unless it was the result of such person's
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
G-9
<PAGE> 198
25. NOTICES. Any notice, report, or other communication required or
permitted to be given hereunder shall be in writing unless some other method of
giving such notice, report, or other communication is accepted by the party to
whom it is given, and shall be given by being delivered at the following
addresses of the parties hereto:
The Directors and/or the Company:
Income Opportunity Realty Investors, Inc.
10670 North Central Expressway
Suite 600
Dallas, Texas 75231
Attention: President
The Advisor:
Basic Capital Management, Inc.
10670 North Central Expressway
Suite 600
Dallas, Texas 75231
Attention: Executive Vice President and
Chief Financial Officer
Either party may at any time give notice in writing to the other party of a
change of its address for the purpose of this Section 25.
26. HEADINGS. The section headings hereof have been inserted for
convenience of reference only and shall not be construed to affect the meaning,
construction, or effect of this Agreement.
27. GOVERNING LAW. This Agreement has been prepared, negotiated and
executed in the State of Texas. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of Texas
applicable to agreements made and to be performed entirely in the State of
Texas.
28. EXECUTION. This instrument is executed and made on behalf of the
Company by an officer of the Company, not individually but solely as an Officer,
and the obligations under this Agreement are not binding upon, nor shall resort
be had to the private property of, any of the Directors, stockholders, officers,
employees, or agents of the Company personally, but bind only the Company
property.
IN WITNESS WHEREOF, INCOME OPPORTUNITY REALTY INVESTORS, INC. and BASIC
CAPITAL MANAGEMENT, INC., by their duly authorized officers, have signed these
presents all as of the day and year first above written.
INCOME OPPORTUNITY REALTY
INVESTORS, INC.
By:
---------------------------------
Randall M. Paulson
President
BASIC CAPITAL MANAGEMENT, INC.
By:
---------------------------------
Thomas A. Holland
Executive Vice President
G-10
<PAGE> 199
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 IN SUCH JURISDICTION.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... 5
Certain Risk Factors.................. 14
General Shareholder Information....... 19
Proposed Incorporation Procedure...... 21
Market Prices of the Shares;
Dividends........................... 52
Business and Properties of IORI
Nevada.............................. 53
Business and Properties of the
Trust............................... 54
Security Ownership of Certain
Beneficial Owners and Management.... 66
Selected Historical Consolidated
Financial Information............... 67
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 68
Legal Matters......................... 72
Experts............................... 72
Available Information................. 73
Incorporation of Certain Documents By
Reference........................... 73
Solicitation of Proxies............... 74
</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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INCOME OPPORTUNITY
REALTY TRUST
-------------------------
PROXY STATEMENT
-------------------------
INCOME OPPORTUNITY REALTY INVESTORS, INC.
-------------------------
PROSPECTUS
-------------------------
791,444 SHARES
OF COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
FEBRUARY 14, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 200
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:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------------------- ----------------------------------------------------------------------
<C> <S>
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 Kaempfer 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).
</TABLE>
II-1
<PAGE> 201
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------------------- ----------------------------------------------------------------------
<C> <S>
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/A 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 8.1)
23.3 -- Consent of Kummer Kaempfer Bonner & Renshaw (included as part of
Exhibit 5.2)
*24.1 -- Power of Attorney (set forth on pages, pages II-5 and II-6 of the
Registration Statement (File No. 33-62211) filed with the
Commission on August 29, 1995)
27.0 -- Financial Data Schedule
**99.1 -- Form of Proxy Card
</TABLE>
- ---------------
* Previously filed
** Filed herewith.
(b) Financial Statement Schedules:
<TABLE>
<CAPTION>
SCHEDULE
NUMBER DESCRIPTION OF SCHEDULE
- ------------------- ------------------------------------------------------------------------
<C> <S>
III -- Real Estate and Accumulated Depreciation
IV -- Mortgage Loans on Real Estate
</TABLE>
(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
II-2
<PAGE> 202
(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 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-3
<PAGE> 203
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 4 to Registration Statement No. 62211 to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on February 9, 1996.
INCOME OPPORTUNITY REALTY
INVESTORS, INC.
By: /s/ RANDALL M. PAULSON
-------------------------
Randall M. Paulson,
President
POWER OF ATTORNEY
Pursuant to requirements of the Securities Act of 1933, this Amendment No.
4 to Registration Statement No. 62211 has been signed by the following persons
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- -----------------
<C> <S> <C>
/s/ RANDALL M. PAULSON President (Principal February 9, 1996
- --------------------------------------------- Executive Officer)
Randall M. Paulson
THOMAS A. HOLLAND* Executive Vice President and February 9, 1996
- --------------------------------------------- Chief Financial Officer
Thomas A. Holland (Principal Financial and
Accounting Officer)
Director
- ---------------------------------------------
Geoffrey C. Etnire
JOHN P. PARSONS* Director February 9, 1996
- ---------------------------------------------
John P. Parsons
BENNETT B. SIMS* Director February 9, 1996
- ---------------------------------------------
Bennett B. Sims
TED P. STOKELY* Director February 9, 1996
- ---------------------------------------------
Ted P. Stokely
MARTIN L. WHITE* Director February 9, 1996
- ---------------------------------------------
Martin L. White
EDWARD G. ZAMPA* Director February 9, 1996
- ---------------------------------------------
Edward G. Zampa
*By: /s/ RANDALL M. PAULSON
- ---------------------------------------------
Randall M. Paulson,
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 204
SCHEDULE III
INCOME OPPORTUNITY REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1994
<TABLE>
<CAPTION>
COST
CAPITALIZED GROSS AMOUNTS OF WHICH CARRIED
INITIAL COST TO TRUST SUBSEQUENT TO AT END OF YEAR
--------------------- ACQUISITION --------------------------------
BUILDING & ------------- BUILDING & ACCUMULATED
PROPERTY/LOCATION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL(1) DEPRECIATION
- ------------------------ ------------ ------ ------------ ------------- ------ ------------ -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <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 4,251 998
Mesquite, Texas
Plumtree.............. 5,875 1,751 5,038 824 1,751 5,862 7,613 1,642
Martinez, California
Treehouse............. 1,886 375 2,124 185 375 2,309 2,684 358
San Antonio, Texas
Porticos.............. 10,084 2,897 11,588 50 2,897 11,638 14,535 929
Milwaukee, Wisconsin
OFFICE BUILDINGS
Saratoga.............. -- 2,577 10,306 388 2,583 10,688 13,271 886
Saratoga, California
Town Center Plaza..... -- 554 2,214 99 554 2,313 2,867 242
Boca Raton, Florida
-------- ------ ------- ------ ------ ------- ------- ------
$ 19,767 $9,533 $ 34,811 $ 1,867 $9,539 $ 36,672 46,211 $5,055
======== ====== ======= ====== ====== ======= ======
Allowance for estimated
losses................ (121)
-------
$46,090
=======
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
DATE OF DATE OF OPERATION
PROPERTY/LOCATION CONSTRUCTION ACQUIRED IS COMPUTED
- ------------------------ ------------ -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
PROPERTIES HELD FOR SALE
APARTMENTS
Cedars................ 1964 12/94 40 years
Irving, Texas
Eastpoint............. 1985 01/86 5 - 40 years
Mesquite, Texas
Plumtree.............. 1986 02/86 5 - 40 years
Martinez, California
Treehouse............. 1975 09/89 5 - 40 years
San Antonio, Texas
Porticos.............. 1973 11/91 40 years
Milwaukee, Wisconsin
OFFICE BUILDINGS
Saratoga.............. 1986 12/91 3 - 40 years
Saratoga, California
Town Center Plaza..... 1985 03/91 5 - 40 years
Boca Raton, Florida
Allowance for estimated
losses................
</TABLE>
- ---------------
(1) The aggregate cost for Federal income tax purposes is $45,587.
II-5
<PAGE> 205
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, Additions............................. $ 4,088 $ 3,139 $ 2,370
Depreciation........................................... 967 949 910
Deductions
Sale of real estate.................................... -- -- (141)
------- ------- -------
Balance at December 31,..................................... $ 5,055 $ 4,088 $ 3,139
======= ======= =======
</TABLE>
II-6
<PAGE> 206
SCHEDULE IV
INCOME OPPORTUNITY REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1994
<TABLE>
<CAPTION>
FINAL
INTEREST MATURITY PRIOR FACE AMOUNT
DESCRIPTION RATE DATE PERIODIC PAYMENT TERMS LIENS OF MORTGAGE
- --------------------------------------- -------- -------- ------------------------------------- ----- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
WRAPAROUND MORTGAGE NOTE
Twin Oaks.............................. 10.00% 08/98 Monthly interest -- only payments due $ 813 $2,000
Secured by shopping center in Joliet, through maturity, at which time the
IL. entire principal balance and all
accrued and unpaid interest are due.
Interest Receivable....................
Discount on Notes Receivable...........
Allowance for Estimated Losses.........
<CAPTION>
PRINCIPAL AMOUNT
OF LOANS SUBJECT
CARRYING TO DELINQUENT
AMOUNTS PRINCIPAL OR
DESCRIPTION OF MORTGAGE(1) INTEREST
- --------------------------------------- --------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
WRAPAROUND MORTGAGE NOTE
Twin Oaks.............................. $ 2,000 $ --
Secured by shopping center in Joliet,
IL.
Interest Receivable.................... 17
Discount on Notes Receivable........... (43)
-------
1,974
Allowance for Estimated Losses......... --
-------
$ 1,974
=======
</TABLE>
- ---------------
(1) The aggregate cost for Federal income tax purposes is $3,135.
II-7
<PAGE> 207
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-8
<PAGE> 208
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 January 31, 1996, 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
February 8, 1996
S-1
<PAGE> 209
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Trustees of
Income Opportunity Realty Trust and
The Partners of Tri-City Limited Partnership
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our reports dated February 28, 1995, relating to the
consolidated financial statements and schedules of Income Opportunity Realty
Trust and the financial statements and schedules of Tri-City Limited
Partnership, which are contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
Dallas, Texas
February 8, 1996
S-2
<PAGE> 210
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------------------- ----------------------------------------------------------------------
<C> <S>
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 Kaempfer 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/A 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 8.1)
23.3 -- Consent of Kummer Kaempfer Bonner & Renshaw (included as part of
Exhibit 5.2)
*24.1 -- Power of Attorney (set forth on pages, pages II-5 and II-6 of the
Registration Statement (File No. 33-62211) filed with the
Commission on August 29, 1995)
27.0 -- Financial Data Schedule
**99.1 -- Form of Proxy Card
</TABLE>
- ---------------
* Previously filed
** Filed herewith.
<PAGE> 1
[ANDREWS & KURTH LETTERHEAD]
Exhibit 8.1
February 5, 1996
Income Opportunity Realty Investors, Inc.
10670 North Central Expressway
Suite 300
Dallas, Texas 75231
Re: Income Opportunity Realty Investors, Inc.
Registration Statement on Form S-4
791,444 shares of Common Stock, par value $.01 per share
Ladies and Gentlemen:
We have acted as counsel for Income Opportunity Realty Investors,
Inc., a Nevada corporation (the "Company"), in connection with a Registration
Statement on Form S-4 filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended (the "Registration Statement"), covering
shares of the Company's common stock, par value $.01 per share, to be offered
in connection with the proposed merger (the "Merger") of Income Opportunity
Realty Corporation, a California corporation, (the "California
Corporation")(the successor in interest to Income Opportunity Realty Trust, a
California real estate investment trust (the "Trust")) with and into the
Company (the "Incorporation Procedure"). In that capacity, we have examined
the charter and bylaws of the Company and of the California Corporation, the
Second Amended and Restated Declaration of Trust and the Restated Trustees'
Regulations of the Trust, the Registration Statement, the corporate action
taken by the Company and the California Corporation and the action taken by the
Trust in connection with the Incorporation Procedure that provide for the
incorporation of the Trust, the Merger, and the issuance of 791,444 shares of
the Common Stock pursuant thereto, and such other materials and matters as we
have deemed necessary to the issuance of this opinion.
In all such examinations, we have assumed the genuineness of all
signatures, the authority to sign of all signatories, the due execution of all
original and certified documents, and the conformity to the original and
certified documents of all copies submitted to us as conformed, photostatic or
facsimile copies. As to various questions of fact material to our opinion, we
have relied upon statements and certificates of officers of the Company, the
California Corporation and the Trust, public officials and others. In
addition, we have assumed that the Agreement and Plan of Merger to be entered
into between the California Corporation and the Company in connection with
<PAGE> 2
Income Opportunity Realty Investors, Inc.
February 5, 1996
Page 2
the Merger (the "Merger Agreement") will become effective substantially in the
form included in the Registration Statement and that the Incorporation
Procedure will be consummated as described in the Registration Statement and
pursuant to and in accordance with Merger Agreement.
Based upon such examination and the qualifications set forth herein
and in reliance thereon, we are of the opinion that (i) for federal income tax
purposes the Incorporation Procedure will constitute a reorganization within
the meaning of section 368(a)(1)(F) of the Internal Revenue Code of l986, as
amended (the "Code") and (ii) the information in the Registration Statement
under the caption "Material Federal Income Tax Consequences," to the extent it
constitutes matters of law or legal conclusions, is correct in all material
respects. Upon consummation of the Incorporation Procedure, the Company will
be treated as the same taxpayer as the Trust for federal income tax purposes.
Thus, the conversion of the Trust into the Company essentially will be
irrelevant for federal income tax purposes and the operations of the Trust and
the Company will be combined for purposes of determining whether the Company
qualifies as a real estate investment trust for the taxable year in which the
Incorporation Procedure is consummated. The Incorporation Procedure will not,
in and of itself, adversely affect the ability of the Trust or the Company to
qualify as a real estate investment trust for federal income tax purposes.
The opinions herein are based upon our interpretations of current law,
including court authority and existing Final and Temporary Regulations, which
are subject to change both prospectively and retroactively, and upon the facts
and assumptions discussed herein. This opinion letter is limited to the
matters set forth herein, and no opinions are intended to be implied or may be
inferred beyond those expressly stated herein. Our opinions are rendered as of
the date hereof and we assume no obligation to update or supplement these
opinions or any matter related to these opinions to reflect any change of fact,
circumstances, or law after the date hereof. In addition, our opinions are
based on the assumption that the matter, if litigated, will be properly
presented to the applicable court. Furthermore, our opinions are not binding
on the Internal Revenue Service or a court. In addition, we must note that our
opinions represent merely our best legal judgment on the matters presented and
that others may disagree with our conclusions. There can be no assurance that
the Internal Revenue Service will not take contrary positions or that a court
would agree with our opinions if litigated. In the event any one of the
statements, representations or assumptions we have relied upon to issue these
opinions is incorrect, our opinions might be adversely affected and may not be
relied upon.
This opinion is solely for the benefit of the addressee hereof, and,
without our prior written consent, may not be quoted in whole or in part or
otherwise referred to in any legal opinion, document, or other report, and may
not be furnished to any person or entity. We consent to the filing
<PAGE> 3
Income Opportunity Realty Investors, Inc.
February 5, 1996
Page 3
of this opinion as an exhibit to the Registration Statement and to the
reference to this firm in the Registration Statement and Proxy
Statement/Prospectus which is a part thereof. By giving such consent, we do
not hereby admit that we are an expert with respect to any part of the
Registration Statement, including this exhibit, within the meaning of the term
"expert" as used in the Securities Act of l933, as amended. This opinion is
delivered as of the date hereof and we disclaim any responsibility to update
this opinion at any time following the date hereof.
Very truly yours,
/s/ ANDREWS & KURTH L.L.P.
<PAGE> 1
EXHIBIT 99.1
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 15, 1996
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 March 15, 1996,
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)
-1-
<PAGE> 2
[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 BY 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 ________________________, 1996
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
-2-
