<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1996
--------------
Commission File Number 1-9525
------
INCOME OPPORTUNITY REALTY INVESTORS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 75-2615944
- - -------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas, 75231
--------------------------------------------------------- ---------
(Address of Principal Executive Office) (Zip Code)
(214) 692-4700
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
INCOME OPPORTUNITY REALTY TRUST
-------------------------------
(Former Name of Registrant)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
Common Stock $.01 par value 770,744
- - ----------------------------- --------------------------------
(Class) (Outstanding at April 30, 1996)
1
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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 Investors, Inc., (the "Company"), all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the Company'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 INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- ----------
Assets (dollars in thousands)
------
<S> <C> <C>
Notes and interest receivable
Performing........................................ $ 1,989 $ 1,986
Foreclosed real estate held for sale, net of
accumulated depreciation ($20 in 1996 and
$20 in 1995)...................................... 856 966
Less - allowance for estimated losses.............. - (121)
---------- ----------
2,845 2,831
Real estate held for investment, net of accumulated
depreciation ($6,350 in 1996 and $6,087 in 1995).. 39,232 39,480
Investment in partnerships......................... 2,532 2,472
Cash and cash equivalents.......................... 8,670 2,988
Other assets (including $74 in 1996 and $90 in
1995 from affiliates)............................. 2,159 1,398
---------- ----------
$ 55,438 $ 49,169
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable......................... $ 29,934 $ 22,682
Other liabilities (including $243 in 1995
to affiliates).................................... 2,238 2,296
---------- ----------
32,172 24,978
Commitments and contingencies
Stockholders' equity
Common Stock, $.01 par value;
authorized, 10,000,000 shares; issued and
outstanding, 767,044 shares in 1996 and 791,444
shares in 1995.................................... 8 3,347
Paid-in capital.................................... 64,811 62,093
Accumulated distributions in excess of accumulated
earnings.......................................... (41,553) (41,249)
---------- ----------
23,266 24,191
---------- ----------
$ 55,438 $ 49,169
========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
<PAGE> 3
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------
1996 1995
--------- ---------
(dollars in thousands,
except per share)
<S> <C> <C>
INCOME
Rents..................................... $ 2,033 $ 1,750
Interest.................................. 77 62
--------- ---------
2,110 1,812
EXPENSES
Property operations....................... 1,042 935
Equity in loss (income) of partnerships... 1 (85)
Interest.................................. 496 470
Depreciation.............................. 263 257
Advisory fee to affiliate................. 94 92
General and administrative................ 360 135
--------- ---------
2,256 1,804
--------- ---------
Net income (loss).......................... $ (146) $ 8
========= =========
Earnings Per Share
Net income (loss)......................... $ (.19) $ .02
========= =========
Weighted average Common shares used in
computing earnings per share.............. 780,296 791,444
========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE> 4
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1996
<TABLE>
<CAPTION>
Accumulated
Distributions
Common Stock in Excess of
---------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Earnings Equity
------- -------- --------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1996.................... 791,444 $ 3,347 $ 62,093 $ (41,249) $ 24,191
Change in par value - (3,339) 3,339 - -
Repurchase of Common
Stock................... (31,500) - (621) - (621)
Dividends ($.20 per
share).................. - - - (158) (158)
Net (loss)..................... - - - (146) (146)
------- -------- --------- ---------- --------
Balance, March 31, 1996........ 767,044 $ 8 $ 64,811 $ (41,553) $ 23,266
======= ======== ========= ========== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------------------
1996 1995
-------------- --------------
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Rents collected.................................. $ 2,040 $ 1,748
Interest collected............................... 73 59
Interest paid.................................... (433) (449)
Payments for property operations................. (1,048) (1,140)
Advisory fee paid to affiliate................... (88) (92)
General and administrative expenses paid......... (218) (213)
Distribution from partnerships................... 5 4
Other............................................ (449) 317
-------------- --------------
Net cash provided by (used in) operating
activities.................................. (118) 234
Cash Flows from Investing Activities
Real estate improvements......................... (26) (21)
Contributions to partnerships.................... (66) -
-------------- --------------
Net cash (used in) investing activities....... (92) (21)
Cash Flows from Financing Activities
Payments on notes payable........................ (89) (150)
Proceeds from notes payable...................... 7,300 -
Debt issue costs................................. (297) -
Distributions to stockholders.................... (158) (119)
Payments on advances from advisor................ (243) (37)
Repurchase of Common Stock....................... (621) -
-------------- --------------
Net cash provided by (used in) financing
activities.................................. 5,892 (306)
Net increase (decrease) in cash and cash
equivalents...................................... 5,682 (93)
Cash and cash equivalents, beginning of period.... 2,988 232
-------------- --------------
Cash and cash equivalents, end of period.......... $ 8,670 $ 139
============== ==============
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities
Net income (loss)................................. $ (146) $ 8
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization.................... 281 276
Equity in (income) loss of partnerships.......... 1 (85)
Distributions from partnerships in excess of
current period earnings....................... 5 4
(Increase) decrease in other assets.............. (486) 270
Increase (decrease) in interest payable.......... 41 (1)
Increase (decrease) in other liabilities......... 186 (238)
-------------- --------------
Net cash provided by (used in) operating
activities.................................. $ (118) $ 234
============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete financial
statements. Operating results for the three month period ended March 31, 1996
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. For further information, refer to the Consolidated
Financial Statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K").
At a special meeting of shareholders held on March 15, 1996, shareholders
approved a proposal to convert the Company, then a California business trust
with a finite life into a Nevada corporation with a perpetual life.
NOTE 2. NOTES AND INTEREST PAYABLE
In March 1996, the Company obtained mortgage financing of $7.3 million secured
by the previously unencumbered Saratoga Office Building in Saratoga,
California. The Company received net cash of $6.6 million after funding
required tax and insurance escrows and the payment of various closing costs
associated with the financing. The mortgage bears interest at 9.0% per annum,
requires monthly payments of principal and interest of $61,261 and matures
April 1, 2006. The Company paid a mortgage brokerage and equity refinancing
fee of $73,000 to Basic Capital Management, Inc., the Company's advisor, based
on the $7.3 million financing.
NOTE 3. COMMITMENTS AND CONTINGENCIES
The Company is involved in various lawsuits arising in the ordinary course of
business. The Company's management is of the opinion that the outcome of these
lawsuits will have no material impact on the Company's financial condition,
results of operations or liquidity.
____________________________
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Income Opportunity Realty Investors, Inc. (the "Company") invests in equity
interests in real estate through acquisitions, leases and partnerships and in
mortgage loans on real estate, including first, wraparound, and junior mortgage
loans. The Company is the successor to a California business trust organized
on December 14, 1984 which commenced operations on April 10, 1985.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 1996 aggregated $8.7 million, compared
with $3.0 million at December 31, 1995. The Company's principal sources of
cash have been and will continue to be property operations, proceeds from
property sales, financings and refinancings, collection of interest on its
mortgage note receivable and to a lesser extent distributions from
partnerships. The Company's business plan provides for the Company's use of
approximately $7.5 million of its available cash for acquisitions during the
remainder of 1996. However, through April 30, 1996, the Company has not
contracted to purchase any property. The Company anticipates that after
closing such acquisitions, it will have sufficient cash to meet its various
cash requirements during the remainder of 1996, including the payment of
distributions, debt service obligations and property maintenance and
improvements.
In March 1996, the Company received net cash of $6.6 million from the financing
of its previously unencumbered Saratoga Office Building in Saratoga,
California.
In the first quarter of 1996, the Company increased its regular quarterly
dividend to $.20 per share or a total of $158,000.
As of April 30, 1996, the Company had repurchased 99,452 of shares of its
Common Stock at a total cost of $1.8 million pursuant to a repurchase program
commenced in December 1989. 31,500 of such shares were repurchased in 1996 at
a total cost of $625,000. The Company's Board of Directors has authorized the
Company's repurchase of a total of 100,000 shares under such repurchase
program, of which 548 shares remain to be repurchased.
On a quarterly basis, the Company's management reviews the carrying value of
the Company's mortgage note receivable and properties held for sale and
periodically, but no less than annually its properties held for investment.
Generally accepted accounting principles require that the carrying value of
such assets cannot exceed the lower of their respective carrying amounts or
estimated net realizable value. In the initial instance when the estimated net
realizable value of a mortgage note receivable or a property held for sale is
less than the carrying amount at the time of evaluation, a reserve is
established and a corresponding provision for loss is recorded by a charge
against earnings. A subsequent revision to estimated net realizable value
either increases or decreases such reserve with a corresponding charge against
or credit to earnings. In the case of properties held for investment the
carrying value of the property is written down and a provision for loss is
recorded. The estimate of net realizable value of the Company'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
maintenance requirements, discussions with the manager of the property and a
review of the surrounding area. See "Recent Accounting Pronouncement," below.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations
For the three months ended March 31, 1996, the Company reported a net loss of
$146,000, as compared with net income of $8,000 for the corresponding period in
1995. The primary factors contributing to the Company's net loss are discussed
in the following paragraphs.
Rents in the three months ended March 31, 1996 were $2.0 million, as compared
to $1.8 million in the corresponding period in 1995. Of this increase,
$140,000 is due to the Company's obtaining, through foreclosure, the Spanish
Trace Apartments in Irving, Texas.
Property operations expense in the three months ended March 31, 1996 was $1.0
million, as compared to $935,000 in 1995. Of this increase, $116,000 is due to
the Company's obtaining, through foreclosure, the Spanish Trace Apartments.
Interest income increased from $62,000 in the three months ended March 31, 1995
to $77,000 in the three months ended March 31, 1996. This increase is due to
increased short term investments.
Equity in income of partnerships decreased to a loss of $1,000 in the three
months ended March 31, 1996 from income of $85,000 in the corresponding period
in 1995. Of this decrease, $47,000 is due to a decrease in interest income at
the Nakash Income Associates partnership in which the Company has a 40% general
partner interest and $38,000 is due to an increase in expenses at the apartment
properties owned by the Tri-City Limited Partnership, in which the Company has
a 36.3% general partner interest.
Interest expense, depreciation and advisory fee for the the three months ended
March 31, 1996 approximated that of the corresponding period in 1995.
Depreciation, interest and advisory fees are expected to increase as the
Company acquires additional properties over the remainder of 1996.
General and administrative expense increased to $360,000 in the three months
ended March 31, 1996 from $135,000 in the corresponding period in 1995. This
increase is due to an increase in legal fees related to the Company's
conversion from a business trust to a corporation. See NOTE 1. "BASIS OF
PRESENTATION."
Tax Matters
As more fully discussed in the Company's 1995 Form 10-K, the Company has
elected and, in management's opinion, qualified, to be taxed as a real estate
investment trust ("REIT"), as defined under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, (the "Code"). To continue to
qualify for federal taxation as a REIT under the Code, the Company 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
stockholders.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Inflation
The effects of inflation on the Company's operations are not quantifiable.
Revenues from property operations generally fluctuate proportionately with
inflationary increases and decreases in housing costs. Fluctuations in the rate
of inflation also affect the sales value of properties and, correspondingly,
the ultimate realizable value of the Company's real estate and notes receivable
portfolios.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, the Company 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 Company for personal injury
associated with such materials.
The Company's management is not aware of any environmental liability relating
to the above matters that would have a material adverse effect on the Company's
business, assets or results of operations.
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 statement requires that long-lived assets be considered impaired "...if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset." If impairment exists,
an impairment loss shall be recognized, by a charge against earnings, equal to
"...the amount by which the carrying amount of the asset exceeds the fair value
of the asset." If impairment of a long-lived asset is recognized, the carrying
amount of the asset shall be reduced by the amount of the impairment, shall be
accounted for as the asset's "new cost" and such new cost shall be depreciated
over the asset's remaining useful life.
SFAS No. 121 further requires that 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 a held
for sale asset's estimated fair value less cost to sell shall be recorded as an
adjustment to the asset's carrying amount, but not in excess of the asset's
carrying amount when originally classified as held for sale. A corresponding
charge against or credit
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Recent Accounting Pronouncement (Continued
to earnings is to be recognized. Long-lived assets held for sale are not to be
depreciated. The Company adopted SFAS No. 121 effective January 1, 1996.
The effect of adopting SFAS No. 121 was the discontinuance of depreciation on
the Company's one property held for sale which would have amounted to $6,000 in
the three months ended March 31, 1996, and a corresponding reduction in
Company's reported net loss.
THIS SPACE INTENTIONALLY LEFT BLANK.
10
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On March 15, 1996, shareholders approved the conversion of the Company from a
California business trust into a Nevada corporation. Upon conversion, each
shareholder received one share of the Company's Common Stock with $.01 par
value in exchange for each share of beneficial interest held in the business
trust.
See the exhibit to the Company's Form 8-K dated as of March 15, 1996 for
additional terms of the Company's Common Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of shareholders held on March 15, 1996, shareholders
approved a proposal to convert the Company, then a California business trust
with a finite life, into a Nevada Corporation with a perpetual life with
448,685 votes for the proposal, 39,702 votes against the proposal and 13,449
votes abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- - ------- ---------------------------------------------------------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K as follows:
A Current Report on Form 8-K, dated March 15, 1996, was filed with
respect to Item 5., which reports that on March 15, 1996, Income
Opportunity Realty Trust, having previously incorporated in California,
merged with and into its wholly-owned subsidiary, Income Opportunity
Realty Investors, Inc., a Nevada corporation pursuant to an Agreement
and Plan of Merger dated as of March 15, 1996. The incorporation and
the merger were each approved at a special meeting of shareholders held
on March 15, 1996.
11
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SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INCOME OPPORTUNITY REALTY INVESTORS,
INC.
Date: May 9, 1996 By: /s/ Randall M. Paulson
------------------------ ----------------------------------
Randall M. Paulson
President
Date: May 9, 1996 By: /s/ Thomas A. Holland
------------------------ -----------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
12
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Three Months Ended March 31, 1996
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- - ------- --------------------------------------------------- ------
<S> <C> <C>
27.0 Financial Data Schedule. 14
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 8,670
<SECURITIES> 0
<RECEIVABLES> 1,989
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 46,458
<DEPRECIATION> 6,370
<TOTAL-ASSETS> 55,438
<CURRENT-LIABILITIES> 0
<BONDS> 29,934
<COMMON> 8
0
0
<OTHER-SE> 23,258
<TOTAL-LIABILITY-AND-EQUITY> 55,438
<SALES> 0
<TOTAL-REVENUES> 2,033
<CGS> 0
<TOTAL-COSTS> 1,042
<OTHER-EXPENSES> 263
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 496
<INCOME-PRETAX> (146)
<INCOME-TAX> 0
<INCOME-CONTINUING> (146)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (146)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
