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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Year Ended December 31, 1998
Commission File Number 1-14784
----------------
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 Identification No.)
Incorporation or Organization)
10670 North Central Expressway, Suite
300, Dallas, Texas 75231
(Address of Principal Executive (Zip Code)
Offices)
(214) 692-4700
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value American Stock Exchange
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
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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 at least the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 5, 1999, the Registrant had 1,526,043 shares of Common Stock
outstanding. Of the total shares outstanding 596,315 were held by other than
those who may be deemed to be affiliates, for an aggregate value of $4,621.000
based on the last trade as reported on the American Stock Exchange on March 5,
1999. The basis of this calculation does not constitute a determination by the
Registrant that all of such persons or entities are affiliates of the
Registrant as defined in Rule 405 of the Securities Act of 1933, as amended.
Documents Incorporated by Reference:
NONE
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<PAGE>
INDEX TO
ANNUAL REPORT ON FORM 10-K
<TABLE>
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Page
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PART I
Item 1. Business ........................................................ 3
Item 2. Properties ...................................................... 5
Item 3. Legal Proceedings ............................................... 9
Item 4. Submission of Matters to a Vote of Security Holders ............. 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters ................................................................ 11
Item 6. Selected Financial Data ......................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................. 12
Item 8. Financial Statements and Supplementary Data ..................... 17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................... 35
PART III
Item 10. Directors, Executive Officers and Advisor of the Registrant .... 35
Item 11. Executive Compensation ......................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management
........................................................................ 44
Item 13. Certain Relationships and Related Transactions ................. 45
PART IV
Item 14. Exhibits, Consolidated Financial Statements, Schedules and
Reports on Form 8-K .................................................... 47
Signature Page .......................................................... 48
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
Income Opportunity Realty Investors, Inc. (the "Company" or "Registrant"), a
Nevada corporation, is the successor to a California business trust organized
pursuant to a declaration of trust dated December 14, 1984. The Company has
elected to be treated as a Real Estate Investment Trust ("REIT") under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the
"Code"). The Company has, in the opinion of management, qualified for federal
taxation as a REIT for all periods since May 1, 1985.
The Company's real estate at December 31, 1998, consisted of fourteen
properties held for investment and an interest in a partnership which owns
three properties and an interest in second partnership which holds a
wraparound mortgage loan. There were no properties purchased in 1998 nor were
any mortgage loans funded during 1998. The Company's real estate portfolio is
more fully discussed in ITEM 2. "PROPERTIES."
Business Plan
The Company's only business is investing in equity interests in real estate
through direct equity investments and partnerships and financing real estate
and real estate related activities through investments in mortgage loans. The
Company's real estate is located in the Pacific, Southeast and Southwest
regions of the continental United States. Information regarding the real
estate portfolio of the Company is set forth in ITEM 2. "PROPERTIES," and in
Schedule III to the Consolidated Financial Statements included at ITEM 8.
"FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
The Company's business is not seasonal. The Company has determined to
continue to pursue a balanced investment strategy, seeking both current income
and capital appreciation. With respect to new investments, the Company's plan
of operation is to acquire higher class apartment and commercial properties in
keeping with the current class of properties in its real estate portfolio. In
1999, the Company intends to focus on apartment acquisitions in order to
maintain a balance between apartment and commercial properties. The Company
does not expect that it will seek to fund or acquire new mortgage loans. It
may, however, originate mortgage loans in conjunction with providing purchase
money financing of a property sale. The Company also intends to continue its
strategy of maximizing each property's operating income by aggressive property
management through closely monitoring expenses while at the same time making
property renovations and/or improvements where appropriate. While such
expenditures increase the amount of revenue required to cover operating
expenses, management believes that such expenditures are necessary to maintain
or enhance the value of the properties.
The Board of Directors currently intends to continue its policy of
prohibiting the Company from incurring aggregate secured and unsecured
indebtedness in excess of 300% of the Company's net asset value (defined as
the book value of all assets of the Company minus all of its liabilities);
however, the Board of Directors may alter such policy at any time.
Management of the Company
Although the Board of Directors is directly responsible for managing the
affairs of the Company and for setting the policies which guide it, the day-
to-day operations of the Company are performed by Basic Capital Management,
Inc. ("BCM" or the "Advisor"), a contractual advisor under the supervision of
the Board of Directors. The duties of the Advisor include, among other things,
locating, investigating, evaluating and recommending real estate and mortgage
note investment and sales opportunities, as well as financing and refinancing
sources. The Advisor also serves as a consultant in connection with the
Company's business plan and investment decisions made by the Board of
Directors.
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 Company's predecessor trust
until December 31, 1992. Mr. Phillips also served as a director
3
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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 Company. BCM is more fully described in ITEM 10. "DIRECTORS,
EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT--The Advisor."
BCM has been providing advisory services to the Company since March 28,
1989. Renewal of BCM's advisory agreement was approved by stockholders at
their annual meeting held on December 28, 1998. BCM also serves as advisor to
Continental Mortgage and Equity Trust ("CMET") and Transcontinental Realty
Investors, Inc. ("TCI"). The Directors of the Company are also trustees of
CMET and directors of TCI and the officers of the Company are also officers of
CMET and TCI. BCM also serves as advisor to American Realty Trust, Inc.
("ART"). Mr. Phillips served as a director and Chairman of the Board of ART
until November 16, 1992. Randall M. Paulson, President of the Company, also
serves as President of CMET, TCI and BCM, and as Executive Vice President of
ART. NRLP Management Corp. ("NMC"), a wholly-owned subsidiary of ART, is the
general partner of National Realty, L.P. ("NRLP") and National Operating, L.P.
("NOLP"), the operating partnership of NRLP. BCM performs certain
administrative functions for NRLP and NOLP on a cost- reimbursement basis. The
officers of the Company are also officers of ART and NMC. As of March 5, 1999,
ART and TCI each owned approximately 30.4% and 22.7% of the Company's
outstanding shares of Common Stock.
Since February 1, 1990, affiliates of BCM have provided property management
services to the Company. Currently Carmel Realty Services, Ltd. ("Carmel,
Ltd.") provides such property management services. Carmel, Ltd. subcontracts
with other entities for the provision of property-level management services to
the Company. The general partner of Carmel, Ltd. is BCM. The limited partners
of Carmel, Ltd. are (1) First Equity Properties, Inc. ("First Equity"), which
is 50% owned by a subsidiary of BCM, (2) Gene E. Phillips, and (3) a trust for
the benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the
property-level management and leasing of the Company's 10 office buildings and
the commercial properties owned by a real estate partnership in which the
Company and TCI are partners to Carmel Realty, Inc. ("Carmel Realty"), which
is a company owned by First Equity. 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.
Carmel Realty is also entitled to receive real estate brokerage commissions
in accordance with the terms of a nonexclusive brokerage agreement as
discussed in ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR TO THE
REGISTRANT--The Advisor."
The Company has no employees. Employees of the Advisor render services to
the Company.
Competition
The real estate business is highly competitive and the Company competes with
numerous entities engaged in real estate activities (including certain
entities described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS--Related Party Transactions"), some of which have greater
financial resources than those of the Company. Management believes that
success against such competition is dependent upon the geographic location of
the property, the performance of the property managers in areas such as
marketing, collection and the ability to control operating expenses, the
amount of new construction in the area and the maintenance and appearance of
the property. Additional competitive factors with respect to commercial
properties are the ease of access to the property, the adequacy of related
facilities, such as parking, and sensitivity to market conditions in setting
rent levels. With respect to apartments, competition is also based upon the
design and mix of the units and the ability to provide a community atmosphere
for the tenants. Management believes that general economic circumstances and
trends and new or renovated properties in the vicinity of each of the
Company's properties are also competitive factors.
4
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To the extent that the Company seeks to sell any of its properties, the
sales prices for such properties may be affected by competition from other
real estate entities and financial institutions also attempting to sell their
properties located in areas in which the Company's properties are located.
As described above and in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS--Related Party Transactions," the officers and Directors of the
Company 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 Company. The Company's Directors, officers
and Advisor owe fiduciary duties to such other entities as well as to the
Company under applicable law. In determining to which entity a particular
investment opportunity will be allocated, the officers, trustees or directors
and the Advisor consider the respective investment objectives of each such
entity and the appropriateness of a particular investment in light of each
such entity's existing real estate and mortgage notes receivable portfolios.
To the extent that any particular investment opportunity is appropriate to
more than one of such entities, such investment opportunity will be allocated
to the entity which has had funds available for investment for the longest
period of time or, if appropriate, the investment may be shared among all or
some of such entities.
In addition, also as described in ITEM 13. "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS--Certain Business Relationships," the Company also
competes with other entities which are affiliates of the Advisor and which may
have investment objectives similar to the Company's and that may compete with
the Company in the acquisition, sale, leasing and financing of real estate. In
resolving any potential conflicts of interest which may arise, the Advisor has
informed management that it intends to continue to exercise its best judgment
as to what is fair and reasonable under the circumstances in accordance with
applicable law.
Certain Factors Associated with Real Estate and Related Investments
The Company is 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, changes in general or local economic conditions, changes in
interest rates and the availability of permanent mortgage financing which may
render the acquisition, sale or refinancing of a property difficult or
unattractive and which may make debt service burdensome, changes in real
estate and zoning laws, increases in real estate taxes, federal or local
economic or rent controls, floods, earthquakes, hurricanes and other acts of
God, and other factors beyond the control of management or the Advisor. Also,
the illiquidity of real estate investments may impair the ability of the
Company to respond promptly to changing circumstances. Management believes
that such risks are partially mitigated by the diversification by geographic
region and property type of the Company's real estate portfolio. However, to
the extent property acquisitions are concentrated in any particular geographic
region or property type, the advantages of diversification may be mitigated.
ITEM 2. PROPERTIES
The Company's principal offices are located at 10670 North Central
Expressway, Suite 300, Dallas, Texas 75231. In the opinion of management, the
offices are suitable and adequate for the Company's present operations.
Details of the Company's real estate portfolio at December 31, 1998, is set
forth in Schedule III to the Consolidated Financial Statements included at
ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." The discussions set
forth below under the headings "Real Estate" and "Mortgage Loans" provide
certain summary information concerning the Company's real estate portfolio and
a mortgage note receivable collected in 1998.
The Company's real estate portfolio consists of properties held for
investment and an investment in a partnership. The Company holds a fee simple
title to all of the properties in its real estate portfolio. The discussion
set forth below under the heading "Real Estate" provides certain summary
information concerning
5
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the Company's real estate and further summary information with respect to the
properties held for investment and its partnership investments.
The Company's real estate is geographically diverse. At December 31, 1998,
the Company held equity investments in apartments and office buildings in the
Pacific, Southwest and Southeast regions of the continental United States, as
shown more specifically in the table under "Real Estate" below. The majority
of the Company's properties are, however, located in California and Texas. At
December 31, 1998, the Company held no mortgage notes receivable.
At December 31, 1998, two of the Company's properties, Renaissance Parc
Apartments and Saratoga Office Building, each exceeded 10% of the Company's
total assets. At December 31, 1998, 95% of the Company's assets consisted of
properties held for investment and 2% consisted of investments in
partnerships. The remaining 3% of the Company's assets at December 31, 1998,
were cash, cash equivalents and other assets. The percentage of the Company's
assets invested in any one category is subject to change and no assurance can
be given that the composition of the Company's assets in the future will
approximate the percentages listed above. See ITEM 1. "BUSINESS--Business
Plan."
To continue to qualify for federal taxation as a REIT under the Code, the
Company 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.
Geographic Regions
The Company 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 Company 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
Company has 2 commercial properties in this region.
Southwest region comprised of the states of Arizona, Arkansas, Louisiana,
New Mexico, Oklahoma and Texas. The Company has 4 apartments and 2 office
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 Company has no
properties in this region.
Mountain region comprised of the states of Colorado, Idaho, Montana,
Nevada, Utah and Wyoming. The Company has no properties in this region.
Pacific region comprised of the states of California, Oregon and
Washington. The Company has 6 commercial properties in this region.
6
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Real Estate
At December 31, 1998, 95% of the Company's assets were invested in real
estate, located in the Pacific, Southeast and Southwest regions of the
continental United States, on a leveraged basis. The Company's real estate
portfolio consists of properties held for investment and an investment in a
partnership.
Types of Real Estate Investments. The Company's real estate consists of
apartments and commercial properties (office buildings) having established
income-producing capabilities. In selecting real estate for investment, the
location, age and type of property, gross rents, lease terms, financial and
business standing of tenants, operating expenses, fixed charges, land values
and physical condition are considered. The Company may acquire properties
subject to, or assume, existing debt and may mortgage, pledge or otherwise
obtain financing for its properties. The Board of Directors may alter the
types of and criteria for selecting new real estate investments and for
obtaining financing without a vote of stockholders.
The Company expects that in 1999 it will expend approximately $650,000 for
tenant improvements and leasing commissions at 2010 Valley View, an office
building construction of which was completed in 1998.
The Company has typically invested in developed real estate. The Company may
also invest in new construction or development either directly or in
partnership with nonaffiliated parties or affiliates (subject to approval by
the Board of Directors). To the extent that the Company invests in
construction and development projects, it will be subject to business risks,
such as cost overruns and construction delays, associated with such higher
risk projects.
In the opinion of management, the properties owned by the Company are
adequately covered by insurance.
The Company's owned real estate portfolio consisted of 14 properties at
January 1, and December 31, 1998, no properties being either purchased or
sold. The following table sets forth the percentages, by property type and
geographic region, of the Company's real estate at December 31, 1998.
<TABLE>
<CAPTION>
Commercial
Region Apartments Properties
------ ---------- ----------
<S> <C> <C>
Pacific................................................ -- % 73%
Southwest.............................................. 100 13
Southeast.............................................. -- 14
--- ---
100% 100%
</TABLE>
7
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The foregoing table is based solely on the number of apartment units and
commercial square footage owned and does not reflect the value of the
Company's investment in each region. See Schedule III to the Consolidated
Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA" for a more detailed description of the Company's real
estate.
Properties Held for Investment. Set forth below are the Company's properties
held for investment and the monthly rental rate for apartments and the average
annual rental rate for office buildings and occupancy thereof at December 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
Rent Per Square Foot Occupancy %
Units/ -------------------- --------------
Property Location Square Footage 1998 1997 1996 1998 1997 1996
- -------- -------------------- -------------------------- ------ ------ ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Apartments
Eastpoint............... Mesquite, TX 126 units/ 113,138 sq. ft. $ .70 $ .67 $ .66 93 97 97
LaMonte Park............ Houston, TX 128 units/ 123,184 sq. ft. .63 .59 * 99 96 *
Renaissance Parc........ Dallas, TX 294 units/ 293,654 sq. ft. .82 .80 * 96 95 *
Treehouse............... San Antonio, TX 106 units/ 88,957 sq. ft. .78 .76 .75 96 98 94
Office Buildings
2010 Valley View........ Farmers Branch, TX 39,568 sq. ft. $ 3.00 $ ** $ ** 19 ** **
5600 Mowry.............. Newark, CA 56,120 sq. ft. 19.86 18.92 * 58 81 *
Akard Plaza............. Dallas, TX 42,895 sq. ft. 13.47 13.27 * 92 99 *
Chuck Yeager............ Chantilly, VA 60,060 sq. ft. 13.39 13.07 * 72 93 *
Daley Plaza............. San Diego, CA 122,795 sq. ft. 12.53 12.74 12.88 74 76 80
La Mesa Village......... La Mesa, CA 92,611 sq. ft. 16.47 17.15 * 89 90 *
Olympic................. Los Angeles, CA 46,685 sq. ft. 21.47 21.94 16.09 100 73 73
Saratoga................ Saratoga, CA 89,825 sq. ft. 26.17 21.27 19.42 95 100 98
Town Center............. Boca Raton, FL 24,518 sq. ft. 9.36 8.86 8.21 43 100 100
Westlake Village........ Westlake Village, CA 45,500 sq. ft. 14.44 14.20 * 79 98 *
</TABLE>
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* Property was purchased in 1997.
** Property was purchased in 1997 and construction was completed in 1998.
In September 1997, the Company purchased 2010 Valley View, a partially
complete four story office building in Farmers Branch, Texas. In September
1998, the Company completed construction at a total cost of $1.9 million with
$1.8 million being spent in 1998. The Company also expended an additional
$184,000 for tenant improvements in 1998. In August 1998, the Company obtained
mortgage financing of $816,000 secured by the office building, receiving net
cash of $778,000, after the payment of various closing costs. The mortgage
bears interest at 9.1% per annum, requires monthly payments of interest only
and matures in August 2000. A mortgage brokerage and equity refinancing fee of
$8,000 was paid to BCM.
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Partnership Properties. Set forth below are the properties owned by a
partnership in which the Company is an equity investee and the average annual
rental rate for commercial properties and occupancy thereof at December 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
Rent Per
Square Foot Occupancy %
----------------- --------------
Property Location Square Footage 1998 1997 1996 1998 1997 1996
- -------- -------------- -------------- ----- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Office Building
MacArthur Mills......... Carrollton, TX 53,472 sq. ft. $9.62 $9.35 $8.38 100 97 94
Shopping Centers
Chelsea Square.......... Houston, TX 70,275 sq. ft. 8.58 9.21 9.32 81 49 69
Summit at Bridgewood.... Fort Worth, TX 48,696 sq. ft. 9.48 9.48 8.67 79 65 62
</TABLE>
The Company owns a 36.3% general partner interest and TCI owns a 63.7%
combined general and limited partner interest in Tri-City Limited Partnership
which in turn owns the three properties listed above. In May 1998, Tri-City
sold its two apartments for a total of $3.3 million. Tri-City received net
cash of $1.4 million after paying off $1.9 million in mortgage debt and the
payment of various closing costs. The Company received a distribution of
$399,000 of such net cash. Tri-City paid a real estate brokerage commission of
$119,000 to Carmel Realty. Tri-City recognized a gain of $496,000 of which the
Company's equity share was $180,000. In 1998, the Company made no advances to
the partnership and received $181,000 in operating distributions.
Mortgage Loans
Prior to 1991, a substantial portion of the Company's assets had been
invested in mortgage notes secured by income-producing real estate. The
Company's mortgage notes have included first, wraparound and junior mortgage
loans. The Company has determined that it will not seek to fund or acquire new
mortgage loans, other than those which it may originate in conjunction with
providing purchase money financing of a property sale. See ITEM 1. "BUSINESS".
BCM, in its capacity as a mortgage servicer, serviced the Company's mortgage
notes.
At December 31, 1997, the Company had one mortgage note receivable and none
at December 31, 1998.
In August 1998, the Company's last remaining mortgage note receivable with a
principal balance of $2.0 million was collected in full. Net cash of $1.5
million was received, after paying off $500,000 in underlying mortgage debt.
Partnership mortgage loans. The Company owns a 40% general partner interest
and TCI owns a 60% general partner interest in Nakash Income Associates
("NIA"), which holds a wraparound mortgage note receivable secured by a
building occupied by a Wal-Mart in Maulden, Missouri. The Company received no
distributions from NIA in 1998, but did advance the partnership $8,000.
ITEM 3. LEGAL PROCEEDINGS
Olive Litigation
In February 1990, the Company, together with CMET, National Income Realty
Trust and TCI, three real estate entities with, at the time, the same
officers, directors or trustees and advisor as the Company, entered into a
settlement of a class and derivative action entitled Olive et al. v. National
Income Realty Trust et al., in the United States District Court for the
Northern District of California, 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 "Olive Modification") which settled
subsequent claims of breaches of the settlement that were asserted by the
plaintiffs and that modified certain provisions of April 1990 settlement. The
Olive 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.
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The Court retained jurisdiction to enforce the Olive Modification, and
during August and September 1996, the Court held evidentiary hearings to
assess compliance with the terms of the Olive Modification by various parties.
The Court issued no ruling or order with respect to the matters addressed at
the hearings.
Separately, in 1996, legal counsel for the plaintiffs notified the Company's
Board of Directors that he intended to assert that certain actions taken by
the Board of Directors breached the terms of the Olive Modification. On
January 27, 1997, the parties entered into an Amendment to the Olive
Modification effective January 9, 1997 (the "Olive Amendment"), which was
submitted to the Court for approval on January 29, 1997. The Olive Amendment
provides for the settlement of all matters raised at the evidentiary hearings
and by plaintiffs' counsel in his notices to the Company's Board of Directors.
On May 2, 1997, a hearing was held for the Court to consider approval of the
Olive Amendment. As a result of the hearing, the parties entered into a
revised Olive Amendment. The Court issued an order approving the Olive
Amendment on July 3, 1997.
The Olive Amendment provides for the addition of four new unaffiliated
members to the Company's Board of Directors and sets forth new requirements
for the approval of any transactions with certain affiliates until April 28,
1999. In addition, the Company, CMET, TCI and their stockholders released the
defendants from any claims relating to the plaintiffs' allegations and matters
which were the subject of the evidentiary hearings. The plaintiffs'
allegations of any breaches of the Olive Modification shall be settled by
mutual agreement of the parties or, lacking such agreement, by an arbitration
proceeding.
Under the Olive Amendment, all shares of the Company owned by Gene E.
Phillips or any of his affiliates shall be voted at all stockholder meetings
of the Company held until April 28, 1999 in favor of all new members of the
Company's Board of Directors added under the Olive Amendment. The Olive
Amendment also requires that, until April 28, 1999, all shares of the Company
owned by Mr. Phillips or his affiliates in excess of forty percent (40%) of
the Company's outstanding shares shall be voted in proportion to the votes
cast by all non-affiliated stockholders of the Company.
In accordance with the Olive Amendment, Richard W. Douglas, Larry E. Harley
and R. Douglas Leonhard were added to the Company's Board of Directors in
January 1998 and Murray Shaw was added to the Company's Board of Directors in
February 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on December 29, 1998, at
which meeting the stockholders were asked to consider and vote upon: (1) the
election of Directors; and (2) approval of the renewal of the advisory
agreement with BCM. At such meeting stockholders elected the following
individuals as Directors:
<TABLE>
<CAPTION>
Shares Voting
-------------------
Withheld
Director For Authority
-------- --------- ---------
<S> <C> <C>
Richard W. Douglas............................... 1,251,200 12,371
Larry E. Harley...................................... 1,251,738 11,833
R. Douglas Leonhard.................................. 1,251,738 11,883
Murray Shaw.......................................... 1,251,288 11,833
Ted P. Stokely....................................... 1,251,288 12,283
Martin L. White...................................... 1,251,288 12,283
Edward G. Zampa...................................... 1,251,288 12,283
</TABLE>
Also at such meeting, stockholders approved the renewal of the advisory
agreement with BCM with 1,210,119 votes for the proposal, 24,227 votes against
and 29,160 votes abstaining.
10
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange ("AMEX")
under the symbol "IOT". The following table sets forth the high and low prices
for the Company's Common Stock as reported on the AMEX.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- --------- ---------
<S> <C> <C>
March 31, 1999 (through March 5, 1999)......................... $ 8 $ 6 3/8
March 31, 1998................................................. 12 11 3/8
June 30, 1998.................................................. 12 1/8 11 1/2
September 30, 1998............................................. 11 7/8 7 15/16
December 31, 1998.............................................. 7 13/16 6 1/8
March 31, 1997................................................. 14 5/8 11
June 30, 1997.................................................. 14 1/2 11 1/2
September 30, 1997............................................. 16 11
December 31, 1997.............................................. 12 1/2 11 1/2
</TABLE>
As of March 5, 1999, the closing price of the Company's Common Stock on the
AMEX was $7.75 per share.
As of March 5, 1999, the Company's Common Stock was held by 1,640 holders of
record.
The Company paid quarterly dividends in 1998 and 1997 as follows:
<TABLE>
<CAPTION>
Amount
Date Declared Record Date Payable Date Per Share
------------- ------------------ ------------------ ---------
<S> <C> <C> <C>
February 16, 1998 March 13, 1998 March 31, 1998 $.15
May 27, 1998 June 4, 1998 June 19, 1998 .15
August 31, 1998 September 15, 1998 September 30, 1998 .15
November 24, 1998 December 15, 1998 December 30, 1998 .15
February 26, 1997 March 14, 1997 March 31, 1997 .10
June 5, 1997 June 13, 1997 June 30, 1997 .10
September 3, 1997 September 15, 1997 September 30, 1997 .10
December 1, 1997 December 15, 1997 December 31, 1997 .10
</TABLE>
The Company reported to the Internal Revenue Service that 100% of the
dividends paid in 1998 represented a return of capital and 100% of the
dividends paid in 1997 represented capital gains.
On December 5, 1989, the Board of Directors approved a share repurchase
program. The Board of Directors authorized the repurchase of a total of
200,000 shares of the Company's Common Stock pursuant to such program. Through
December 31, 1998, a total of 198,904 shares had been repurchased at a total
cost of $1.8 million. No shares were repurchased in 1998.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
EARNINGS DATA
Revenues................ $14,498 $12,487 $ 9,005 $ 7,919 $ 6,852
Expenses................ 15,470 13,175 9,658 8,081 7,225
--------- --------- --------- --------- ---------
(Loss) from operations.. (972) (688) (653) (162) (373)
Equity in income (loss)
of partnerships........ 293 52 85 (744) 86
Gain on sale of real
estate................. -- 3,953 -- -- --
--------- --------- --------- --------- ---------
Net income (loss)....... $ (679) $ 3,317 $ (568) $ (906) $ (287)
========= ========= ========= ========= =========
PER SHARE DATA
Net income (loss)....... $ (.44) $ 2.18 $ (.37) $ (.57) $ (.18)
========= ========= ========= ========= =========
Dividends per share..... $ .60 $ .40 $ .40 $ .30 $ .30
Weighted average Common
shares outstanding..... 1,521,832 1,519,888 1,530,008 1,582,888 1,582,888
<CAPTION>
December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Notes and interest
receivable, net........ $ -- $ 2,010 $ 1,998 $ 1,986 $ 1,974
Real estate held for
sale, net
Foreclosed............ -- -- 914 845 15,878
Other................. -- -- 5,709 -- 25,157
Real estate held for
investment, net........ 83,691 81,914 46,693 39,480 -
Total assets............ 88,695 90,309 63,593 49,169 49,035
Notes and interest
payable................ 60,786 61,323 38,957 22,682 20,717
Stockholders' equity.... 23,560 25,131 22,381 24,191 25,572
Book value per share.... $ 15.44 $ 16.53 $ 14.63 $ 15.28 $ 16.16
</TABLE>
The Company purchased eight properties in 1997 for a total of $46.6 million
and sold three properties for a total of $24.8 million. No properties were
purchased or sold in 1998. See ITEM 2. "PROPERTIES--REAL ESTATE" and ITEM 8.
"FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
Shares and per share data have been restated for the two for one forward
Common Stock split effected June 14, 1996.
ITEM 7. 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. The
Company is the successor to a California business trust organized on December
14, 1984 which commenced operations on April 10, 1985.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 1998 totaled $103,000 compared to
$1.1 million at December 31, 1997. The Company's principal sources of cash
have been and will continue to be property operations, proceeds from property
sales and refinancings and partnership distributions. Management anticipates
that the Company will generate sufficient cash in 1999 to meet its various
cash requirements including the payment of dividends, debt service obligations
and property renovation and/or improvement costs.
Net cash provided by operating activities decreased to $1.0 million in 1998
from $1.6 million in 1997. The primary factors affecting the Company's cash
flow from operating activities are discussed in the following paragraphs.
12
<PAGE>
The Company's cash flow from property operations (rents collected less
payments for property operating expenses) increased to $7.9 million in 1998
from $6.5 million in 1997. This increase was the result of the purchase of
eight properties in 1997 partially offset by a decrease of $632,000 due to the
sale of three properties in 1997 and $178,000 due to increased repair and
maintenance at two of the Company's commercial properties. Management believes
that this trend will continue, particularly in the Company's commercial
properties, if the economy remains stable or improves.
Interest collected on mortgage notes receivable decreased to $182,000 in
1998 from $253,000 in 1997. This decrease was due to a decrease in short term
investment income and the collection of the Company's last remaining mortgage
note receivable in August 1998. The Company has determined that generally, it
will not actively seek to originate new mortgage loans, other than those
resulting from the Company's providing purchase money financing in connection
with a property sale.
Interest paid on the Company's notes payable increased to $5.5 million in
1998 from $3.9 million in 1997. This increase was primarily attributable to
interest paid on mortgages secured by eight properties purchased and interest
paid on the refinancing of a commercial property in 1997 and the financing of
an unencumbered property in 1998. The Company believes that interest paid on
notes payable will continue to increase as the Company continues to acquire
properties on a leveraged basis.
Advisory and net income fee paid to affiliate of $534,000 in 1998
approximated the $567,000 paid in 1997.
In 1998, the Company received cash of $2.0 million from the collection of
its last remaining mortgage note receivable and also received cash of $800,000
from a mortgage financing of an unencumbered property. During 1998, the
Company made scheduled mortgage principal payments totaling $1.4 million.
Scheduled principal payments on notes payable of $3.9 million are due in
1999. For those mortgages that come due in 1999, it is the Company's intention
to either seek to extend the due dates one or more years, or refinance the
debt on a long-term basis or pay them when due. Management believes it will
continue to be successful in obtaining loan extensions or refinancings.
The Company owns a 36.3% general partner interest and Transcontinental
Realty Investors, Inc. ("TCI") owns a 63.7% combined general and limited
partner interest in the Tri-City Limited Partnership ("Tri-City"). In 1998,
the Company received $181,000 in distributions from Tri-City's operating cash
flow and $399,000 from its investing cash flow. In 1998, the Company received
no distributions from and made $8,000 in contributions to Nakash Income
Associates ("NIA"). The Company owns a 40% general partner interest and TCI
owns a 60% general partner interest in NIA. See NOTE 5. "INVESTMENT IN EQUITY
METHOD REAL ESTATE ENTITIES."
The Company has paid quarterly dividends since the first quarter of 1993. In
1998, the Company paid dividends to its stockholders totaling $945,000 or $.60
per share and in 1997 $567,000 or $.40 per share.
Management reviews the carrying values of the Company's properties at least
annually and whenever events or a change in circumstances indicate that
impairment may exist. Impairment is considered to exist if, in the case of a
property, the future cash flow from the property (undiscounted and without
interest) is less than the carrying amount of the property. If impairment is
found to exist, a provision for loss is recorded by a charge against earnings.
The property review generally includes selective property inspections,
discussions with the manager of the property and visits to selected properties
in the area and a review of the following: (1) the property's current rents
compared to market rents; (2) the property's expenses; (3) the property's
maintenance requirements; and (4) the property's cash flows.
13
<PAGE>
Results of Operations
1998 Compared to 1997. For the year 1998, the Company reported a net loss of
$679,000 as compared with net income of $3.3 million in 1997. The Company's
1997 net income included gains on sale of real estate of $4.0 million whereas
its 1998 net loss includes no such gains. The primary factors contributing to
the Company's 1998 net loss are discussed in the following paragraphs.
Rents increased to $14.3 million in 1998 from $12.2 million in 1997. Of this
increase, $4.2 million was attributable to the eight properties purchased in
1997. This increase was partially offset by a decrease of $2.1 million due to
three apartments being sold in 1997. Rents are expected to increase in 1999
due to a full year of operations of the 2010 Valley View Office Building and
increased occupancy and rental rates at its apartment and commercial
properties.
Interest income decreased to $172,000 in 1998 from the $266,000 earned in
1997. This decrease was due to a decrease in short term investment income and
the collection, in August 1998, of the Company's last remaining mortgage note
receivable. Interest income is expected to be minimal in 1999.
Property operations expense increased to $6.5 million in 1998 from $5.9
million for 1997. Of the increase, $2.2 million was attributable to the eight
properties purchased in 1997 and $178,000 was due to increased repairs and
maintenance at two of the Company's commercial properties. These increases
were partially offset by a decrease of $1.5 million due to three apartments
being sold in 1997.
Interest expense increased to $5.8 million in 1998 from $4.1 million in
1997. Of this increase, $1.7 million was attributable to the purchase of eight
properties in 1997, $418,000 was due to the refinancing of a commercial
property in 1997 and $29,000 was due to the financing of an unencumbered
property in 1998. These increases were partially offset by a decrease of
$444,000 due to three apartments being sold in 1997. Interest expense in 1999
is expected to approximate 1998.
Depreciation expense increased to $2.2 million in 1998 from $1.6 million in
1997. Of this increase, $592,000 was due to eight properties being purchased
in 1997 partially offset by a decrease of $159,000 due to three apartments
being sold in 1997. Depreciation expense in 1999 is expected to approximate
1998.
Advisory fee decreased to $329,000 in 1998 from $343,000 in 1997. Such
decrease was attributable to a decrease in the Company's gross assets, the
basis for such fee and an increase in the operating expense limitation refund.
See NOTE 9. "ADVISORY AGREEMENT." Such fee is expected to continue to decrease
if the Company's assets continue to decrease.
A net income fee of $275,000 was earned by the Company's advisor in 1997.
Such fee was the result of the Company recognizing gains totaling $4.0 million
from the sale of three apartments in 1997. No such fee was incurred in 1998.
General and administrative expenses decreased to $755,000 in 1998 from $1.0
million in 1997. This decrease was attributable to a decrease in legal fees
related to the Olive litigation (see NOTE 14. "COMMITMENTS AND
CONTINGENCIES").
Equity in income of partnerships increased to $293,000 in 1998 from $52,000
in 1997. Included in equity earnings in 1998 are gains on the sale of real
estate of $180,000, the Company's equity share of the gain recognized by Tri-
City on the sale of its two apartments. See NOTE 5. "INVESTMENT IN EQUITY
METHOD PARTNERSHIPS."
1997 Compared to 1996. For the year 1997, the Company reported net income of
$3.3 million as compared with a net loss of $568,000 in 1996. The Company's
1997 net income included gains on sale of real estate of $4.0 million, its
1996 net loss included no such gains. The primary factors contributing to the
Company's 1997 net income are discussed in the following paragraphs.
14
<PAGE>
Rents increased to $12.2 million in 1997 from $8.7 million in 1996. Of this
increase, $5.4 million was attributable to the ten properties purchased in
1997 and late 1996 and $355,000 was attributable to increased occupancy and
rental rates at two of the Company's commercial properties and two of its
apartments. These increases were partially offset by a decrease of $2.2
million due to three apartments being sold in 1997.
Property operations expense increased to $5.9 million in 1997 from $4.4
million in 1996. Of the increase, $2.5 million was attributable to the ten
properties purchased in 1997 and late 1996 and $87,000 was due to increased
repairs and maintenance at one of the Company's commercial properties. These
increases were partially offset by a decrease of $1.0 million due to three
apartments being sold in 1997.
Interest income decreased to $266,000 in 1997 from $339,000 in 1996. This
decrease was primarily due to a decrease in short term investment income.
Interest expense increased to $4.1 million in 1997 from $2.6 million in
1996. Of this increase $2.1 million was attributable to the purchase of ten
properties in 1997 and late 1996 and $191,000 was due to the financing of two
unencumbered commercial properties in late 1996 and the refinancing of a
commercial property in 1997. These increases were partially offset by a
decrease of $848,000 due to three apartments being sold in 1997.
Depreciation expense increased to $1.6 million in 1997 from $1.1 million in
1996. Of this increase, $734,000 was due to ten properties purchased in 1997
and late 1996 partially offset by a decrease of $294,000 due to three
apartments being sold in 1997.
Advisory fee increased to $343,000 in 1997 from $227,000 in 1996. Such
increase was attributable to an increase in the Company's gross assets, the
basis for such fee.
A net income fee of $275,000 was earned by the Company's advisor in 1997.
Such fee was the result of the Company recognizing gains totaling $4.0 million
from the sale of three apartments in 1997. No such fees were incurred in 1996.
General and administrative expenses decreased to $1.0 million in 1997 from
$1.3 million in 1996. Of this decrease, $189,000 was attributable to a
decrease in legal fees related to the Olive litigation (see NOTE 14.
"COMMITMENTS AND CONTINGENCIES") and $248,000 was attributable to the 1996
preparation of proxy material and registration statement relating to the
Company's incorporation, which was nonrecurring in nature. These decreases are
partially offset by an increase of $73,000 in advisor cost reimbursements and
$90,000 in professional fees relating to the selection of new directors.
Equity in income of partnerships was $52,000 in 1997 compared to $85,000 in
1996. The decrease is due to expenses relating to the refinancing of one of
the equity partnership's mortgage debt.
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 for personal
injury associated with such materials.
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.
Inflation
The effects of inflation on the Company's operations are not quantifiable.
Revenues from property operations tend to fluctuate proportionately with
inflationary increases and decreases in housing costs.
15
<PAGE>
Fluctuations in the rate of inflation also affect the sales values of
properties and the ultimate gain to be realized from property sales. To the
extent that inflation affects interest rates, earnings from short-term
investments and the cost of new financings as well as the cost of variable
interest rate debt will be affected.
Taxes
For the years 1996, 1997 and 1998, the Company elected and in the opinion of
management 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.
Year 2000
Basic Capital Management, Inc. ("BCM"), the Company's advisor, has informed
management that its computer hardware operating system and computer software
have been certified as year 2000 compliant.
Further, Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of BCM
that performs property management services for the Company's properties, has
informed management that effective January 1, 1999, it began using year 2000
compliant computer hardware and property management software for the Company's
commercial properties. With regard to the Company's apartments, Carmel, Ltd.
has informed management that its subcontractors either have in place or will
have in place in the first quarter of 1999, year 2000 compliant computer
hardware and property management software.
The Company has not incurred, nor does it expect to incur, any costs related
to its computer hardware and accounting and property management software being
modified, upgraded or replaced to make them year 2000 compliant. Such costs
have been or will be borne by either BCM, Carmel, Ltd. or the property
management subcontractors of Carmel, Ltd.
Management has completed its evaluation of the Company's computer controlled
building systems, such as security, elevators, heating and cooling, etc., to
determine what systems are not year 2000 compliant. Management believes that
necessary modifications to such systems are insignificant and do not require
significant expenditures to make the affected systems year 2000 compliant, as
enhanced operating systems are readily available.
The Company has or will have in place the year 2000 compliant systems that
will allow it to operate. The risks the Company faces are that certain of its
vendors will not be able to supply goods or services and that financial
institutions and taxing authorities will not be able to accurately apply
payments made to them. Management believes that other vendors are readily
available and that financial institutions and taxing authorities will, if
necessary, apply monies received manually. The likelihood of the above having
a significant impact on the Company's operations is negligible.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants....................... 18
Consolidated Balance Sheets--December 31, 1998 and 1997.................. 19
Consolidated Statements of Operations--Years Ended December 31, 1998,
1997 and 1996........................................................... 20
Consolidated Statements of Stockholders' Equity--Years Ended December 31,
1998, 1997 and 1996..................................................... 21
Consolidated Statements of Cash Flows--Years Ended December 31, 1998,
1997 and 1996........................................................... 22
Notes to Consolidated Financial Statements............................... 24
Schedule III--Real Estate and Accumulated Depreciation................... 33
</TABLE>
All other schedules are omitted because they are not required, are not
applicable or the information required is included in the Financial Statements
or the notes thereto.
17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors of
Income Opportunity Realty Investors, Inc.
We have audited the accompanying consolidated balance sheets of Income
Opportunity Realty Investors, Inc. and Subsidiaries as of December 31, 1998
and 1997 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. We have also audited the schedule listed in the accompanying index.
These financial statements and the schedule are the responsibility of the
Company'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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Income Opportunity Realty Investors, Inc. and Subsidiaries as of December
31, 1998 and 1997, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles.
Also, in our opinion, the schedule referred to above presents fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN, LLP
Dallas, Texas
March 24, 1999
18
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
(dollars in thousands,
except per share)
<S> <C> <C>
Assets
Notes and interest receivable
Performing.......................................... $ -- $ 2,010
Real estate held for investment, net of accumulated
depreciation ($7,379 in 1998 and $5,211 in 1997).... 83,691 81,914
Investment in partnerships........................... 1,483 1,762
Cash and cash equivalents............................ 103 1,145
Other assets (including $475 in 1998 and $302 in 1997
from affiliates).................................... 3,418 3,478
----------- -----------
$ 88,695 $ 90,309
=========== ===========
Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable........................... $ 60,786 $ 61,323
Other liabilities (including $1,194 in 1998 and $468
in 1997 to affiliates).............................. 4,349 3,855
----------- -----------
65,135 65,178
Commitments and contingencies
Stockholders' equity
Common Stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 1,526,043 shares in
1998 and 1,519,888 shares in 1997................... 15 15
Paid-in capital...................................... 64,857 64,804
Accumulated distributions in excess of accumulated
earnings............................................ (41,312) (39,688)
----------- -----------
23,560 25,131
----------- -----------
$ 88,695 $ 90,309
=========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
19
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
(dollars in thousands, except per share)
<S> <C> <C> <C>
Revenues
Rents............................ $ 14,326 $ 12,221 $ 8,666
Interest......................... 172 266 339
------------- ------------- -------------
14,498 12,487 9,005
Expenses
Property operations (including
$634 in 1998, $503 in 1997 and
$209 in 1996 to affiliates)..... 6,462 5,900 4,358
Interest......................... 5,756 4,069 2,629
Depreciation..................... 2,168 1,615 1,128
Advisory fee to affiliate........ 329 343 227
Net income fee to affiliate...... -- 275 --
General and administrative
(including $228 in 1998, $248 in
1997 and $175 in 1996 to
affiliate)...................... 755 973 1,316
------------- ------------- -------------
15,470 13,175 9,658
------------- ------------- -------------
(Loss) from operations............ (972) (688) (653)
Equity in income of partnerships.. 293 52 85
Gain on sale of real estate....... -- 3,953 --
------------- ------------- -------------
Net income (loss)................. $ (679) $ 3,317 $ (568)
============= ============= =============
Earnings per share
Net income (loss)................. $ (.44) $ 2.18 $ (.37)
============= ============= =============
Weighted average shares of Common
Stock used in computing earnings
per share........................ 1,521,832 1,519,888 1,530,008
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
20
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Distributions
Common Stock in Excess of
------------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Earnings Equity
--------- ------- ------- ------------- -------------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1996................... 1,582,888 $ 3,347 $62,093 $(41,249) $24,191
Change in par value..... -- (3,332) 3,332 -- --
Repurchase of Common
Stock.................. (63,000) -- (621) -- (621)
Dividends ($.40 per
share)................. -- -- -- (621) (621)
Net (loss).............. -- -- -- (568) (568)
--------- ------- ------- -------- -------
Balance, December 31,
1996................... 1,519,888 15 64,804 (42,438) 22,381
Dividends ($.40 per
share)................. -- -- -- (567) (567)
Net income.............. -- -- -- 3,317 3,317
--------- ------- ------- -------- -------
Balance, December 31,
1997................... 1,519,888 15 64,804 (39,688) 25,131
Sale of Common Stock
under dividend
reinvestment plan...... 6,155 -- 53 -- 53
Dividends ($.60 per
share)................. -- -- -- (945) (945)
Net (loss).............. -- -- -- (679) (679)
--------- ------- ------- -------- -------
Balance, December 31,
1998................... 1,526,043 $ 15 $64,857 $(41,312) $23,560
========= ======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
21
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1998 1997 1996
---------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Rents collected......................... $ 14,326 $ 11,772 $ 8,688
Interest collected...................... 182 253 327
Interest paid........................... (5,540) (3,856) (2,281)
Payments for property operations
(including $634 in 1998, $503 in 1997
and $209 in 1996 to affiliate)......... (6,427) (5,295) (5,223)
Advisory and net income fee paid to
affiliate.............................. (534) (567) (386)
General and administrative expenses paid
(including $228 in 1998, $248 in 1997
and $175 in 1996 to affiliate)......... (1,048) (1,081) (1,151)
Distributions from equity partnerships'
operating cash flow.................... 181 218 308
Escrow funding.......................... (135) (522) (219)
Other................................... (9) 663 88
---------- ----------- -----------
Net cash provided by operating
activities........................... 996 1,585 151
Cash Flows from Investing Activities
Funding of equity partnerships.......... (8) (224) (82)
Real estate improvements................ (3,945) (901) (290)
Acquisition of real estate (including
$1,826 in 1997 and $532 in 1996 to
affiliate)............................. -- (38,174) (10,151)
Proceeds from sale of real estate....... -- 23,593 --
Distributions from equity partnerships'
investing cash flow.................... 399 -- --
Collection on notes receivable.......... 2,000 -- --
---------- ----------- -----------
Net cash (used in) investing
activities........................... (1,554) (15,706) (10,523)
Cash Flows from Financing Activities
Proceeds from notes payable............. 800 31,565 13,011
Payments on notes payable............... (1,422) (19,452) (439)
Deferred financing costs................ (25) (250) (488)
Distributions from equity partnerships'
financing cash flow.................... -- 627 --
Sale of Common Stock under dividend
reinvestment plan...................... 53 -- --
Dividends to stockholders............... (945) (567) (621)
Repurchase of Common Stock.............. -- -- (621)
Payments (to)/from advisor.............. 1,055 157 (272)
---------- ----------- -----------
Net cash provided by (used in)
financing activities................. (484) 12,080 10,570
Net increase (decrease) in cash and cash
equivalents............................. (1,042) (2,041) 198
Cash and cash equivalents, beginning of
year.................................... 1,145 3,186 2,988
---------- ----------- -----------
Cash and cash equivalents, end of year... $ 103 $ 1,145 $ 3,186
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
22
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1998 1997 1996
---------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of net income (loss) to net
cash provided by operating activities
Net income (loss)........................ $(679) $ 3,317 $ (568)
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities
Depreciation and amortization.......... 2,297 1,718 1,261
Gain on sale of real estate............ -- (3,953) --
Equity in (income) of partnerships..... (293) (52) (85)
Distributions from equity partnerships'
operating cash flow................... 181 218 308
Decrease in interest receivable........ 17 -- --
(Increase) in other assets............. (102) (1,091) (350)
Increase in interest payable........... 80 97 203
Increase (decrease) in other
liabilities........................... (505) 1,331 (618)
--------- ----------- ----------
Net cash provided by operating
activities.......................... $ 996 $ 1,585 $ 151
========= =========== ==========
Schedule of noncash investing and financing
activities
Notes payable from purchase of real
estate.................................. $ -- $ 7,736 $ 3,500
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
23
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of Income Opportunity
Realty Investors, Inc. and consolidated entities (the "Company") 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.
Certain balances for 1997 have been reclassified to conform to the 1998
presentation.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and company business. Income Opportunity Realty Investors, Inc.
("IORI") is the successor to a California business trust organized on December
14, 1984, which commenced operations on April 10, 1985. The Company may hold
interests in real estate through direct ownership, leases and partnerships and
it may also invest in mortgage loans on real estate.
Basis of consolidation. The Consolidated Financial Statements include the
accounts of IORI and controlled subsidiaries and partnerships. All significant
intercompany transactions and balances have been eliminated.
Accounting estimates. In the preparation of the Consolidated Financial
Statements in conformity with generally accepted accounting principles it was
necessary for management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the Consolidated Financial Statements and the
reported amounts of revenues and expenses for the year then ended. Actual
results could differ from these estimates.
Real estate held for investment and depreciation. Real estate held for
investment is carried at cost. Statement of Financial Accounting Standards No.
121 ("SFAS No. 121") requires that a property 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 property. If impairment
exists, an impairment loss is recognized by a charge against earnings equal to
the amount by which the carrying amount of the property exceeds the fair value
of the property. If impairment of a property is recognized, the carrying
amount of the property is reduced by the amount of the impairment, and a new
cost for the property is established. Such new cost is depreciated over the
property's remaining useful life. Depreciation is provided by the straight-
line method over estimated useful lives, which range from 2 to 40 years.
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 Company uses the equity method
to account for investments in partnerships which it does not control. Under
the equity method, the Company's initial investment, recorded at cost, is
increased by the Company's proportionate share of the partnership's operating
income and additional advances and decreased by its proportionate share of the
partnership's operating losses and distributions received.
24
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Operating segments. Management has determined that the Company's reportable
operating segments are those that are based on the Company's method of
internal reporting which disaggregates its operations based on the type of
real estate.
Fair value of financial instruments. The Company used the following
assumptions in estimating the fair value of its note receivable and notes
payable. For its note receivable in 1997, which was performing, the fair value
was estimated by discounting future cash flows using current interest rates
for similar loans. The estimated fair value presented does not purport to
represent the amount to be ultimately realized on collection. The amount
ultimately realized may vary significantly from the estimated fair value
presented. For notes payable the fair value was estimated using year end
interest rates for mortgages with similar terms and maturities.
Cash equivalents. For purposes of the Consolidated Statements of Cash Flows,
the Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Earnings per share. Income (loss) per share is presented in accordance with
Statement of Financial Accounting Standards No. 128 "Earnings Per Share."
Income (loss) per share is computed based upon the weighted average number of
shares of Common Stock outstanding during each year.
NOTE 2. NOTES AND INTEREST RECEIVABLE
Notes and interest receivable consisted of the following:
<TABLE>
<CAPTION>
1997
---------------------
ESTIMATED FAIR BOOK
VALUE VALUE
-------------- ------
<S> <C> <C>
Note Receivable
Performing.......................................... $2,015 $2,000
======
Accrued interest...................................... 17
Unamortized discount.................................. (7)
------
$2,010
======
</TABLE>
In August 1998, the Company's last remaining note receivable with a
principal balance of $2.0 million was collected in full. Net cash of $1.5
million was received, after paying off $500,000 in underlying debt.
NOTE 3. REAL ESTATE AND DEPRECIATION
In 1997, the Company purchased (1) the Chuck Yeager Office Building in
Chantilly, Virginia, for $5.1 million, (2) the La Mesa Village Office Building
in La Mesa, California, for $8.1 million, (3) the Renaissance Parc apartments
in Dallas, Texas, for $15.7 million, (4) the La Monte Park apartments in
Houston, Texas, for $3.7 million, (5) the 2010 Valley View Office Building in
Farmers Branch, Texas, for $565,000, (6) the Westlake Village Office Building
in Westlake Village, California, for $3.9 million, (7) the Akard Plaza Office
Building in Dallas, Texas, for $3.5 million, and (8) the 5600 Mowry Office
Building in Newark, California, for $6.0 million. In connection with these
purchases, the Company either assumed existing mortgage debt or obtained new
mortgage debt totaling $34.8 million with the remainder of the purchase prices
paid in cash. Also during 1997, the Company sold the Plumtree Apartments in
Martinez, California, for $7.8 million, the Porticos Apartments in Milwaukee,
Wisconsin, for $15.2 million and the Spanish Trace Apartments in Irving,
Texas, for $1.8 million. The Company received net cash of $8.5 million from
the sales after paying off $15.3 million in mortgage debt. Gains totaling $4.0
million were recognized.
25
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4. ALLOWANCE FOR ESTIMATED LOSSES
Activity in the allowance for estimated losses was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Balance January 1,..................................... $ -- $ -- $ 121
Amounts charged off.................................. -- -- (121)
----- ----- -----
Balance December 31,................................... $ -- $ -- $ --
===== ===== =====
</TABLE>
NOTE 5. INVESTMENT IN EQUITY METHOD PARTNERSHIPS
The Company's investment in equity method partnerships consist of the
following:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Tri-City Limited Partnership ("Tri-City")..................... $1,204 $1,523
Nakash Income Associates ("NIA").............................. 279 239
------ ------
$1,483 $1,762
====== ======
</TABLE>
The Company uses the equity method to account for its 36.3% general partner
interest in Tri-City, which owned five properties in Texas. Transcontinental
Realty Investors, Inc. ("TCI") owns a combined 63.7% general and limited
partner interest in Tri-City. In May 1998, Tri-City sold its two apartments
for a total of $3.3 million in cash, receiving net cash of $1.4 million after
paying off $1.9 million in mortgage debt and the payment of various closing
costs. The Company received a distribution of $399,000 of such net cash. Tri-
City recognized a gain of $496,000 on the sale of which the Company's equity
share was $180,000. In September 1997, Tri-City had obtained first mortgage
financing of $1.9 million secured by its two unencumbered apartments. The
Company received $627,000 of the net financing proceeds. As of March 5, 1999,
TCI owned approximately 22.7% of the Company's outstanding shares of Common
Stock.
The Company also uses the equity method to account for its 40% general
partner interest in NIA, its only asset being a wraparound mortgage note
receivable secured by a shopping center in Maulden, Missouri. TCI owns the
remaining 60% general partner interest in NIA.
Set forth below are summarized financial data for the partnerships the
Company accounts for using the equity method:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Notes receivable............................................ $ 902 $ 902
Real estate, net of accumulated depreciation ($4,298 in 1998
and $4,368 in 1997)........................................ 7,319 10,024
Other assets................................................ 264 410
Notes payable............................................... (2,040) (4,102)
Other liabilities........................................... (256) (415)
------- -------
Partners' capital........................................... $ 6,189 $ 6,819
======= =======
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Rents................................................ $ 2,612 $ 2,648 $ 2,643
Interest income...................................... 156 30 121
Interest expense..................................... (260) (289) (249)
Property operations expense.......................... (1,077) (1,757) (1,768)
Depreciation......................................... (483) (472) (501)
Provision for losses................................. -- -- --
------- ------- -------
Net income........................................... $ 948 $ 160 $ 246
======= ======= =======
</TABLE>
26
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's equity share of the above net income for 1998, 1997 and 1996
was $347,000, $56,000 and $89,000, respectively, before amortization of
property acquisition costs discussed below.
The Company's share of the above partnerships' capital was $2.3 million in
1998 and $2.5 million in 1997.
The excess of the Company's investment over its respective share of the
equity in the underlying net assets of Tri-City relates principally to the
remaining unamortized property acquisition costs of $118,000 in 1998 and
$172,000 in 1997. These amounts are being amortized over the remaining
estimated useful lives of the properties.
NOTE 6. NOTES AND INTEREST PAYABLE
Notes and interest payable consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Notes payable............................ $61,025 $60,380 $62,612 $60,998
======= =======
Interest payable......................... 406 325
------- -------
$60,786 $61,323
======= =======
</TABLE>
Scheduled notes payable principal payments are due as follows:
<TABLE>
<S> <C>
1999................................................................. $ 3,915
2000................................................................. 3,402
2001................................................................. 3,840
2002................................................................. 9,891
2003................................................................. 4,900
Thereafter........................................................... 34,432
-------
$60,380
=======
</TABLE>
Mortgage notes payable at December 31, 1998, bear interest at rates ranging
from 7.75% to 10.25% and mature between 1999 and 2007. These notes are
collateralized by deeds of trust on real estate with a net carrying value of
$83.7 million.
In August 1998, the Company obtained mortgage financing of $816,000 secured
by the unencumbered 2010 Valley View Office Building in Farmers Branch, Texas,
receiving net cash of $778,000 after the payment of various closing costs. The
mortgage bears interest at 9.1% per annum, requires monthly payments of
interest only and matures in August 2000.
In December 1998, the mortgage debt in the amount of $2.5 million secured by
the Akard Plaza Office Building in Dallas, Texas matured. In February 1999,
the lender agreed to extend the mortgage's maturity date to June 1999, all
other terms remained unchanged.
In January 1999, the mortgage debt in the amount of $2.6 million secured by
the Chuck Yeager Office Building in Chantilly, Virginia matured. In February
1999, the lender agreed to extend the mortgage's maturity date to January
2000, all other terms remained unchanged.
27
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1997, the Company purchased two apartments and six office buildings for a
total of $46.6 million. In conjunction with the purchases, the Company either
assumed existing mortgage debt or obtained mortgage financing totaling $34.8
million. The mortgages bore interest at rates ranging from 8.375% to 10.75%
per annum, required monthly payments of principal and interest, totaling
$310,939, and matured from June 1998 to July 2007.
In October 1997, the Company refinanced the matured mortgage debt secured by
the Daley Plaza Office Building in San Diego, California in the amount of $7.0
million, receiving net cash of $3.3 million after paying off $3.7 million in
mortgage debt and the payment of various closing costs. The new mortgage bears
interest at a variable rate, currently 9% per annum, requires monthly payments
of principal and interest of $62,380 and matures in October 2002.
NOTE 7. DIVIDENDS
The Company has paid quarterly dividends to its stockholders since the first
quarter of 1993. The Company paid dividends of $945,000 ($.60 per share) in
1998 $567,000 ($.40 per share) in 1997 and $621,000 ($.40 per share) in 1996.
The Company reported to the Internal Revenue Service that 100% of the
dividends paid in 1998 and 1996 represented a return of capital and 100% of
the dividends paid in 1997 represented capital gains.
NOTE 8. RENTS UNDER OPERATING LEASES
The Company's operations include the leasing of office buildings. The leases
thereon expire at various dates through 2007. The following is a schedule of
minimum future rents on non-cancelable operating leases as of December 31,
1998:
<TABLE>
<S> <C>
1999................................................................. $ 7,841
2000................................................................. 5,104
2001................................................................. 2,661
2002................................................................. 1,536
2003................................................................. 971
Thereafter........................................................... 303
-------
$18,416
=======
</TABLE>
NOTE 9. ADVISORY AGREEMENT
Basic Capital Management, Inc. ("BCM" or the "Advisor") has served as
advisor to the Company 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 Company's predecessor 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 Company.
At the annual meeting of stockholders held on December 28, 1998, the renewal
of the Company's Advisory Agreement with BCM through the next annual meeting
of stockholders was approved. Subsequent renewals of the Advisory Agreement
with BCM do not require the approval of stockholders, but do require approval
of the Board of Directors.
Under the Advisory Agreement, the Advisor is required to formulate and
submit annually for approval by the Board of Directors a budget and business
plan containing a twelve-month forecast of operations and cash
28
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
flow, a general plan for asset sales and purchases, borrowing activity and
other investments. The Advisor is required to report quarterly to the Board of
Directors on the Company's performance against the business plan. In addition,
all transactions or investments require prior approval by the Board of
Directors, unless they are explicitly provided for in the approved business
plan or are made pursuant to authority expressly delegated to the Advisor by
the Board of Directors.
The Advisory Agreement also requires prior approval of the Board of
Directors 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 stockholders and
contains a broad standard governing the Advisor's liability for losses by the
Company.
The Advisory Agreement provides for BCM to be responsible for the day-to-day
operations of the Company 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 (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 net income.
The Advisory Agreement also provides for BCM to receive an annual incentive
sales fee. BCM or an affiliate of BCM is to receive an acquisition commission
for supervising the purchase or long-term lease of real estate. BCM or an
affiliate of BCM is to receive a mortgage or loan acquisition fee with respect
to the purchase of any existing mortgage loan by the Company. BCM or an
affiliate of BCM is also to receive a mortgage brokerage and equity
refinancing fee for obtaining loans or refinancing on the Company's
properties. BCM is also to receive reimbursement of certain expenses incurred
by it, in the performance of advisory services to the Company.
The Advisory Agreement requires BCM or any affiliate of BCM to pay to the
Company one-half of any compensation received from third parties with respect
to the origination, placement or brokerage of any loan made by the Company.
Under the Advisory Agreement all or a portion of the annual advisory fee
must be refunded by the Advisor if the Operating Expenses of the Company (as
defined in the Advisory Agreement) exceed certain limits specified in the
Advisory Agreement. The effect of this limitation was to require that BCM
refund $336,000, $201,000 and $191,000, of the 1998, 1997 and 1996 annual
advisory fee, respectively.
Additionally, if management were to request that BCM render services to the
Company other than those required by the Advisory Agreement, BCM or an
affiliate of BCM is separately compensated for such additional services on
terms to be agreed upon from time to time. As discussed in NOTE 10. "PROPERTY
MANAGEMENT," the Company has hired Carmel Realty Services, Ltd. ("Carmel,
Ltd."), an affiliate of BCM, to provide property management for the Company's
properties and, as discussed in NOTE 11. "REAL ESTATE BROKERAGE," the Company
has engaged Carmel Realty, Inc. ("Carmel Realty"), also an affiliate of BCM,
on a non-exclusive basis, to provide brokerage services for the Company.
BCM may only assign the Advisory Agreement with the prior consent of the
Company.
NOTE 10. PROPERTY MANAGEMENT
Carmel, Ltd. provides 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 Company at various rates. The general partner of
Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (1) First Equity
Properties, Inc. ("First Equity"), which is 50% owned by a subsidiary of BCM,
(2) Gene E. Phillips and (3) a trust for the benefit of the children of Mr.
Phillips. Carmel, Ltd. subcontracts the property-level management and leasing
of the Company's 10 office buildings and the commercial properties owned by
Tri-City in which the Company and TCI are partners to Carmel Realty which
29
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
is a company owned by First Equity. 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
Carmel Realty, also provides brokerage services on a non-exclusive basis.
Carmel Realty is entitled to receive a commission for property purchases and
sales in accordance with a sliding scale of total fees to be paid by the
Company.
NOTE 12. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
Fees and cost reimbursements to BCM and its affiliates:
<TABLE>
<CAPTION>
1998 1997 1996
---- ------ ------
<S> <C> <C> <C>
Fees
Advisory................................................. $329 $ 343 $ 227
Net income............................................... -- 269 --
Incentive sales.......................................... -- 6 --
Brokerage commissions.................................... -- 2,472 532
Mortgage brokerage and equity refinancing................ 8 70 85
Property and construction management and leasing
commissions*.............................................. 634 503 209
---- ------ ------
$971 $3,663 $1,053
==== ====== ======
Cost reimbursements........................................ $228 $ 248 $ 175
==== ====== ======
</TABLE>
- --------
* Net of property management fees paid to subcontractors, other than Carmel
Realty.
NOTE 13. INCOME TAXES
For the years 1998, 1997 and 1996, the Company 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 stockholders, 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.
The Company had a net losses for federal income tax purposes in 1998 and
1996 and net income before the application of operating loss carryforwards in
1997; therefore, the Company recorded no provision for income taxes. The
Company'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, depreciation on owned
properties and investments in joint venture partnerships. At December 31,
1998, the Company's tax basis in its net assets exceeded their basis for
financial statement purposes by $2.2 million. As a result, aggregate future
income for income tax purposes will be less than such amount for financial
statement purposes and the Company would be able to maintain its REIT status
without distributing 95% of its financial statement income. Additionally, at
December 31, 1998, the Company had tax net operating loss carryforwards of
$17.4 million expiring through the year 2018.
As a result of the Company'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.
30
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 14. COMMITMENTS AND CONTINGENCIES
Olive Litigation. In February 1990, the Company, together with Continental
Mortgage and Equity Trust ("CMET"), National Income Realty Trust and TCI,
three real estate entities with, at the time, the same officers, directors or
trustees and advisor as the Company, 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 "Olive Modification") which 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 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 Court retained jurisdiction to enforce the Olive Modification, and
during August and September 1996, the Court held evidentiary hearings to
assess compliance with the terms of the Olive Modification by various parties.
The Court issued no ruling or order with respect to the matters addressed at
the hearings.
Separately, in 1996, legal counsel for the plaintiffs notified the Company's
Board of Directors that he intended to assert that certain actions taken by
the Board of Directors breached the terms of the Olive Modification. On
January 27, 1997, the parties entered into an Amendment to the Olive
Modification effective January 9, 1997 (the "Olive Amendment"), which was
submitted to the Court for approval on January 29, 1997. The Olive Amendment
provides for the settlement of all matters raised at the evidentiary hearings
and by plaintiffs' counsel in his notices to the Company's Board of Directors.
On May 2, 1997, a hearing was held for the Court to consider approval of the
Olive Amendment. As a result of the hearing, the parties entered into a
revised Olive Amendment. The Court issued an order approving the Olive
Amendment on July 3,1997.
The Olive Amendment provides for the addition of four new unaffiliated
members to the Company's Board of Directors and sets forth new requirements
for the approval of any transactions with certain affiliates until April 28,
1999. In addition, the Company, CMET, TCI and their stockholders released the
defendants from any claims relating to the plaintiffs' allegations and matters
which were the subject of the evidentiary hearings. The plaintiffs'
allegations of any breaches of the Olive Modification shall be settled by
mutual agreement of the parties or, lacking such agreement, by an arbitration
proceeding.
Under the Olive Amendment, all shares of the Company owned by Gene E.
Phillips or any of his affiliates shall be voted at all stockholder meetings
of the Company held until April 28, 1999 in favor of all new members of the
Company's Board of Directors added under the Olive Amendment. The Olive
Amendment also requires that, until April 28, 1999, all shares of the Company
owned by Mr. Phillips or his affiliates in excess of forty percent (40%) of
the Company's outstanding shares shall be voted in proportion to the votes
cast by all non-affiliated stockholders of the Company.
In accordance with the Olive Amendment, Richard W. Douglas, Larry E. Harley
and R. Douglas Leonhard were added to the Company's Board of Directors in
January 1998 and Murray Shaw was added to the Company's Board of Directors in
February 1998.
Other Litigation. The Company is also involved in various other lawsuits
arising in the ordinary course of business. 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.
31
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15. OPERATING SEGMENTS
Significant differences among the accounting policies of the segments as
compared to the Company's consolidated financial statements principally
involve the calculation and allocation of administrative expenses. Management
evaluates the performance of its operating segments and allocates resources to
them based on net operating income and cash flow. The Company based
reconciliation of expenses that are not reflected in the segments is $1.1
million of administrative expenses. There are no intersegment revenues and
expenses and the Company conducts all of its business in the United States.
The Company has not disclosed prior years' operating segment data on a
comparative basis, because management found it impractical to obtain the data
for prior years.
Presented below are the reportable operating segments, their operating
income and 1998 segment assets.
<TABLE>
<CAPTION>
Commercial
Properties Apartments Total
---------- ---------- -------
<S> <C> <C> <C>
Operating revenue............................. $9,058 $5,268 $14,326
Operating expenses............................ 3,852 2,610 6,462
------ ------ -------
Net operating income.......................... 5,206 2,658 7,864
Depreciation.................................. 1,573 595 2,168
Interest on debt.............................. 3,898 1,858 5,756
Capital expenditures.......................... 3,907 38 3,945
Assets at December 31, 1998................... 58,793 24,898 83,691
</TABLE>
NOTE 16. QUARTERLY DATA
The following is a tabulation of the Company's quarterly results of
operations for the years 1998 and 1997 (unaudited).
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1998
Revenues........................... $3,653 $3,662 $3,354 $3,829
Expenses........................... 3,755 3,778 3,898 4,039
------ ------ ------ ------
(Loss) from operations............. (102) (116) (544) (210)
Equity in income (loss) of
partnerships...................... 13 248 (12) 44
------ ------ ------ ------
Net income (loss).................. $ (89) $ 132 $ (556) $ (166)
====== ====== ====== ======
Earnings per share
Net income (loss).................. $ (.06) $ .09 $ (.37) $ (.10)
====== ====== ====== ======
1997
Revenues........................... $2,761 $2,966 $3,235 $3,525
Expenses........................... 3,094 2,855 3,476 3,750
------ ------ ------ ------
Income (loss) from operations...... (333) 111 (241) (225)
Equity in income (loss) of
partnerships...................... 17 29 (25) 31
Gain on sale of real estate........ 1,849 1,473 -- 631
------ ------ ------ ------
Net income (loss).................. $1,533 $1,613 $ (266) $ 437
====== ====== ====== ======
Earnings per share
Net income (loss).................. $ 1.01 $ 1.06 $ (.18) $ .29
====== ====== ====== ======
</TABLE>
32
<PAGE>
SCHEDULE III
INCOME OPPORTUNITY REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Cost Gross Amounts of Which
Initial Cost Capitalized Carried at End of Year Accumu-
-------------------- Construc- Subsequent to ---------------------------- lated Date of
Encum- Building & tion in Acquisition Building & (1) Depreci- Construc- Date
Property/Location brances Land Improvements Progress Improvements Land Improvements Total ation tion Acquired
- ----------------- ------- ------- ------------ --------- ------------- ------- ------------ ------- -------- --------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Properties Held
For Investment
Apartments
Eastpoint
Mesquite, TX.... $ 3,306 $ 1,181 $ 2,749 $-- $ 465 $ 1,181 $ 3,214 $ 4,395 $1,362 1985 01/86
LaMonte Park
Houston, TX..... 3,362 784 3,137 -- 53 784 3,190 3,974 136 1981 06/97
Renaissance Parc
Dallas, TX...... 12,405 3,274 13,095 -- 50 3,279 13,140 16,419 526 1972 06/97
Treehouse San
Antonio, TX..... 2,776 375 2,124 -- 247 375 2,371 2,746 611 1975 09/89
<CAPTION>
Life on
Which
Depreciation
In Latest
Statement
of Operation
Property/Location is Computed
- ----------------- ------------
<S> <C>
Properties Held
For Investment
Apartments
Eastpoint
Mesquite, TX.... 3-40 years
LaMonte Park
Houston, TX..... 5-40 years
Renaissance Parc
Dallas, TX...... 5-40 years
Treehouse San
Antonio, TX..... 5-40 years
Office Buildings
2010 Valley View
Farmers Branch,
TX.............. 803 120 479 -- 2,093 120 2,572 2,692 55 1998 09/97
5600 Mowry
Newark, CA...... 4,235 1,263 5,054 -- 239 1,263 5,293 6,556 150 1987 12/97
Akard Plaza
Dallas, TX...... 2,500 734 2,936 -- 103 734 3,039 3,773 88 1984 12/97
Chuck Yeager
Chantilly, VA... 2,615 1,080 4,321 -- 298 1,080 4,619 5,699 233 1991 01/97
Daley Plaza San
Diego, CA....... 6,915 1,502 6,008 -- 846 1,502 6,854 8,356 472 1987 09/96
La Mesa Village
La Mesa, CA..... 5,900 1,709 6,836 -- 146 1,709 6,982 8,691 304 1991 05/97
Olympic Los
Angeles, CA..... 4,428 1,264 5,055 -- 477 1,264 5,532 6,796 354 1990 11/96
Saratoga
Saratoga, CA.... 7,057 2,577 10,306 -- 935 2,583 11,235 13,818 2,446 1986 12/91
Town Center Boca
Raton, FL....... 1,181 554 2,214 -- 141 554 2,355 2,909 540 1985 03/91
Westlake Village
Westlake
Village, CA..... 2,897 831 3,324 -- 91 831 3,415 4,246 102 1982 11/97
------- ------- ------- ---- ------ ------- ------- ------- ------
$60,380 $17,248 $67,638 $-- $6,184 $17,259 $73,811 $91,070 $7,379
======= ======= ======= ==== ====== ======= ======= ======= ======
Office Buildings
2010 Valley View
Farmers Branch,
TX.............. 5-40 years
5600 Mowry
Newark, CA...... 3-40 years
Akard Plaza
Dallas, TX...... 5-40 years
Chuck Yeager
Chantilly, VA... 5-40 years
Daley Plaza San
Diego, CA....... 2-40 years
La Mesa Village
La Mesa, CA..... 5-40 years
Olympic Los
Angeles, CA..... 5-40 years
Saratoga
Saratoga, CA.... 3-40 years
Town Center Boca
Raton, FL....... 5-40 years
Westlake Village
Westlake
Village, CA..... 5-40 years
</TABLE>
- ----
(1) The aggregate cost for Federal income tax purposes is $92.6 million.
33
<PAGE>
SCHEDULE III
(Continued)
INCOME OPPORTUNITY REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of Real Estate
Balance at January 1,............................... $87,125 $ 60,551 $46,553
Additions
Acquisitions and Improvements................... 3,945 49,905 14,119
Deductions
Sale of real estate............................. -- (22,278) --
Sale of foreclosed property..................... -- (1,053) --
Writedown due to permanent impairment of
property, previously reserved.................. -- -- (121)
------- -------- -------
Balance at December 31, ............................ $91,070 $ 87,125 $60,551
======= ======== =======
Reconciliation of Accumulated Depreciation
Balance at January 1,............................... $ 5,211 $ 7,235 $ 6,107
Additions
Depreciation.................................... 2,168 1,615 1,128
Deductions
Sale of real estate............................. -- (3,619) --
Sale of foreclosed property..................... -- (20) --
------- -------- -------
Balance at December 31, ............................ $ 7,379 $ 5,211 $ 7,235
======= ======== =======
</TABLE>
34
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
----------------
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
Directors
The affairs of Income Opportunity Realty Investors, Inc. (the "Company" or
the "Registrant") are managed by a Board of Directors. The Directors are
elected at the annual meeting of stockholders or appointed by the incumbent
Board of Directors and serve until the next annual meeting of stockholders or
until a successor has been elected or approved.
The Directors of the Company are listed below, together with their ages,
terms of service, all positions and offices with the Company or its advisor,
Basic Capital Management, Inc. ("BCM" or the "Advisor"), their principal
occupations, business experience and directorships with other companies during
the last five years or more. The designation "Affiliated", when used below
with respect to a Director, means that the Director is an officer, director or
employee of the Advisor or an officer of the Company. The designation
"Independent" when used below with respect to a Director, means that the
Director is neither an officer of the Company nor a director, officer or
employee of the Advisor, although the Company may have certain business or
professional relationships with such Director as discussed in ITEM 13.
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Certain Business
Relationships."
TED P. STOKELY: Age 65, Director (Independent) (since April 1990) and
Chairman of the Board (since January 1995).
General Manager (since January 1995) of ECF Senior Housing Corporation, a
nonprofit corporation; General Manager (since January 1993) of Housing
Assistance Foundation, Inc., a nonprofit corporation; Part-time unpaid
Consultant (since January 1993) and paid Consultant (April 1992 to December
1992) of Eldercare Housing Foundation ("Eldercare"), a nonprofit
corporation; President (April 1992 to April 1994) of PSA Group; Executive
Vice President (1987 to 1991) of Key Companies Inc.; Trustee (since April
1990) and Chairman of the Board (since January 1995) of Continental
Mortgage and Equity Trust ("CMET"); Director (since April 1990) and
Chairman of the Board (since January 1995) of Transcontinental Realty
Investors, Inc. ("TCI"); and Trustee (April 1990 to August 1994) of
National Income Realty Trust ("NIRT").
RICHARD W. DOUGLAS: Age 51, Director (Independent) (since January 1998).
Executive Vice President of The Staubach Company (since February 1999);
President (1991 to 1999) of Dallas Chamber of Commerce; President (1988 to
1991) of North Texas Commission; President (1978 to 1981) of Las Colinas
Corporation and Southland Investment Properties, both affiliates of
Southland Financial Corporation; Trustee (since January 1998) of CMET; and
Director (since January 1998) of TCI.
LARRY E. HARLEY: Age 58, Director (Independent) (since January 1998).
President (1993 to 1997) and Executive Vice President (1992 to 1993) of
U.S. Operations, Executive Vice President (1989 to 1992) and Senior Vice
President (1986 to 1989) of Distribution Operations, Director of Marketing
(1984 to 1986), and Manager of North Central Distribution Center (1974 to
1984) of Mary Kay Cosmetics; Trustee (since January 1998) of CMET; and
Director (since January 1998) of TCI.
35
<PAGE>
R. DOUGLAS LEONHARD: Age 62, Director (Independent) (since January 1998).
Director (since November 1998) of Optel, Inc.; Senior Vice President
(1986 to 1997) of LaCantera Development Company, a wholly-owned subsidiary
of USAA; Senior Vice President (1980 to 1985) of The Woodlands Development
Corporation; Vice President and Houston Projects Manager (1973 to 1979) of
Friendswood Development Company; Manager in various capacities (1960 to
1973) of Exxon Corp.; Trustee (since January 1998) of CMET; and Director
(since January 1998) of TCI.
MURRAY SHAW: Age 67, Director (Independent) (since February 1998).
Chairman of the Board of Regents (since 1997) of Stephen F. Austin
University; Vice President (1967 to 1996) of Tracor, Inc.; Trustee (since
February 1998) of CMET; and Director (since February 1998) of TCI.
MARTIN L. WHITE: Age 59, Director (Independent) (since January 1995).
Chief Executive Officer (since 1995) of Builders Emporium, Inc.; Chairman
and Chief Executive Officer (since 1993) of North American Trading Company
Ltd.; President and Chief Operating Officer (since 1992) of Community Based
Developers, Inc.; Development Officer and Loan Manager (1986 to 1992) of
the City of San Jose, California; Vice President and Director of Programs
(1967 to 1986) of Arpact, Inc., a government contractor for small business
development and trade; Trustee (since January 1995) of CMET; and Director
(since January 1995) of TCI.
EDWARD G. ZAMPA: Age 64, Director (Independent) (since January 1995).
General Partner (since 1976) of Edward G. Zampa and Company; Trustee
(since January 1995) of CMET; and Director (since January 1995) of TCI.
Board Committees
The Company's Board of Directors held six meetings during 1998. For such
year, no incumbent Director attended fewer than 75% of the aggregate of (1)
the total number of meetings held by the Board of Directors during the period
for which he had been a Director and (2) the total number of meetings held by
all committees of the Board of Directors on which he served during the period
that he served.
The Board of Directors has an Audit Committee, the function of which is to
review the Company's operating and accounting procedures. The current members
of the Audit Committee, all of whom are Independent Directors, are Messrs.
Stokely, Leonhard and White. The Audit Committee met twice during 1998.
The Board of Directors has a Relationship with Advisor Committee and a Board
Development Committee. The current members of the Relationship with Advisor
Committee are Messrs. Stokely and Zampa. The Relationship with Advisor
Committee reviews and reports to the Board of Directors on the services
provided to the Company by the Advisor and its affiliates and the terms of any
engagement or compensation of the Advisor or its affiliates. The Relationship
with Advisor Committee did not meet in 1998. The Board Development Committee
reviews and reports to the Board of Directors on the membership, compensation
and functions of the Board of Directors. The current member of the Board
Development Committee is Mr. White. The Board Development Committee did not
meet in 1998.
The Board of Directors does not have Nominating or Compensation Committees.
36
<PAGE>
EXECUTIVE OFFICERS
The following persons currently serve as executive officers of the Company:
Randall M. Paulson, President; Karl L. Blaha, Executive Vice President--
Commercial Asset Management; Bruce A. Endendyk, Executive Vice President;
Thomas A. Holland, Executive Vice President and Chief Financial Officer; and
Steven K. Johnson, Executive Vice President--Residential Asset Management.
Their positions with the Company are not subject to a vote of stockholders.
Their ages, terms of service, all positions and offices with the Company or
BCM, other principal occupations, business experience and directorships with
other companies during the last five years or more are set forth below.
RANDALL M. PAULSON: Age 52, President (since August 1995) and Executive Vice
President (January 1995 to August 1995).
President (since August 1995) and Executive Vice President (January 1995
to August 1995) of CMET, TCI and Syntek Asset Management, Inc. ("SAMI");
President (since August 1995) and Executive Vice President (October 1994 to
August 1995) of BCM; President (since January 1998) and Director (January
1998 to December 1998) of NRLP Management Corp. ("NMC"), the general
partner of National Realty, L.P. ("NRLP") and National Operating, L.P.
("NOLP"); Director (August 1995 to November 1998) of SAMI; Executive Vice
President (since January 1995) of American Realty Trust, Inc. ("ART"); Vice
President (1993 to 1994) of GSSW, LP, a joint venture of Great Southern
Life and Southwestern Life; Vice President (1990 to 1993) of Property
Company of America Realty, Inc.; and President (1990) of Paulson Realty
Group.
KARL L. BLAHA: Age 51, Executive Vice President--Commercial Asset Management
(since July 1997).
Executive Vice President--Commercial Asset Management (since July 1997)
and Executive Vice President and Director of Commercial Management (April
1992 to August 1995) of BCM, CMET, TCI, and SAMI; Director (since June
1996), President (since October 1993) and Executive Vice President and
Director of Commercial Management (April 1992 to October 1993) of ART;
Executive Vice President (October 1992 to July 1997) of Carmel Realty, Inc.
("Carmel Realty"), a company owned by First Equity Properties, Inc. ("First
Equity"), which is 50% owned by a subsidiary of BCM; President and Director
(since 1996) of First Equity; Director (since November 1998) of SAMI;
Executive Vice President (since January 1998) and Director (since December
1998) of NMC; Executive Vice President and Director of Commercial
Management (April 1992 to February 1994) of NIRT and Vinland Property Trust
("VPT"); Partner--Director of National Real Estate Operations (August 1988
to March 1992) of First Winthrop Corporation; and Corporate Vice President
(April 1984 to August 1988) of Southmark Corporation ("Southmark").
BRUCE A. ENDENDYK: Age 50, Executive Vice President (since January 1995).
President (since January 1995) of Carmel Realty; Executive Vice President
(since January 1995) of BCM, SAMI, ART, CMET and TCI, and (since January
1998) of NMC; Management Consultant (November 1990 to December 1994);
Executive Vice President (January 1989 to November 1990) of Southmark; and
President and Chief Executive Officer (March 1988 to January 1989) of
Southmark Equities Corporation.
THOMAS A. HOLLAND: Age 56, Executive Vice President and Chief Financial
Officer (since August 1995); Secretary (since February 1997) and Senior Vice
President and Chief Accounting Officer (July 1990 to August 1995).
Executive Vice President and Chief Financial Officer (since August 1995)
and Senior Vice President and Chief Accounting Officer (July 1990 to August
1995) of BCM, SAMI, ART, CMET and TCI; Executive Vice President and Chief
Financial Officer (since January 1998) of NMC; Secretary (since February
1997) of CMET and TCI; and Senior Vice President and Chief Accounting
Officer (July 1990 to February 1994) of NIRT and VPT.
37
<PAGE>
STEVEN K. JOHNSON: Age 41, Executive Vice President--Residential Asset
Management (since August 1998) and Vice President (August 1990 to August
1991).
Executive Vice President--Residential Asset Management (since August
1998) and Vice President (August 1990 to August 1991) of BCM, SAMI, ART,
CMET and TCI; Executive Vice President--Residential Asset Management (since
August 1998) of NMC; Chief Operating Officer (January 1993 to August 1998)
of Garden Capital, Inc.; Executive Vice President (December 1994 to August
1998) of Garden Capital Management, Inc.; and, Executive Vice President--
Residential (August 1991 to January 1993) of SHL Properties Realty
Advisors, Inc. and SHL Acquisition Corporation II and III.
Officers
Although not executive officers of the Company, the following persons
currently serve as officers of the Company: Robert A. Waldman, Senior Vice
President and General Counsel; and Drew D. Potera, Vice President and
Treasurer. Their positions with the Company are not subject to a vote of
stockholders. Their ages, terms of service, all positions and offices with the
Company or BCM, other principal occupations, business experience and
directorships with other companies during the last five years or more are set
forth below.
ROBERT A. WALDMAN: Age 46, Senior Vice President and General Counsel (since
January 1995); Vice President (December 1990 to January 1995) and Secretary
(December 1993 to February 1997).
Senior Vice President and General Counsel (since January 1995), Vice
President (December 1990 to January 1995) and Secretary (December 1993 to
February 1997) of CMET and TCI; Senior Vice President and General Counsel
(since January 1995), Vice President (January 1993 to January 1995) and
Secretary (since December 1989) of ART; Senior Vice President and General
Counsel (since November 1994), Vice President and Corporate Counsel
(November 1989 to November 1994), and Secretary (since November 1989) of
BCM; Senior Vice President and General Counsel (since January 1995), Vice
President (April 1990 to January 1995) and Secretary (since December 1990)
of SAMI; and Senior Vice President, Secretary and General Counsel (since
January 1998) of NMC.
DREW D. POTERA: Age 39, Vice President (since December 1996) and Treasurer
(since December 1990).
Vice President (since December 1996) and Treasurer (since December 1990)
of CMET and TCI; Vice President (since December 1996) and Treasurer (since
August 1991) and Assistant Treasurer (December 1990 to August 1991) of ART;
Vice President, Treasurer and Securities Manager (since July 1990) of BCM;
Vice President and Treasurer (since February 1992) of SAMI; Vice President
and Treasurer (since January 1998) of NMC; Treasurer (December 1990 to
February 1994) of NIRT and VPT; and Financial Consultant with Merrill
Lynch, Pierce, Fenner & Smith Incorporated (June 1985 to June 1990).
In addition to the foregoing officers, the Company has several vice
presidents and assistant secretaries who are not listed herein.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Under the securities laws of the United States, the Company's Directors,
executive officers, and any persons holding more than ten percent of the
Company's shares of Common Stock are required to report their share ownership
and any changes in that ownership to the Securities and Exchange Commission
(the "Commission"). Specific due dates for these reports have been established
and the Company is required to report any failure to file by these dates
during 1998. All of these filing requirements were satisfied by the Company's
Directors and executive officers and ten percent holders. In making these
statements, the Company has relied on the written representations of its
incumbent Directors and executive officers and its ten percent holders and
copies of the reports that they have filed with the Commission.
38
<PAGE>
THE ADVISOR
Although the Board of Directors is directly responsible for managing the
affairs of the Company and for setting the policies which guide it, the day-to-
day operations of the Company are performed by a contractual advisor under the
supervision of the Board of Directors. The duties of the advisor include, among
other things, locating, investigating, evaluating and recommending real estate
and mortgage note investment and sales opportunities as well as financing and
refinancing sources. The advisor also serves as a consultant to the Board of
Directors in connection with the business plan and investment decisions made by
the Board of Directors.
BCM has served as the Company's advisor since March 1989. BCM is a company of
which Messrs. Paulson, Blaha, Endendyk, Holland and Johnson serve as executive
officers. BCM is owned by a trust for the benefit of the children of Gene E.
Phillips. Mr. Phillips served 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 BCM's performance of advisory services to the Company.
At the annual meeting of stockholders held on December 29, 1998, stockholders
approved the renewal of the Advisory Agreement with BCM through the next annual
meeting of stockholders. Subsequent renewals of the Advisory Agreement with BCM
do not require the approval of stockholders, but do require approval of the
Board of Directors.
Under the Advisory Agreement, the Advisor is required to formulate and submit
annually for approval by the Board of Directors a budget and business plan
containing a twelve month forecast of operations and cash flow, a general plan
for asset sales and purchases, borrowing activity, and other investments. The
Advisor is required to report quarterly to the Board of Directors on the
Company's performance against the business plan. In addition, all transactions
shall require prior approval by the Board of Directors, unless they are
explicitly provided for in the approved business plan or are made pursuant to
authority expressly delegated to the Advisor by the Board of Directors.
The Advisory Agreement also requires prior approval of the Board of Directors
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 stockholders; contains a broad
standard governing the Advisor's liability for losses by the Company; and
contains guidelines for the Advisor's allocation of investment opportunities as
among itself, the Company and other entities it advises.
The Advisory Agreement provides for BCM to be responsible for the day-to-day
operations of the Company 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 (total assets less allowance for amortization, depreciation or
depletion and valuation reserves) and an annual net income fee equal to 7.5% of
the Company'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 Company during such fiscal year
exceeds the sum of: (1) the cost of each such property as originally recorded
in the Company's books for tax purposes (without deduction for depreciation,
amortization or reserve for losses), (2) capital improvements made to such
assets during the period owned, and (3) all closing costs, (including real
estate commissions) incurred in the sale of such real estate; 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 net investment including capital improvements, calculated over the holding
period before depreciation and inclusive of operating income and sales
consideration and (b) the aggregate net operating income from all real estate
owned 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.
39
<PAGE>
Additionally, pursuant to the Advisory Agreement BCM or an affiliate of BCM
is to receive an acquisition commission for supervising the acquisition,
purchase or long-term lease of real estate equal to the lesser of (1) up to 1%
of the cost of acquisition, inclusive of commissions, if any, paid to
nonaffiliated brokers or (2) 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, provided that the aggregate purchase price of each
property (including acquisition fees and real estate brokerage commissions)
may not exceed such property's appraised value at acquisition.
The Advisory Agreement requires BCM or any affiliate of BCM to pay to the
Company, one-half of any compensation received from third parties with respect
to the origination, placement or brokerage of any loan made by the Company;
provided, however, that the compensation retained by BCM or any affiliate of
BCM shall not exceed the lesser of (1) 2% of the amount of the loan commitment
or (2) a loan brokerage and commitment fee which 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 purchase of any
existing mortgage loan equal to the lesser of (1) 1% of the amount of the loan
purchased or (2) 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 of any mortgage loan by the Company.
Under the Advisory Agreement, BCM or an affiliate of BCM is also to receive
a mortgage brokerage and equity refinancing fee for obtaining loans or
refinancing on properties equal to the lesser of (1) 1% of the amount of the
loan or the amount refinanced or (2) 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 Board of Directors. 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
Company.
Under the Advisory Agreement all or a portion of the annual advisory fee
must be refunded by the Advisor if the Operating Expenses of the Company (as
defined in the Advisory Agreement) exceed certain limits specified in the
Advisory Agreement based on the book value, net asset value and net income of
the Company during such fiscal year. The effect of this limitation was to
require that BCM refund $336,000 of the 1998 annual advisory fee.
Additionally, if management were to request that BCM render services other
than those required by the Advisory Agreement, BCM or an affiliate of BCM is
separately compensated for such additional services on terms to be agreed upon
from time to time. As discussed below, under "Property Management", the
Company has hired Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate
of BCM, to provide management for the Company's properties and, as discussed
below, under "Real Estate Brokerage" the Company has engaged Carmel Realty,
also an affiliate of BCM, on a non-exclusive basis to provide brokerage
services for the Company.
BCM may only assign the Advisory Agreement with the prior consent of the
Company.
40
<PAGE>
The directors and principal officers of BCM are set forth below.
<TABLE>
<C> <S>
Mickey N. Phillips: Director
Ryan T. Phillips: Director
Randall M. Paulson: President
Karl L. Blaha: Executive Vice President--Commercial Asset Management
Bruce A. Endendyk: Executive Vice President
Thomas A. Holland: Executive Vice President and Chief Financial Officer
Steven K. Johnson: Executive Vice President--Residential Asset
Management
A. Cal Rossi, Jr.: Executive Vice President
Cooper B. Stuart: Executive Vice President
Clifford C. Towns, Jr.: Executive Vice President--Finance
Dan S. Allred: Senior Vice President--Land Development
James D. Canon, III: Senior Vice President--Portfolio Management
Robert A. Waldman: Senior Vice President, Secretary and General Counsel
Drew D. Potera: Vice President, Treasurer and Securities Manager
</TABLE>
Mickey N. Phillips is Gene E. Phillips' brother and Ryan T. Phillips is Gene
E. Phillips' son. Gene E. Phillips serves as a representative of the trust
established for the benefit of his children 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 Company.
PROPERTY MANAGEMENT
Since February 1, 1990, affiliates of BCM have provided property management
services to the Company. 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 provision of the property-level management services
to the Company at various rates. The general partner of Carmel, Ltd. is BCM.
The limited partners of Carmel, Ltd. are (i) First Equity, which is 50% owned
by a subsidiary of BCM, (ii) Gene E. Phillips and (iii) a trust for the benefit
of the children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level
management and leasing of the Company's 10 office buildings and the commercial
properties owned by a real estate partnership in which the Company and TCI are
partners to Carmel Realty which is a company owned by First Equity. Carmel
Realty is entitled to receive property and construction management fees and
leasing commissions in accordance with its property-level management agreement
with Carmel, Ltd.
REAL ESTATE BROKERAGE
Since December 1, 1992, Carmel Realty has been engaged, on a non-exclusive
basis, to provide brokerage services for the Company. Carmel Realty is entitled
to receive a real estate brokerage commission for property acquisitions and
sales in accordance with the following sliding scale of total fees to be paid:
(1) maximum fee of 5% on the first $2.0 million of any purchase or sale
transaction of which no more than 4% would be paid to Carmel Realty or
affiliates; (2) 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; (3) 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, (4) 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.
41
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The Company has no employees, payroll or benefit plans and pays no
compensation to its executive officers. The executive officers of the Company
who are also officers or employees of BCM, the Company's Advisor, are
compensated by the Advisor. Such executive officers perform a variety of
services for the Advisor and the amount of their compensation is determined
solely by the Advisor. BCM does not allocate the cash compensation of its
officers among the various entities for which it serves as advisor. See ITEM
10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT--The Advisor"
for a more detailed discussion of the compensation payable to BCM by the
Company.
The only remuneration paid by the Company is to the Directors who are not
officers or directors of BCM or its affiliated companies. The Independent
Directors (1) review the business plan of the Company to determine that it is
in the best interest of the stockholders, (2) review the advisory contract,
(3) supervise the performance of the Company's advisor and review the
reasonableness of the compensation paid to the advisor in terms of the nature
and quality of services performed, (4) reviews the reasonableness of the total
fees and expenses of the Company and (5) select, when necessary, a qualified
independent real estate appraiser to appraise properties acquired.
Each Independent Director receives compensation in the amount of $15,000 per
year, plus reimbursement for expenses, and the Chairman of the Board receives
an additional fee of $1,500 per year for serving in such position. In
addition, each Independent Director receives an additional fee of $1,000 per
day for any special services rendered by him to the Company outside of his
ordinary duties as Director, plus reimbursement of expenses.
During 1998, $112,000 was paid to the Independent Directors in total
Directors' fees for all services including the annual fee for service during
the period January 1, 1998 through December 31, 1998, and 1998 special service
fees, as follows: Richard W. Douglas, $15,000; Larry E. Harley, $15,000; R.
Douglas Leonhard, $15,000, Murray Shaw, $13,750; Ted P. Stokely, $16,500;
Edward L. Tixier, $3,750; Martin L. White, $15,000; and Edward G. Zampa,
$18,000.
42
<PAGE>
Performance Graph
The following performance graph compares the cumulative total stockholder
return on the Company's shares of Common Stock with the Standard & Poor's 500
Stock Index ("S&P 500 Index") and the National Association of Real Estate
Investment Trusts, Inc. Hybrid REIT Total Return Index ("REIT Index"). The
comparison assumes that $100 was invested on December 31, 1993 in the Company's
shares of Common Stock and in each of the indices and further assumes the
reinvestment of all distributions. Past performance is not necessarily an
indicator of future performance.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
The Company 100.00 134.28 138.72 161.67 174.49 106.99
S&P 500 Index 100.00 101.31 139.22 171.19 228.29 293.54
REIT Index 100.00 104.00 127.91 165.45 183.24 120.88
</TABLE>
43
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners. The following table sets
forth the ownership of the Company's shares of Common Stock, both beneficially
and of record, both individually and in the aggregate for those persons or
entities known by the Company to be beneficial owners of more than 5% of its
shares of Common Stock as of the close of business on March 5, 1999.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER OWNERSHIP CLASS (/1/)
------------------- ----------------- -----------
<S> <C> <C>
American Realty Trust, Inc..................... 464,663 30.4%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231
Transcontinental Realty Investors, Inc......... 345,728 22.7%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231
Basic Capital Management, Inc.................. 118,337 7.8%
10670 N. Central Expressway
Suite 300
Dallas, TX 75231
</TABLE>
--------
(1) Percentages are based upon 1,526,043 shares of Common Stock outstanding
at March 5, 1999.
Security Ownership of Management. The following table sets forth the
ownership of the Company's shares of Common Stock, both beneficially and of
record, both individually and in the aggregate for the Directors and executive
officers of the Company as of the close of business on March 5, 1999.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP CLASS (/1/)
------------------------ ----------------- -----------
<S> <C> <C>
All Directors and Executive Officers as a
group
(12 individuals)........................ 929,728(/2/)(/3/) 60.9%
</TABLE>
--------
(1) Percentage is based upon 1,526,043 shares of Common Stock outstanding
at March 5, 1999.
(2) Includes 345,728 shares owned by TCI of which the Directors may be
deemed to be beneficial owners by virtue of their positions as
directors of TCI and 464,663 shares owned by ART and 118,337 shares
owned by BCM, of which the executive officers of the Company may be
deemed to be beneficial owners by virtue of their positions as
executive officers of ART and BCM. The Directors and executive officers
disclaim beneficial ownership of such shares. Each of the directors of
ART may be deemed to be beneficial owners of the shares owned by ART by
virtue of their positions as directors of ART. Each of the directors of
BCM may be deemed to be beneficial owners of the shares owned by BCM by
virtue of their positions as directors of BCM. The directors of ART and
BCM disclaim such beneficial ownership.
(3) Includes 1,000 shares owned by Richard W. Douglas.
44
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Business Relationships
In February 1989, the Board of Directors voted to retain BCM as the
Company's advisor. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF
THE REGISTRANT--The Advisor." BCM is a company of which Messrs. Paulson,
Blaha, Endendyk, Holland and Johnson serve as executive officers. Gene E.
Phillips served as a director of BCM until December 22, 1989, and as Chief
Executive Officer of BCM until September 1, 1992. BCM is owned by a trust for
the benefit of the children of Mr. Phillips. 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
BCM's performance of advisory services to the Company.
Since February 1, 1991, affiliates of BCM have provided property management
services to the Company. Currently, Carmel, Ltd. provides such property
management services. The general partner of Carmel, Ltd. is BCM. The limited
partners of Carmel, Ltd. are (1) First Equity, (2) Mr. Phillips and (3) a
trust for the benefit of the children of Mr. Phillips. Carmel, Ltd.
subcontracts the property-level management and leasing of the Company's 10
office buildings and the commercial properties owned by a real estate
partnership in which the Company and TCI are partners to Carmel Realty, which
is a company owned by First Equity.
Prior to December 1, 1992, affiliates of BCM provided brokerage services for
the Company and received brokerage commissions in accordance with the advisory
agreement. Since December 1, 1992, the Company engaged, on a non-exclusive
basis, Carmel Realty to perform brokerage services. Carmel Realty is a company
owned by First Equity.
The Directors and officers of the Company also serve as trustees or
directors and officers of CMET and TCI. The Directors owe fiduciary duties to
such entities as well as to the Company under applicable law. CMET and TCI
have the same relationship with BCM as the Company. BCM also serves as advisor
to ART. Messrs. Blaha, Paulson, Endendyk, Holland and Johnson serve as
executive officers of ART and NMC. NMC, a wholly-owned subsidiary of ART, is
the general partner of NRLP and NOLP. BCM performs certain administrative
functions for NRLP and NOLP on a cost-reimbursement basis.
From April 1992 to December 31, 1992, Mr. Stokely was employed as a paid
Consultant and since January 1993 as a part-time unpaid Consultant for
Eldercare, a nonprofit corporation engaged in the acquisition of low income
and elderly housing. Eldercare has a revolving loan commitment from Syntek
West, Inc. of which Mr. Phillips is the sole shareholder. Eldercare filed for
bankruptcy protection in July 1993 and was dismissed from bankruptcy in
October 1994. Eldercare again filed for bankruptcy protection in May 1995 and
was reorganized in bankruptcy in February 1996, and has since paid all debts
as directed by the Bankruptcy Court.
Related Party Transactions
Historically, the Company has engaged in and may continue to engage in
business transactions, including real estate partnerships, with related
parties. 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 Company as could have been obtained from unrelated third
parties.
As more fully described in ITEM 2. "PROPERTIES--Real Estate," the Company is
a partner with TCI in the Tri-City Limited Partnership and Nakash Income
Associates.
In 1998, the Company paid BCM and its affiliates $329,000 in advisory fees,
$8,000 in mortgage brokerage and equity refinancing fees, and $634,000 in
property management and construction supervision fees (net of property
management fees paid to subcontractors, other than Carmel Realty). In
addition, as provided in the Advisory Agreement, BCM received cost
reimbursements of $228,000 in 1998.
45
<PAGE>
Restrictions on Related Party Transactions
Article FOURTEENTH of the Company's Articles of Incorporation provides that
the Company shall not, directly or indirectly, contract or engage in any
transaction with (1) any director, officer or employee of the Company, (2) any
director, officer or employee of the advisor, (3) the advisor or (4) any
affiliate or associate (as such terms are defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended) of any of the aforementioned
persons, 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 Company's Board
of Directors or the appropriate committee thereof and (b) the Company's Board
of Directors or committee thereof determines that such contract or transaction
is fair to the Company and simultaneously authorizes or ratifies such contract
or transaction by the affirmative vote of a majority of independent directors
of the Company entitled to vote thereon.
Article FOURTEENTH defines an "Independent Director" as one who is neither
an officer or employee of the Company nor a director, officer or employee of
the Company's advisor.
Pursuant to the terms of the Modification of Stipulation of Settlement (the
"Olive Modification") in the Olive Litigation, as more fully discussed in ITEM
3. "LEGAL PROCEEDINGS--Olive Litigation," which became effective on January
11, 1995, certain related party transactions which the Company may enter into
prior to April 28, 1999, require the unanimous approval of the Board of
Directors. In addition, such related party transactions are to be discouraged
and may only be entered into in exceptional circumstances and after a
determination by the Board of Directors that the transaction is in the best
interests of the Company and that no other opportunity exists that is as good
as the opportunity presented by such transaction.
The Olive Modification requirements for related party transactions do not
apply to direct contractual agreements for services between the Company and
the Advisor or one of its affiliates, (including the Advisory Agreement, the
Brokerage Agreement and the property management contracts). These agreements,
pursuant to the specific terms of the Olive Modification, require the prior
approval by two-thirds of the Directors of the Company, and if required,
approval by a majority of stockholders. The Olive Modification requirements
for related party transactions also do not apply to joint ventures between or
among the Company 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 Gene E. Phillips, William S. 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 Directors of the Company.
An Amendment to the Olive Modification (the "Olive Amendment") was approved
by the Court on July 3, 1997. The Olive Amendment requires that additional
requirements be met for certain transactions with affiliates ("Affiliated
Transaction"). Independent counsel to the Board must review, advise and report
to the Board of Directors on any Affiliated Transaction prior to its
consideration and approval by the Board of Directors and the Board of
Directors must unanimously approve the transaction after receiving independent
counsel's advice and report. In addition, a notice must be given to the
plaintiffs' counsel at least 10 days prior to the closing of the transaction
and during such 10 day period plaintiffs' counsel is entitled to seek a Court
order prohibiting consummation of the transaction. Neither BCM nor any of its
affiliates may receive any fees or commissions in connection with an
Affiliated Transaction.
46
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets--December 31, 1998 and 1997
Consolidated Statements of Operations--Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Equity--Years Ended December
31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows--Years Ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule 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 Financial Statements
or the Notes thereto.
3. Exhibits
The following documents are filed as Exhibits to this Report:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.0 Articles of Incorporation of Income Opportunity Realty
Investors, Inc. (incorporated by reference to Appendix C to the
Registrant's Registration Statement on Form S-4 dated February
12, 1996).
3.1 Bylaws of Income Opportunity Realty Investors, Inc.
(incorporated by reference to Appendix D to the Registrant's
Registration Statement on Form S-4 dated February 12, 1996).
10.0 Advisory Agreement dated as of October 15, 1998, between Income
Opportunity Realty Investors, Inc. and Basic Capital Management,
Inc., filed herewith.
10.1 Advisory Agreement dated as of March 15, 1996, between Income
Opportunity Realty Investors, Inc. and Basic Capital Management,
Inc. (incorporated by reference to Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).
27.0 Financial Data Schedule, filed herewith.
</TABLE>
(b) Reports on Form 8-K:
None.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Income Opportunity Realty Investors,
Inc.
/s/ Randall M. Paulson
By: _________________________________
Randall M. Paulson
President
Dated: March 25, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Ted P. Stokely Chairman of the Board and March 25, 1999
______________________________________ Director
Ted P. Stokely
/s/ Richard W. Douglas Director March 25, 1999
______________________________________
Richard W. Douglas
/s/ Murray Shaw Director March 25, 1999
______________________________________
Murray Shaw
Director
______________________________________
Larry E. Harley
/s/ Martin L. White Director March 25, 1999
______________________________________
Martin L. White
/s/ R. Douglas Leonhard Director March 25, 1999
______________________________________
R. Douglas Leonhard
/s/ Edward G. Zampa Director March 25, 1999
______________________________________
Edward G. Zampa
/s/ Thomas A. Holland Executive Vice President March 25, 1999
______________________________________ and Chief Financial
Thomas A. Holland Officer (Principal
Financial and Accounting
Officer)
</TABLE>
48
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
EXHIBITS TO
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------- ----------- ----
<C> <S> <C>
10.0 Advisory Agreement dated as of October 15, 1998, between Income 50
Opportunity Realty Investors, Inc. and Basic Capital
Management, Inc.
27.0 Financial Data Schedule. 75
</TABLE>
<PAGE>
Exhibit 10.0
ADVISORY AGREEMENT
BETWEEN
INCOME OPPORTUNITY REALTY INVESTORS, INC.
AND
BASIC CAPITAL MANAGEMENT, INC.
THIS AGREEMENT dated as of October 15, 1998, between Income Opportunity
Realty Investors, Inc., a Nevada corporation (the "Company"), and Basic Capital
Management, Inc. (the "Advisor"), a Nevada corporation.
W I T N E S S E T H:
- - - - - - - - - -
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");
<PAGE>
(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;
<PAGE>
(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;
(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
<PAGE>
(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
<PAGE>
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.
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
<PAGE>
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
<PAGE>
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.
<PAGE>
(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.
(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
<PAGE>
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;
<PAGE>
(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.
(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.
<PAGE>
(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
<PAGE>
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; or (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
<PAGE>
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 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.
<PAGE>
(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
<PAGE>
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);
<PAGE>
(b) advertising and promotional expenses incurred in seeking
investments for the Company;
(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 and, without limiting the generality of the foregoing, it
is specifically agreed that the following expenses of the Company shall be paid
by the Company and shall not be paid by the Advisor:
(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,
<PAGE>
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
<PAGE>
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;
(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,
<PAGE>
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, or (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
<PAGE>
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 successor shall be bound hereunder and by the terms of said
assignment in the same manner as the Company is bound hereunder.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
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
<PAGE>
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: /s/ Randall M. Paulson
------------------------------
Randall M. Paulson
President
BASIC CAPITAL MANAGEMENT, INC.
By: /s/ Thomas A. Holland
------------------------------
Thomas A. Holland
Executive Vice President
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<PAGE>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 103
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 91,070
<DEPRECIATION> 7,379
<TOTAL-ASSETS> 88,695
<CURRENT-LIABILITIES> 0
<BONDS> 60,786
0
0
<COMMON> 15
<OTHER-SE> 23,545
<TOTAL-LIABILITY-AND-EQUITY> 88,695
<SALES> 0
<TOTAL-REVENUES> 14,326
<CGS> 0
<TOTAL-COSTS> 6,462
<OTHER-EXPENSES> 2,168
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,756
<INCOME-PRETAX> (679)
<INCOME-TAX> 0
<INCOME-CONTINUING> (679)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (679)
<EPS-PRIMARY> (.44)
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</TABLE>
