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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, 1999
Commission File Number 1-14784
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Income Opportunity Realty Investors, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 75-2615944
(I.R.S. Employer Identification No.)
(State or Other Jurisdiction of
Incorporation or Organization)
10670 North Central Expressway, Suite
300, Dallas, Texas
75231
(Zip Code)
(Address of Principal Executive
Offices)
(214) 692-4700
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
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<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 3, 2000, the Registrant had 1,530,500 shares of Common Stock
outstanding. Of the total shares outstanding 592,077 were held by other than
those who may be deemed to be affiliates, for an aggregate value of $3,440,000
based on the last trade as reported on the American Stock Exchange on March 3,
2000. 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 7A. Quantitative and Qualitative Disclosures Regarding Market Risk.. 16
Item 8. Financial Statements and Supplementary Data ..................... 17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................... 36
PART III
Item 10. Directors, Executive Officers and Advisor of the Registrant .... 36
Item 11. Executive Compensation ......................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management
........................................................................ 44
Item 13. Certain Relationships and Related Transactions ................. 44
PART IV
Item 14. Exhibits, Consolidated Financial Statements, Schedules and
Reports on Form 8-K .................................................... 46
Signature Page .......................................................... 47
</TABLE>
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PART I
ITEM 1. BUSINESS
Income Opportunity Realty Investors, Inc. ("IORI"), a Nevada corporation, is
the successor to a California business trust organized on December 14, 1984,
which commenced operations on April 15, 1985. IORI 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"). IORI has, in the
opinion of management, qualified for federal taxation as a REIT for all
periods since May 1, 1985.
At December 31, 1999, IORI's real estate consisted of 14 properties held for
investment. In addition, IORI owns interests in two partnerships, each of
which owns a property and a third partnership which holds a wraparound
mortgage note receivable. In 1999, IORI purchased one property as well as sold
one property. No mortgage loans were funded during 1999. IORI's real estate
portfolio is more fully discussed in ITEM 2. "PROPERTIES."
Business Plan
IORI's 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. IORI's real
estate is located in the Pacific, Southeast and Southwest regions of the
continental United States. Information regarding IORI's real estate portfolio
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."
IORI's business is not seasonal. Management has determined to continue to
pursue a balanced investment strategy, seeking both current income and capital
appreciation. With respect to new investments, management's plan of operation
is to acquire higher class apartment and commercial properties in keeping with
the current class of properties in IORI's real estate portfolio. In 2000,
management intends to focus on apartment acquisitions to maintain a balance
between apartment and commercial properties. Management does not expect that
IORI will seek to fund or acquire new mortgage loans. IORI may, however,
originate mortgage loans in conjunction with providing purchase money
financing of a property sale. Management 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 renovation
and/or improvement 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 IORI's properties.
The Board of Directors currently intends to continue its policy of
prohibiting IORI from incurring aggregate secured and unsecured indebtedness
in excess of 300% of IORI's net asset value (defined as the book value of all
assets of IORI minus all of its liabilities); however, the Board may alter
such policy at any time.
Management of the Company
Although the Board of Directors is directly responsible for managing the
affairs of IORI and for setting the policies which guide it, the day-to-day
operations of IORI are performed by Basic Capital Management, Inc. ("BCM"), a
contractual advisor under the supervision of the Board. The duties of BCM
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. BCM also serves as a consultant
in connection with IORI's business plan and investment decisions made by the
Board.
BCM is a company owned by a trust for the benefit of the children of Gene E.
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 its performance of advisory
services to IORI. BCM is more
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fully described in ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT--The Advisor."
BCM has been providing advisory services to IORI since March 28, 1989.
Renewal of BCM's advisory agreement was approved by stockholders at their
annual meeting held on October 12, 1999. BCM also serves as advisor to
Transcontinental Realty Investors, Inc. ("TCI"). The Directors of IORI are
also directors of TCI. BCM also serves as Advisor to American Realty Trust,
Inc. ("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. Karl L. Blaha, President of IORI, also serves as President of ART, NMC,
TCI and BCM and the officers of IORI also serve as officers of ART, NMC, TCI
and BCM. As of March 3, 2000, ART and TCI each owned approximately 30.9% and
22.6% of IORI's outstanding shares of Common Stock and BCM owned approximately
7.8% of IORI's outstanding shares of Common Stock.
Since February 1, 1990, affiliates of BCM have provided property management
services to IORI. Currently Triad Realty Services, Ltd. ("Triad") provides
such property management services. Triad subcontracts with other entities for
the provision of property-level management services to IORI. The general
partner of Triad is BCM. The limited partners of Triad are Syntek West, Inc.
("Syntek West"), a company owned by Gene E. Phillips, and Mr. Phillips. Triad
subcontracts the property-level management and leasing of IORI's 9 office
buildings and the two commercial properties owned by real estate partnerships
in which IORI and TCI are partners to Regis Realty, Inc. ("Regis"), which is a
company owned by Syntek West. Regis is entitled to receive property and
construction management fees and leasing commissions in accordance with the
terms of its property-level management agreement with Triad.
Regis 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."
IORI has no employees. Employees of BCM render services to IORI.
Competition
The real estate business is highly competitive and IORI 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 IORI. Management believes that success
against such competition is dependent upon the geographic location of the
property, the performance of the property-level managers in areas such as
marketing, collection and control of 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
units and IORI's ability to provide a community atmosphere for the tenants.
Management believes that beyond general economic circumstances and trends, the
rate at which properties are renovated or the rate new properties are
developed in the vicinity of each of IORI's properties are also competitive
factors.
To the extent that IORI 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 the same areas as well as aggressive buyers attempting
to penetrate or dominate a particular market.
As described above and in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS--Related Party Transactions," the officers and Directors of IORI
also serve as officers or directors of certain other entities, each of which
is also advised by BCM, and each of which has business objectives similar to
those of IORI. IORI's Directors, officers and advisor owe fiduciary duties to
such other
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entities as well as to IORI under applicable law. In determining to which
entity a particular investment opportunity will be allocated, the officers,
Directors and advisor consider the respective investment objectives of each
entity and the appropriateness of a particular investment in light of each
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 the entities, the 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, as described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS--Certain Business Relationships," IORI also competes with other
entities which are affiliates of BCM, which may have investment objectives
similar to IORI's and that may compete with it in the acquisition, sale,
leasing and financing of real estate. In resolving any potential conflicts of
interest which may arise, BCM 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
IORI 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 BCM. The illiquidity of real
estate investments also may impair the ability of management to respond
promptly to changing circumstances. Management believes that such risks are
partially mitigated by the diversification by geographic region and property
type of IORI'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
IORI's principal offices are located at 10670 North Central Expressway,
Suite 300, Dallas, Texas 75231 and are, in the opinion of management, suitable
and adequate for IORI's present operations.
IORI's real estate portfolio at December 31, 1999, 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" provide certain summary information concerning IORI's
real estate portfolio.
IORI's real estate portfolio consists of 14 owned properties and an
investment in three partnerships. IORI holds a fee simple title to the owned
properties. IORI does not hold any mortgage notes receivable, although a
partnership in which it is a 40% general partner holds a wraparound mortgage
note. The discussion set forth below under the heading "Real Estate" provides
certain summary information concerning IORI's real estate and further summary
information with respect to its owned properties and its partnership
investments.
IORI's real estate is geographically diverse. At December 31, 1999, IORI
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
IORI's properties are, however, located in California and Texas.
At December 31, 1999, two of IORI's properties, Renaissance Parc Apartments
and Saratoga Office Building, each exceeded 10% of IORI's total assets. At
December 31, 1999, 95% of IORI's assets consisted of owned properties and 1%
consisted of investments in partnerships. The remaining 4% of IORI's assets
were cash,
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cash equivalents and other assets. The percentage of IORI's assets invested in
any one category is subject to change and no assurance can be given that the
composition of IORI'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, IORI
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
IORI 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. IORI has no properties in this
region.
Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia. IORI has
1 commercial property in this region.
Southwest region comprised of the states of Arizona, Arkansas, Louisiana, New
Mexico, Oklahoma and Texas. IORI has 5 apartments and 2 commercial properties
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. IORI has no properties in this region.
Mountain region comprised of the states of Colorado, Idaho, Montana, Nevada,
Utah and Wyoming. IORI has no properties in this region.
Pacific region comprised of the states of California, Oregon and Washington.
IORI has 6 commercial properties in this region.
Real Estate
At December 31, 1999, 95% of IORI's assets were invested in real estate, on
a leveraged basis, in the Pacific, Southeast and Southwest regions of the
continental United States. IORI's real estate portfolio consists of 14 owned
properties and an investment in three partnerships.
Types of Real Estate Investments. IORI'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. IORI may acquire properties subject to, or
assume, existing debt and may mortgage, pledge or otherwise obtain financing
for its properties. The IORI Board may alter the types of and criteria for
selecting new real estate investments and for obtaining financing without a
vote of stockholders.
IORI has typically invested in developed real estate, although it may also
invest in new construction or development either directly or in partnership
with nonaffiliated parties or affiliates (subject to approval by the
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Board). To the extent that IORI 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, IORI's properties are adequately covered by
insurance.
IORI's owned real estate portfolio consisted of 14 properties at January 1,
and December 31, 1999. In 1999, IORI purchased and sold one property. The
following table sets forth the percentages, by property type and geographic
region, of IORI's owned real estate at December 31, 1999.
<TABLE>
<CAPTION>
Commercial
Region Apartments Properties
------ ---------- ----------
<S> <C> <C>
Pacific................................................ -- % 76%
Southwest.............................................. 100 14
Southeast.............................................. -- 10
--- ---
100% 100%
=== ===
</TABLE>
The foregoing table is based solely on the number of apartment units and
commercial square footage owned and does not reflect the value of IORI's
investment in each region. See Schedule III to the Consolidated Financial
Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA"
for a detailed description of IORI's real estate.
A summary of the activity in IORI's owned real estate portfolio during 1999
is as follows:
<TABLE>
<S> <C>
Owned properties at January 1,........................................... 14
Property purchased....................................................... 1
Property sold............................................................ (1)
---
Owned properties at December 31, 1999.................................... 14
===
</TABLE>
Properties Held for Investment. Set forth below are IORI's owned properties
at December 31, 1999, all of which were 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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Rent Per Square Foot Occupancy %
Units/ -------------------- --------------
Property Location Square Footage 1999 1998 1997 1999 1998 1997
- -------- -------------------- -------------------------- ------ ------ ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Apartments
Eastpoint............... Mesquite, TX 126 units/ 113,138 sq. ft. $ .74 $ .70 $ .67 97 93 97
La Monte Park........... Houston, TX 128 units/ 123,184 sq. ft. .67 .63 .59 98 99 96
Meridian................ Midland, TX 280 units/ 264,000 sq. ft. .46 * * 69 * *
Renaissance Parc........ Dallas, TX 294 units/ 293,654 sq. ft. .85 .82 .80 91 96 95
Treehouse............... San Antonio, TX 106 units/ 88,957 sq. ft. .80 .78 .76 96 96 98
Office Buildings
2010 Valley View........ Farmers Branch, TX 39,568 sq. ft. $16.26 $16.50 $ ** 64 19 **
5600 Mowry.............. Newark, CA 56,120 sq. ft. 22.94 19.86 18.92 100 58 81
Akard Plaza............. Dallas, TX 42,895 sq. ft. 15.34 13.47 13.27 92 92 99
Chuck Yeager............ Chantilly, VA 60,060 sq. ft. 14.70 13.39 13.07 41 72 93
Daley Plaza............. San Diego, CA 122,795 sq. ft. 14.68 12.53 12.74 79 74 76
La Mesa Village......... La Mesa, CA 92,611 sq. ft. 17.29 16.47 17.15 88 89 90
Olympic................. Los Angeles, CA 46,685 sq. ft. 21.50 21.47 21.94 100 100 73
Saratoga................ Saratoga, CA 89,825 sq. ft. 28.60 26.17 21.27 85 95 100
Westlake Village........ Westlake Village, CA 45,500 sq. ft. 16.96 14.44 14.20 70 79 98
</TABLE>
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* Property was purchased in 1999.
** Property was purchased in 1997 and construction was completed in 1998.
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In July 1999, the matured mortgage debt secured by the 42,895 sq. ft. Akard
Plaza Office Building in Dallas, Texas, was refinanced in the amount of $2.1
million. IORI paid net cash of $547,000 to pay off $2.5 million in mortgage
debt and to pay various closing costs, including a mortgage brokerage and
equity refinancing fee of $21,000 to BCM. The new mortgage bears interest at a
variable rate, currently 8.07% per annum, requires monthly payments of
principal and interest of $16,306 and matures in August 2002.
In August 1999, the mortgage debt secured by the 128 unit La Monte Park
Apartments in Houston, Texas, was refinanced in the amount of $3.8 million.
IORI received net cash of $355,000 after paying off $3.3 million in mortgage
debt and the payment of various closing costs and escrows including a mortgage
brokerage and equity refinancing fee of $38,000 to BCM. The new mortgage bears
interest at 7.95% per annum, requires monthly payments of principal and
interest of $28,031 and matures in September 2009.
In November 1999, the 23,518 sq. ft. Town Center Plaza in Boca Raton,
Florida, was sold for $3.2 million. IORI received net cash of $1.5 million
after paying off $1.3 million in mortgage debt, including a $180,000
prepayment penalty, and the payment of various closing costs, including a real
estate brokerage commission of $116,000 to Regis. A gain of $490,000 was
recognized on the sale.
In December 1999, the 280 unit Meridian Apartments in Midland, Texas, was
purchased for $5.4 million. IORI paid $2.4 million in cash and obtained
mortgage financing of $3.0 million. The mortgage bears interest at 8.85% per
annum through December 2000, and at a variable rate thereafter, requires
monthly payments of principal and interest of $26,882 and matures in December
2004. Additional fundings of up to $1.0 million may be requested upon the
property reaching certain established performance goals. A real estate
brokerage commission of $168,000 was paid to Regis and an acquisition
commission of $54,000 was paid to BCM.
Also in December 1999, the mortgage debt secured by 2010 Valley View Office
Building in Farmers Branch, Texas was refinanced in the amount of $1.8
million. IORI received net cash of $632,000 after paying off $804,000 in
mortgage debt, including a $4,000 prepayment penalty, the funding of required
escrows and the payment of various closing costs, including a mortgage
brokerage and equity refinancing fee of $18,000 to BCM. The new mortgage bears
interest at a variable rate, currently 10.39% per annum, requires monthly
payments of principal and interest of $17,285 and matures in January 2025.
In March 2000, IORI sold the 128 unit La Monte Park Apartments in Houston,
Texas, for $5.0 million IORI received net cash of $921,000 after paying off
$3.9 million in mortgage debt and the payment of various closing costs,
including a real estate brokerage commission of $145,000 to Regis. A gain will
be recognized on the sale.
Partnership Properties. Set forth below is the commercial property owned by
each of the two partnerships in which IORI is an equity investee and the
average annual rental rate and occupancy thereof at December 31, 1999, 1998
and 1997:
<TABLE>
<CAPTION>
Rent per Square Footage Occupancy
----------------------- ----------------
Property Location Square Footage 1999 1998 1997 1999 1998 1997
- -------- ----------- --------------- ------- ------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shopping Centers
Chelsea Square.......... Houston, TX 70,275 sq. ft. $8.78 $8.58 $9.21 100% 100% 100%
Eton Square............. Tulsa, OK 222,654 sq. ft. 9.77 * * 87% * *
</TABLE>
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* Partnership interest was purchased in 1999.
IORI owns a 36.3% general partner interest and TCI owns a 63.7% limited
partner interest in Tri-City Limited Partnership which in turn owns Chelsea
Square Shopping Center. In June 1999, Tri-City sold Summit at Bridgewood, a
48,696 sq. ft. shopping center in Ft. Worth, Texas, for $3.3 million,
receiving net cash of $3.1 million after the payment of various closing costs
including a real estate brokerage commission of $119,000 to Regis. IORI
received a distribution of $1.2 million of the net cash. Tri-City recognized a
gain of $587,000 of which IORI's equity share was $213,000. In July 1999, the
53,472 sq. ft. Mac Arthur Mills Office Building in
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Carrollton, Texas, was sold for $3.9 million. Tri-City received net cash of
$2.3 million after paying off $1.3 million of mortgage debt and the payment of
various closing costs, including a real estate brokerage commission of
$137,000 to Regis. IORI received a distribution of $871,000 of the net cash.
Tri-City recognized a gain of $2.3 million on the sale of which IORI's equity
share was $822,000. In 1999, IORI also received $155,000 in operating
distributions from the partnership.
In September 1999, IORI invested $384,000 for a 10% limited partner interest
in TCI Eton Square, L.P. ("Eton Square"). TCI owns a 90% general partner
interest in the partnership. Also in September 1999, the partnership purchased
the 222,654 sq. ft. Eton Square Building in Tulsa, Oklahoma, for $14.0 million
paying $3.6 million in cash and obtaining mortgage financing of $10.5 million.
The mortgage bears interest at 8.5% per annum, requires monthly payments of
principal and interest of $84,549 and matures in October 2004. The partnership
paid a real estate brokerage commission of $330,000 to Regis and a real estate
acquisition fee of $140,000 to BCM.
Mortgage Loans
Prior to 1991, a substantial portion of IORI's assets had been invested in
mortgage notes secured by income-producing real estate. IORI's mortgage notes
had included first, wraparound and junior mortgage loans. Management has
determined that IORI will not seek to fund or acquire new mortgage loans,
other than those which may originate in conjunction with IORI's providing
purchase money financing of a property sale. See ITEM 1. "BUSINESS." BCM, in
its capacity as a mortgage servicer, serviced the mortgage notes.
Partnership mortgage loans. IORI 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. IORI received no distributions from NIA in
1999, but did advance the partnership $2,000.
ITEM 3. LEGAL PROCEEDINGS
Olive Litigation
In February 1990, IORI, together with National Income Realty Trust,
Continental Mortgage and Equity Trust ("CMET") and TCI, three real estate
entities with, at the time, the same officers, directors or trustees and
advisor as IORI, entered into a settlement (the "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 January 27, 1997, the parties entered into an Amendment to the Settlement
effective January 9, 1997 (the "Olive Amendment"), which was submitted to the
Court for approval on January 29, 1997. The Olive Amendment provided for the
settlement of all matters raised by plaintiffs' counsel in 1996. The Court
issued an order approving the Olive Amendment on July 3, 1997.
The Olive Amendment provided, among other things, for the addition of four
new unaffiliated members to IORI's Board and set forth new requirements for
the approval of any transactions with certain affiliates until April 28, 1999.
In addition, IORI, CMET, TCI and their stockholders released the defendants
from any claims relating to the plaintiffs' allegations.
The Olive Amendment also provided that IORI's Board retain a
management/compensation consultant or consultants to evaluate the fairness of
the BCM advisory contract and any contract of its affiliates with IORI, CMET
and TCI, including, but not limited to, the fairness to IORI, CMET and TCI of
such contracts relative to other means of administration. In 1998, the Board
engaged a management/compensation consultant to perform the evaluation which
was completed in September 1998. Plaintiffs' counsel has asserted that the
Board did not
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comply with the provision requiring such engagement and has requested that the
Court exercise its retained jurisdiction to determine whether there was a
breach of this provision of the Olive Amendment. A status conference on this
matter was held on February 14, 2000. The Court has not entered any order.
The provisions of the Settlement and Olive Amendment terminated on April 28,
1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting was held on October 12, 1999, at which meeting
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 the meeting stockholders elected the following individuals as Directors:
<TABLE>
<CAPTION>
Shares Voting
-------------------
Withheld
Director For Authority
-------- --------- ---------
<S> <C> <C>
Richard W. Douglas.................................... 1,205,889 14,303
Larry E. Harley....................................... 1,205,889 14,303
R. Douglas Leonhard................................... 1,205,889 14,303
Murray Shaw........................................... 1,205,889 14,303
Ted P. Stokely........................................ 1,205,889 14,303
Martin L. White....................................... 1,205,889 14,303
Edward G. Zampa....................................... 1,205,889 14,303
</TABLE>
Also at the meeting, stockholders approved the renewal of the advisory
agreement with BCM, with 1,190,438 votes for the proposal, 17,216 votes
against and 12,538 votes abstaining.
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
IORI'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
IORI's Common Stock as reported on the AMEX.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- --------- ---------
<S> <C> <C>
March 31, 2000 (through March 3, 2000)................... $ 6 $ 5 1/4
March 31, 1999........................................... 8 6 3/8
June 30, 1999............................................ 7 3/4 5 5/8
September 30, 1999....................................... 7 1/8 5 1/8
December 31, 1999........................................ 5 7/8 4 3/4
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
</TABLE>
As of March 3, 2000, the closing price of IORI's Common Stock on the AMEX
was $5.81 per share.
As of March 3, 2000, IORI's Common Stock was held by 1,534 holders of
record.
IORI paid quarterly dividends in 1999 and 1998 as follows:
<TABLE>
<CAPTION>
Amount
Date Declared Record Date Payable Date Per Share
----------------- ------------------ ------------------ ---------
<S> <C> <C> <C>
March 4, 1999 March 15, 1999 March 31, 1999 $.15
June 2, 1999 June 14, 1999 June 30, 1999 .15
September 9, 1999 September 20, 1999 October 5, 1999 .15
November 22, 1999 December 15, 1999 December 31, 1999 .15
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
</TABLE>
IORI reported to the Internal Revenue Service that 100% of the dividends
paid in 1999 and 1998 represented a return of capital.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
EARNINGS DATA
Revenues................ $ 15,997 $ 14,498 $ 12,487 $ 9,005 $ 7,919
Expenses................ 16,348 15,470 13,175 9,658 8,081
--------- --------- --------- --------- ---------
(Loss) from operations.. (351) (972) (688) (653) (162)
Equity in income (loss)
of partnerships........ 148 113 52 85 (744)
Gain on sale of real
estate................. 1,525 180 3,953 -- --
--------- --------- --------- --------- ---------
Net income (loss)....... $ 1,322 $ (679) $ 3,317 $ (568) $ (906)
========= ========= ========= ========= =========
PER SHARE DATA
Net income (loss)....... $ .87 $ (.44) $ 2.18 $ (.37) $ (.57)
========= ========= ========= ========= =========
Dividends per share..... $ .60 $ .60 $ .40 $ .40 $ .30
Weighted average Common
shares outstanding..... 1,527,386 1,521,832 1,519,888 1,530,008 1,582,888
<CAPTION>
December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(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
Real estate held for
sale, net.............. -- -- -- 6,623 845
Real estate held for
investment, net........ 86,542 83,691 81,914 46,693 39,480
Total assets............ 91,185 88,695 90,309 63,593 49,169
Notes and interest
payable................ 62,852 60,786 61,323 38,957 22,682
Stockholders' equity.... 23,991 23,560 25,131 22,381 24,191
Book value per share.... $ 15.69 $ 15.44 $ 16.53 $ 14.63 $ 15.28
</TABLE>
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
IORI invests in equity interests in real estate through acquisitions, leases
and partnerships. IORI is the successor to a California business trust
organized on December 14, 1984, which commenced operations on April 10, 1985.
Liability and Capital Resources
Cash and cash equivalents at December 31, 1999, totaled $722,000 compared to
$103,000 at December 31, 1998. IORI'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 IORI
will generate sufficient cash in 2000 to meet its various cash requirements
including the payment of dividends, property renovation and/or improvement
costs and debt service obligations.
Net cash provided by operating activities increased to $3.3 million in 1999
from $1.0 million in 1998. The primary factors affecting cash flow from
operating activities are discussed in the following paragraphs.
12
<PAGE>
Cash flow from property operations (rents collected less payments for
property operating expenses) increased to $9.7 million in 1999 from $7.9
million in 1998. This increase was the result of higher rents and occupancy
rates primarily at IORI's office buildings. Management believes that this
trend will continue, particularly in IORI's office buildings, if the economy
remains stable or improves.
Interest collected decreased to $29,000 in 1999 from $182,000 in 1998. This
decrease was due to a decrease in short-term investment income and the
collection of IORI's last remaining mortgage note receivable in August 1998.
Management has determined that generally, IORI will not actively seek to
originate new mortgage loans other than those resulting from IORI's providing
purchase money financing in connection with a property sale.
Interest paid on notes payable was $5.5 million in 1999 and 1998. Interest
paid on notes payable will continue to increase as IORI continues to acquire
properties on a leveraged basis.
Advisory and net income fee paid to affiliate decreased to $388,000 in 1999
from $534,000 in 1998, due to an increase in the amount of the operating
expense limitation reimbursement. The reimbursement of the excess operating
expenses occurred in the first quarter of 1999. See NOTE 7. "ADVISORY
AGREEMENT."
In 1999, IORI made improvements to its properties totaling $2.2 million,
purchased one apartment for $5.4 million, paying $2.4 million in cash and
obtaining mortgage financing of $3.0 million, and sold one commercial property
for $3.2 million, receiving net cash of $1.5 million after the payoff of
mortgage debt and the payment of various closing costs.
In 1999, IORI received net cash of $440,000 from the refinancing of three
properties. During 1999, IORI made scheduled mortgage principal payments
totaling $874,000.
Scheduled principal payments on notes payable of $3.0 million are due in
2000. For those mortgages that come due in 2000, it is management's intent to
either seek an extension of the due dates one or more years, or refinance the
debt on a long-term basis or pay off the debt at maturity. Management believes
it will continue to be successful in obtaining loan extensions and/or
refinancings.
IORI owns a 36.3% general partner interest in the Tri-City partnership. In
1999, IORI received $155,000 in distributions from Tri-City's operating cash
flow, $2.0 million from its investing cash flow and advanced $36,000 to the
partnership. In 1999, IORI received no distributions from the NIA partnership
but did make a $2,000 contribution to the partnership. In 1999, IORI invested
$385,000 for a 10% limited partnership interest in the TCI Eton Square
partnership. IORI received no distributions and made no contributions to the
partnership in 1999. See NOTE 3. "INVESTMENT IN EQUITY METHOD REAL ESTATE
ENTITIES."
IORI has paid quarterly dividends since the first quarter of 1993. Dividends
paid to stockholders totaled $908,000 or $.60 per share in 1999 and $945,000
or $.60 per share in 1998.
Management reviews the carrying values of IORI's properties at least
annually and whenever events or a change in circumstances indicate that
impairment may exist. Impairment is considered to exist if the future cash
flow from a 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 (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.
Results of Operations
1999 Compared to 1998. IORI reported net income of $1.3 million in 1999, as
compared to a net loss of $679,000 in 1998. Net income in 1999 included gains
on sale of real estate of $1.5 million whereas 1998's net loss included gains
on sale of real estate of $180,000. The primary factors contributing to IORI's
1999 net income are discussed in the following paragraphs.
13
<PAGE>
Rents increased to $16.0 million in 1999 from $14.3 million in 1998. Of this
increase, $1.6 million was due to higher rents and occupancy rates, primarily
at IORI's office buildings and $251,000 was attributable to a full year of
operations of an office building construction of which was completed in 1998.
This increase was partially offset by a decrease of $182,000 due to one office
building being sold in 1999. Rents are expected to increase in 2000 due to a
full year of operations of the Meridian Apartments, purchased in 1999, and
increased occupancy and rental rates at IORI's apartments and office
buildings.
Interest income decreased to $29,000 in 1999 from the $172,000 in 1998. This
decrease was due to a decrease in short-term investment income and the August
1998 collection of IORI's last remaining mortgage note receivable. Interest
income is expected to be minimal in 2000.
Property operations expense increased to $6.8 million in 1999 from $6.5
million in 1998. This increase was attributable to a full year of operations
of an office building construction of which was completed in 1998.
Interest expense of $5.7 million in 1999 approximated the $5.8 million in
1998. Interest expense in 2000 is expected to approximated that in 1999, if
IORI neither purchases nor sells any of its properties.
Depreciation expense increased to $2.7 million in 1999 from $2.2 million in
1998. This increase was primarily due to an increase in tenant improvements.
Depreciation expense in 2000 is expected to approximate 1999.
Advisory fee increased to $371,000 in 1999 from $329,000 in 1998. Such
increase was attributable to an increase in IORI's gross assets, the basis for
the fee and a decrease in the operating expense limitation refund. See NOTE 7.
"ADVISORY AGREEMENT." The fee is expected to increase if IORI's assets
increase.
A net income fee of $81,000 was earned by the advisor in 1999, the result of
IORI having net income. No fee was incurred in 1998.
General and administrative expense of $747,000 in 1999 approximated the
$755,000 in 1998.
Equity in income of partnerships increased to $148,000 in 1999 from $113,000
in 1998. The increase was due to an equity partnership acquisition of Eton
Square and to increased rental rates at the partnership's commercial
properties.
In 1999, IORI recognized gains on sale of real estate totaling $1.5 million,
$1.0 million being IORI's equity share of the gain recognized by Tri-City on
the sale of two commercial properties, and $490,000 on IORI's sale of Town
Center Plaza in November. See NOTE 2. "REAL ESTATE" and NOTE 3. "INVESTMENT IN
EQUITY METHOD PARTNERSHIPS." In 1998, IORI recognized gains on sale of real
estate totaling $180,000, its equity share of the gain recognized by Tri-City
on the sale of two apartments.
1998 Compared to 1997. IORI reported a net loss of $679,000 in 1998, as
compared with net income of $3.3 million in 1997. In 1997, net income included
gains on sale of real estate of $4.0 million whereas the 1998 net loss
included a gain on sale of real estate of $180,000. The primary factors
contributing to IORI'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.
Interest income decreased to $172,000 in 1998 from $266,000 in 1997. This
decrease was due to a decrease in short-term investment income and the August
1998 collection of the last remaining mortgage note receivable.
Property operations expense increased to $6.5 million in 1998 from $5.9
million in 1997. Of the increase, $2.2 million was attributable to the eight
properties purchased in 1997 and $178,000 was due to increased repairs
14
<PAGE>
and maintenance at two commercial properties. These increases were partially
offset by a decrease of $1.5 million due to the sale of three apartments 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 the sale of three apartments in 1997.
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 the sale of three
apartments in 1997.
Advisory fee expense decreased to $329,000 in 1998 from $343,000 in 1997.
The decrease was attributable to a decrease in gross assets, the basis for the
fee and an increase in the operating expense limitation refund. See NOTE 7.
"ADVISORY AGREEMENT."
A net income fee of $275,000 was earned by the advisor in 1997, the result
of recognized gains totaling $4.0 million from the sale of three apartments in
1997. No such fee was incurred in 1998.
General and administrative expense decreased to $755,000 in 1998 from
$973,000 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 $113,000 in 1998 from $52,000
in 1997.
In 1998, gains on sale of real estate totaled $180,000, IORI's equity share
of the gain recognized by Tri-City on the sale of its two apartments. See NOTE
3. "INVESTMENT IN EQUITY METHOD PARTNERSHIPS." For 1997, gains on sale of real
estate totaled $4.0 million, including $1.9 million on the sale of Plumtree
Apartments in March, $1.5 million on the sale of Porticos Apartments in June
and $631,000 on the sale of Spanish Trace Apartments in December.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, IORI 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 IORI's business, assets
or results of operations.
Inflation
The effects of inflation on IORI's operations are not quantifiable. Revenues
from property operations tend to fluctuate proportionately with inflationary
increases and decreases in housing costs. 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 1997, 1998 and 1999, IORI elected and in the opinion of
management qualified, to be taxed as a REIT as defined under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended. To
15
<PAGE>
continue to qualify for federal taxation as a REIT, IORI 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. As a REIT, IORI is also required to distribute at least
95% of its REIT taxable income plus 95% of its net income from foreclosure
property on an annual basis to stockholders.
Year 2000
Even though January 1, 2000, has passed and no adverse impact from the
transition to the year 2000 has been experienced, no assurance can be provided
that IORI's suppliers and tenants have not been affected in a manner not yet
apparent. As a result, IORI's advisor will continue to monitor its year 2000
compliance and the year 2000 compliance of IORI's suppliers and tenants.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
IORI's future operations, cash flow and fair values of financial instruments
are partially dependent upon the then existing market interest rates and
market equity prices. Market risk is the changes in the market rates and
prices and the affect of the changes on future operations. Market risk is
managed by matching the property's anticipated net operating income to an
appropriate financing.
The following table contains only those exposures that existed at December
31, 1999. Anticipation of exposures or risk on positions that could possibly
arise was not considered. IORI's ultimate interest rate risk and its affect on
operations will depend on future capital market exposures, which cannot be
anticipated with a probable assurance level. Dollars in thousands.
Liabilities
Notes payable
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Variable interest rate-
fair value $23,827
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total
------ ------ ------- ------ ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Instrument's
maturities........... $2,341 $ -- $11,374 $4,288 $2,687 $ 225 $20,915
Instrument's
amortization......... 224 247 225 119 96 1,534 2,445
Interest............. 1,995 1,966 1,644 812 428 2,246 9,091
Average rate.......... 8.6% 8.6% 8.6% 8.6% 8.6% 7.7% --
Fixed interest rate-fair
value $38,721
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total
------ ------ ------- ------ ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Instrument's
maturities........... $ -- $ -- $ -- $ -- $ -- $34,818 $34,818
Instrument's
amortization......... 468 511 559 609 660 1,505 4,312
Interest............. 3,344 3,301 3,253 3,203 3,152 6,742 22,995
Average rate.......... 9.0% 9.5% 11.2% 12.0% 13.6% 10.5% --
</TABLE>
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, 1999 and 1998.................. 19
Consolidated Statements of Operations--Years Ended December 31, 1999,
1998 and 1997........................................................... 20
Consolidated Statements of Stockholders' Equity--Years Ended December 31,
1999, 1998 and 1997..................................................... 21
Consolidated Statements of Cash Flows--Years Ended December 31, 1999,
1998 and 1997........................................................... 22
Notes to Consolidated Financial Statements............................... 24
Schedule III--Real Estate and Accumulated Depreciation................... 34
</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, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. 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 schedule 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
schedule are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and schedule. 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 schedule.
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, 1999 and 1998, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, 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 3, 2000
18
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
(dollars in thousands,
except per share)
<S> <C> <C>
Assets
Real estate held for investment, net of accumulated
depreciation ($9,509 in 1999 and $7,379 in 1998).... $ 86,542 $ 83,691
Investment in partnerships........................... 907 1,483
Cash and cash equivalents............................ 722 103
Other assets (including $107 in 1999 and $475 in 1998
from affiliates).................................... 3,014 3,418
----------- -----------
$ 91,185 $ 88,695
=========== ===========
Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable........................... $ 62,852 $ 60,786
Other liabilities (including $721 in 1999 and $1,195
in 1998 to affiliates).............................. 4,342 4,349
----------- -----------
67,194 65,135
Commitments and contingencies
Stockholders' equity
Common Stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 1,528,908 shares in
1999 and 1,526,043 shares in 1998................... 15 15
Paid-in capital...................................... 64,874 64,857
Accumulated distributions in excess of accumulated
earnings............................................ (40,898) (41,312)
----------- -----------
23,991 23,560
----------- -----------
$ 91,185 $ 88,695
=========== ===========
</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,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
(dollars in thousands, except per share)
<S> <C> <C> <C>
Revenues
Rents............................ $ 15,968 $ 14,326 $ 12,221
Interest......................... 29 172 266
------------- ------------- -------------
15,997 14,498 12,487
------------- ------------- -------------
Expenses
Property operations (including
$687 in 1999, $634 in 1998 and
$503 in 1997 to affiliates)..... 6,768 6,462 5,900
Interest......................... 5,658 5,756 4,069
Depreciation..................... 2,723 2,168 1,615
Advisory fee to affiliate........ 371 329 343
Net income fee to affiliate...... 81 -- 275
General and administrative
(including $260 in 1999, $228 in
1998 and $248 in 1997 to
affiliate)...................... 747 755 973
------------- ------------- -------------
16,348 15,470 13,175
------------- ------------- -------------
(Loss) from operations............ (351) (972) (688)
Equity in income of partnerships.. 148 113 52
Gain on sale of real estate....... 1,525 180 3,953
------------- ------------- -------------
Net income (loss)................. $ 1,322 $ (679) $ 3,317
============= ============= =============
Earnings per share
Net income (loss)................. $ .87 $ (.44) $ 2.18
============= ============= =============
Weighted average shares of Common
Stock used in computing earnings
per share........................ 1,527,386 1,521,832 1,519,888
============= ============= =============
</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,
1997.................... 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 ($.60 per
share).................. -- -- -- (945) (945)
Net (loss)............... -- -- -- (679) (679)
--------- ---- ------- -------- -------
Balance, December 31,
1998.................... 1,526,043 15 64,857 (41,312) 23,560
Sale of Common Stock
under dividend
reinvestment plan....... 2,865 -- 17 -- 17
Dividends ($.60 per
share).................. -- -- -- (908) (908)
Net income............... -- -- -- 1,322 1,322
--------- ---- ------- -------- -------
Balance, December 31,
1999.................... 1,528,908 $ 15 $64,874 $(40,898) $23,991
========= ==== ======= ======== =======
</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,
-----------------------------------
1999 1998 1997
---------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Rents collected.......................... $ 16,065 $ 14,326 $ 11,772
Interest collected....................... 29 182 253
Interest paid............................ (5,458) (5,540) (3,856)
Payments for property operations
(including $687 in 1999, $634 in 1998
and $503 in 1997 to affiliate).......... (6,325) (6,427) (5,295)
Advisory and net income fee paid to
affiliate............................... (388) (534) (567)
General and administrative expenses paid
(including $260 in 1999, $228 in 1998
and $248 in 1997 to affiliate).......... (793) (798) (1,081)
Distributions from equity partnerships'
operating cash flow..................... 155 181 218
Escrow funding........................... -- (135) (522)
Other.................................... 34 (259) 663
---------- ---------- -----------
Net cash provided by operating
activities............................ 3,319 996 1,585
Cash Flows from Investing Activities
Acquisition of equity partnership
interest................................ (384) -- --
Funding of equity partnerships........... (39) (8) (224)
Real estate improvements................. (2,199) (3,945) (901)
Acquisition of real estate (including
$222 in 1999 and $1,826 in 1997 to
affiliate).............................. (5,287) -- (38,174)
Proceeds from sale of real estate........ 2,673 -- 23,593
Distributions from equity partnerships'
investing cash flow..................... 2,027 399 --
Collection of note receivable............ -- 2,000 --
---------- ---------- -----------
Net cash (used in) investing
activities............................ (3,209) (1,554) (15,706)
</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,
-----------------------------------
1999 1998 1997
---------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities
Proceeds from notes payable.............. $10,778 $ 800 $ 31,565
Payments on notes payable................ (8,681) (1,422) (19,452)
Deferred financing costs................. (258) (25) (250)
Distributions from equity partnerships'
financing cash flow..................... -- -- 627
Sale of Common Stock under dividend
reinvestment plan....................... 17 53 --
Dividends to stockholders................ (908) (945) (567)
Payments (to)/from advisor............... (439) 1,055 157
---------- ---------- -----------
Net cash provided by (used in)
financing activities.................. 509 (484) 12,080
---------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents.............................. 619 (1,042) (2,041)
Cash and cash equivalents, beginning of
year..................................... 103 1,145 3,186
---------- ---------- -----------
Cash and cash equivalents, end of year.... $ 722 $ 103 $ 1,145
========== ========== ===========
Reconciliation of net income (loss) to net
cash provided by operating activities
Net income (loss)....................... $ 1,322 $(679) $ 3,317
Adjustments to reconcile net income
(loss) to net cash provided
by operating activities
Depreciation and amortization......... 2,967 2,297 1,718
Gain on sale of real estate........... (1,525) -- (3,953)
Equity in (income) of partnerships.... (148) (293) (52)
Distributions from equity
partnerships' operating cash flow.... 155 181 218
Decrease in interest receivable....... -- 17 --
(Increase) decrease in other assets... 127 (102) (1,091)
Increase (decrease) in interest
payable.............................. (44) 80 97
Increase (decrease) in other
liabilities.......................... 465 (505) 1,331
---------- ---------- -----------
Net cash provided by operating
activities......................... $ 3,319 $ 996 $ 1,585
========== ========== ===========
Schedule of noncash investing and
financing activities
Notes payable from purchase of real
estate................................. $ -- $ -- $ 7,736
</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") were 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 1998 have been reclassified to conform to the 1999
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 invests 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 those 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 type of real
estate.
Fair value of financial instruments. The Company used the following
assumptions in estimating the fair value of its 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,
all highly liquid debt instruments purchased with an original maturity of
three months or less are considered 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. REAL ESTATE
In 1999, the Company purchased the 280 unit Meridian Apartments in Midland,
Texas, for $5.4 million, paying $2.4 million in cash and obtaining mortgage
financing of $3.0 million.
Also during 1999, the Company sold the Town Center Plaza in Boca Raton,
Florida, for $3.2 million, receiving net cash of $1.5 million after paying off
$1.3 million in mortgage debt. A gain of $490,000 was recognized.
NOTE 3. INVESTMENT IN EQUITY METHOD PARTNERSHIPS
The Company's investment in equity method partnerships consist of the
following:
<TABLE>
<CAPTION>
1999 1998
---- ------
<S> <C> <C>
Tri-City Limited Partnership
("Tri-City")................................................... $194 $1,204
Nakash Income Associates ("NIA")................................ 316 279
TCI Eton Square, L.P. ("Eton Square")........................... 397 --
---- ------
$907 $1,483
==== ======
</TABLE>
The Company uses the equity method to account for its 36.3% general partner
interest in Tri-City, which at January 1, 1998, owned five properties in
Texas. Transcontinental Realty Investors, Inc. ("TCI") owns a 63.7% limited
partner interest in Tri-City. In June 1999, Tri-City sold a shopping center
for $3.3 million, receiving net cash of $3.1 million. The Company received a
distribution of $1.2 million of such net cash. Tri-City recognized a gain of
$587,000 on the sale of which the Company's equity share was $213,000. In July
1999, Tri-City sold an office building for $3.9 million, receiving net cash of
$2.3 million. The Company received a distribution of $871,000 of such net
cash. Tri-City recognized a gain of $2.3 million on the sale of which the
Company's equity share was $822,000. 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. 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. As of March 3, 2000, TCI owned approximately 22.6%
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. NIA's only asset is a wraparound mortgage note
receivable secured by a shopping center in Maulden, Missouri. TCI owns the
remaining 60% general partner interest in NIA.
25
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In September 1999, the Company invested $384,000 for a 10% limited partner
interest in Eton Square, which purchased the 222,654 sq. ft. Eton Square
Building in Tulsa, Oklahoma, for $14.0 million, paying $3.6 million in cash
and obtaining mortgage financing of $10.5 million. The Company uses the equity
method to account for its investment in Eton Square. TCI owns a 90% general
partner interest in Eton Square.
Set forth below are summarized financial data for the partnerships the
Company accounts for using the equity method:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Notes receivable........................................... $ 902 $ 902
Real estate, net of accumulated depreciation ($1,600 in
1999 and $4,298 in 1998).................................. 17,936 7,319
Other assets............................................... 526 264
Notes payable.............................................. (11,134) (2,040)
Other liabilities.......................................... (734) (256)
-------- -------
Partners' capital.......................................... $ 7,496 $ 6,189
======== =======
</TABLE>
The Company's share of the above partnerships' capital was $1.7 million in
1999 and $2.3 million in 1998.
<TABLE>
<CAPTION>
1999 1998 1997
------ ------- -------
<S> <C> <C> <C>
Rents................................................. $1,873 $ 2,116 $ 2,648
Interest income....................................... 156 156 30
Interest expense...................................... (375) (260) (289)
Property operations expense........................... (781) (1,077) (1,757)
Depreciation.......................................... (371) (483) (472)
------ ------- -------
Income before gains on sale of real estate............ 502 452 160
Gain on sale.......................................... 2,851 496 --
------ ------- -------
Net income............................................ $3,353 $ 948 $ 160
====== ======= =======
</TABLE>
The Company's equity share of:
<TABLE>
<CAPTION>
1999 1998 1997
------ ---- ----
<S> <C> <C> <C>
Income before gains on sale of real estate..................... $ 148 $113 $52
Gain on sale of real estate.................................... 1,035 180 --
------ ---- ---
Net income..................................................... $1,183 $293 $52
====== ==== ===
</TABLE>
26
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4. NOTES AND INTEREST PAYABLE
Notes and interest payable consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Notes payable........................... $62,548 $62,490 $61,025 $60,380
======= =======
Interest payable........................ 362 406
------- -------
$62,852 $60,786
======= =======
</TABLE>
Scheduled notes payable principal payments are due as follows:
<TABLE>
<S> <C>
2000................................................................. $ 3,033
2001................................................................. 758
2002................................................................. 12,158
2003................................................................. 5,016
2004................................................................. 3,443
Thereafter........................................................... 38,082
-------
$62,490
=======
</TABLE>
Mortgage notes payable at December 31, 1999, bear interest at rates ranging
from 7.75% to 11.0% and mature between 2000 and 2025. The mortgages are
collateralized by deeds of trust on real estate with a net carrying value of
$86.5 million.
In 1999, the Company refinanced mortgage debt, in the total amount of $7.8
million, secured by one apartment and two office buildings. The Company
received net cash of $440,000, after the payoff of $6.6 million in mortgage
debt, the funding of escrows and the payment of various closing costs. One
mortgage bears interest at 7.95% per annum and two at variable rates,
currently 8.07% and 10.39% per annum, respectively, require monthly payments
of principal and interest totaling $61,622 and mature in September 2009,
August 2002 and January 2025, respectively.
Also in 1999, the Company purchased an apartment for a total of $5.4
million, paying $2.4 million in cash and obtaining mortgage financing of $3.0
million. The mortgage bears interest at 8.85% per annum through December 2000
and at a variable rate thereafter, requires monthly payments of principal and
interest of $26,882 and matures in December 2004. Additional fundings of up to
$1.0 million may be requested upon the property reaching certain established
performance goals.
NOTE 5. DIVIDENDS
Quarterly dividends have been paid since the first quarter of 1993.
Dividends were paid of $908,000 ($.60 per share) in 1999, $945,000 ($.60 per
share) in 1998 and $567,000 ($.40 per share) in 1997.
The Company reported to the Internal Revenue Service that 100% of the
dividends paid in 1999 and 1998 represented a return of capital and 100% of
the dividends paid in 1997 represented capital gains.
27
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6. RENTS UNDER OPERATING LEASES
The Company's operations include the leasing of office buildings. The leases
thereon expire at various dates through 2010. The following is a schedule of
minimum future rents on non-cancelable operating leases as of December 31,
1999:
<TABLE>
<S> <C>
2000................................................................. $ 6,813
2001................................................................. 4,775
2002................................................................. 3,101
2003................................................................. 2,193
2004................................................................. 1,226
Thereafter........................................................... 5,707
-------
$23,815
=======
</TABLE>
NOTE 7. ADVISORY AGREEMENT
Basic Capital Management, Inc. ("BCM") 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 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.
At the annual meeting of stockholders held on October 12, 1999, the renewal
of the 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, BCM is required to annually formulate and
submit for Board approval 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. BCM is required to report
quarterly to the Board on the Company's performance against the business plan.
In addition, all transactions require prior Board approval, unless they are
explicitly provided for in the approved business plan or are made pursuant to
authority expressly delegated to BCM by the Board.
The Advisory Agreement also requires prior Board approval for the retention
of all consultants and third party professionals, other than legal counsel.
The Advisory Agreement provides that BCM shall be deemed to be in a fiduciary
relationship to the stockholders and contains a broad standard governing BCM'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. BCM or an affiliate of BCM also
is to receive a mortgage brokerage and equity refinancing fee for obtaining
loans or refinancing on the Company's properties. In addition, BCM receives
reimbursement of certain expenses incurred by it, in the performance of
advisory services to the Company.
28
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 BCM 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 required BCM to refund $289,000,
$336,000 and $201,000, of the 1999, 1998 and 1997 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 8. "PROPERTY
MANAGEMENT," the Company has hired Triad Realty Services, Ltd. ("Triad"), an
affiliate of BCM, to provide property management for the Company's properties
and, as discussed in NOTE 9. "REAL ESTATE BROKERAGE," the Company has engaged
Regis Realty, Inc. ("Regis"), 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 8. PROPERTY MANAGEMENT
Triad provides property management services for a fee of 5% or less of the
monthly gross rents collected on the properties under its management. Triad
subcontracts with other entities for the property-level management services to
the Company at various rates. The general partner of Triad is BCM. The limited
partners of Triad are Syntek West, Inc. ("Syntek West"), which is a company
owned by Gene E. Phillips, and Mr. Phillips. Triad subcontracts the property-
level management and leasing of the Company's nine office buildings and the
commercial property owned by Tri-City and Eton Square, in which the Company
and TCI are partners to Regis which is a company owned by Syntek West. Regis
is entitled to receive property and construction management fees and leasing
commissions in accordance with the terms of its property-level management
agreement with Triad.
NOTE 9. REAL ESTATE BROKERAGE
Regis also provides brokerage services on a non-exclusive basis. Regis is
entitled to receive a commission for property purchases and sales, in
accordance with a sliding scale of total brokerage fees to be paid by the
Company.
29
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
Fees and cost reimbursements to BCM and its affiliates:
<TABLE>
<CAPTION>
1999 1998 1997
------ ---- ------
<S> <C> <C> <C>
Fees
Advisory................................................. $ 371 $329 $ 343
Net income............................................... 81 -- 269
Incentive sales.......................................... -- -- 6
Brokerage commissions.................................... 337 -- 2,472
Mortgage brokerage and equity refinancing................ 78 8 70
Property and construction management and leasing
commissions*.............................................. 618 634 503
------ ---- ------
$1,485 $971 $3,663
====== ==== ======
Cost reimbursements........................................ $ 260 $228 $ 248
====== ==== ======
</TABLE>
- --------
* Net of property management fees paid to subcontractors, other than Regis.
NOTE 11. INCOME TAXES
For the years 1999, 1998 and 1997, 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 net losses for federal income tax purposes in 1999 and 1998
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,
1999, the Company's tax basis in its net assets exceeded their basis for
financial statement purposes by $976,000. 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, 1999, the Company had tax net operating loss carryforwards of $17.2
million expiring through the year 2019.
As a result of the Company's election to be treated as a REIT for income tax
purposes and its intention to distribute its taxable income, if any, in future
years, no deferred tax asset, liability or valuation allowance was recorded.
NOTE 12. OPERATING SEGMENTS
Significant differences among the accounting policies of the operating
segments as compared to the Consolidated Financial Statements principally
involve the calculation and allocation of general and administrative expenses.
Management evaluates the performance of the operating segments and allocates
resources to each of them based on their operating income and cash flow.
Expenses that are not reflected in the segments are $747,000 in 1999 and
$755,000 in 1998 of general and administrative expenses. There are no
intersegment revenues and expenses and all business is conducted in the United
States.
30
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Presented below is the operating income of each operating segment.
<TABLE>
<CAPTION>
Commercial
Properties Apartments Total
---------- ---------- -------
<S> <C> <C> <C>
1999
Rents............................................ $10,639 $ 5,329 $15,968
Property operating expenses...................... 4,394 2,374 6,768
------- ------- -------
Operating income................................. $ 6,245 $ 2,955 $ 9,200
======= ======= =======
Depreciation..................................... $ 2,111 $ 612 $ 2,723
Interest......................................... 3,802 1,856 5,658
Real estate improvements......................... 2,199 -- 2,199
Assets........................................... 56,566 29,976 86,542
Property Sales
<CAPTION>
Commercial
Properties Total
---------- -------
<S> <C> <C> <C>
Sales price...................................... $ 3,200 $ 3,200
Cost of sale..................................... 2,710 2,710
------- -------
Gain on sale..................................... $ 490 $ 490
======= =======
<CAPTION>
Commercial
Properties Apartments Total
---------- ---------- -------
<S> <C> <C> <C>
1998
Rents............................................ $ 9,058 $ 5,268 $14,326
Property operating expenses...................... 3,852 2,610 6,462
------- ------- -------
Operating income................................. $ 5,206 $ 2,658 $ 7,864
======= ======= =======
Depreciation..................................... $ 1,573 $ 595 $ 2,168
Interest......................................... 3,898 1,858 5,756
Real estate improvements......................... 3,907 38 3,945
Assets........................................... 58,793 24,898 83,691
</TABLE>
NOTE 13. QUARTERLY DATA
The following is a tabulation of the Company's quarterly results of
operations for the years 1999 and 1998 (unaudited).
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1999
Revenues............................ $3,735 $4,095 $4,209 $3,958
Expenses............................ 4,008 4,102 4,280 3,958
------ ------ ------ ------
(Loss) from operations.............. (273) (7) (71) --
Equity in income of partnerships.... 52 39 28 29
Gain on sale of real estate......... -- 213 822 490
------ ------ ------ ------
Net income (loss)................... $ (221) $ 245 $ 779 $ 519
====== ====== ====== ======
Earnings per share
Net income (loss) $ (.14) $ .16 $ .51 $ .34
====== ====== ====== ======
</TABLE>
31
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the second quarter of 1999, the Company recognized a gain on sale of real
estate of $213,000, its share of the gain recognized by Tri-City, an equity
partnership. In the third quarter of 1999, the Company recognized a gain on
sale of real estate of $822,000, its share of the gain recognized by Tri-City.
In the fourth quarter of 1999, the Company sold an office building,
recognizing a gain of $490,000. See NOTE 2. "REAL ESTATE" and NOTE 3.
"INVESTMENT IN EQUITY METHOD PARTNERSHIPS."
<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 68 (12) 44
Gain on sale of real estate........ -- 180 -- --
------ ------ ------ ------
Net income (loss).................. $ (89) $ 132 $ (556) $ (166)
====== ====== ====== ======
Earnings per share
Net income (loss).................. $ (.06) $ .09 $ (.37) $ (.10)
====== ====== ====== ======
</TABLE>
In the second quarter of 1998, the Company recognized a gain on sale of real
estate of $180,000, its share of the gain recognized by Tri-City, an equity
partnership. See NOTE 3. "INVESTMENT IN EQUITY METHOD PARTNERSHIPS."
NOTE 14. COMMITMENTS AND CONTINGENCIES
Olive Litigation. In February 1990, the Company, together with National
Income Realty Trust, Continental Mortgage and Equity Trust ("CMET") 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 (the
"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 January 27, 1997, the parties entered into an Amendment to the Settlement
effective January 9, 1997 (the "Olive Amendment"), which was submitted to the
Court for approval on January 29, 1997. The Olive Amendment provided for the
settlement of all matters raised by plaintiffs' counsel in 1996. The Court
issued an order approving the Olive Amendment on July 3,1997.
The Olive Amendment provided, among other things, for the addition of four
new unaffiliated members to the Company's Board of Directors and set 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.
The Olive Amendment also provided that IORI's Board retain a
management/compensation consultant or consultants to evaluate the fairness of
the BCM advisory contract and any contract of its affiliates with the Company,
CMET and TCI, including, but not limited to, the fairness to the Company, CMET
and TCI of such contracts relative to other means of administration. In 1998,
the Board engaged a management/compensation consultant to perform the
evaluation which was completed in September 1998. Plaintiffs' counsel has
asserted that the Board did not comply with the provision requiring such
engagement and has requested that the Court exercise its retained jurisdiction
to determine whether there was a breach of this provision of the Olive
32
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Amendment. A status conference on this matter was held on February 14, 2000.
The Court has not entered any order.
The provision of the Settlement and Olive Amendment terminated on April 28,
1999.
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.
NOTE 15. SUBSEQUENT EVENTS
In March 2000, the Company sold the 128 unit La Monte Park Apartments in
Houston, Texas, for $5.0 million. The Company received net cash of $921,000
after paying off $3.9 million in mortgage debt and the payment of various
closing costs. A gain will be recognized on the sale.
33
<PAGE>
SCHEDULE III
INCOME OPPORTUNITY REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
<TABLE>
<CAPTION>
Cost Gross Amount
Initial Cost Capitalized Carried at End of Year(1) Accumu-
-------------------- Subsequent to ---------------------------- lated Date of
Encum- Building & Acquisition Building & Depreci- Construc- Date
Property/Location brances Land Improvements Improvements Land Improvements Total ation tion Acquired
- ----------------- ------- ------- ------------ ------------- ------- ------------ ------- -------- --------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Properties Held
For Investment
Apartments
Eastpoint,
Mesquite, TX.... $ 3,269 $ 1,181 $ 2,749 $ 465 $ 1,181 $ 3,214 $ 4,395 $1,471 1985 01/86
La Monte Park,
Houston, TX..... 3,833 784 3,137 53 784 3,190 3,974 225 1981 06/97
Meridian,
Midland, TX..... 2,992 1,138 4,552 -- 1,138 4,552 5,690 10 1983 12/99
Renaissance
Parc, Dallas,
TX.............. 12,313 3,274 13,095 50 3,279 13,140 16,419 861 1972 06/97
Treehouse, San
Antonio, TX..... 2,726 375 2,124 247 375 2,371 2,746 680 1975 09/89
<CAPTION>
Life on
Which
Depreciation
In Latest
Statement
of Operation
Property/Location is Computed
- ----------------- ------------
<S> <C> <C>
Properties Held
For Investment
Apartments
Eastpoint,
Mesquite, TX.... 3-40 years
La Monte Park,
Houston, TX..... 5-40 years
Meridian,
Midland, TX..... 40 years
Renaissance
Parc, Dallas,
TX.............. 5-40 years
Treehouse, San
Antonio, TX..... 5-40 years
Office Buildings
2010 Valley
View, Farmers
Branch, TX...... 1,846 120 479 2,614 120 3,093 3,213 221 1998 09/97
5600 Mowry,
Newark, CA 4,202 1,263 5,054 647 1,263 5,701 6,964 414 1987 12/97
Akard Plaza,
Dallas, TX...... 2,092 734 2,936 333 734 3,269 4,003 188 1984 12/97
Chuck Yeager,
Chantilly, VA... 2,341 1,080 4,321 672 1,080 4,993 6,073 449 1991 01/97
Daley Plaza, San
Diego, CA....... 6,824 1,502 6,008 1,115 1,502 7,123 8,625 847 1987 09/96
La Mesa Village,
La Mesa, CA..... 5,826 1,709 6,836 284 1,709 7,120 8,829 530 1991 05/97
Olympic, Los
Angeles, CA..... 4,406 1,264 5,055 481 1,264 5,536 6,800 574 1990 11/96
Saratoga,
Saratoga, CA.... 6,962 2,577 10,306 1,170 2,583 11,470 14,053 2,841 1986 12/91
Westlake
Village,
Westlake
Village, CA..... 2,858 831 3,324 112 831 3,436 4,267 198 1982 11/97
------- ------- ------- ------ ------- ------- ------- ------
$62,490 $17,832 $69,976 $8,243 $17,843 $78,208 $96,051 $9,509
======= ======= ======= ====== ======= ======= ======= ======
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
Westlake
Village,
Westlake
Village, CA..... 5-40 years
</TABLE>
- ----
(1) The aggregate cost for Federal income tax purposes is $95.2 million.
34
<PAGE>
SCHEDULE III
(Continued)
INCOME OPPORTUNITY REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- --------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of Real Estate
Balance at January 1,................................ $91,070 $87,125 $ 60,551
Additions
Acquisitions and Improvements.................... 7,890 3,945 49,905
Deductions
Sale of real estate.............................. (2,909) -- (22,278)
Sale of foreclosed property...................... -- -- (1,053)
------- ------- --------
Balance at December 31, ............................. $96,051 $91,070 $ 87,125
======= ======= ========
Reconciliation of Accumulated Depreciation
Balance at January 1,................................ $ 7,379 $ 5,211 $ 7,235
Additions
Depreciation..................................... 2,723 2,168 1,615
Deductions
Sale of real estate.............................. (593) -- (3,619)
Sale of foreclosed property...................... -- -- (20)
------- ------- --------
Balance at December 31, ............................. $ 9,509 $ 7,379 $ 5,211
======= ======= ========
</TABLE>
35
<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. ("IORI") are
managed by a Board of Directors. The Directors are elected at the annual
meeting of stockholders or appointed by the incumbent Board and serve until
the next annual meeting of stockholders or until a successor has been elected
or approved.
The Directors of IORI are listed below, together with their ages, terms of
service, all positions and offices with IORI or its advisor, Basic Capital
Management, Inc. ("BCM"), 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 BCM or an officer of
IORI. The designation "Independent" when used below with respect to a
Director, means that the Director is neither an officer of IORI nor a
director, officer or employee of BCM, although IORI may have certain business
or professional relationships with the Director as discussed in ITEM 13.
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Certain Business
Relationships."
TED P. STOKELY: Age 66, 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; and Director (since April 1990) and Chairman of the Board
(since January 1995) of Transcontinental Realty Investors, Inc. ("TCI").
RICHARD W. DOUGLAS: Age 52, Director (Independent) (since January 1998).
Executive Vice President (since February 1999) of The Staubach Company;
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; and Director (since January 1998) of TCI.
LARRY E. HARLEY: Age 59, 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; and Director (since January 1998) of TCI.
R. DOUGLAS LEONHARD: Age 63, Director (Independent) (since January 1998).
Director (since November 1998) and Chairman (since October 1999) 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.; and Director (since
January 1998) of TCI.
36
<PAGE>
MURRAY SHAW: Age 68, 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.; and Director
(since February 1998) of TCI.
MARTIN L. WHITE: Age 60, 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; and Director (since January 1995) of TCI.
EDWARD G. ZAMPA: Age 65, Director (Independent) (since January 1995).
General Partner (since 1976) of Edward G. Zampa and Company; and Director
(since January 1995) of TCI.
Board Committees
Board of Directors held seven meetings during 1999. For such year, no
incumbent Director attended fewer than 75% of the aggregate of (1) the total
number of meetings held by the Board during the period for which he had been a
Director and (2) the total number of meetings held by all committees of the
Board 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 IORI'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 1999.
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 on the services provided by BCM and
its affiliates and the terms of any engagement or compensation of BCM or its
affiliates. The Relationship with Advisor Committee did not meet in 1999. The
Board Development Committee reviews and reports to the Board 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 1999.
The Board of Directors does not have Nominating or Compensation Committees.
Executive Officers
The following persons currently serve as executive officers of IORI: Karl L.
Blaha, President; 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 and David W.
Starowicz, Executive Vice President--Commercial Asset Management. Their
positions with IORI are not subject to a vote of stockholders. Their ages,
terms of service, all positions and offices with IORI or BCM, other principal
occupations, business experience and directorships with other companies during
the last five years or more are set forth below.
KARL L. BLAHA: Age 52, President (since September 1999); Executive Vice
President--Commercial Asset Management (July 1997 to September 1999); and
Executive Vice President and Director of Commercial Management (April 1992 to
August 1995).
President (since September 1999), Executive Vice President-Commercial
Asset Management (July 1997 to September 1999) and Executive Vice President
and Director of Commercial Management (April
37
<PAGE>
1992 to August 1995) of BCM and TCI; Director (since June 1996), President
(since October 1993) and Executive Vice President and Director of
Commercial Management (April 1992 to October 1993) of American Realty
Trust, Inc. ("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 BCM; President and
Director (since 1996) of First Equity; President (since August 1999),
Executive Vice President (January 1998 to August 1999) and Director (since
December 1998) of NRLP Management Corp. ("NMC"), a wholly-owned subsidiary
of ART and general partner of National Realty, L.P. ("NRLP") and National
Operating, L.P. ("NOLP"), the operating partnership of NRLP.
BRUCE A. ENDENDYK: Age 51, Executive Vice President (since January 1995).
President (since November 1999) of Regis Realty, Inc. ("Regis") and
(January 1995 to November 1999) of Carmel Realty; Executive Vice President
(since January 1995) of BCM, ART and TCI, and (since January 1998) of NMC;
and Management Consultant (November 1990 to December 1994).
THOMAS A. HOLLAND: Age 57, Executive Vice President and Chief Financial
Officer (since August 1995); Secretary (February 1997 to June 1999) 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, ART and TCI; Executive Vice President and Chief Financial
Officer (since January 1998) of NMC; and Secretary (February 1997 to June
1999) of TCI.
STEVEN K. JOHNSON: Age 42, 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, ART 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.; and Executive Vice President (December 1994 to August 1998)
of Garden Capital Management, Inc.
DAVID W. STAROWICZ: Age 44, Executive Vice President--Commercial Asset
Management (since September 1999) and Vice President (May 1992 to September
1999).
Executive Vice President--Commercial Asset Management (since September
1999), Vice President (May 1992 to September 1999) and Asset Manager
(November 1990 to May 1992) of BCM, ART and TCI.
Officers
Although not an executive officer, Robert A. Waldman currently serves as
Senior Vice President, Secretary and General Counsel. His position with IORI
is not subject to a vote of stockholders. His age, term of service, all
positions and offices with IORI or BCM, other principal occupations, business
experience and directorships with other companies during the last five years
or more is set forth below.
ROBERT A. WALDMAN: Age 47, Senior Vice President and General Counsel (since
January 1995); Vice President (December 1990 to January 1995) and Secretary
(December 1993 to February 1997 and since June 1999).
Senior Vice President and General Counsel (since January 1995), Vice
President (December 1990 to January 1995) and Secretary (December 1993 to
February 1997 and since June 1999 ) of 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; and Senior Vice President, Secretary and General
Counsel (since January 1998) of NMC.
38
<PAGE>
In addition to the foregoing officers, IORI 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, IORI's Directors, executive
officers, and any persons holding more than ten percent of IORI'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 IORI is
required to report any failure to file by these dates during 1999. All of
these filing requirements were satisfied by IORI's Directors and executive
officers and ten percent holders. In making these statements, IORI 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.
The Advisor
Although the Board of Directors is directly responsible for managing the
affairs of IORI and for setting the policies which guide it, day-to-day
operations are performed by a contractual advisor under the supervision of the
Board. 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 in connection
with the business plan and investment decisions made by the Board.
BCM has served as IORI's advisor since March 1989. BCM is a company of which
Messrs. Blaha, Endendyk, Holland, Johnson and Starowicz serve as executive
officers. BCM is owned by a trust for the benefit of the children of Gene E.
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.
At the annual meeting of stockholders held on October 12, 1999, 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 Board
approval.
Under the Advisory Agreement, BCM is required to annually formulate and
submit for Board approval 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. BCM is required to
report quarterly to the Board on IORI's performance against the business plan.
In addition, all transactions require prior Board approval, unless they are
explicitly provided for in the approved business plan or are made pursuant to
authority expressly delegated to BCM by the Board.
The Advisory Agreement also requires prior approval of the Board for the
retention of all consultants and third party professionals, other than legal
counsel. The Advisory Agreement provides that BCM shall be deemed to be in a
fiduciary relationship to the stockholders; contains a broad standard
governing BCMs liability for losses by IORI; and contains guidelines for BCMs
allocation of investment opportunities as among itself, IORI and other
entities it advises.
The Advisory Agreement provides for BCM to be responsible for the day-to-day
operations of IORI 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 IORI'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 IORI during the fiscal
39
<PAGE>
year exceeds the sum of: (1) the cost of each property as originally recorded
in IORI'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. 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.
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 IORI one-
half of any compensation received from third parties with respect to the
origination, placement or brokerage of any loan made by IORI. However, 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 IORI.
Under the Advisory Agreement, BCM or an affiliate of BCM also is 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. However, 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 IORI.
Under the Advisory Agreement all or a portion of the annual advisory fee
must be refunded by BCM if the Operating Expenses of IORI (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 IORI during the
fiscal year. The effect of this limitation was to require that BCM refund
$289,000 of the 1999 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, IORI has
hired Triad Realty Services, Ltd. ("Triad"), an affiliate of BCM, to provide
management for IORI's properties and, as discussed below, under Real Estate
Brokerage IORI has engaged Regis, also an affiliate of BCM, on a non-exclusive
basis to provide brokerage services for IORI.
BCM may only assign the Advisory Agreement with the prior consent of IORI.
40
<PAGE>
The directors and principal officers of BCM are set forth below.
<TABLE>
<C> <S>
Mickey N. Phillips: Director
Ryan T. Phillips: Director
Carey M. Portman: Director and Vice President
Karl L. Blaha: President
Bruce A. Endendyk: Executive Vice President
Thomas A. Holland: Executive Vice President and Chief Financial Officer
Executive Vice President--Residential Asset
Steven K. Johnson: Management
A. Cal Rossi, Jr.: Executive Vice President
Executive Vice President--Commercial Asset
David W. Starowicz: Management
Cooper B. Stuart: Executive Vice President
Clifford C. Towns, Jr.: Executive Vice President--Finance
Dan S. Allred: Senior Vice President--Land Development
Michael E. Bogel: Senior Vice President--Projects Manager
James D. Canon, III: Senior Vice President--Portfolio Management
Robert A. Waldman: Senior Vice President, Secretary and General Counsel
</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.
41
<PAGE>
Property Management
Since February 1, 1990, affiliates of BCM have provided property management
services. Currently, Triad provides such property management services for a
fee of 5% or less of the monthly gross rents collected on the properties under
its management. Triad subcontracts with other entities for the provision of
the property-level management services to IORI at various rates. The general
partner of Triad is BCM. The limited partners of Triad are Syntek West, Inc.
(Syntek West), a company owned by Gene E. Phillips, and Mr. Phillips. Triad
subcontracts the property-level management and leasing of IORI's nine office
buildings and the two commercial properties owned by real estate partnerships
in which IORI and TCI are partners to Regis which is a company owned by Syntek
West. Regis is entitled to receive property and construction management fees
and leasing commissions in accordance with its property-level management
agreement with Triad.
Real Estate Brokerage
Since December 1, 1992, affiliates of BCM have provided real estate
brokerage services to IORI. Currently, Regis provides such real estate
brokerage services on a non-exclusive basis. Regis 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 4.5% on the first $2.0 million of any purchase or sale
transaction of which no more than 3.5% would be paid to Regis or affiliates,
(2) maximum fee of 3.5% on transaction amounts between $2.0--$5.0 million of
which no more than 3% would be paid to Regis or affiliates, (3) maximum fee of
2.5% on transaction amounts between $5.0--$10.0 million of which no more than
2% would be paid to Regis or affiliates, and (4) maximum fee of 2% on
transaction amounts in excess of $10.0 million of which no more than 1.5%
would be paid to Regis or affiliates.
ITEM 11. EXECUTIVE COMPENSATION
IORI has no employees, payroll or benefit plans and pays no compensation to
its executive officers. The executive officers of IORI, who are also officers
or employees of BCM, IORI's advisor, are compensated by BCM. Such executive
officers perform a variety of services for BCM and the amount of their
compensation is determined solely by BCM. 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.
The only remuneration paid by IORI 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 IORI to determine that it is in the best interest
of the stockholders, (2) review the advisory contract, (3) supervise the
performance of IORI'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 IORI 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. The Chairman of the Board receives an
additional fee of $1,500 per year. In addition, each Independent Director
receives an additional fee of $1,000 per day for any special services rendered
by him to IORI outside of his ordinary duties as Director, plus reimbursement
of expenses.
During 1999, $106,500 was paid to the Independent Directors in total
Directors' fees for all services including the annual fee for service during
the period January 1, 1999 through December 31, 1999, and 1999 special service
fees, were as follows: Richard W. Douglas, $15,000; Larry E. Harley, $15,000;
R. Douglas Leonhard, $15,000, Murray Shaw, $15,000; Ted P. Stokely, $16,500;
Martin L. White, $15,000; and Edward G. Zampa, $15,000.
42
<PAGE>
Performance Graph
The following performance graph compares the cumulative total stockholder
return on IORI'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, 1994 in IORI'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.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
IORI................................ 100.00 103.30 120.41 129.95 80.01 72.04
S&P 500 Index....................... 100.00 137.58 169.17 225.60 290.08 351.12
REIT Index.......................... 100.00 115.27 155.93 187.52 154.70 147.55
</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 IORI's shares of Common Stock, both beneficially and of
record, both individually and in the aggregate for those persons or entities
known by IORI to be beneficial owners of more than 5% of its shares of Common
Stock as of the close of business on March 3, 2000.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percent of
Name and Address of Beneficial Owner Ownership Class(/1/)
------------------------------------ ----------------- ----------
<S> <C> <C>
American Realty Trust, Inc. .................... 472,958 30.9%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231
Transcontinental Realty Investors, Inc. ........ 345,728 22.6%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231
Basic Capital Management, Inc. ................. 118,737 7.8%
10670 N. Central Expressway
Suite 300
Dallas, TX 75231
</TABLE>
--------
(1) Percentages are based upon 1,530,500 shares of Common Stock outstanding
at March 3, 2000.
Security Ownership of Management. The following table sets forth the
ownership of IORI's shares of Common Stock, both beneficially and of record,
both individually and in the aggregate, for the Directors and executive
officers of IORI as of the close of business on March 3, 2000.
<TABLE>
<CAPTION>
Amount and Nature
Name of Beneficial of Beneficial Percent of
Owner Ownership Class(/1/)
------------------ ----------------- ----------
<S> <C> <C>
All Directors and
Executive Officers as
a group (12
individuals).......... 938,423(/2/)(/3/) 61.3%
</TABLE>
--------
(1) Percentage is based upon 1,530,500 shares of Common Stock outstanding
at March 3, 2000.
(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 472,958 shares owned by ART and 118,737 shares
owned by BCM, of which the executive officers of IORI 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Business Relationships
In February 1989, the Board of Directors voted to retain BCM as IORI's
advisor. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT--The Advisor." BCM is a company of which Messrs. Blaha, Endendyk,
Holland, Johnson and Starowicz serve as executive officers. BCM is owned by a
trust for the benefit of the children of Gene E. 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.
44
<PAGE>
Since February 1, 1991, affiliates of BCM have provided property management
services to IORI. Currently, Triad provides such property management services.
The general partner of Triad is BCM. The limited partners of Triad are Syntek
West, a company owned by Gene E. Phillips, and Mr. Phillips. Triad
subcontracts the property-level management and leasing of IORI's nine office
buildings and two commercial properties owned by real estate partnerships in
which IORI and TCI are partners to Regis which is a company owned by Syntek
West.
Since December 1, 1992, affiliates of BCM have provided brokerage services,
on a non-exclusive basis, for IORI and received brokerage commissions in
accordance with the brokerage agreement. Currently, Regis performs such
brokerage services. Regis is a company owned by Syntek West.
The Directors and officers of IORI also serve as directors and officers of
TCI. The Directors owe fiduciary duties to TCI as well as to IORI under
applicable law. TCI has the same relationship with BCM as IORI. BCM also
serves as advisor to ART. Messrs. Blaha, Endendyk, Holland, Johnson and
Starowicz 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, a company owned by Gene E. Phillips. Eldercare 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, IORI 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
IORI as could have been obtained from unrelated third parties.
As more fully described in ITEM 2. "PROPERTIES--Real Estate," IORI is a
partner with TCI in the Tri-City Limited Partnership, Nakash Income Associates
and TCI Eton Square, L.P.
In September 1999, IORI invested $384,000 for a 10% limited partner interest
in Eton Square, L.P., which purchased the 222,654 sq. ft. Eton Square Building
in Tulsa, Oklahoma, for $14.0 million, paying $3.6 million in cash and
obtaining mortgage financing of $10.5 million. IORI uses the equity method to
account for its investment in Eton Square. TCI owns a 90% general partner
interest in Eton Square.
In 1999, IORI paid BCM and its affiliates $388,000 in advisory and net
income fees, $337,000 in brokerage commissions, $78,000 in mortgage brokerage
and equity refinancing fees, and $618,000 in property management and
construction supervision fees (net of property management fees paid to
subcontractors, other than Regis). In addition, as provided in the Advisory
Agreement, BCM received cost reimbursements of $260,000.
Restrictions on Related Party Transactions
Article FOURTEENTH of IORI's Articles of Incorporation provides that IORI
shall not, directly or indirectly, contract or engage in any transaction with
(1) any director, officer or employee of IORI, (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 IORI's Board of Directors or the appropriate
committee thereof and (b) IORI's Board of Directors or committee thereof
determines that such contract or transaction is fair to IORI and
simultaneously authorizes or ratifies such contract or transaction by the
affirmative vote of a majority of independent directors of IORI entitled to
vote thereon.
45
<PAGE>
Article FOURTEENTH defines an "Independent Director" as one who is neither
an officer or employee of IORI, nor a director, officer or employee of IORI's
advisor.
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, 1999 and 1998
Consolidated Statements of Operations--Years Ended December 31, 1999,
1998 and 1997
Consolidated Statements of Stockholders' Equity--Years Ended December
31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows--Years Ended December 31, 1999,
1998 and 1997
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., (incorporated by reference to Exhibit 10.0 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998).
27.0 Financial Data Schedule, filed herewith.
</TABLE>
(b) Reports on Form 8-K:
None.
46
<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/ Karl L. Blaha
By: _________________________________
Karl L. Blaha
President
Dated: March 15, 2000
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 15, 2000
______________________________________ Director
Ted P. Stokely
/s/ Richard W. Douglas Director March 15, 2000
______________________________________
Richard W. Douglas
/s/ Larry E. Harley Director March 15, 2000
______________________________________
Larry E. Harley
/s/ R. Douglas Leonhard Director March 15, 2000
______________________________________
R. Douglas Leonhard
/s/ Murray Shaw Director March 15, 2000
______________________________________
Murray Shaw
/s/ Martin L. White Director March 15, 2000
______________________________________
Martin L. White
/s/ Edward G. Zampa Director March 15, 2000
______________________________________
Edward G. Zampa
/s/ Thomas A. Holland Executive Vice President March 15, 2000
______________________________________ and Chief Financial
Thomas A. Holland Officer (Principal
Financial and Accounting
Officer)
</TABLE>
47
<PAGE>
INCOME OPPORTUNITY REALTY INVESTORS, INC.
EXHIBITS TO
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------- ----------- ----
<C> <S> <C>
27.0 Financial Data Schedule 64
</TABLE>
48
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<CASH> 722
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 96,051
<DEPRECIATION> 9,509
<TOTAL-ASSETS> 91,185
<CURRENT-LIABILITIES> 0
<BONDS> 62,852
0
0
<COMMON> 15
<OTHER-SE> 23,976
<TOTAL-LIABILITY-AND-EQUITY> 91,185
<SALES> 0
<TOTAL-REVENUES> 15,968
<CGS> 0
<TOTAL-COSTS> 6,768
<OTHER-EXPENSES> 2,723
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,658
<INCOME-PRETAX> 1,322
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,322
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,322
<EPS-BASIC> .87
<EPS-DILUTED> .87
</TABLE>
