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, 2001, IORI's real estate consisted of 16 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. IORI's real estate portfolio is more fully discussed in ITEM 2.
ITEM 2. PROPERTIES
IORI's principal offices are located at 1800 Valley View Lane, Suite 300, Dallas, Texas 75234 and are, in the opinion of management, suitable and adequate for IORI's present operations.
IORI's real estate portfolio at December 31, 2001, 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 16 owned properties and an investment in two partnerships each of which owns a commercial property. IORI holds a fee simple title to the owned properties. IORI holds one mortgage note receivable, and a partnership in which it is a 40% general partner that 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, 2001, 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, 2001, IORI held a mortgage note secured by a second lien on 165 acres of unimproved land in The Colony, Texas, as described more specifically under "Mortgage Loans," below.
At December 31, 2001, one of IORI's properties, the Travelers land parcel, exceeded 10% of IORI's total assets. At December 31, 2001, 95% of IORI's assets consisted of owned properties and less than 1% consisted of investments in partnerships. The remaining 5% of IORI's assets were cash, 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.
[GRAPHIC MAP]
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 7 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 4 commercial properties in this region.
Excluded from above are two parcels of unimproved land in the Southwest Region, as described below.
Real Estate
At December 31, 2001, 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 16 owned properties and an investment in two partnerships, each of which owns a commercial property.
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 also may invest in new construction or development either directly or in partnership with nonaffiliated parties or affiliates (subject to approval by the 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.
The following table sets forth the percentages, by property type and geographic region, (other than two parcels of unimproved land, as described below) of IORI's owned real estate at December 31, 2001.
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. IORI owns two parcels of unimproved land, 1.01 acres and 204 acres, both in the Southwest 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 2001 is as follows:
Properties Held for Investment. Set forth below are IORI's owned properties at December 31, 2001, 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, 2001, 2000 and 1999:
- -------- * Property was purchased in 2000.
Partnership Properties. Set forth below is the commercial property owned by each of the two partnerships in which IORI is an equity investor and the average annual rental rate and occupancy thereof at December 31, 2001, 2000 and 1999:
IORI owns a 36.3% general partner interest and TCI owns a 63.7% limited partner interest in Tri-City Limited Partnership ("Tri-City") which in turn owns Chelsea Square Shopping Center. In February 2000, Tri-City obtained mortgage financing of $2.1 million secured by the previously unencumbered shopping center. Tri-City received net cash of $2.0 million after the funding of required escrows and the payment of various closing costs. The mortgage bore interest at a fixed rate of 10.24% per annum until February 2001 and a variable rate thereafter, currently 9.44% per annum, requires monthly payments of principal and interest of $20,601 and matures in February 2005. IORI received a distribution of $739,000 of the net financing proceeds.
IORI owns a 10% limited partner interest and TCI owns a 90% general partner interest in TCI Eton Square, L.P., which owns the Eton Square Building in Tulsa, Oklahoma.
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. Prior to the third quarter of 2000, management had not been seeking to fund or acquire new mortgage loans, other than those which may have originated 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, services the mortgage notes.
Junior Mortgage Loans. Junior mortgage loans are loans secured by mortgages that are subordinate to one or more prior liens either on the fee or a leasehold interest in real estate. Recourse on the loans ordinarily includes the real estate which secures the loan, other collateral and personal guarantees of the borrower.
The following discussion briefly describes the junior mortgage loan funded in 2000.
In September 2000, IORI funded a $1.5 million loan, secured by a second lien on 165 acres of unimproved land in The Colony, Texas. In May 2001, IORI received $1.0 million as a partial principal paydown. The loan bears interest at 18.0% per annum, requires monthly payments of interest only and matured in January 2002. In January 2002, the loan was extended to April 2002.
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 advanced the partnership $24,000 in 2001.
ITEM 3.
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. The Settlement was modified in 1994 (the "Modification").
On January 27, 1997, the parties entered into an Amendment to the Modification effective January 9, 1997 (the "Olive Amendment"). The Olive Amendment provided for the settlement of additional matters raised by plaintiffs' counsel in 1996. The Court issued an order approving the Olive Amendment on July 3, 1997.
The Olive Amendment 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.
In 1999, plaintiffs' counsel asserted that the Board did not comply with the provision requiring such engagement and requested that the Court exercise its retained jurisdiction to determine whether there was a breach of this provision of the Olive Amendment. In January 2000, the Board engaged another management/compensation consultant to perform the required evaluation again. This evaluation was completed in April 2000 and was provided to plaintiffs' counsel. The Board believes that any alleged breach of the Olive Amendment has been fully remedied by the Board's engagement of the second consultant. Although several status conferences on this matter have been held, there has been no court order resolving whether there was any breach of the Olive Amendment.
In October 2000, plaintiffs' counsel asserted that the stock option agreement to purchase TCI shares, which was entered into by IORI and ARI, an affiliate of IORI, in October 2000 with an investment fund, breached a provision of the Modification. As a result of this assertion, IORI assigned all of its rights to purchase the TCI shares under this stock option agreement to ARI.
The Board believes that the provisions of the Settlement, Modification and the Olive Amendment terminated on April 28, 1999. However, in September 2000, the Court ruled that certain provisions of the Modification continue to be effective after the termination date. This ruling has been appealed to the United States Court of Appeals for the Ninth Circuit by IORI and TCI.
On October 23, 2001, IORI, TCI and ARI jointly announced a preliminary agreement with the plaintiff's legal counsel for complete settlement of all disputes in the lawsuit. In February 2002, the court granted final approval for the proposed settlement. Under the proposal, ARI would acquire all of the outstanding shares of IORI and TCI not currently owned by ARI for a cash payment or shares of ARI preferred stock. ARI will pay $19.00 cash per IORI share and $17.50 cash per TCI share for the stock held by non-affiliated stockholders. ARI would issue one share of Series H Preferred Stock with a liquidation value of $21.50 per share for each share of IORI Common Stock for stockholders who elect to receive ARI preferred stock in lieu of cash. ARI would issue one share of Series G Preferred Stock with a liquidation value of $20.00 per share for each share of TCI Common Stock for stockholders who elect to receive ARI preferred stock in lieu of cash. Each share of Series H Preferred Stock will be convertible into 2.25 shares of ARI Common Stock during a 75-day period that commences fifteen days after the date of the first ARI Form 10-Q filing that occurs after the closing of the merger transaction. Upon the acquisition of the IORI and TCI shares, IORI and TCI would become wholly-owned subsidiaries of ARI. The transaction is subject to the negotiation of a definitive merger agreement and a vote of the shareholders of all three entities. IORI has the same board as TCI and the same advisor as TCI and ARI.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
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.
As of March 4, 2002, the closing price of IORI's Common Stock on the AMEX was $18.15 per share.
As of March 4, 2002, IORI's Common Stock was held by 1,350 holders of record.
IORI paid no dividends in 2001. See ITEM 7. "MANAGEMENT DISCUSSION AND ANALYSIS--Liquidity and Capital Resources." IORI paid dividends in 2000 as follows:
IORI reported to the Internal Revenue Service that 100% of the dividends paid in 2000 represented capital gains.
On December 5, 1989, the Board of Directors approved a share repurchase program, authorizing the repurchase of a total of 200,000 shares of IORI's Common Stock. In June 2000, the Board increased this authorization to 300,000 shares. Through December 31, 2001, a total of 218,804 shares had been repurchased at a cost of $1.9 million. In September 2001, the Board approved separately a private block purchase of 75,100 shares of IORI Common Stock for a total cost of $1.3 million.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
IORI purchased nine properties for a total of $46.5 million in 2000, one property for $5.4 million in 1999, and eight properties for a total of $40.6 million in 1997. IORI sold seven properties for a total of $66.6 million in 2000, one property for $3.2 million in 1999, and three properties for a total of $24.8 million in 1997. See ITEM 2. "PROPERTIES - Real Estate" and ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
ITEM 7.
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, partnerships and in mortgage loans. IORI is the successor to a California business trust organized on December 14, 1984, which commenced operations on April 10, 1985.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2001, totaled $66,000 compared to $2.1 million at December 31, 2000. IORI's principal sources of cash have been and will continue to be property operations, proceeds from property sales and refinancings and partnership distributions. Although management anticipates that IORI will generate excess cash from operations in 2002 due to increased rental rates and occupancy at its properties, such excess, however, will not be sufficient to discharge all of IORI's debt obligations as they mature. Management intends to selectively sell income producing real estate, refinance real estate and incur additional borrowings against real estate to meet its cash requirements.
Net cash used in operating activities was $2.0 million in 2001 as compared to $1.9 million in 2000. The primary factors affecting cash flow from operating activities are discussed in the following paragraphs.
Cash flow from property operations (rents collected less payments for property operating expenses) decreased to $6.0 million in 2001 from $6.6 million in 2000. A decrease of $2.0 million was due to the sale of three apartments and two office buildings in 2000. The decrease was offset in part by an increase of $721,000 from the purchase of five apartments in 2000 and an increase of $700,000 due to increased rental rates and occupancies at IORI's apartment and commercial properties.
Interest collected decreased to $148,000 in 2001 from $310,000 in 2000. This decrease was due to a decrease in short-term investment income and the partial paydown of one mortgage note receivable in 2001.
Interest paid on notes payable increased to $5.5 million in 2001 from $5.0 million in 2000. Of this increase, $427,000 was due to the purchase of five apartments in 2000 and $1.6 million was due to the purchase of one parcel of unimproved land in 2000. The increase also was due to a $188,000 increase from a loan refinancing for a commercial property in 2001. This increase was offset by a decrease of $883,000 from the sale of three apartments in 2000, $496,000 from the sale of two commercial properties in 2000, and $135,000 from the sale of two unimproved land parcels in 2000. A decrease of $200,000 was due to variable interest rates decreasing during 2001 for several of IORI's variable rate notes.
Advisory and net income fee paid to affiliate decreased to $1.1 million in 2001 from $2.6 million in 2000. A decrease of $1.4 million was due to a decrease in the net income fee paid which is due to a decrease in IORI's net income, the basis for such fee. The remaining decrease was due to a decrease in gross assets. See NOTE 8. "ADVISORY AGREEMENT."
General and administrative expenses paid increased to $1.6 million in 2001 from $1.2 million in 2000. This increase was due to increases in taxes accrued in 2000 and paid in 2001.
In 2001, IORI made improvements to its properties totaling $3.5 million compared to the $1.9 million in 2000. The increase was primarily due to improvements made to IORI's unimproved land.
In 2001, IORI received cash of $1.0 million from mortgage receivable principal payments, and net cash of $14.1 million from refinancings. In 2001, $14.8 million was expended in principal payments on mortgage debt.
Scheduled principal payments on notes payable of $12.0 million are due in 2002. For those mortgages that come due in 2002, it is management's intent to either seek an extension of the due dates by one or more years, or refinance the debt on a long-term basis, or pay off the debt at maturity, or selectively sell income producing real estate. Management believes it will continue to be successful in obtaining loan extensions and/or refinancings.
Management expects that funds from existing cash resources, selective sales of income producing properties, refinancing of real estate, and additional borrowings against real estate will be sufficient to meet IORI's cash requirements associated with its current and anticipated level of operations, maturing debt obligations and existing commitments. To the extent that IORI's liquidity permits or financing sources are available, management intends to make new real estate investments.
IORI owns a 36.3% general partner interest in the Tri-City partnership. In 2001, IORI received a distribution of $18,000 from Tri-City's operating cash flow, and advanced $4,000 to the partnership. IORI owns a 40% general partner interest in the NIA partnership. In 2001, IORI received no distributions from NIA and made a $24,000 contribution to the partnership. IORI owns a 10% limited partnership interest in the TCI Eton Square partnership. IORI received no distributions and made no contributions to the partnership in 2001. See NOTE 4. "INVESTMENT IN EQUITY METHOD PARTNERSHIPS."
IORI paid no dividends in 2001. In December 2000, the Board of Directors determined not to pay a fourth quarter dividend to holders of IORI's Common Stock. The non-payment decision was based on the Board determining that IORI needed to retain cash for acquisitions that were anticipated in 2001 and that IORI had no REIT taxable income that required a distribution.
In 2001, IORI repurchased 75,100 shares of Common Stock in a private block purchase for a total of $1.3 million.
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
2001 Compared to 2000. IORI reported a net loss of $3.5 million in 2001, as compared to net income of $16.8 million in 2000, which included gains on real estate totaling $20.9 million. Fluctuations in these and the other components of revenue and expense are discussed in the following paragraphs.
Rents decreased to $13.0 million in 2001 from $13.7 million in 2000. Of this decrease, $1.6 million was due to the sale of two commercial properties in 2000 and $2.0 million was due to the sale of three apartments in 2000. This decrease was offset by increases of $1.4 million due to the purchase of five apartment properties in 2000 and $1.3 million and $151,000 was due to increased rental rates at IORI's commercial and apartment properties, respectively. Rents in 2002 are expected to decrease as IORI selectively sells properties.
Property operations expense decreased to $6.6 million in 2001 from $7.0 million in 2000. Of this decrease, $1.1 million was due to the sale of three apartments and $570,000 due to the sale of two commercial properties in 2000. This decrease was offset by an increase of $673,000 due to the purchase of five apartments in 2000, $320,000 was due to increased utility, cleaning, repairs, and insurance expenses at IORI's commercial properties, and $250,000 was due to an increase in property taxes for IORI's land. Properties operations expense is expected to decrease in 2002 as IORI selectively sells properties.
Interest income decreased to $194,000 in 2001 from $319,000 in 2000. This decrease was due to a decrease in short-term investments, and from a $1.0 million principal paydown received in May 2001 on IORI's only note receivable. Interest income is expected to decrease as IORI's mortgage loan is paid in full in 2002.
Interest expense increased to $6.1 million in 2001 from $5.1 million in 2000. Of this increase, $345,000 and $2.0 million was due to the purchase of five apartments and one unimproved land parcel in 2000, respectively, and $174,000 was due to one loan refinanced in 2001. These increases were offset by decreases of $441,000 due to the sale of two commercial properties; $755,000 due to the sale of three apartments; and $134,000 due to the sale of two unimproved land parcels in 2000. The remaining decrease of $203,000 was due to lower variable interest rates at IORI's apartment and commercial properties. Interest expense in 2002 is expected to decrease from 2001 due to a decrease in outstanding debt.
Depreciation expense decreased to $2.4 million in 2001 from $2.5 million in 2000. A decrease of $427,000 was from the sale of five properties in 2000, offset by an increase of $138,000 from the purchase of five properties in 2000 and an increase of $200,000 was from tenant improvements. Depreciation expense in 2002 is expected to approximate 2001.
Advisory fee to affiliate increased to $817,000 in 2001 from $664,000 in 2000. The increase was attributable to an increase in gross assets, the basis of such fee. The advisory fee in 2002 is expected to approximate 2001. See NOTE 8. "ADVISORY AGREEMENT."
IORI paid no net income fee in 2001 compared to the $1.4 million in 2000. The net income fee is based on 7.5% of IORI's net income.
General and administrative expense decreased to $739,000 in 2001 from $1.5 million in 2000. This decrease was primarily due to a decrease in taxes.
Equity losses of partnerships was $9,000 in 2001 compared to $61,000 in 2000. The decrease was primarily due to a decrease in operating expenses at Eton Square Office Building.
In 2001, IORI realized no gains on the sale of real estate.
In 2000, gains on sale of real estate totaling $20.9 million were realized: $903,000 on the sale of La Monte Park Apartments, $1.2 million on the sale of Renaissance Parc Apartments, $1.9 million on the sale of Olympic Office Building, $13.1 million on the sale of Saratoga Office Building, $2.2 million on the sale of Eastpoint Apartments, $388,000 on the sale of Etheredge and Fambrough land and a $1.3 million recognition of a deferred gain.
2000 Compared to 1999. IORI reported net income of $16.8 million in 2000, as compared to net income of $1.3 million in 1999. Net income included gains on sale of real estate of $20.9 million in 2000 and gains on sale of real estate of $1.5 million in 1999. Fluctuations in these and the other components of revenue and expense are discussed in the following paragraphs.
Rents decreased to $13.7 million in 2000 from $16.0 million in 1999. A decrease of $4.9 million was due to the sale of six income producing properties in 2000 and 1999. The decrease was offset in part by an increase of $1.4 million from the acquisition of six income producing properties in 2000 and fourth quarter of 1999 and an additional $1.2 million was from an increase in occupancy and rental rates at IORI's apartments and office buildings.
Interest income increased to $319,000 in 2000 from the $29,000 in 1999. This increase was due to an increase in short-term investments, and from the funding of a note receivable in 2000.
Property operations expense increased to $ 7.0 million in 2000 from $6.8 million in 1999. An increase in property operations expense of $1.7 million was due to six income producing properties being purchased in 2000 and the fourth quarter of 1999, offset by a decrease of $1.6 million from the sale of six income producing properties in 2000 and 1999.
Interest expense decreased to $5.1 million in 2000 from $5.7 million in 1999. A decrease of $1.6 million was from the sale of eight properties subject to debt in 2000 and 1999 and offset by $1.0 million from the purchase of nine properties in 2000 and 1999.
Depreciation expense decreased to $2.5 million in 2000 from $2.7 million in 1999. A decrease of $775,000 is from the sale of six properties in 2000 and 1999, offset by an increase of $297,000 from the purchase of five properties in 2000 and 1999 and an increase of $205,000 is from tenant improvements.
Advisory fee to affiliate increased to $664,000 in 2000 from $371,000 in 1999. The increase was attributable to a decrease in the operating expense limitation refund. See NOTE 8. "ADVISORY AGREEMENT."
The net income fee to affiliate increased to $1.4 million in 2000, from $81,000 in 1999. The increase was attributable to the increase in IORI's net income. The net income fee is based on 7.5% of IORI's net income.
General and administrative expense increased to $1.5 million in 2000 from $747,000 in 1999. This increase was primarily due to an increase in legal fees, consultant fees, taxes and advisor cost reimbursements.
Equity in income of partnerships was a loss of $61,000 in 2000 compared to income of $148,000. The decrease was due to the sale of two commercial properties by the Tri-City partnership in 1999.
In 2000, gains on sale of real estate totaling $20.9 million were realized: $903,000 on the sale of La Monte Park Apartments, $1.2 million on the sale of Renaissance Parc Apartments, $1.9 million on the sale of Olympic Office Building, $13.1 million on the sale of Saratoga Office Building, $2.2 million on the sale of Eastpoint Apartments, $388,000 on the sale of Etheredge and Fambrough land and a $1.3 million recognition of a deferred gain. 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 Shopping Center. See NOTE 2. "REAL ESTATE" and NOTE 4. "INVESTMENT IN EQUITY METHOD PARTNERSHIPS."
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 1999, 2000 and 2001, 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 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 90% (95% in 2000 and 1999) of its REIT taxable income plus 90% (95% in 2000 and 1999) of its net income from foreclosure property on an annual basis to stockholders.
ITEM 7A.
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, 2001. 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
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. We have also audited the schedules listed in the accompanying index. These financial statements and the schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe our audits provide a reasonable basis for our opinion.
As described in Note 15, Income Opportunity Realty Investors, Inc.'s management has indicated its intent to both sell income producing properties and refinance or extend debt secured by real estate, to meet its liquidity needs.
As discussed in Note 1, IORI adopted the provisions of SFAS 144, Accounting for Impairment of Long Lived Assets, in 2001.
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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the schedules referred to above presents fairly, in all material respects, the information set forth therein.
BDO SEIDMAN, LLP
Dallas, Texas March 11, 2002
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these Consolidated Financial Statements.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these Consolidated Financial Statements.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these Consolidated Financial Statements.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these Consolidated Financial Statements.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
The accompanying notes are an integral part of these Consolidated Financial Statements.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of Income Opportunity Realty Investors, Inc. and consolidated entities 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 2000 and 1999 have been reclassified to conform to the 2001 presentation.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and 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. IORI invests in real estate through direct ownership, leases and partnerships and it also may invest in mortgage loans on real estate.
In October 2001, IORI announced a preliminary agreement for the acquisition of IORI by American Realty Investors, Inc. See ITEM 13. "LEGAL PROCEEDINGS."
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.
Accounting pronouncements. In June 2001, the Financial Accounting Standards Board finalized FASB Statement No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that IORI recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001. It also requires, upon adoption of SFAS 142, that IORI reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that IORI identify reporting units in order to assess potential future impairment of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. SFAS 142 requires that an intangible asset with an indefinite useful life be tested for impairment in accordance with specified guidelines. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires IORI to complete a transitional goodwill impairment test six months from the date of
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
adoption. IORI is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. Currently, IORI does not believe that the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations.
SFAS 143 requires that the fair value for an asset retirement obligation be recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made, and that the carrying value of the asset, including capitalized asset retirement costs, be tested for impairment. SFAS 143, is effective for fiscal years beginning after June 15, 2002. Management does not believe this statement will have a material effect on IORI's financial position or results of operations.
Real estate held for investment and depreciation. Real estate held for investment is carried at cost. Statement of Financial Accounting Standards No. 144 ("SFAS No. 144") 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 equity method is used to account for investments in partnerships which IORI does not control. Under the equity method, an initial investment, recorded at cost, is increased by a proportionate share of the partnership's operating income and any additional advances and decreased by a proportionate share of the partnership's operating losses and distributions received.
Operating segments. Management has determined reportable operating segments to be those that are used for internal reporting purposes which disaggregates operations by type of real estate.
Fair value of financial instruments. The following assumptions were used in estimating the fair value of notes receivable and payable. For notes receivable the fair value was estimated by discounting future cash flows using current interest rates for similar loans. For notes payable the fair value was estimated using year end interest rates for mortgages with similar terms and maturities.
Cash equivalents. For purposes of the Consolidated Statements of Cash Flows, 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.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2. REAL ESTATE
In 2000, the following properties were purchased:
- -------- (1) The Frankel portfolio consisted of five apartments: 60 unit Brighton Court, 92 unit Del Mar Villas, 68 unit Enclave, 57 unit Signature Place and 114 unit Sinclair Place. (2) Seller financing. (3) The property was sold in September 2000. (4) The loan was refinanced in December 2001. See NOTE 5. "NOTES AND INTEREST PAYABLE."
In 2000, the following properties were sold:
- -------- (1) Debt assumed by purchaser.
Concentration of investment risk. IORI has a high concentration of investment risk on properties in the Southwest region of the United States. This risk includes, but is not limited to changes in local economic conditions, changes in real estate and zoning laws, increases in real estate taxes, floods, tornados and other acts of God and other factors beyond the control of management. In the opinion of management, this investment risk is partially mitigated by the diversification of property types in other geographical regions of the United States, management's review of additional investments, acquisitions in other areas and by insurance.
NOTE 3. NOTES AND INTEREST RECEIVABLE
In September 2000, IORI funded a $1.5 million loan secured by a second lien on 165 acres of unimproved land in The Colony, Texas. In May 2001, IORI received $1.0 million as a partial principal paydown. The loan bears interest at 18.0% per annum, requires monthly payments of interest only and matured in January 2002. In January 2002, the loan was extended to April 2002. The loan had an estimated fair value at December 31, 2001, equal to its principal balance of $500,000.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4. INVESTMENT IN EQUITY METHOD PARTNERSHIPS
Investments in equity method partnerships consisted of the following:
IORI owns a 36.3% general partner interest in Tri-City, which at December 31, 2001, owned a shopping center in Houston, Texas. Transcontinental Realty Investors, Inc. ("TCI") owns a 63.7% limited partner interest in Tri-City. In February 2000, Tri-City obtained mortgage financing of $2.1 million secured by the previously unencumbered shopping center. Tri-City received net cash of $2.0 million after the funding of required escrows and the payment of various closing costs. The mortgage bore interest at a fixed rate of 10.24% per annum until February 2001 and currently, 9.44% per annum thereafter, requires monthly payments of principal and interest of $20,601 and matures in February 2005. IORI received a distribution of $739,000 of the net financing proceeds. In 1999, Tri-City sold a shopping center in Ft. Worth, Texas, and an office building in Carrollton, Texas, for a total of $7.2 million, receiving net cash of $5.4 million after paying off $1.3 million in mortgage debt and the payment of various closing costs. IORI received a distribution of $2.1 million of the net cash. Tri-City recognized gains of $2.9 million on the sales of which IORI's equity share was $1.0 million.
IORI also owns a 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.
In September 1999, IORI 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. TCI owns a 90% general partner interest in Eton Square.
Set forth below are summarized financial data for the partnerships accounted for using the equity method:
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
IORI's share of the equity partnerships' capital was $854,000 in 2001 and $892,000 in 2000.
IORI's equity share of:
NOTE 5. NOTES AND INTEREST PAYABLE
Notes and interest payable consisted of the following:
Scheduled notes payable principal payments are due as follows:
Notes payable at December 31, 2001, bear interest at rates ranging from 6.25% to 10.5% and mature between 2002 and 2025. The mortgages are collateralized by deeds of trust on real estate with a net carrying value of $87.3 million.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 2001, IORI refinanced the following properties:
- -------- (1) Variable rate.
NOTE 6. DIVIDENDS
Dividends of $685,000 ($.45 per share) were paid in 2000 and $908,000 ($.60 per share) in 1999.
It was reported to the Internal Revenue Service that 100% of the dividends paid in 2000 represented capital gains and that 100% of the dividends paid in 1999 represented a return of capital.
In December 2000, the Board of Directors determined not to pay a fourth quarter dividend to holders of IORI's Common Stock. The non-payment decision was based on the Board determining that IORI needed to retain cash for acquisitions that were anticipated in 2001 and that IORI had no REIT taxable income that required a distribution.
NOTE 7. RENTS UNDER OPERATING LEASES
Operations include the leasing of office buildings. The leases thereon expire at various dates through 2009. The following is a schedule of minimum future rents on non-cancelable operating leases as of December 31, 2001:
NOTE 8. ADVISORY AGREEMENT
Basic Capital Management, Inc. ("BCM"), an affiliate, has served as advisor to IORI 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 to IORI.
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.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 incurred by IORI.
The Advisory Agreement provides for BCM to be responsible for IORI's day-to-day operations 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 of IORI's properties. In addition, BCM receives reimbursement of certain expenses incurred by it, in the performance of advisory services for IORI.
The Advisory Agreement requires BCM or any affiliate of BCM to pay to IORI one-half of any compensation received from third parties with respect to the origination, placement or brokerage of any loan made by 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. The effect of this limitation was to require BCM to refund $256,000 of the 2001 annual advisory fee, and $289,000 of the 1999 annual advisory fee. BCM was not required to refund any of its 2000 advisory fees.
Additionally, if management was to request that BCM render services other than those required by the Advisory Agreement, BCM or an affiliate of BCM would be separately compensated for such additional services on terms to be agreed upon from time to time. As discussed in NOTE 9. "PROPERTY MANAGEMENT," Triad Realty Services, Ltd. ("Triad"), an affiliate of BCM, provides property management services and, as discussed in NOTE 10. "REAL ESTATE BROKERAGE," Regis Realty, Inc. ("Regis"), a related party, provides, on a non-exclusive basis, brokerage services.
BCM may assign the Advisory Agreement only with the prior consent of IORI.
NOTE 9. PROPERTY MANAGEMENT
Triad provides property management services for a fee of 5% or less of the monthly gross rents collected on the residential properties and 3% or less of the monthly gross rents collected on commercial properties under its management. Triad subcontracts with other entities for the property-level management services at various rates. The general partner of Triad is BCM. The limited partner of Triad is GS Realty Services, Inc. ("GS Realty"), a related party. Triad subcontracts the property-level management and leasing of IORI's seven office buildings and the commercial property owned by each of Tri-City and Eton Square, to Regis, a related party, which is a company owned by GS Realty. 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 10. 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.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 11. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
Fees and cost reimbursements to BCM and its affiliates:
Fees paid to GS Realty, a related party to IORI.
- -------- * Net of property management fees paid to subcontractors, other than Regis, and affiliates of BCM.
NOTE 12. INCOME TAXES
For the years 2001, 2000 and 1999, IORI 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 90% (95% in 2000 and 1999) of its REIT taxable income, plus 90% (95% in 2000 and 1999) of its taxable income from foreclosure property as defined in Section 857 of the Code, is distributed.
IORI had a net loss for federal income tax purposes before the application of operating loss carryforwards in 2001, had net income for federal income tax purposes in 2000 and had net losses for federal income tax purposes in 1999. Therefore, IORI recorded no provision for income taxes. IORI'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, 2001, IORI's tax basis in its net assets exceeded their net basis for financial statement purposes by approximately $2.1 million. As a result, aggregate future income for income tax purposes will be less than such amount for financial statement purposes and IORI would be able to maintain its REIT status without distributing 90% of its financial statement income. Additionally, at December 31, 2001, IORI has current and prior tax net operating loss carryforwards of $5.8 million expiring through the year 2021.
As a result of IORI's election to be treated as a REIT for income tax purposes and its intention to distribute its REIT taxable income, if any, in future years, no deferred tax asset, liability or valuation allowance was recorded.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13. 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. Items of income that are not reflected in the segments are interest, equity in partnerships and previously deferred gains on sale of real estate totaling $185,000 and $1.5 million for 2001 and 2000, respectively. Expenses that are not reflected in the segments are general and administrative expenses, non-segment interest expense and advisory incentive sales and net income fees totaling $1.6 million and $3.6 million for 2001 and 2000, respectively. Excluded from operating segment assets are assets of $4.4 million at December 31, 2001, and $10.2 million at December 31, 2000, which are not identifiable with an operating segment. There are no intersegment revenues and expenses and all business is conducted in the United States.
Presented below is the operating income of each operating segment.
- -------- * Excludes a $1.3 million deferred gain on the sale of a property to an affiliate, recognized by IORI upon the affiliate's subsequent resale of the property.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- -------- * Excludes IORI's share of gains recognized by Tri-City, an equity affiliate of $1.1 million.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 14. QUARTERLY DATA
The following is a tabulation of quarterly results of operations for the years 2001 and 2000 (unaudited).
In the first quarter of 2000, the La Monte Park Apartments were sold, a gain on sale of real estate of $903,000 was recognized. In the second quarter of 2000, gains on sale of real estate totaling $16.1 million were recognized on the sale of Renaissance Parc Apartments, Olympic Office Building and Saratoga Office Building. In the third quarter of 2000, gains on sale of real estate totaling $2.6 million were recognized on the sale of the Fambrough and Etheredge land, Eastpoint Apartments and a $1.3 million deferred gain also was recognized on the sale of a property by an affiliate, which it had previously purchased from IORI.
NOTE 15. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY
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
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The Settlement was modified in 1994 (the "Modification").
On January 27, 1997, the parties entered into an Amendment to the Modification effective January 9, 1997 (the "Olive Amendment"). The Olive Amendment provided for the settlement of additional matters raised by plaintiffs' counsel in 1996. The Court issued an order approving the Olive Amendment on July 3,1997.
The Olive Amendment 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.
In 1999, plaintiffs' counsel asserted that the Board did not comply with the provision requiring such engagement and requested that the Court exercise its retained jurisdiction to determine whether there was a breach of this provision of the Olive Amendment. In January 2000, the Board engaged another management/compensation consultant to perform the required evaluation again. This evaluation was completed in April 2000 and was provided to plaintiffs' counsel. The Board believes that any alleged breach of the Olive Amendment has been fully remedied by the Board's engagement of the second consultant. Although several status conferences have been held on this matter, there has been no Court order resolving whether there was any breach of the Olive Amendment.
In October 2000, plaintiffs' counsel asserted that the stock option agreement to purchase TCI shares, which was entered into by IORI and an affiliate of IORI, American Realty Investors, Inc. ("ARI"), in October 2000 with an investment fund, breached a provision of the Modification. As a result of this assertion, IORI assigned all of its rights to purchase the TCI shares under this stock option agreement to ARI.
The Board believes that all provisions of the Settlement, the Modification and Olive Amendment terminated on April 28, 1999. However, in September 2000, the Court ruled that certain provisions of the Modification continue to be effective after the termination date. This ruling has been appealed to the United States Court of Appeals for the Ninth Circuit by IORI and TCI.
On October 23, 2001, IORI and ARI jointly announced a preliminary agreement with the plaintiff's legal counsel for complete settlement of all disputes in the lawsuit. In February 2002, the court granted final approval for a proposed settlement. Under the proposal, ARI would acquire all of the outstanding shares of IORI and TCI not currently owned by ARI for a cash payment or shares of ARI Preferred Stock. ARI will pay $17.50 cash per TCI share and $19.00 cash per IORI share for the stock held by non-affiliated stockholders. ARI would issue one share of Series G Preferred Stock with a liquidation value of $20.00 per share for each share of TCI Common Stock for stockholders who elect to receive ARI preferred stock in lieu of cash. ARI would issue one share of Series H Preferred Stock with a liquidation value of $21.50 per share for each share of IORI Common Stock for stockholders who elect to receive ARI preferred stock in lieu of cash. Each share of Series H Preferred Stock will be convertible into 2.25 shares of ARI Common Stock during a 75-day period that commences fifteen days after the date of the first ARI Form 10-Q filing that occurs after the closing of the merger transaction. Upon the acquisition of IORI and TCI shares, TCI and IORI would become wholly-owned subsidiaries of ARI. The transaction is subject to the negotiation of a definitive merger agreement and a vote of the shareholders of all three entities. TCI has the same board as IORI and the same advisor as IORI and ARI.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Liquidity. Although management anticipates that IORI will generate excess cash from operations in 2001, due to increased rental rates and occupancy at its properties, however, such excess will not be sufficient to discharge all of IORI's debt obligations as they mature. Management intends to selectively sell income producing real estate, refinance real estate and incur additional borrowings against real estate to meet its cash requirements.
Other Litigation. IORI 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 16. SUBSEQUENT EVENTS
In January 2002, IORI sold the 124,059 sq. ft., Daley Corporate Center, in San Diego, California, for $15.5 million, receiving net cash of $8.1 million after paying off $6.6 million in mortgage debt and the payment of various closing costs. A gain of $7.1 million was recognized on the sale.
Also in January 2002, IORI purchased 100% of the outstanding common shares of Rosedale Corporation ("Rosedale"), a wholly-owned subsidiary of ARI, a related party, for $5.1 million cash. Rosedale owns the 83,331 sq. ft. Rosedale Towers Office Building in Roseville, Minnesota. ARI has guaranteed that the asset shall produce at least a 12% return annually of the purchase price for a period of three years from the purchase date. If the assets fail to produce the 12% return, ARI shall pay IORI any shortfall. In addition, if the asset fails to produce the 12% return for a calendar year, IORI may require ARI to repurchase the shares of Rosedale for the purchase price. Management has classified this related party transaction as a note receivable from ARI.
In February 2002, IORI funded a $2.0 million mortgage loan as a participation agreement with TCI. The loan is secured by a second lien on a retail center in Montgomery County, Texas. The note receivable bears interest at 16.0% per annum, requires monthly interest only payments of $67,000 and matured in February 2002. IORI and TCI will receive 57% and 43%, respectively, on the remaining principal and interest payments. In February 2002, the loan was extended until April 2002.
SCHEDULE III
INCOME OPPORTUNITY REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
- -------- (1) The aggregate cost for Federal income tax purposes is $94.0 million.
SCHEDULE III (Continued)
INCOME OPPORTUNITY REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE IV
INCOME OPPORTUNITY REALTY INVESTORS, INC.
MORTGAGE LOANS ON REAL ESTATE December 31, 2001
- -------- (1) The aggregate cost for federal income tax purposes is $500,000.
SCHEDULE IV (Continued)
INCOME OPPORTUNITY REALTY INVESTORS, INC.
MORTGAGE LOANS ON REAL ESTATE
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
-----------------
PART III
ITEM 10.
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 68, 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) 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").
HENRY A. BUTLER: Age 51, Director (Affiliated) (since December 2001).
Broker--Land Sales (since 1992) of Basic Capital Management, Inc. ("BCM"); Owner/Operator (1989 to 1991) of Butler Interests, Inc.; and Director (since December 2001) of TCI.
EARL D. CECIL: Age 72, Director (Independent) (since March 2002).
Financial and business consultant (since January 1994); Division Vice President (February 1987 to December 1993) of James Mitchell & Company, a financial services marketing organization; Director (since November 2001) of ARI; and Director (since March 2002) of TCI.
MARTIN L. WHITE: Age 62, 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.; and Director (since January 1995) of TCI.
Board Committees
The Board of Directors held seven meetings during 2001. 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. Cecil, Stokely and White. The Audit Committee met four times during 2001.
The Board of Directors does not have Nominating or Compensation Committees.
Executive Officers
The following persons currently serve as executive officers of IORI: Mark Branigan, Executive Vice President--Residential; Louis J. Corna Executive Vice President--Tax; Ronald E. Kimbrough, Executive Vice President and Chief Financial Officer; and David W. Starowicz, Executive Vice President--Acquisitions, Sales and Construction. 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.
MARK W. BRANIGAN: Age 47, Executive Vice President--Residential (since June 2001); Executive Vice President and Chief Financial Officer (August 2000 to June 2001), Vice President--Director of Construction (August 1999 to August 2000) and Executive Vice President--Residential Asset Management (January 1992 to October 1997).
Executive Vice President--Residential (since June 2001), Executive Vice President and Chief Financial Officer (August 2000 to June 2001), Vice President--Director of Construction (August 1999 to August 2000) and Executive Vice President--Residential Management (January 1992 to October 1997) of BCM, American Realty Trust, Inc, ("ART") and TCI; Executive Vice President and Chief Financial Officer (August 2000 to June 2001) and Director (September 2000 to June 2001) of ARI; and real estate consultant (November 1997 to July 1999).
LOUIS J. CORNA: Age 54, Executive Vice President--Tax (since October 2001), Executive Vice President and Chief Financial Officer (June 2001 to October 2001), and Senior Vice President--Tax (December 2001 to June 2001).
Executive Vice President--Tax (since October 2001), Executive Vice President and Chief Financial Officer (June 2001 to October 2001), and Senior Vice President--Tax (December 2000 to June 2001) of BCM, ARI and TCI; Private Attorney (January 2000 to December 2000); Vice President--Taxes and Assistant Treasurer (March 1998 to January 2000) of IMC Global, Inc.; and Vice President--Taxes (July 1991 to February 1998) of Whitman Corporation.
RONALD E. KIMBROUGH: Age 49, Executive Vice President and Chief Financial Officer (since January 2002).
Executive Vice President and Chief Financial Officer (since January 2002) of BCM, ARI and TCI; Controller (from September 2000 to January 2002) of BCM; Vice President and Treasurer (from January 1998 to September 2000) of Syntek West, Inc. and One Realco Corporation; and Consultant (1997).
DAVID W. STAROWICZ: Age 46, Executive Vice President--Acquisitions, Sales and Construction (since March 2001), Executive Vice President--Commercial Asset Management (September 1999 to March 2001) and Vice President (May 1992 to September 1999).
Executive Vice President--Acquisitions, Sales and Construction (since March 2001), Executive Vice President--Commercial Asset Management (September 1999 to March 2001), Vice President (May 1992 to September 1999) and Asset Manager (November 1990 to May 1992) of BCM, ART and TCI; and Executive Vice President--Commercial Asset Management (since August 2000) of ARI.
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 49, 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 August 2000) of ARI.
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 2001. 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. Branigan, Corna, Kimbrough 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 to IORI.
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 BCM's liability for losses by IORI; and contains guidelines for BCM's 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 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. BCM was required to refund $256,000 of the 2001 advisory fee under this provision.
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 Realty, Inc. ("Regis"), a related party, on a non-exclusive basis to provide brokerage services for IORI.
BCM may assign the Advisory Agreement only with the prior consent of IORI.
The directors and principal officers of BCM are set forth below.
Mickey N. Phillips is Gene E. Phillips' brother and Ryan T. Phillips is Gene E. Phillips' son. Gene E. Phillips serves as a representative of the trust established for the benefit of his children which owns BCM and, in such capacity has substantial contact with the management of BCM and input with respect to its performance of advisory services to IORI.
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 residential properties and 3% or less of the monthly gross rents collected on commercial 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 partner of Triad is GS Realty Services, Inc. ("GS Realty"), a related party. Triad subcontracts the property-level management and leasing of IORI's seven office buildings and the two commercial properties owned by real estate partnerships in which IORI and TCI are partners to Regis, a related party, which is a company owned by GS Realty. 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
Regis also provides real estate brokerage services to IORI 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.
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. The members of the Audit Committee receive a fee of $250 for each committee meeting attended. 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 2001, $76,250 was paid to the Independent Directors in total Directors' fees for all services including the annual fee for service during the period January 1, 2001, through December 31, 2001, and 2001 special service fees as follows: R. Douglas Leonhard, $18,250; Murray Shaw, $7,500; Ted P. Stokely, $18,000; Martin L. White, $17,000; and Edward G. Zampa, $15,500.
Performance Graph
The following performance graph compares the cumulative total stockholder return on IORI's shares of Common Stock with the Dow Jones Equity Market Index ("DJ Equity Index") and the Dow Jones Real Estate Investment Index ("DJ Real Estate Index"). The comparison assumes that $100 was invested on December 31, 1996, 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.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
[CHART]
ITEM 12.
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 4, 2002.
- -------- (1) Percentages are based upon 1,438,945 shares of Common Stock outstanding at March 4, 2002. (2) EQK Holdings, Inc. ("EQK") is a wholly-owned subsidiary of ART which is a wholly-owned subsidiary of ARI.
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 4, 2002.
- -------- (1) Percentage is based upon 1,438,945 shares of Common Stock outstanding at March 4, 2002. (2) Includes 345,728 shares owned by TCI of which the Directors of IORI may be deemed to be beneficial owners by virtue of their positions as directors of TCI and 409,935 shares owned by EQK and 106,802 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 ARI and BCM. The Directors and executive officers disclaim beneficial ownership of such shares. Each of the directors of ARI may be deemed to be beneficial owners of the shares owned by ARI by virtue of their positions as directors of ARI. 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 ARI and BCM disclaim such beneficial ownership.
ITEM 13.
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. Branigan, Corna, Kimbrough 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 to IORI.
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 partner of Triad is GS Realty, a related party. Triad subcontracts the property-level management and leasing of IORI's seven office buildings and two commercial properties owned by real estate partnerships in which IORI and TCI are partners to Regis, a related party, which is a company owned by GS Realty.
Prior to May 1, 2000, affiliates of BCM provided brokerage services, on a non-exclusive basis, and received brokerage commissions in accordance with a brokerage agreement. Currently, Regis performs such brokerage services.
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 ARI. Messrs. Branigan, Corna, Kimbrough and Starowicz serve as executive officers of ARI.
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 had a revolving loan commitment from Syntek West, Inc., a company owned by Gene E. Phillips. The loan commitment expired in 1998.
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.
In January 2002, IORI purchased 100% of the outstanding common shares of Rosedale Corporation, a wholly-owned subsidiary of ARI, for $5.1 million in cash. See NOTE 16 "SUBSEQUENT EVENTS."
In February 2002, IORI purchased a $2.0 million senior participation interest in a loan from TCI. See NOTE 3. "NOTES AND INTEREST RECEIVABLE."
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 2001, IORI paid BCM and its affiliates and related parties $817,000 in advisory fees, $99,000 in mortgage brokerage fees and $312,000 in property and construction management fees and leasing commissions, net of property management fees paid to subcontractors other than Regis. In addition, from time-to-time, IORI has made advances to BCM, which generally have not had specific repayment terms and have been reflected in IORI's financial statements as other assets or other liabilities from affiliates. At December 31, 2001, BCM advanced IORI $593,000. As of March 2002, IORI has repaid that amount to BCM.
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.
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.
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, 2001 and 2000
Consolidated Statements of Operations--Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity--Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows--Years Ended December 31, 2001, 2000 and 1999
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:
(b) Reports on Form 8-K:
A Current Report on Form 8-K, dated January 28, 2002, was filed with respect to Item 5. "Other Events and Regulation FD Disclosures," which reports the resignation of R. Douglas Leonhard and Edward G. Zampa as Directors of IORI and the election of Henry A. Butler as Director of IORI and the execution of the Second Amendment in the Olive Litigation.
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.
Dated: March 20, 2002 INCOME OPPORTUNITY REALTY INVESTORS, INC.
By: /s/ Ronald E. Kimbrough ----------------------------- Ronald E. Kimbrough Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Acting Principal Executive Officer)
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.
Signature Title Date --------- ----- ----
/s/ TED P. STOKELY Chairman of the Board and March 20, 2002 - ----------------------------- Director Ted P. Stokely
/s/ HENRY A. BUTLER Director March 20, 2002 - ----------------------------- Henry A. Butler
/s/ EARL D. CECIL Director March 20, 2002 - ----------------------------- Earl D. Cecil
/s/ MARTIN L. WHITE Director March 20, 2002 - ----------------------------- Martin L. White
/s/ RONALD E. KIMBROUGH Executive Vice President and March 20, 2002 - ----------------------------- Chief Financial Officer Ronald E. Kimbrough (Principal Financial and Accounting Officer and Acting Principal Executive Officer)