10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2000 ------------- Commission File Number 1-14784 ------- INCOME OPPORTUNITY REALTY INVESTORS, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) NEVADA 75-2615944 ------------------------------- ------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 10670 North Central Expressway, Suite 300, Dallas, Texas, 75231 ---------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (214) 692-4700 ------------------------------ (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- Common Stock, $.01 par value 1,518,200 ---------------------------- -------------------------------- (Class) (Outstanding at July 31, 2000) 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ----------------------------- The accompanying Consolidated Financial Statements have not been audited by independent certified public accountants, but in the opinion of the management of Income Opportunity Realty Investors, Inc. ("IORI"), all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the IORI's consolidated financial position, consolidated results of operations and consolidated cash flows at the dates and for the periods indicated have been included. INCOME OPPORTUNITY REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2000 1999 --------- ------------ (dollars in thousands, except per share) Assets ------ Real estate held for investment, net of accumulated depreciation ($5,978 in 2000 and $9,509 in 1999).................................... $ 67,950 $ 86,542 Investment in partnerships.......................... 82 907 Cash and cash equivalents........................... 18,297 722 Other assets (including $1,400 in 2000 and $107 in 1999 from affiliates)........................... 3,252 3,014 --------- --------- $ 89,581 $ 91,185 ========= ========= Liabilities and Stockholders' Equity ------------------------------------ Liabilities Notes and interest payable.......................... $ 48,559 $ 62,852 Other liabilities (including $13 in 2000 and $721 in 1999 to affiliates)........................ 2,481 4,342 --------- --------- 51,040 67,194 Commitments and contingencies Stockholders' equity Common Stock, $.01 par value; authorized, 10,000,000 shares; issued and outstanding, 1,530,500 shares in 2000 and 1,528,908 in 1999.................................. 15 15 Paid-in capital..................................... 64,882 64,874 Accumulated distributions in excess of accumulated earnings........................................... (26,321) (40,898) Treasury stock at cost, 6,000 shares in 2000........ (35) -- --------- --------- 38,541 23,991 --------- --------- $ 89,581 $ 91,185 ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 2 INCOME OPPORTUNITY REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------- ----------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (dollars in thousands, except per share) Property revenue Rents........................................... $ 3,623 $ 4,089 $ 7,738 $ 7,817 Property expense Property operations............................ 1,771 1,621 3,619 3,293 --------- --------- --------- --------- Operating income.............................. 1,852 2,468 4,119 4,524 Other income Interest........................................ 91 6 98 13 Equity in income/(loss) of partnerships.................................. (23) 253 (69) 305 Gain on sale of real estate.................... 16,119 -- 17,022 -- --------- --------- --------- --------- 16,187 259 17,051 318 Other expense Interest........................................ 1,356 1,464 2,771 2,835 Depreciation.................................... 613 675 1,324 1,318 Advisory fee to affiliate....................... 168 166 335 332 Net income fee to affiliate..................... 1,171 2 1,219 2 General and administrative...................... 289 173 487 329 --------- --------- --------- --------- 3,597 2,480 6,136 4,816 --------- --------- --------- --------- Net income...................................... $ 14,442 $ 247 $ 15,034 $ 26 ========= ========= ========= ========= Earnings Per Share Net income.................................... $ 9.43 $ .16 $ 9.82 $ .02 ========= ========= ========= ========= Weighted average Common shares used in computing earnings per share..................................... 1,530,345 1,526,785 1,530,379 1,526,416 ========= ========= ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 3 INCOME OPPORTUNITY REALTY INVESTORS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Six Months Ended June 30, 2000
Accumulated Distributions Common Stock in Excess of ------------------- Treasury Paid-In Accumulated Stockholders' Shares Amount Stock Capital Earnings Equity --------- ------ -------- --------- ------------- ------------ (dollars in thousands, except per share) Balance, January 1, 2000............... 1,528,908 $ 15 $ -- $ 64,874 $ (40,898) $ 23,991 Sale of Common Stock under dividend reinvestment plan.................................. 1,592 -- -- 8 -- 8 Repurchase 6,000 shares of Common Stock.......................... -- -- (35) -- -- (35) Dividends ($.30 per share)............. -- -- -- -- (457) (457) Net income............................. -- -- -- -- 15,034 15,034 --------- ------ -------- --------- ------------- ------------ Balance, June 30, 2000................. 1,530,500 $ 15 $ (35) $ 64,882 $ (26,321) $ 38,541 ========= ====== ======== ========= ============= ============
The accompanying notes are an integral part of these Consolidated Financial Statements. 4 INCOME OPPORTUNITY REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, --------------------- 2000 1999 -------- -------- (dollars in thousands) Cash Flows from Operating Activities Rents collected...................................... $ 7,793 $ 7,818 Payments for property operations..................... (3,493) (3,175) Interest collected................................... 98 13 Interest paid........................................ (2,651) (2,734) Advisory and net income fee (paid to)/refunded by affiliate...................................... (1,301) 6 General and administrative expenses paid............. (485) (342) Distributions from equity partnerships' operating cash flow......................................... 25 155 Other................................................ (522) 626 -------- -------- Net cash provided by (used in) operating activities....................................... (536) 2,367 Cash Flows from Investing Activities Funding of equity partnerships....................... (8) (2) Distributions from equity partnerships' investing cash flow............................... -- 1,155 Real estate improvements............................. (766) (1,622) Proceeds from sale of real estate.................... 25,931 -- Acquisition of real estate........................... (4,892) -- -------- -------- Net cash provided by (used in) investing activities....................................... 20,265 (469) Cash Flows from Financing Activities Payments on notes payable............................ (426) (452) Deferred financing costs............................. -- (37) Distributions from equity partnerships' financing cash flow......................................... 739 -- Sale of common stock under dividend reinvestment plan.............................................. 8 5 Purchase of treasury stock........................... (35) -- Dividends to stockholders............................ (453) (452) Net (payments) to affiliate.......................... (1,987) (579) -------- -------- Net cash (used in) financing activities............. (2,154) (1,515) Net increase in cash and cash equivalents............. 17,575 383 Cash and cash equivalents, beginning of period........ 722 103 -------- -------- Cash and cash equivalents, end of period.............. $ 18,297 $ 486 ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 5 INCOME OPPORTUNITY REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Six Months Ended June 30, -------------------- 2000 1999 -------- -------- (dollars in thousands) Reconciliation of net income to net cash provided by (used in) operating activities Net income........................................... $ 15,034 $ 26 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization...................... 1,393 1,428 Gain on sale of real estate........................ (17,022) -- Equity in (income)/loss of partnerships............ 69 (305) Distributions from equity partnerships' operating cash flow......................................... 25 155 (Increase) decrease in other assets................. (160) 902 Increase (decrease) in interest payable............. 51 (8) Increase in other liabilities....................... 74 169 -------- -------- Net cash provided by (used in) operating activities....................................... $ (536) $ 2,367 ======== ======== Schedule of noncash investing and financing activities Notes payable from acquisition of real estate...... $ 2,814 $ -- Notes payable assumed by buyer on sale of real estate...................................... (16,094) --
The accompanying notes are an integral part of these Consolidated Financial Statements. 6 INCOME OPPORTUNITY REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION ----------------------------- The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. Dollar amounts in tables are in thousands, except per share amounts. Operating results for the six month period ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information, refer to the Consolidated Financial Statements and notes thereto included in IORI's Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999 Form 10-K"). Certain balances for 1999 have been reclassified to conform to the 2000 presentation. NOTE 2. INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES -------------------------------------------------------- IORI owns a 36.3% general partner interest in Tri-City Limited Partnership ("Tri-City"), which owns the 70,275 sq. ft. Chelsea Square Shopping Center in Houston, Texas. 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 bears interest at a fixed rate of 10.24% per annum until February 2001 and thereafter at a variable rate, 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 cash. NOTE 3. REAL ESTATE ------------------- In 2000, IORI sold the following properties:
Net Sales Cash Debt Gain on Property Location Units/Sq.Ft. Price Received Discharged Sale ------------- --------------- ------------- -------- ---------- ---------- --------- First Quarter Apartments La Monte Park Houston, TX 128 Units $ 5,000 $ 1,066 $ 3,829 * $ 903 Second Quarter Apartments Renaissance Parc Dallas, TX 294 Units 17,198 4,536 12,265 * 1,213 Office Buildings Olympic Los Angeles, CA 46,685 Sq.Ft. 8,500 3,811 4,443 1,850 Saratoga Saratoga, CA 89,825 Sq.Ft. 25,000 17,709 6,968 13,056
------------ * Debt assumed by purchaser. 7 INCOME OPPORTUNITY REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. REAL ESTATE (Continued) ------------------- In 2000, IORI purchased the following properties:
Net Units/ Purchase Cash Debt Interest Maturity Property Location Sq.Ft./Acres Price Paid Incurred Rate Date -------------- ------------------ ------------ -------- ------- --------- --------- -------- Second Quarter Apartments Frankel Portfolio * Midland, TX 391 Units * $ 14,034 $ 2,905 $ 10,875 9.13% 07/03 Land Etheredge Collin County, TX 74.98 Acres 1,875 344 1,406 ** 10.0% 04/01 Fambrough Collin County, TX 75.07 Acres 1,877 345 1,408 ** 10.0% 04/01 Frankel Midland County, TX 1.01 Acres 41 43 -- -- --
------------ * Frankel portfolio consists of five apartments: 60 unit Brighton Court, 92 unit Del Mar Villas, 68 unit The Enclave, 57 unit Signature Place and 114 unit Sinclair Place. ** Seller financing. NOTE 4. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC. ----------------------------------------------------- Fees and cost reimbursements to Basic Capital Management, Inc. ("BCM"), a contractual advisor under the supervision of the Board of Directors, and its affiliates for the six months ended: June 30, 2000 ------- Fees Advisory................................... $ 335 Net income................................. 1,219 Property acquisition....................... 565 Real estate brokerage...................... 1,192 Mortgage brokerage and equity refinancing.. 7 Property and construction management and leasing commissions*..................... 330 ------- $ 3,648 ======= Cost reimbursements........................ $ 164 ======= ------------------- * Net of property management fees paid to subcontractors other than Regis Realty, Inc., which is owned by an affiliate of BCM. NOTE 5. OPERATING SEGMENTS -------------------------- Significant differences among the accounting policies of IORI's 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 each 8 INCOME OPPORTUNITY REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 5. OPERATING SEGMENTS (Continued) -------------------------- of the operating segments and allocates resources to each of them based on their net operating income and cash flow. Expenses that are not reflected in the segments are $487,000 and $329,000 of general and administrative expenses for the six months ended June 30, 2000 and 1999, respectively. Excluded from operating segment assets are assets of $21.7 million at June 30, 2000, and $3.4 million at June 30, 1999, 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 for the six months ended June 30 and each segment's assets at June 30. Commercial 2000 Properties Apartments Land Total ---------- ---------- ------ --------- Rents..................... $ 4,866 $ 2,872 $ -- $ 7,738 Property operations....... 1,984 1,635 -- 3,619 ---------- ---------- ------ --------- Segment operating income.. $ 2,882 $ 1,237 $ -- $ 4,119 ========== ========== ====== ========= Depreciation.............. $ 1,001 $ 323 $ -- $ 1,324 Interest.................. 1,767 934 70 2,771 Real estate improvements.. 483 283 -- 766 Assets.................... 38,660 25,249 4,041 67,950 Commercial Property sales: Properties Apartments Total ---------- ---------- --------- Sales price............... $ 33,500 $ 22,198 $ 55,698 Cost of sale.............. 18,594 20,082 38,676 ---------- ---------- --------- Gain on sale.............. $ 14,906 $ 2,116 $ 17,022 ========== ========== ========= Commercial 1999 Properties Apartments Total ---------- ---------- --------- Rents..................... $ 5,168 $ 2,649 $ 7,817 Property operations....... 2,141 1,152 3,293 ---------- ---------- --------- Segment operating income.. $ 3,027 $ 1,497 $ 4,524 ========== ========== ========= Depreciation.............. $ 1,015 $ 303 $ 1,318 Interest.................. 1,925 910 2,835 Real estate improvements.. 1,622 -- 1,622 Assets.................... 59,400 24,595 83,995
NOTE 6. COMMITMENTS AND CONTINGENCIES ------------------------------------- IORI is involved in various 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 IORI's financial condition, results of operations or liquidity. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------------------------------------------------------------------------ RESULTS OF OPERATIONS --------------------- Introduction ------------ IORI invests in equity interests in real estate through direct equity ownership and partnerships and has invested in mortgage loans on real estate. 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 June 30, 2000, were $18.3 million, compared with $722,000 at December 31, 1999. IORI's principal sources of cash have been, and will continue to be property operations, proceeds from property sales, financings and refinancings, partnership distributions and, to the extent necessary, advances from its advisor. IORI's cash from property operations (rents collected less payments for expenses applicable to rental income) decreased to $4.3 million for the six months ended June 30, 2000, from $4.6 million in 1999. The decrease was primarily due to the sale of La Monte Park Apartments, Renaissance Parc Apartments, Saratoga Office Building and Olympic Office Building in 2000, partially offset by the Meridian Apartments acquisition in 1999. General and administrative expenses paid increased to $485,000 in the six months ended June 30, 2000, from $342,000 in 1999. The increase was primarily due to an increase in legal fees, shareholder relations expenses, professional fees and advisor cost reimbursements. Distributions from equity partnerships' operating cash flow were $25,000 for the six months ended June 30, 2000, compared to $155,000 in 1999. No distributions from equity partnerships' investing cash flow were received in the six months ended June 30, 2000, compared to $1.2 million in 1999. The 1999 distribution was due to Tri-City's sale of Summit at Bridgewood Shopping Center in 1999. Distributions from equity partnerships' financing cash flow of $739,000 were received in the six months ended June 30, 2000. See NOTE 2. "INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES." Advisory and net income fee paid increased to $1.3 million in the six months ended June 30, 2000 from a refund of $6,000 in the six months ended June 30, 1999. The increase is primarily due to the net income fee of $1.3 million. No such fee was incurred in 1999. Under its advisory agreement, all or a portion of the annual advisory fee must be refunded by the advisor if the operating expenses of IORI exceed certain limits specified in the advisory agreement. IORI received a refund of $289,000 of its 1999 advisory fee in April 2000, compared to $167,000 of its 1998 advisory fee in March 1999. Other cash used in operating activities was $522,000 for the six months ended June 30, 2000, compared to cash provided of $626,000 in 1999. The change is primarily due to the funding of escrows and payments of prepaid expenses. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------------------------------------------------------------------------ RESULTS OF OPERATIONS (Continued) --------------------- Liquidity and Capital Resources (Continued) ------------------------------- In 2000, IORI paid dividends of $.30 per share or a total of $453,000, and 1,592 shares of Common Stock were sold through the dividend reinvestment program for a total of $8,000. In 2000, 6,000 shares of Common Stock were repurchased for a total of $35,000. There were no shares repurchased in 1999. In March 2000, IORI sold the 128 unit La Monte Park Apartments in Houston, Texas, for $5.0 million, receiving net cash of $1.1 million after the payment of various closing costs. The purchaser assumed the $3.8 million mortgage secured by the property. In April 2000, IORI purchased, in separate transactions, Etheredge and Fambrough land, 75.0 acre and 75.1 acre parcels of unimproved land in Collin County, Texas, for $1.9 million each. IORI paid a total of $689,000 in cash and obtained seller financing of the remaining $1.4 million of each of the purchase prices. In May 2000, IORI sold the 89,825 sq.ft. Saratoga Office Building in Saratoga, California, for $25.0 million, receiving net cash of $17.7 million after the payment of various closing costs. Also in May 2000, IORI sold the 46,685 sq.ft. Olympic Office Building in Los Angeles, California, for $8.5 million, receiving net cash of $3.8 million after the payment of various closing costs. In June 2000, IORI sold the 294 unit Renaissance Parc Apartments in Dallas, Texas, for $17.2 million, receiving net cash of $4.5 million after the payment of various closing costs. The purchaser assumed the $12.3 million mortgage secured by the property. Also in June 2000, IORI purchased, the Frankel portfolio, consisting of the 60 unit Brighton Court Apartments, the 92 unit Del Mar Villas Apartments, the 68 unit Enclave Apartments, the 57 unit Signature Place Apartments and the 114 unit Sinclair Place Apartments in Midland, Texas, for $14.0 million. IORI paid $2.9 million in cash and obtained mortgage financing of $10.9 million. Further in June 2000, IORI purchased Frankel land, a 1.0 acre parcel of unimproved land in Midland County, Texas, for $41,000. IORI paid $43,000 in cash after the payment of various closing costs. 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, in the case of a property, the future cash flow from the property (undiscounted and without interest) is less than the carrying amount of the property. If impairment is found to exist, a provision for loss is recorded by a charge against earnings. The property review generally includes selective property inspections, discussions with the manager of the 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------------------------------------------------------------------------ RESULTS OF OPERATIONS (Continued) --------------------- Liquidity and Capital Resources (Continued) ------------------------------- property visits to selected properties in the area and a review of the following: (1) the property's current rents compared to market rents, (2) the property's expenses, (3) the property's maintenance requirements, and (4) the property's cash flows. Results of Operations --------------------- For the three and six months ended June 30, 2000, IORI had net income of $14.4 million and $15.0 million as compared with net income of $247,000 and $26,000 for the corresponding periods in 1999. Fluctuations in components of revenue and expense between the 1999 and 2000 periods are discussed below. Rents in the three and six months ended June 30, 2000 of $3.6 million and $7.7 million approximated the $4.1 million and $7.8 million in the corresponding periods in 1999. Rents for the remainder of 2000 are expected to increase with the purchase of the Frankel portfolio. Property operations expense in the three and six months ended June 30, 2000 of $1.8 million and $3.6 million approximated the $1.6 million and $3.3 million in the corresponding periods in 1999. Interest income in the three and six months ended June 30, 2000 was $91,000 and $98,000 as compared to $6,000 and $13,000 in the corresponding periods in 1999. The increase was due to the investment of cash received from the sale of two apartment and two commercial properties. Interest income for the remainder of 2000 is expected to decline as IORI selectively purchases properties. Equity in partnerships in the three and six months ended June 30, 2000 were losses of $23,000 and $69,000, as compared to income of $253,000 and $305,000. The decrease is mainly due to IORI's equity share of the 1999 gain recognized by Tri-City on the sale of one commercial property. For the three and six months ended June 30, 2000, gains on sale of real estate totaling $16.1 million and $17.0 million were recognized, $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 and $13.1 million on the sale of Saratoga Office Building. No such gains were recognized in 1999. Interest expense of $1.4 million in the three months ended June 30, 2000 was comparable to the $1.5 million in 1999 and was $2.8 million for the six months ended June 30, 2000 and 1999. Interest expense for the remainder of 2000 is expected to approximate that of the first and second quarter, unless IORI should selectively acquire or sell properties. Depreciation expense decreased to $613,000 in the three months ended June 30, 2000 compared to $675,000 in 1999 and remained constant at $1.3 million in the six months ended June 30, 2000 and 1999. The decrease in 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------------------------------------------------------------------------ RESULTS OF OPERATIONS (Continued) --------------------- Results of Operations (Continued) --------------------- the second quarter is due to sale of one apartment and two commercial properties. Depreciation is expected to increase from the second quarter with the purchase of the Frankel portfolio. Advisory fee expense of $168,000 and $335,000 in the three and six months ended June 30, 2000 was comparable to the $166,000 and $332,000 in 1999. IORI's gross assets are the basis for such fee. Advisory fee expense is expected to remain constant, unless IORI should selectively acquire or sell properties. Net income fee was $1.2 million and $2,000 in the three and six months ended June 30, 2000 and 1999. The net income fee is payable to IORI's advisor based on 7.5% of IORI's net income. General and administrative expense was $289,000 and $487,000 for the three and six months ended June 30, 2000 as compared to $173,000 and $329,000 in the corresponding periods in 1999. The three and six month increase was primarily due to an increase in legal fees, professional fees, shareholder relations expenses and advisor cost reimbursements. General and administrative expense for the remaining quarters of 2000 is expected to approximate that of the first and second quarter of 2000. Tax Matters ----------- As more fully discussed in IORI's 1999 Form 10-K, IORI has elected and, in management's opinion, qualified, to be taxed as a real estate investment trust ("REIT"), as defined under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, (the "Code"). To continue to qualify for federal taxation as a REIT under the Code, 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. The Code also requires a REIT to distribute at least 95% of its REIT taxable income plus 95% of its net income from foreclosure property, all as defined in Section 857 of the Code, on an annual basis to shareholders. Inflation --------- The effects of inflation on IORI's operations are not quantifiable. Revenues from apartment operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect the sales value 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. Environmental Matters --------------------- Under various federal, state and local environmental laws, ordinances and regulations, IORI may be potentially liable for removal or 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------------------------------------------------------------------------ RESULTS OF OPERATIONS (Continued) --------------------- Environmental Matters (Continued) --------------------- 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. Year 2000 --------- Even though January 1, 2000, has passed and no adverse impact from the transition to the year 2000 was experienced, no assurance can be provided that IORI's suppliers and tenants have not been affected in a manner that is not yet apparent. As a result, management will continue to monitor IORI's year 2000 compliance and the year 2000 compliance of IORI's suppliers and tenants. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK ----------------------------------------------------------------------- At June 30, 2000, IORI's exposure to a change in interest rates on its debt is as follows:
Weighted Effect of 1% Average Increase In Balance Interest Rate Base Rates ---------- ------------- ------------ (Amounts in thousands, except per share) Wholly-owned debt: Variable rate.................. $ 29,711 10.96% $ 296 Fixed rate..................... 18,848 8.45% -- -------- ------ $ 48,559 $ 296 ======== ====== Total decrease in IORI's annual net income..................... $ 296 ======
----------------------------------------- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS -------------------------- Olive Litigation. In February 1990, IORI, together with Continental Mortgage and Equity Trust ("CMET"), National Income Realty Trust and Transcontinental Realty Investors, Inc. ("TCI"), three real estate 14 ITEM 1. LEGAL PROCEEDINGS (Continued) -------------------------- 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 (the "Olive Litigation"). 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 of Directors retain a management/compensation consultant or consultants to evaluate the fairness of IORI's advisory contract with Basic Capital Management, Inc. and any contract of its affiliates with TCI, CMET and IORI, including, but not limited to, the fairness to TCI, CMET and IORI 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. 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 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. The Board believes that the provisions of the Settlement, the Modification and Olive Amendment terminated on April 28, 1999. However, plaintiffs' counsel has asserted that certain provisions continue to be effective after the termination date. This matter is pending before the Court. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ----------------------------------------- (a) Exhibits: Exhibit Number Description ------- --------------------------------------------------------- 27.0 Financial Data Schedule, filed herewith. 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (Continued) ----------------------------------------- (b) Reports on Form 8-K as follows: A Current Report on Form 8-K, dated June 15, 2000, was filed June 22, 2000, with respect to ITEM 5. "OTHER EVENTS," which reports the resignation of two directors. A Current Report on Form 8-K, dated May 25, 2000, was filed August 2, 2000, with respect to ITEM 2. "ACQUISITIONS AND DISPOSITION OF ASSETS," and ITEM 7. "FINANCIAL STATEMENTS AND EXHIBITS," which reports the acquisition of the Frankel Portfolio and Etheredge, Fambrough and Frankel land as well as the disposition of La Monte Park Apartments, Renaissance Parc Apartments, Olympic Office Building and Saratoga Office Building. 16 SIGNATURE PAGE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INCOME OPPORTUNITY REALTY INVESTORS, INC. Date: August 14, 2000 By: /s/ Karl L. Blaha ------------------------ ------------------------------------- Karl L. Blaha President Date: August 14, 2000 By: /s/ Mark W. Branigan ------------------------ ------------------------------------- Mark W. Branigan Executive Vice President and Chief Financial Officer (Principal Financial Officer) 17 INCOME OPPORTUNITY REALTY INVESTORS, INC. EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the Quarter Ended June 30, 2000 Exhibit Page Number Description Number ------- ------------------------------------------------ ------ 27.0 Financial Data Schedule. 19 18