10-K405 1 0001.txt FORM 10-K ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Year Ended December 31, 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.) 1800 Valley View Lane Suite 300, Dallas, Texas 75234 (Address of Principal Executive Offices) (Zip Code)
(469) 522-4200 (Registrant's Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.01 par value American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 2, 2001, the Registrant had 1,514,045 shares of Common Stock outstanding. Of the total shares outstanding 651,580 were held by other than those who may be deemed to be affiliates, for an aggregate value of $5,603,588 based on the last trade as reported on the American Stock Exchange on March 2, 2001. The basis of this calculation does not constitute a determination by the Registrant that all of such persons or entities are affiliates of the Registrant as defined in Rule 405 of the Securities Act of 1933, as amended. Documents Incorporated by Reference: NONE ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- INDEX TO ANNUAL REPORT ON FORM 10-K
Page ---- PART I Item 1. Business......................................................... 3 Item 2. Properties....................................................... 5 Item 3. Legal Proceedings................................................ 9 Item 4. Submission of Matters to a Vote of Security Holders.............. 10 PART II Item 5. Market for the Registrant's Shares of Common Stock and Related Stockholder Matters..................................................... 11 Item 6. Selected Financial Data.......................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 12 Item 7A. Quantitative and Qualitative Disclosures Regarding Market Risk.. 16 Item 8. Financial Statements and Supplementary Data...................... 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................... 39 PART III Item 10. Directors, Executive Officers and Advisor of the Registrant..... 39 Item 11. Executive Compensation.......................................... 44 Item 12. Security Ownership of Certain Beneficial Owners and Management.. 46 Item 13. Certain Relationships and Related Transactions.................. 46 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8- K....................................................................... 48 Signature Page........................................................... 49
2 PART I ITEM 1. BUSINESS Income Opportunity Realty Investors, Inc. ("IORI"), a Nevada corporation, is the successor to a California business trust organized on December 14, 1984, which commenced operations on April 15, 1985. IORI has elected to be treated as a Real Estate Investment Trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). IORI has, in the opinion of management, qualified for federal taxation as a REIT for all periods since May 1, 1985. At December 31, 2000, 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. In 2000, IORI purchased nine properties as well as sold seven properties. One $1.5 million mortgage loan was funded during 2000. IORI's real estate portfolio is more fully discussed in ITEM 2. "PROPERTIES." Business Plan IORI's business is investing in equity interests in real estate through direct equity investments and partnerships, and financing real estate and real estate related activities through investments in mortgage loans. IORI's real estate is located in the Pacific, Southeast and Southwest regions of the continental United States. Information regarding IORI's real estate portfolio is set forth in ITEM 2. "PROPERTIES," and in Schedule III to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." IORI's business is not seasonal. Management has determined to continue to pursue a balanced investment strategy, seeking both current income and capital appreciation. With respect to new investments, management's plan of operation is to acquire higher class apartment and commercial properties in keeping with the current class of properties in IORI's real estate portfolio. In 2000, IORI began making higher risk, higher reward investments in unimproved land. In 2001, management intends to focus on income producing property acquisitions to maintain a balance between income producing and non-income producing properties. Management does not expect that IORI will seek to fund or acquire additional mortgage loans. IORI may, however, originate mortgage loans in conjunction with providing purchase money financing of a property sale. Management also intends to continue its strategy of maximizing each property's operating income by aggressive property management through closely monitoring expenses while at the same time making property renovations and/or improvements where appropriate. While renovation and/or improvement expenditures increase the amount of revenue required to cover operating expenses, management believes that such expenditures are necessary to maintain or enhance the value of IORI's properties. The Board of Directors currently intends to continue its policy of prohibiting IORI from incurring aggregate secured and unsecured indebtedness in excess of 300% of IORI's net asset value (defined as the book value of all assets of IORI minus all of its liabilities); however, the Board may alter such policy at any time. Management of the Company Although the Board of Directors is directly responsible for managing the affairs of IORI and for setting the policies which guide it, the day-to-day operations of IORI are performed by Basic Capital Management, Inc. ("BCM"), a contractual advisor under the supervision of the Board. The duties of BCM include, among other things, locating, investigating, evaluating and recommending real estate and mortgage note investment and sales opportunities, as well as financing and refinancing sources. BCM also serves as a consultant in connection with IORI's business plan and investment decisions made by the Board. BCM is a company owned by a trust for the benefit of the children of Gene E. Phillips. Mr. Phillips serves as a representative of his children's trust, which owns BCM and, in such capacity had, until June 2000, 3 substantial contact with the management of BCM and input with respect to its performance of advisory services to IORI. BCM is more fully described in ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT--The Advisor." BCM has been providing advisory services to IORI since March 28, 1989. Renewal of BCM's advisory agreement was approved by the Board of Directors on August 18, 2000. BCM also serves as advisor to Transcontinental Realty Investors, Inc. ("TCI") and Directors of IORI are also directors of TCI. BCM also serves as Advisor to American Realty Investors, Inc. ("ARI"). Karl L. Blaha, President of IORI, also serves as President of ARI, TCI and BCM and the officers of IORI also serve as officers of ARI, TCI and BCM. As of March 2, 2001, ARI and TCI owned approximately 27.1% and 22.8%, respectively, of IORI's outstanding shares of Common Stock and BCM owned approximately 7.1% of IORI's outstanding shares of Common Stock. Since February 1, 1990, affiliates of BCM have provided property management services to IORI. Currently Triad Realty Services, Ltd. ("Triad") provides such property management services. Triad subcontracts with other entities for the provision of property-level management services to IORI. The general partner of Triad is BCM. The limited partners of Triad are Gene E. Phillips and GS Realty Services, Inc. ("GS Realty"), which is a company not affiliated with Mr. Phillips or BCM. 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 Realty, Inc. ("Regis"), a related party, which is a company also 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. Regis also is entitled to receive real estate brokerage commissions in accordance with the terms of a nonexclusive brokerage agreement as discussed in ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR TO THE REGISTRANT--The Advisor." IORI has no employees. Employees of BCM render services to IORI. Competition The real estate business is highly competitive and IORI competes with numerous entities engaged in real estate activities (including certain entities described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Related Party Transactions"), some of which have greater financial resources than those of IORI. Management believes that success against such competition is dependent upon the geographic location of the property, the performance of the property-level managers in areas such as marketing, collection and control of operating expenses, the amount of new construction in the area and the maintenance and appearance of the property. Additional competitive factors with respect to commercial properties are the ease of access to the property, the adequacy of related facilities, such as parking, and sensitivity to market conditions in setting rent levels. With respect to apartments, competition is also based upon the design and mix of units and IORI's ability to provide a community atmosphere for the tenants. Management believes that beyond general economic circumstances and trends, the rate at which properties are renovated or the rate new properties are developed in the vicinity of each of IORI's properties also are competitive factors. To the extent that IORI seeks to sell any of its properties, the sales prices for such properties may be affected by competition from other real estate entities and financial institutions also attempting to sell their properties located in the same areas as well as aggressive buyers attempting to penetrate or dominate a particular market. As described above and in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Related Party Transactions," the officers and Directors of IORI also serve as officers or directors of certain other entities, also advised by BCM, and which have business objectives similar to those of IORI. IORI's Directors, officers and advisor owe fiduciary duties to such other entities as well as to IORI under applicable law. In determining to which entity a particular investment opportunity will be allocated, the officers, Directors and advisor consider the respective investment objectives of each entity and the appropriateness of a particular investment in light of each entity's existing real estate and mortgage notes receivable portfolios. To the extent 4 that any particular investment opportunity is appropriate to more than one of the entities, the investment opportunity will be allocated to the entity which has funds available for investment for the longest period of time, or, if appropriate, the investment may be shared among all or some of such entities. In addition, as described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS---Certain Business Relationships," IORI also competes with other entities which are affiliates of BCM, which may have investment objectives similar to IORI's and that may compete with it in the acquisition, sale, leasing and financing of real estate. In resolving any potential conflicts of interest which may arise, BCM has informed management that it intends to continue to exercise its best judgment as to what is fair and reasonable under the circumstances in accordance with applicable law. Certain Factors Associated with Real Estate and Related Investments IORI is subject to all the risks incident to ownership and financing of real estate and interests therein, many of which relate to the general illiquidity of real estate investments. These risks include, but are not limited to, changes in general or local economic conditions, changes in interest rates and the availability of permanent mortgage financing which may render the acquisition, sale or refinancing of a property difficult or unattractive and which may make debt service burdensome, changes in real estate and zoning laws, increases in real estate taxes, federal or local economic or rent controls, floods, earthquakes, hurricanes and other acts of God and other factors beyond the control of management or BCM. The illiquidity of real estate investments also may impair the ability of management to respond promptly to changing circumstances. Management believes that such risks are partially mitigated by the diversification by geographic region and property type of IORI's real estate portfolio. However, to the extent property acquisitions are concentrated in any particular geographic region or property type, the advantages of diversification may be mitigated. ITEM 2. PROPERTIES IORI's principal offices are located at 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, 2000, 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 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, 2000, 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, 2000, 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, 2000, one of IORI's properties, the Travelers land parcel, exceeded 10% of IORI's total assets. At December 31, 2000, 92% of IORI's assets consisted of owned properties and less than 1% consisted of investments in partnerships. The remaining 8% 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." 5 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. [MAP APPEARS HERE] 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, 2000, 92% 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. 6 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, 2000.
Commercial Region Apartments Properties ------ ---------- ---------- Pacific................................................ -- % 69% Southwest.............................................. 100 18 Southeast.............................................. -- 13 --- --- 100% 100% === ===
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 241 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 2000 is as follows: Owned properties at January 1, 2000...................................... 14 Properties purchased..................................................... 9 Properties sold.......................................................... 7 --- Owned properties at December 31, 2000.................................... 16 ===
Properties Held for Investment. Set forth below are IORI's owned properties at December 31, 2000, 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, 2000, 1999 and 1998:
Rent Per Square Foot Occupancy % -------------------- -------------- Property Location Units/ Square Footage 2000 1999 1998 2000 1999 1998 -------- -------------------- -------------------------- ------ ------ ------ ---- ---- ---- Apartments Brighton Court.......... Midland, TX 60 Units/90,672 Sq. Ft. $ .53 $ * $ * 93 * * Del Mar................. Midland, TX 92 Units/105,348 Sq. Ft. .50 * * 98 * * Enclave................. Midland, TX 68 Units/89,734 Sq. Ft. .56 * * 93 * * Meridian................ Midland, TX 280 Units/ 264,000 Sq. Ft. .41 .46 * 95 69 * Signature Place......... Midland, TX 57 Units/72,480 Sq. Ft. .56 * * 86 * * Sinclair Place.......... Midland, TX 114 Units/91,529 Sq. Ft. .49 * * 96 * * Treehouse............... San Antonio, TX 106 Units/ 88,957 Sq. Ft. .83 .80 .78 95 96 96 Office Buildings 2010 Valley View........ Farmers Branch, TX 39,568 Sq. Ft. 17.40 16.26 16.50 86 64 19 5600 Mowry.............. Newark, CA 56,120 Sq. Ft. 24.64 22.94 19.86 100 100 58 Akard Plaza............. Dallas, TX 42,895 Sq. Ft. 15.46 15.34 13.47 91 92 92 Chuck Yeager............ Chantilly, VA 60,060 Sq. Ft. 11.21 14.70 13.39 41 41 72 Daley Plaza............. San Diego, CA 122,795 Sq. Ft. 15.32 14.68 12.53 88 79 74 La Mesa Village......... La Mesa, CA 92,611 Sq. Ft. 16.87 17.29 16.47 77 88 89 Westlake Village........ Westlake Village, CA 45,500 Sq. Ft. 18.10 16.96 14.44 52 70 79 Land Frankel................. Midland County, TX 1.01 Acres Travelers............... Farmers Branch, TX 204 Acres
-------- * Property was purchased in 1999 or 2000. 7 In 2000, IORI purchased the following properties:
Net Purchase Cash Debt Interest Maturity Property Location Units/Acres Price Paid Incurred Rate Date -------- ------------------ ------------------------- -------- ------- -------- -------- -------- (dollars in thousands) Apartments Frankel Portfolio(1).... Midland, TX 391 Units/123,184 Sq. Ft. $14,034 $ 3,784 $10,875 9.13% 07/03 Land Etheredge............... Collin County, TX 74.98 Acres 1,875 391 1,406(2) 10.0% 04/01 Fambrough............... Collin County, TX 75.07 Acres 1,877 592 1,408(2) 10.0% 04/01 Frankel................. Midland County, TX 1.01 Acres 41 43 -- -- -- Travelers............... Farmers Branch, TX 204 Acres 28,650 13,117 12,000 14.0% 12/01
-------- (1) 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. In 2000, IORI sold the following properties:
Gain Sales Net Cash Debt on Property Location Units/Sq.Ft./Acres Price Received Discharged Sale -------- ----------------- ------------------------ ------- -------- ---------- ------ (dollars in thousands) Apartments East Point.............. Mesquite, TX 126 Units/113,138 Sq.Ft. $ 5,575 $ 1,804 $ 3,242 $2,179 La Monte Park........... Houston, TX 128 Units/123,184 Sq.Ft. 5,000 1,066 3,829(1) 903 Renaissance Parc........ Dallas, TX 294 Units/293,654 Sq.Ft. 17,198 4,536 12,265(1) 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 Land Etheredge............... Collin County, TX 74.98 Acres 2,341 754 1,406 194 Fambrough............... Collin County, TX 75.07 Acres 2,338 754 1,408 194
-------- (1) Debt assumed by purchaser. Partnership Properties. Set forth below is the commercial property owned by each of the two partnerships in which IORI is an equity investee and the average annual rental rate and occupancy thereof at December 31, 2000, 1999 and 1998:
Rent per Square Foot Occupancy % ------------------ -------------- Property Location Square Footage 2000 1999 1998 2000 1999 1998 -------- ----------- --------------- ------ ----- ----- ---- ---- ---- Shopping Center Chelsea Square... Houston, TX 70,275 Sq. Ft. $ 9.31 $8.78 $8.58 77 100 100 Office Building Eton Square...... Tulsa, OK 222,654 Sq. Ft. 10.52 9.77 * 59 87 *
-------- * Partnership interest was purchased in 1999. IORI owns a 36.3% general partner interest and TCI owns a 63.7% limited partner interest in Tri-City Limited Partnership ("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 8 costs. The mortgage bore interest at a fixed rate of 10.24% per annum until February 2001 and a variable rate thereafter, currently, 10.0% 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. The loan bears interest at 18.0% per annum, requires monthly payments of interest only and matures in January 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 received distributions of $25,000 from NIA in 2000, and advanced the partnership $13,000. ITEM 3. LEGAL PROCEEDINGS Olive Litigation In February 1990, IORI, together with National Income Realty Trust, Continental Mortgage and Equity Trust ("CMET") and TCI, three real estate entities with, at the time, the same officers, directors or trustees and advisor as IORI, entered into a settlement (the "Settlement") of a class and derivative action entitled Olive et al. v. National Income Realty Trust et al., relating to the operation and management of each of the entities. On April 23, 1990, the Court granted final approval of the terms of the Settlement. 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 9 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 Gotham Partners, 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF COMMON STOCK AND RELATED SHAREHOLDER MATTERS IORI's Common Stock is traded on the American Stock Exchange ("AMEX") under the symbol "IOT". The following table sets forth the high and low prices for IORI's Common Stock as reported on the AMEX.
QUARTER ENDED HIGH LOW ------------- ---- --- March 31, 2001 (through March 2, 2001).................. $ 9/5///32/ $7 3/4 March 31, 2000.......................................... 7 1/2 5 1/4 June 30, 2000........................................... 7 1/2 2 September 30, 2000...................................... 10 1/4 6 3/4 December 31, 2000....................................... 9 1/4 8 March 31, 1999.......................................... 8 6 3/8 June 30, 1999........................................... 7 3/4 5 5/8 September 30, 1999...................................... 7 1/8 5 1/8 December 31, 1999....................................... 5 7/8 4 3/4
As of March 2, 2001, the closing price of IORI's Common Stock on the AMEX was $8.60 per share. As of March 2, 2001, IORI's Common Stock was held by 1,503 holders of record. IORI paid dividends in 2000 and 1999 as follows:
Amount Date Declared Record Date Payable Date Per Share ----------------- ------------------ ------------------ --------- February 10, 2000 March 15, 2000 March 31, 2000 $.15 June 6, 2000 June 15, 2000 June 30, 2000 .15 September 8, 2000 September 19, 2000 September 29, 2000 .15 March 4, 1999 March 15, 1999 March 31, 1999 $.15 June 2, 1999 June 14, 1999 June 30, 1999 .15 September 9, 1999 September 20, 1999 October 5, 1999 .15 November 22, 1999 December 15, 1999 December 31, 1999 .15
IORI 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. 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, 2000, a total of 218,804 shares had been repurchased at a cost of $1.9 million. 19,900 shares were repurchased in 2000 at a total cost of $134,000. 11 ITEM 6. SELECTED FINANCIAL DATA
For the Years Ended December 31, -------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- (dollars in thousands, except per share) EARNINGS DATA Rents................... $ 13,731 $ 15,968 $ 14,326 $ 12,221 $ 8,666 Property expense........ 6,969 6,768 6,462 5,900 4,358 ---------- ---------- ---------- ---------- ---------- Operating income........ 6,762 9,200 7,864 6,321 4,308 Interest income......... 319 29 172 266 339 Income (loss) from equity partnerships.... (61) 148 113 52 85 ---------- ---------- ---------- ---------- ---------- Gain on sale of real estate................. 20,878 1,525 180 3,953 -- ---------- ---------- ---------- ---------- ---------- 21,136 1,702 465 4,271 424 Other expense........... 11,104 9,580 9,008 7,275 5,300 ---------- ---------- ---------- ---------- ---------- Net income (loss)....... $ 16,794 $ 1,322 $ (679) $ 3,317 $ (568) ========== ========== ========== ========== ========== PER SHARE DATA Net income (loss)....... $ 11.03 $ .87 $ (.44) $ 2.18 $ (.37) ========== ========== ========== ========== ========== Dividends per share..... $ .45 $ .60 $ .60 $ .40 $ .40 Weighted average Common shares outstanding..... 1,522,510 1,527,386 1,521,832 1,519,888 1,530,008 December 31, -------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- (dollars in thousands, except per share) BALANCE SHEET DATA Real estate held for investment, net........ $ 86,277 $ 86,542 $ 83,691 $ 81,914 $ 46,693 Real estate held for sale, net.............. -- -- -- -- 6,623 Notes and interest receivable, net........ 1,500 -- -- 2,010 1,998 Total assets............ 96,519 91,185 88,695 90,309 63,593 Notes and interest payable................ 54,206 62,852 60,786 61,323 38,957 Stockholders' equity.... 39,998 23,991 23,560 25,131 22,381 Book value per share.... $ 26.42 $ 15.69 $ 15.44 $ 16.53 $ 14.63
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. Liability and Capital Resources Cash and cash equivalents at December 31, 2000, totaled $2.1 million compared to $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 and refinancings and partnership distributions. Although management anticipates that IORI will generate excess cash from operations in 2001 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 $1.9 million in 2000 as compared to $3.3 million provided by operating activities in 1999. The primary factors affecting cash flow from operating activities are discussed in the following paragraphs. 12 Cash flow from property operations (rents collected less payments for property operating expenses) decreased to $6.6 million in 2000 from $9.7 million in 1999. A decrease of $3.2 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 $900,000 from the purchase of six apartments in 2000 and 1999. Interest collected increased to $310,000 in 2000 from $29,000 in 1999. This increase was due to an increase in short-term investment income and the funding of one mortgage note receivable in 2000. Interest paid on notes payable decreased to $5.0 million in 2000 from $5.5 million in 1999. A decrease of $1.6 million in interest payments was due to the sale of five properties in 2000 and one property in 1999. The decrease was offset in part by an increase of $971,000 from the purchase of eight properties in 2000 and 1999. Management believes that interest paid on notes payable will increase as IORI continues to acquire properties on a leveraged basis. Advisory and net income fee paid to affiliate increased to $2.6 million in 2000 from $388,000 in 1999. The increase is due to an increase in the net income fee paid due to an increase in IORI's net income, the basis for such fee. The remaining increase was due to an increase in gross assets and no advisory fee refund in 2000. See NOTE 8. "ADVISORY AGREEMENT." In 2000, IORI made improvements to its properties totaling $1.9 million, purchased five apartments and four parcels of land for a total of $46.5 million, paying $17.9 million in cash and obtaining mortgage financing of $25.7 million, and sold three apartments, two office buildings and two parcels of land for a total of $66.0 million, receiving net cash of $30.4 million after the payoff of $33.6 million in mortgage debt and the payment of various closing costs. In 2000, IORI did not refinance any properties. During 2000, IORI made scheduled mortgage principal payments totaling $18.2 million. Scheduled principal payments on notes payable of $14.6 million are due in 2001. For those mortgages that come due in 2001, it is management's intent to either seek an extension of the due dates one or more years, or refinance the debt on a long-term basis, or pay off the debt at maturity, 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 2000, IORI received no distributions from Tri-City's operating cash flow, but did receive a distribution of $739,000 from its financing cash flow and advanced $45,000 to the partnership. IORI owns a 40% general partner interest in the NIA partnership. In 2000, IORI received distributions of $25,000 from NIA and made a $13,000 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 2000. See NOTE 4. "INVESTMENT IN EQUITY METHOD PARTNERSHIPS." IORI paid dividends to stockholders totaling $685,000 or $.45 per share in 2000 and $908,000 or $.60 per share in 1999. 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 are anticipated in 2001 and that IORI had no REIT taxable income that required a distribution. In 2000, stockholders purchased 5,037 shares of Common Stock through the dividend reinvestment program for a total of $32,000. IORI repurchased 19,900 shares of Common Stock on the open market in 2000 for a total of $134,000. No shares were repurchased in 1999. 13 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 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. Rents in 2001 are expected to increase from a full year of operations of the apartments purchased in 2000, and from increased occupancy and rental rates at IORI's 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. Interest income is expected to be minimal in 2001. 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. Interest expense in 2001 is expected to decrease from 2000 due to a decrease in outstanding debt. 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. Depreciation expense in 2001 is expected to approximate 2000. 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. The advisory fee is expected to approximate 2000. 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. 14 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 $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." 1999 Compared to 1998. IORI reported net income of $1.3 million in 1999, as compared to a net loss of $679,000 in 1998. Net income in 1999 included gains on sale of real estate of $1.5 million whereas 1998's net loss included gains on sale of real estate of $180,000. The primary factors contributing to IORI's 1999 net income are discussed in the following paragraphs. Rents increased to $16.0 million in 1999 from $14.3 million in 1998. Of this increase, $1.6 million was due to higher rents and occupancy rates, primarily at IORI's office buildings and $251,000 was attributable to a full year of operations of an office building construction of which was completed in 1998. This increase was partially offset by a decrease of $182,000 due to one office building being sold in 1999. Interest income decreased to $29,000 in 1999 from the $172,000 in 1998. This decrease was due to a decrease in short-term investment income and the August 1998 collection of a note receivable. Property operations expense increased to $6.8 million in 1999 from $6.5 million in 1998. This increase was attributable to a full year of operations of an office building construction of which was completed in 1998. Interest expense of $5.7 million in 1999 approximated the $5.8 million in 1998. Depreciation expense increased to $2.7 million in 1999 from $2.2 million in 1998. This increase was primarily due to an increase in the completion of office building construction. Advisory fee increased to $371,000 in 1999 from $329,000 in 1998. Such increase was attributable to an increase in IORI's gross assets, the basis for the fee and a decrease in the operating expense limitation refund. See NOTE 8. "ADVISORY AGREEMENT." A net income fee of $81,000 was earned by the advisor in 1999, the result of IORI having net income. No fee was incurred in 1998. General and administrative expense of $747,000 in 1999 approximated the $755,000 in 1998. Equity in income of partnerships increased to $148,000 in 1999 from $113,000 in 1998. The increase was due to an equity partnership acquisition of Eton Square and to increased rental rates at the partnership's commercial properties. In 1999, IORI recognized gains on sale of real estate totaling $1.5 million, $1.0 million being IORI's equity share of the gain recognized by Tri-City on the sale of two commercial properties, and $490,000 on IORI's sale of Town Center Plaza in November. See NOTE 2. "REAL ESTATE" and NOTE 4. "INVESTMENT IN EQUITY METHOD PARTNERSHIPS." In 1998, IORI recognized gains on sale of real estate totaling $180,000, its equity share of the gain recognized by Tri-City on the sale of two apartments. 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 15 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 1998, 1999 and 2000, 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 95% of its REIT taxable income plus 95% of its net income from foreclosure property on an annual basis to stockholders. 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, 2000. Anticipation of exposures or risk on positions that could possibly arise was not considered. IORI's ultimate interest rate risk and its affect on operations will depend on future capital market exposures, which cannot be anticipated with a probable assurance level. (Dollars in thousands.) Liabilities Notes payable Variable interest rate-fair value...................................... $42,344
2001 2002 2003 2004 2005 Thereafter Total ------- ------- ------- ------ ----- ---------- ------- Instrument's maturities............. $14,070 $11,435 $10,433 $2,732 $ -- $ 225 $38,895 Instrument's amortization........... 303 319 216 82 23 1,510 2,453 Interest.............. 4,215 2,210 1,402 428 183 2,063 10,501 Average rate.......... 11.2% 9.4% 9.2% 9.5% 10.4% 10.4% Fixed interest rate-fair value.................. $11,212 2001 2002 2003 2004 2005 Thereafter Total ------- ------- ------- ------ ----- ---------- ------- Instrument's maturities............. $ -- $ -- $ -- $ -- $ -- $11,178 $11,178 Instrument's amortization........... 188 199 186 235 257 340 1,405 Interest.............. 1,119 1,102 1,083 1,063 1,047 1,478 6,892 Average rate............ 9.0% 9.0% 9.0% 9.0% 9.0% 9.2%
16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Certified Public Accountants....................... 18 Consolidated Balance Sheets--December 31, 2000 and 1999.................. 19 Consolidated Statements of Operations--Years Ended December 31, 2000, 1999 and 1998........................................................... 20 Consolidated Statements of Stockholders' Equity--Years Ended December 31, 2000, 1999 and 1998..................................................... 21 Consolidated Statements of Cash Flows--Years Ended December 31, 2000, 1999 and 1998........................................................... 22 Notes to Consolidated Financial Statements............................... 24 Schedule III--Real Estate and Accumulated Depreciation................... 35 Schedule IV--Mortgage Loans on Real Estate............................... 37
All other schedules are omitted because they are not required, are not applicable or the information required is included in the Financial Statements or the notes thereto. 17 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, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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. 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, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with generally accepted accounting principles. 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 15, 2001 18 INCOME OPPORTUNITY REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS
December 31, ---------------- 2000 1999 ------- ------- (dollars in thousands, except per share) Assets Real estate held for investment............................. $91,837 $96,051 Less--Accumulated depreciation.............................. (5,560) (9,509) ------- ------- 86,277 86,542 Notes receivable............................................ 1,500 -- Investment in real estate partnerships...................... 141 907 Cash and cash equivalents................................... 2,087 722 Other assets (including $3,862 in 2000 and $107 in 1999 from affiliates)................................................ 6,514 3,014 ------- ------- $96,519 $91,185 ======= ======= Liabilities and Stockholders' Equity Liabilities Notes and interest payable.................................. $54,206 $62,852 Other liabilities (including $721 in 1999 to affiliates).... 2,315 4,342 ------- ------- 56,521 67,194 Commitments and contingencies Stockholders' equity Common Stock, $.01 par value; authorized 10,000,000 shares; issued and outstanding 1,514,045 shares in 2000 and 1,528,908 shares in 1999................................... 15 15 Paid-in capital............................................. 64,772 64,874 Accumulated distributions in excess of accumulated earnings................................................... (24,789) (40,898) ------- ------- 39,998 23,991 ------- ------- $96,519 $91,185 ======= =======
The accompanying notes are an integral part of these Consolidated Financial Statements. 19 INCOME OPPORTUNITY REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, ------------------------------ 2000 1999 1998 --------- --------- --------- (dollars in thousands, except per share) Property revenue Rents.......................................... $ 13,731 $ 15,968 $ 14,326 Property expense Property operations (including $602 in 2000, $618 in 1999 and $634 in 1998 to affiliates and related parties).......................... 6,969 6,768 6,462 --------- --------- --------- Operating income................................ 6,762 9,200 7,864 Other income Interest....................................... 319 29 172 Income (loss) from equity partnerships......... (61) 148 113 Gain on sale of real estate.................... 20,878 1,525 180 --------- --------- --------- 21,136 1,702 465 Other expense Interest....................................... 5,079 5,658 5,756 Depreciation................................... 2,450 2,723 2,168 Advisory fee to affiliate...................... 664 371 329 Net income fee to affiliate.................... 1,362 81 -- General and administrative (including $287 in 2000, $260 in 1999 and $228 in 1998 to affiliate).................................... 1,549 747 755 --------- --------- --------- 11,104 9,580 9,008 --------- --------- --------- Net income ............................... $ 16,794 $ 1,322 $ <679> ========= ========= ========= Earnings per share Net income .............................. $ 11.03 $ .87 $ <.44> ========= ========= ========= Weighted average shares of Common Stock used in computing earnings per share................... 1,522,510 1,527,386 1,521,832 ========= ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 20 INCOME OPPORTUNITY REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Distributions Common Stock in Excess of ----------------- Paid-in Accumulated Stockholders' Shares Amount Capital Earnings Equity --------- ------ ------- ------------- ------------- (dollars in thousands, except shares) Balance, January 1, 1998................... 1,519,888 $ 15 $64,804 $(39,688) $25,131 Sale of Common Stock under dividend reinvestment plan...... 6,155 -- 53 -- 53 Dividends ($.60 per share)................. -- -- -- (945) (945) Net (loss).............. -- -- -- (679) (679) --------- ---- ------- -------- ------- Balance, December 31, 1998................... 1,526,043 15 64,857 (41,312) 23,560 Sale of Common Stock under dividend reinvestment plan...... 2,865 -- 17 -- 17 Dividends ($.60 per share)................. -- -- -- (908) (908) Net income.............. -- -- -- 1,322 1,322 --------- ---- ------- -------- ------- Balance, December 31, 1999................... 1,528,908 15 64,874 (40,898) 23,991 Sale of Common Stock under dividend reinvestment plan...... 5,037 -- 32 -- 32 Repurchase of Common Stock.................. (19,900) -- (134) -- (134) Dividends ($.45 per share)................. -- -- -- (685) (685) Net income.............. -- -- -- 16,794 16,794 --------- ---- ------- -------- ------- Balance, December 31, 2000................... 1,514,045 $ 15 $64,772 $(24,789) $39,998 ========= ==== ======= ======== =======
The accompanying notes are an integral part of these Consolidated Financial Statements. 21 INCOME OPPORTUNITY REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, ------------------------- 2000 1999 1998 ------- ------- ------- (dollars in thousands) Cash Flows from Operating Activities Rents collected..................................... $13,638 $16,065 $14,326 Interest collected.................................. 310 29 182 Interest paid....................................... (5,036) (5,458) (5,540) Payments for property operations (including $602 in 2000, $618 in 1999 and $634 in 1998 to affiliate and related party)................................. (7,068) (6,325) (6,427) Advisory and net income fee paid to affiliate....... (2,576) (388) (534) General and administrative expenses paid (including $287 in 2000, $260 in 1999 and $228 in 1998 to affiliate)......................................... (1,185) (793) (798) Distributions from equity partnerships' operating cash flow.......................................... 25 155 181 Escrow funding...................................... -- -- (135) Other............................................... -- 34 (259) ------- ------- ------- Net cash provided by (used in) operating activities....................................... (1,892) 3,319 996 Cash Flows from Investing Activities Acquisition of interest in equity partnership....... -- (384) -- Funding of equity partnerships...................... (58) (39) (8) Real estate improvements............................ (1,947) (2,199) (3,945) Acquisition of real estate (including $1,514 in 2000 and $337 in 1999 to affiliate and related party)... (37,334) (5,287) -- Proceeds from sale of real estate................... 43,393 2,673 -- Distributions from equity partnership's investing cash flow.......................................... -- 2,027 399 Funding of note receivable.......................... (1,500) Collection of note receivable....................... -- -- 2,000 ------- ------- ------- Net cash provided by (used in) investing activities....................................... 2,554 (3,209) (1,554)
The accompanying notes are an integral part of these Consolidated Financial Statements. 22 INCOME OPPORTUNITY REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
For the Years Ended December 31, ----------------------------------- 2000 1999 1998 ----------- ---------- ---------- (dollars in thousands) Cash Flows from Financing Activities Proceeds from notes payable............... $ 22,875 $ 10,778 $ 800 Payments on notes payable................. (18,153) (8,681) (1,422) Deferred financing costs.................. 172 (258) (25) Distributions from equity partnership's financing cash flow...................... 739 -- -- Sale of Common Stock under dividend reinvestment plan........................ 32 17 53 Dividends to stockholders................. (685) (908) (945) Repurchase of Common Stock................ (134) -- -- Payments (to) from advisor................ (4,143) (439) 1,055 ----------- ---------- ---------- Net cash provided by (used in) financing activities............................. 703 509 (484) ----------- ---------- ---------- Net increase (decrease) in cash and cash equivalents............................... 1,365 619 (1,042) Cash and cash equivalents, beginning of year...................................... 722 103 1,145 ----------- ---------- ---------- Cash and cash equivalents, end of year..... $ 2,087 $ 722 $ 103 =========== ========== ========== Reconciliation of net income (loss) to net cash provided by (used in) operating activities Net income (loss)......................... $ 16,794 $ 1,322 $ (679) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation and amortization............ 2,450 2,967 2,297 Gain on sale of real estate.............. (20,878) (1,525) (180) Equity in (income) loss of partnerships.. 61 (148) (113) Distributions from equity partnerships' operating cash flow..................... 25 155 181 Decrease in interest receivable.......... -- -- 17 (Increase) decrease in other assets...... 338 127 (102) Increase (decrease) in interest payable.. (87) (44) 80 Increase (decrease) in other liabilities............................. (595) 465 (505) ----------- ---------- ---------- Net cash provided by (used in) operating activities............................. $ (1,892) $ 3,319 $ 996 =========== ========== ========== Schedule of noncash investing and financing activities Notes payable from purchase 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. 23 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 1999 and 1998 have been reclassified to conform to the 2000 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. Basis of consolidation. The Consolidated Financial Statements include the accounts of IORI and controlled subsidiaries and partnerships. All significant intercompany transactions and balances have been eliminated. Accounting estimates. In the preparation of the Consolidated Financial Statements in conformity with generally accepted accounting principles it was necessary for management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses for the year then ended. Actual results could differ from those estimates. Real estate held for investment and depreciation. Real estate held for investment is carried at cost. Statement of Financial Accounting Standards No. 121 ("SFAS No. 121") requires that a property be considered impaired, if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property. If impairment exists, an impairment loss is recognized by a charge against earnings equal to the amount by which the carrying amount of the property exceeds the fair value of the property. If impairment of a property is recognized, the carrying amount of the property is reduced by the amount of the impairment and a new cost for the property is established. Such new cost is depreciated over the property's remaining useful life. Depreciation is provided by the straight- line method over estimated useful lives, which range from 2 to 40 years. Revenue recognition on the sale of real estate. Sales of real estate are recognized when and to the extent permitted by Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No. 66"). Until the requirements of SFAS No. 66 for full profit recognition have been met, transactions are accounted for using either the deposit, the installment sale, the cost recovery or the financing method, whichever is appropriate. Investment in noncontrolled partnerships. The 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. 24 INCOME OPPORTUNITY REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. NOTE 2. REAL ESTATE In 2000, the following properties were purchased:
Purchase Net Cash Debt Interest Maturity Property Location Units/Acres Price Paid Incurred Rate Date -------- -------- ----------- -------- -------- -------- -------- -------- Apartments Frankel Portfolio(1).... Midland, TX 391 Units $14,034 $ 3,784 $10,875 9.13% 07/03 Land Etheredge............... Collin County, TX 74.98 Acres 1,875 391 1,406(2) 10.0 04/01 Fambrough............... Collin County, TX 75.07 Acres 1,877 592 1,408(2) 10.0 04/01 Frankel................. Midland County, TX 1.01 Acres 41 43 -- -- -- Travelers............... Farmers Branch, TX 204 Acres 28,650 13,117 12,000 14.0 12/01
-------- (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. In 2000, the following properties were sold:
Gain Sales Net Cash Debt on Property Location Units/ Sq.Ft./Acres Price Received Discharged Sale -------- -------- ------------------- ------- -------- ---------- ------ Apartments East Point.............. Mesquite, TX 126 Units $ 5,575 $1,804 $ 3,242 $2,179 La Monte Park........... Houston, TX 128 Units 5,000 1,066 3,829(1) 903 Renaissance Parc........ Dallas, TX 294 Units 17,198 4,536 12,265(1) 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 Land Etheredge............... Collin County, TX 74.98 Acres 2,341 754 1,406 194 Fambrough............... Collin County, TX 75.07 Acres 2,338 754 1,408 194
-------- (1) Debt assumed by purchaser. In 1999, the following property was purchased:
Purchase Net Cash Debt Interest Maturity Property Location Units Price Paid Incurred Rate Date -------- -------- --------- -------- -------- -------- -------- -------- Apartment Meridian................ Midland, TX 280 Units $5,375 $2,401 $2,992 8.85% 12/04
25 INCOME OPPORTUNITY REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In 1999, the following property was sold:
Sales Net Cash Debt Gain on Property Location Sq. Ft. Price Received Discharged Sale -------- -------------- -------------- ------ -------- ---------- ------- Shopping Center Town Center............. Boca Raton, FL 23,518 Sq. Ft. $3,200 $1,505 $1,168 $490
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. The loan bears interest at 18.0% per annum, requires monthly payments of interest only and matures in January 2002. The loan had an estimated fair value at December 31, 2000, equal to its principal balance of $1.5 million. NOTE 4. INVESTMENT IN EQUITY METHOD PARTNERSHIPS Investments in equity method partnerships consisted of the following:
2000 1999 ----- ---- Tri-City Limited Partnership ("Tri-City")....................... $(572) $194 Nakash Income Associates ("NIA")................................ 343 316 TCI Eton Square, L.P. ("Eton Square")........................... 370 397 ----- ---- $ 141 $907 ===== ====
IORI owns a 36.3% general partner interest in Tri-City, which at December 31, 2000, 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, 10.0% 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 26 INCOME OPPORTUNITY REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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:
2000 1999 -------- -------- Notes receivable.................................... $ 902 $ 902 Real estate, net of accumulated depreciation ($3,342 in 2000 and $1,600 in 1999) 17,788 17,936 Other assets........................................ 190 526 Notes payable....................................... (12,945) (11,134) Other liabilities................................... (652) (734) -------- -------- Partners' capital................................... $ 5,283 $ 7,496 ======== ========
IORI's share of the equity partnerships' capital was $892,000 in 2000 and $1.7 million in 1999.
2000 1999 1998 ------- -------- ------- Rents.......................................... $ 2,561 $ 1,873 $ 2,116 Interest income................................ 156 156 156 Interest expense............................... (1,165) (375) (260) Property operations expense.................... (1,197) (781) (1,077) Depreciation................................... (570) (371) (483) ------- -------- ------- Income (loss) before gains on sale of real estate........................................ (215) 502 452 Gain on sale................................... -- 2,851 496 ------- -------- ------- Net income (loss).............................. $ (215) $ 3,353 $ 948 ======= ======== ======= IORI's equity share of: 2000 1999 1998 ------- -------- ------- Income (loss) before gains on sale of real es- tate.......................................... $ (61) $ 148 $ 113 Gain on sale of real estate.................... -- 1,035 180 ------- -------- ------- Net income (loss).............................. $ (61) $ 1,183 $ 293 ======= ======== =======
NOTE 5. NOTES AND INTEREST PAYABLE Notes and interest payable consisted of the following:
2000 1999 ----------------- ----------------- Estimated Estimated Fair Book Fair Book Value Value Value Value --------- ------- --------- ------- Notes payable............................ $53,556 $53,931 $62,548 $62,490 ======= ======= Interest payable......................... 275 362 ------- ------- $54,206 $62,852 ======= =======
27 INCOME OPPORTUNITY REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Scheduled notes payable principal payments are due as follows: 2001................................................................. $14,561 2002................................................................. 11,953 2003................................................................. 10,835 2004................................................................. 3,049 2005................................................................. 280 Thereafter........................................................... 13,253 ------- $53,931 =======
Notes payable at December 31, 2000, bear interest at rates ranging from 7.75% to 14.0% and mature between 2001 and 2025. The mortgages are collateralized by deeds of trust on real estate with a net carrying value of $86.3 million. In 1999, mortgage debt totaling $7.8 million, secured by an apartment and two office buildings was refinanced. Net cash of $440,000 was received from the refinancings, after the payoff of $6.6 million in existing mortgage debt, the funding of escrows and the payment of various closing costs. The mortgages bear interest rates ranging from 7.95% to 10.39% per annum, require monthly payments of principal and interest totaling $61,622 and mature between August 2002 and January 2025. NOTE 6. DIVIDENDS Dividends were paid of $685,000 ($.45 per share) in 2000, $908,000 ($.60 per share) in 1999 and $945,000 ($.60 per share) in 1998. 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 and 1998 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 are 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, 2000: 2001................................................................. $ 6,196 2002................................................................. 5,025 2003................................................................. 4,434 2004................................................................. 3,251 2005................................................................. 2,682 Thereafter........................................................... 1,252 ------- $22,840 =======
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 28 INCOME OPPORTUNITY REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) representative of his children's trust which owns BCM and, in such capacity, had, until June 2000, substantial contact with the management of BCM and input with respect to its performance of advisory services to IORI. Renewal of the Advisory Agreement with BCM, was approved by the Board of Directors on August 18, 2000. Subsequent renewals of the Advisory Agreement with BCM do not require the approval of stockholders, but do require approval of the Board of Directors. Under the Advisory Agreement, BCM is required to annually formulate and submit for Board approval a budget and business plan containing a twelve-month forecast of operations and cash flow, a general plan for asset sales and purchases, borrowing activity and other investments. BCM is required to report quarterly to the Board on 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 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 $289,000 and $336,000, of the 1999 and 1998 annual advisory fee, respectively. 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. 29 INCOME OPPORTUNITY REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 partners of Triad are Gene E. Phillips and GS Realty Services, Inc. ("GS Realty"), a related party, which is a company not affiliated with Mr. Phillips or BCM. 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. NOTE 11. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC. Fees and cost reimbursements to BCM and its affiliates:
2000 1999 1998 ------ ------ ---- Fees Advisory............................................... $ 664 $ 371 $329 Net income............................................. 1,362 81 -- Real estate brokerage.................................. -- 337 -- Property acquisition................................... 417 -- -- Mortgage brokerage and equity refinancing.............. -- 78 8 Property and construction management and leasing commissions*.......................................... -- 618 634 ------ ------ ---- $2,443 $1,485 $971 ====== ====== ==== Cost reimbursements..................................... $ 287 $ 260 $228 ====== ====== ====
Fees paid to GS Realty, a related party to IORI.
2000 ------ Fees Property acquisition................................................ $ 925 Real estate brokerage............................................... 1,514 Property and construction management and leasing commissions*....... 602 ------ $3,041 ======
-------- * Net of property management fees paid to subcontractors, other than Regis, and affiliates of BCM. NOTE 12. INCOME TAXES For the years 2000, 1999 and 1998, 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 95% of its REIT taxable income, plus 95% of its taxable income from foreclosure property as defined in Section 857 of the Code, is distributed. 30 INCOME OPPORTUNITY REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) IORI had net income for federal income tax purposes before the application of operating loss carryforwards in 2000 and net losses for federal income tax purposes in 1999 and 1998. 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, 2000, IORI's tax basis in its net assets exceeded their basis for financial statement purposes by $1.9 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 95% of its financial statement income. Additionally, at December 31, 2000, IORI had tax net operating loss carryforwards of $1.7 million expiring through the year 2019. 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. 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 previous deferred gains on sale of real estate totaling $1.5 million and $1.7 million for 2000 and 1999, 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 $3.6 million and $1.2 million for 2000 and 1999, respectively. Excluded from operating segment assets are assets of $10.2 million at December 31, 2000, and $4.6 million at December 31, 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.
Commercial Land Properties Apartments Total ------- ---------- ---------- ------- 2000 Rents.................................. $ -- $ 8,200 $ 5,531 $13,731 Property operating expenses............ 9 3,786 3,174 6,969 ------- ------- ------- ------- Operating income (loss)................ $ (9) $ 4,414 $ 2,357 $ 6,762 ======= ======= ======= ======= Depreciation........................... $ -- $ 1,851 $ 599 $ 2,450 Interest............................... 186 3,131 1,762 5,079 Real estate improvements............... -- 1,935 12 1,947 Assets................................. 24,892 39,262 22,122 86,276 Property Sales Sales price............................ $ 4,679 $33,500 $27,773 $65,952 Cost of sale........................... 4,291 18,594 23,477 46,362 ------- ------- ------- ------- Gain on sale........................... $ 388 $14,906 $ 4,296 $19,590* ======= ======= ======= =======
-------- * Excludes a $1.3 million deferred gain on the sale of a property to an affiliate, on the affiliate's subsequent resale of the property. 31 INCOME OPPORTUNITY REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commercial Properties Apartments Total ---------- ---------- ------- 1999 Rents............................................ $ 10,639 $ 5,329 $15,968 Property operating expenses...................... 4,394 2,374 6,768 -------- ------- ------- Operating income................................. $ 6,245 $ 2,955 $ 9,200 ======== ======= ======= Depreciation..................................... $ 2,111 $ 612 $ 2,723 Interest......................................... 3,802 1,856 5,658 Real estate improvements......................... 2,199 -- 2,199 Assets........................................... 56,566 29,976 86,542 Commercial Properties Total ---------- ------- Property Sales Sales price...................................... $ 3,200 $ 3,200 Cost of sale..................................... 2,710 2,710 -------- ------- Gain on sale..................................... $ 490 $ 490 ======== ======= Commercial Properties Apartments Total ---------- ---------- ------- 1998 Rents............................................ $ 9,058 $ 5,268 $14,326 Property operating expenses...................... 3,852 2,610 6,462 -------- ------- ------- Operating income................................. $ 5,206 $ 2,658 $ 7,864 ======== ======= ======= Depreciation..................................... $ 1,573 $ 595 $ 2,168 Interest......................................... 3,898 1,858 5,756 Real estate improvements......................... 3,907 38 3,945 Assets........................................... 58,793 24,898 83,691
NOTE 14. QUARTERLY DATA The following is a tabulation of quarterly results of operations for the years 2000 and 1999 (unaudited).
Three Months Ended ------------------------------------------ March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- 2000 Rents.............................. $4,115 $ 3,623 $2,994 $ 2,999 Property expense................... 1,848 1,771 1,667 1,683 ------ ------- ------ ------- Operating income................. 2,267 1,852 1,327 1,316 Interest income.................... 7 91 108 113 Income (loss) in equity partnerships...................... (46) (23) (2) 10 Gain on sale of real estate........ 903 16,119 3,856 -- ------ ------- ------ ------- 864 16,187 3,962 123 Other expense...................... 2,539 3,597 2,401 2,567 ------ ------- ------ ------- Net income (loss).................. $ 592 $14,442 $2,888 $(1,128) ====== ======= ====== ======= Earnings per share Net income (loss).................. $ .39 $ 9.43 $ 1.88 $ (.67) ====== ======= ====== =======
32 INCOME OPPORTUNITY REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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.
Three Months Ended ----------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- 1999 Rents............................... $3,728 $4,089 $4,199 $3,952 Property expense.................... 1,672 1,622 1,783 1,691 ------ ------ ------ ------ Operating income.................. 2,056 2,467 2,416 2,261 Interest income..................... 7 6 10 6 Income (loss) in equity partnerships....................... 52 39 28 29 Gain on sale of real estate......... -- 213 822 490 ------ ------ ------ ------ 59 258 860 525 Other expense....................... 2,336 2,480 2,497 2,267 ------ ------ ------ ------ Net income (loss)................... $ (221) $ 245 $ 779 $ 519 ====== ====== ====== ====== Earnings per share Net income (loss)................... $ (.14) $ .16 $ .51 $ .34 ====== ====== ====== ======
In the second quarter of 1999, a gain on sale of real estate of $213,000 was recognized, IORI's share of the gain recognized by Tri-City, an equity partnership. In the third quarter of 1999, a gain on sale of real estate of $822,000 was recognized, IORI's share of the gain recognized by Tri-City. In the fourth quarter of 1999, a gain on sale of real estate of $490,000 was recognized from the sale of the Town Center Shopping Center. See NOTE 2. "REAL ESTATE" and NOTE 4. "INVESTMENT IN EQUITY METHOD PARTNERSHIPS." 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 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 33 INCOME OPPORTUNITY REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 Gotham Partners, 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. Liquidity. Although management anticipates that IORI will generate excess cash from operations in 2001, 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. 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 the first quarter of 2001, IORI increased its mortgage obligation secured by the 60,060 sq. ft., Chuck Yeager Office Building in Chantilly, Virginia, to $5.0 million from $2.0 million. IORI received $2.9 million in net proceeds after paying various lending fees. The new mortgage bears interest at 9.5% per annum, until February 2002, and at a variable rate thereafter, requires monthly payments of principal and interest of $22,126 and matures January 2004. 34 SCHEDULE III INCOME OPPORTUNITY REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000
Gross Amount Initial Cost Carried at End of Year(1) -------------------- ---------------------------- Life on Which Cost Depreciation Capitalized Accumu- in Latest Subsequent lated Date of Statement of Encum- Building & to Building & Depreci- Construc- Date Operation is Property/Location brances Land Improvements Acquisition Land Improvements Total ation tion Acquired Computed ----------------- ------- ------- ------------ ----------- ------- ------------ ------- -------- --------- -------- ------------ (dollars in thousands) Properties Held For Investment Apartments Brighton Court, Midland, TX..... $ 2,490 $ 339 $ 3,051 $ -- $ 339 $ 3,051 $ 3,390 $ 44 1983 06/00 40 years Del Mar, Midland, TX..... 2,382 324 2,919 -- 324 2,919 3,243 42 1983 06/00 40 years Enclave, Midland, TX..... 2,382 324 2,919 -- 324 2,919 3,243 42 1983 06/00 40 years Meridian, Midland, TX..... 2,949 1,138 4,552 -- 1,138 4,552 5,691 124 1983 12/99 40 years Signature Place, Midland, TX..... 1,949 265 2,388 -- 265 2,388 2,654 35 1983 06/00 40 years Sinclair Place, Midland, TX..... 1,624 221 1,990 -- 221 1,990 2,211 29 1983 06/00 40 years Treehouse, San Antonio, TX..... 2,673 375 2,124 258 375 2,382 2,757 749 1975 09/89 5-40 years Office Buildings 2010 Valley View, Farmers Branch, TX...... 1,832 120 479 2,981 120 3,460 3,580 460 1998 09/97 5-40 years 5600 Mowry, Newark, CA...... 4,165 1,263 5,054 653 1,263 5,707 6,970 714 1987 12/97 3-40 years Akard Plaza, Dallas, TX...... 2,068 734 2,936 420 734 3,356 4,089 306 1984 12/97 5-40 years Chuck Yeager, Chantilly, VA... 2,070 1,080 4,321 1,342 1,080 5,663 6,743 672 1991 01/97 5-40 years Daley Plaza, San Diego, CA....... 6,766 1,502 6,008 1,427 1,502 7,435 8,938 1,259 1987 09/96 2-40 years La Mesa Village, La Mesa, CA..... 5,744 1,709 6,836 549 1,709 7,385 9,094 784 1991 05/97 5-40 years Westlake Village, Westlake Village, CA..... 2,837 831 3,324 185 831 3,509 4,342 300 1982 11/97 5-40 years Land Frankel, Midland County, TX...... -- 44 -- -- 44 -- 44 -- -- 06/00 40 years Travelers, Farmers Branch, TX.............. 12,000 24,848 -- -- 24,848 -- 24,848 -- -- 06/00 40 years ------- ------- ------- ------ ------- ------- ------- ------ $53,931 $35,117 $48,901 $7,815 $35,117 $56,716 $91,837 $5,560 ======= ======= ======= ====== ======= ======= ======= ======
---- (1) The aggregate cost for Federal income tax purposes is $92.0 million. 35 SCHEDULE III (Continued) INCOME OPPORTUNITY REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION
2000 1999 1998 -------- ------- ------- (dollars in thousands) Reconciliation of Real Estate Balance at January 1,............................... $ 96,051 $91,070 $87,125 Additions Acquisitions and Improvements..................... 45,577 7,890 3,945 Deductions Sale of real estate............................... (49,791) (2,909) -- -------- ------- ------- Balance at December 31,............................. $ 91,837 $96,051 $91,070 ======== ======= ======= Reconciliation of Accumulated Depreciation Balance at January 1,............................... $ 9,509 $ 7,379 $ 5,211 Additions Depreciation...................................... 2,450 2,723 2,168 Deductions Sale of real estate............................... (6,399) (593) -- -------- ------- ------- Balance at December 31,............................. $ 5,560 $ 9,509 $ 7,379 ======== ======= =======
36 SCHEDULE IV INCOME OPPORTUNITY REALTY INVESTORS, INC. MORTGAGE LOANS ON REAL ESTATE December 31, 2000
Principal Amount of Final Carrying Loans Subject to Interest Maturity Prior Face Amount Amounts Delinquent Principal Description Rate Date Periodic Payment Terms Liens of Mortgage of Mortgage (1) or Interest ----------- -------- -------- ------------------------- ------ ----------- --------------- -------------------- (dollars in thousands) Junior Mortgage Loans JNC Enterprises, Ltd. ................ 18.0% 01/02 Interest only payments of $9,000 $1,500 $1,500 $ -- $22,500 due monthly. Secured by 165 acres of land in The Colo- ny, TX. ............. $9,000 $1,500 $1,500 $1,500
---- (1) The aggregate cost for federal income tax purposes is $1.5 million. 37 SCHEDULE IV (Continued) INCOME OPPORTUNITY REALTY INVESTORS, INC. MORTGAGE LOANS ON REAL ESTATE
2000 1999 1998 ------ ---- ------- (dollars in thousands) Balance at January 1,...................................... $ -- $-- $ 2,010 Additions New mortgage loans....................................... 1,500 -- -- Deductions Collections of principal................................. -- -- (2,010) ------ ---- ------- Balance at December 31,.................................... $1,500 $-- $ -- ====== ==== =======
38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ---------------- PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT Directors The affairs of Income Opportunity Realty Investors, Inc. ("IORI") are managed by a Board of Directors. The Directors are elected at the annual meeting of stockholders or appointed by the incumbent Board and serve until the next annual meeting of stockholders or until a successor has been elected or approved. The Directors of IORI are listed below, together with their ages, terms of service, all positions and offices with IORI or its advisor, Basic Capital Management, Inc. ("BCM"), their principal occupations, business experience and directorships with other companies during the last five years or more. The designation "Affiliated", when used below with respect to a Director, means that the Director is an officer, director or employee of BCM or an officer of IORI. The designation "Independent" when used below with respect to a Director, means that the Director is neither an officer of IORI nor a director, officer or employee of BCM, although IORI may have certain business or professional relationships with the Director as discussed in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Certain Business Relationships." TED P. STOKELY: Age 67, 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"). R. DOUGLAS LEONHARD: Age 64, Director (Independent) (since January 1998). Director (since November 1998) and Chairman (since October 1999) of Optel, Inc.; Senior Vice President (1986 to 1997) of LaCantera Development Company, a wholly-owned subsidiary of USAA; and Director (since January 1998) of TCI. MARTIN L. WHITE: Age 61, 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. EDWARD G. ZAMPA: Age 65, Director (Independent) (since January 1995). General Partner (since 1976) of Edward G. Zampa and Company; and Director (since January 1995) of TCI. Board Committees The Board of Directors held 16 meetings during 2000. 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. 39 The Board of Directors has an Audit Committee, the function of which is to review IORI's operating and accounting procedures. The current members of the Audit Committee, all of whom are Independent Directors, are Messrs. Stokely, Leonhard and White. The Audit Committee met four times during 2000. The Board of Directors does not have Nominating or Compensation Committees. Executive Officers The following persons currently serve as executive officers of IORI: Karl L. Blaha, President; Mark W. Branigan, Executive Vice President and Chief Financial Officer; Bruce A. Endendyk, Executive Vice President; and David W. Starowicz, Executive Vice President--Commercial Asset Management. Their positions with IORI are not subject to a vote of stockholders. Their ages, terms of service, all positions and offices with IORI or BCM, other principal occupations, business experience and directorships with other companies during the last five years or more are set forth below. KARL L. BLAHA: Age 53, President (since September 1999); Executive Vice President--Commercial Asset Management (July 1997 to September 1999); and Executive Vice President and Director of Commercial Management (April 1992 to August 1995). President (since September 1999), Executive Vice President--Commercial Asset Management (July 1997 to September 1999) and Executive Vice President and Director of Commercial Management (April 1992 to August 1995) of BCM and TCI; President and Director (since August 2000) of American Realty Investors, Inc.; Director (since June 1996), President (since October 1993) and Executive Vice President and Director of Commercial Management (April 1992 to October 1993) of American Realty Trust, Inc. ("ART"); President and Director (since 1996) of First Equity Properties, Inc., which is 50% owned by BCM; President (since August 1999), Executive Vice President (January 1998 to August 1999) and Director (since December 1998) of NRLP Management Corp. ("NMC"), a wholly-owned subsidiary of ART and general partner of National Realty, L.P. ("NRLP") and National Operating, L.P. ("NOLP"), the operating partnership of NRLP. MARK W. BRANIGAN: Age 46, Executive Vice President and Chief Financial Officer (since August 2000), 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 and Chief Financial Officer (since August 2000), Vice President--Director of Construction (August 1999 to August 2000) and Executive Vice President--Residential Management (January 1992 to October 1997) of BCM, ART and TCI; Executive Vice President and Chief Financial Officer (since August 2000) and Director (since September 2000) of ARI; and real estate consultant (November 1997 to July 1999). BRUCE A. ENDENDYK: Age 52, Executive Vice President (since January 1995). Executive Vice President (since January 1995) of BCM, ART and TCI, and (since January 1998) of NMC; Executive Vice President (since August 2000) of ARI; and Management Consultant (November 1990 to December 1994). DAVID W. STAROWICZ: Age 45, 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. 40 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 48, Senior Vice President and General Counsel (since January 1995); Vice President (December 1990 to January 1995) and Secretary (December 1993 to February 1997 and since June 1999). Senior Vice President and General Counsel (since January 1995), Vice President (December 1990 to January 1995) and Secretary (December 1993 to February 1997 and since June 1999) of TCI; Senior Vice President and General Counsel (since January 1995), Vice President (January 1993 to January 1995) and Secretary (since December 1989) of ART; Senior Vice President and General Counsel (since November 1994), Vice President and Corporate Counsel (November 1989 to November 1994), and Secretary (since November 1989) of BCM; and Senior Vice President, Secretary and General Counsel (since January 1998) of NMC and (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 2000. All of these filing requirements were satisfied by IORI's Directors and executive officers and ten percent holders. In making these statements, IORI has relied on the written representations of its incumbent Directors and executive officers and its ten percent holders and copies of the reports that they have filed with the Commission. The Advisor Although the Board of Directors is directly responsible for managing the affairs of IORI and for setting the policies which guide it, day-to-day operations are performed by a contractual advisor under the supervision of the Board. The duties of the advisor include, among other things, locating, investigating, evaluating and recommending real estate and mortgage note investment and sales opportunities as well as financing and refinancing sources. The advisor also serves as a consultant to the Board in connection with the business plan and investment decisions made by the Board. BCM has served as IORI's advisor since March 1989. BCM is a company of which Messrs. Blaha, Branigan, Endendyk 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, had, until June 2000, substantial contact with the management of BCM and input with respect to BCM's performance of advisory services to IORI. On August 18, 2000, the Board of Directors approved the renewal of the Advisory Agreement with BCM. Subsequent renewals of the Advisory Agreement with BCM do not require the approval of stockholders, but do require Board approval. Under the Advisory Agreement, BCM is required to annually formulate and submit for Board approval a budget and business plan containing a twelve-month forecast of operations and cash flow, a general plan for asset sales and purchases, borrowing activity, and other investments. BCM is required to report quarterly to the Board 41 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. 42 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 not required to refund any of the 2000 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: Director Ryan T. Phillips: Director Karl L. Blaha: President Mark W. Branigan: Executive Vice President and Chief Financial Officer Rick D. Conley: Executive Vice President--Marketing and Promotion Bruce A. Endendyk: Executive Vice President David W. Starowicz: Executive Vice President--Acquisitions, Sales and Construction Dan S. Allred: Senior Vice President--Land Development Michael E. Bogel: Senior Vice President--Projects Manager Robert A. Waldman: Senior Vice President, Secretary and General Counsel
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 had, until June 2000, 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 partners of Triad are Gene E. Phillips and GS Realty Services, Inc. ("GS Realty"), a related party, which is a company not affiliated with Mr. Phillips or BCM. 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 43 sliding scale of total fees to be paid: (1) maximum fee of 4.5% on the first $2.0 million of any purchase or sale transaction of which no more than 3.5% would be paid to Regis or affiliates, (2) maximum fee of 3.5% on transaction amounts between $2.0-$5.0 million of which no more than 3% would be paid to Regis or affiliates, (3) maximum fee of 2.5% on transaction amounts between $5.0-$10.0 million of which no more than 2% would be paid to Regis or affiliates, and (4) maximum fee of 2% on transaction amounts in excess of $10.0 million of which no more than 1.5% would be paid to Regis or affiliates. ITEM 11. EXECUTIVE COMPENSATION IORI has no employees, payroll or benefit plans and pays no compensation to its executive officers. The executive officers of IORI, who are also officers or employees of BCM, IORI's advisor, are compensated by BCM. Such executive officers perform a variety of services for BCM and the amount of their compensation is determined solely by BCM. BCM does not allocate the cash compensation of its officers among the various entities for which it serves as advisor. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT--The Advisor" for a more detailed discussion of the compensation payable to BCM. The only remuneration paid by IORI is to the Directors who are not officers or directors of BCM or its affiliated companies. The Independent Directors (1) review the business plan of IORI to determine that it is in the best interest of the stockholders, (2) review the advisory contract, (3) supervise the performance of IORI's advisor and review the reasonableness of the compensation paid to the advisor in terms of the nature and quality of services performed, (4) reviews the reasonableness of the total fees and expenses of IORI and (5) select, when necessary, a qualified independent real estate appraiser to appraise properties acquired. Each Independent Director receives compensation in the amount of $15,000 per year, plus reimbursement for expenses. The Chairman of the Board receives an additional fee of $1,500 per year. 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 2000, $104,500 was paid to the Independent Directors in total Directors' fees for all services including the annual fee for service during the period January 1, 2000 through December 31, 2000, and 2000 special service fees as follows: Richard W. Douglas, $7,500; Larry E. Harley, $7,500; R. Douglas Leonhard, $18,000, Murray Shaw, $18,000; Ted P. Stokely, $19,000; Martin L. White, $17,250; and Edward G. Zampa, $19,250. 44 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, 1995, 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 [CUMULATIVE TOTAL RETURN COMPARISON GRAPH]
1995 1996 1997 1998 1999 2000 ------ ------ ------ ------ ------ ------ IORI................................ 100.00 116.55 125.79 77.45 69.68 121.76 DJ Equity Index..................... 100.00 122.02 160.84 200.88 246.53 223.68 DJ Real Estate Index................ 100.00 134.61 158.95 125.39 118.72 151.39
45 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 2, 2001.
Amount and Nature of Percent Beneficial of Name and Address of Beneficial Owner Ownership Class(1) ------------------------------------ ---------- -------- American Realty Trust, Inc.............................. 409,935 27.1% 1800 Valley View Lane Suite 300 Dallas, Texas 75234 Transcontinental Realty Investors, Inc.................. 345,728 22.8% 1800 Valley View Lane Suite 300 Dallas, Texas 75234 Basic Capital Management, Inc........................... 106,802 7.1% 1800 Valley View Lane Suite 300 Dallas, TX 75234 -------- (1) Percentages are based upon 1,514,045 shares of Common Stock outstanding at March 2, 2001. Security Ownership of Management. The following table sets forth the ownership of IORI's shares of Common Stock, both beneficially and of record, both individually and in the aggregate, for the Directors and executive officers of IORI as of the close of business on March 3, 2001. Amount and Nature of Percent Beneficial of Name and Address of Beneficial Owner Ownership Class(1) ------------------------------------ ---------- -------- All Directors and Executive Officers as a group (8 individuals)........................................... 862,465(2) 57.0%
-------- (1) Percentage is based upon 1,514,045 shares of Common Stock outstanding at March 2, 2001. (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 ART 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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Business Relationships In February 1989, the Board of Directors voted to retain BCM as IORI's advisor. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT--The Advisor." BCM is a company of which Messrs. Blaha, Branigan, Endendyk 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 46 children's trust which owns BCM and, in such capacity had, until June 2000, 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 partners of Triad are Gene E. Phillips and GS Realty, a related party, which is a company not affiliated with Mr. Phillips or BCM. 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. Blaha, Branigan, Endendyk 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 has a revolving loan commitment from Syntek West, Inc., a company owned by Gene E. Phillips. Eldercare filed for bankruptcy protection in May 1995 and was reorganized in bankruptcy in February 1996, and has since paid all debts as directed by the Bankruptcy Court. Related Party Transactions Historically, IORI has engaged in and may continue to engage in business transactions, including real estate partnerships, with related parties. Management believes that all of the related party transactions represented the best investments available at the time and were at least as advantageous to IORI as could have been obtained from unrelated third parties. As more fully described in ITEM 2. "PROPERTIES--Real Estate," IORI is a partner with TCI in the Tri-City Limited Partnership, Nakash Income Associates and TCI Eton Square, L.P. In 2000, IORI paid BCM and its affiliates and related parties $2.0 million in advisory and net income fees, $1.5 million in property acquisition fees, $1.3 million in real estate brokerage commissions and $602,000 in property and construction management fees and leasing commissions, net of property management fees paid to subcontractors, other than Regis. 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. 47 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, 2000 and 1999 Consolidated Statements of Operations--Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity--Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows--Years Ended December 31, 2000, 1999 and 1998 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:
Exhibit Number Description ------- ----------- 3.0 Articles of Incorporation of Income Opportunity Realty Investors, Inc. (incorporated by reference to Appendix C to the Registrant's Registration Statement on Form S-4 dated February 12, 1996). 3.1 Bylaws of Income Opportunity Realty Investors, Inc. (incorporated by reference to Appendix D to the Registrant's Registration Statement on Form S-4 dated February 12, 1996). 10.0 Advisory Agreement dated as of October 15, 1998, between Income Opportunity Realty Investors, Inc. and Basic Capital Management, Inc., (incorporated by reference to Exhibit 10.0 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998).
(b) Reports on Form 8-K: None. 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Income Opportunity Realty Investors, Inc. /s/ Karl L. Blaha Dated: March 29, 2001 By: _________________________________ Karl L. Blaha President 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 29, 2001 ______________________________________ Director Ted P. Stokely /s/ R. Douglas Leonhard Director March 29, 2001 ______________________________________ R. Douglas Leonhard /s/ Martin L. White Director March 29, 2001 ______________________________________ Martin L. White /s/ Edward G. Zampa Director March 29, 2001 ______________________________________ Edward G. Zampa /s/ Mark W. Branigan Executive Vice President March 29, 2001 ______________________________________ and Chief Financial Mark W. Branigan Officer (Principal Financial Officer)
49