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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31,JUNE 30, 1997
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Commission File Number 1-9525
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
NEVADA 75-2615944
- - ------------------------------- --------------------------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas, 75231
- - -------------------------------------------------------------- --------------------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(214) 692-4700
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(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No ___..
--- ----
Common Stock, $.01 par value 1,519,888
- - ---------------------------- --------------------------------------------------------
(Class) (Outstanding at April 30,August 1, 1997)
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements have not been examined by
independent certified public accountants, but in the opinion of the management
of Income Opportunity Realty Investors, Inc. (the "Company"), all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the Company's consolidated financial position, consolidated results of
operations and consolidated cash flows at the dates and for the periods
indicated, have been included.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
March31,June 30, December 31,
1997 1996
--------- --------------- -------
(dollars in thousands)
Assets
------
Notes and interest receivable Performing .............................................................. $ 2,0012,004 $ 1,998
Foreclosed real estate held for sale, net of
accumulated depreciation ($20 in 1997 and 1996) ...... 914......... 991 914
Real estate under contract for sale, net of
accumulated depreciation ($1,9641,904 in 1996) ........................... -- 5,709
------- -------
914991 6,623
Real estate held for investment, net of
accumulated depreciation ($5,6544,301 in 1997 and
$5,311 in 1996) ...................................... 51,900......................................... 67,546 46,693
Investment in partnerships ............................ 2,351................................. 2,599 2,331
Cash and cash equivalents ............................. 2,571.................................. 1,100 3,186
Other assets (including $97$189 in 1997 and $256 in
1996 from affiliates) ................................ 2,655................................... 2,156 2,762
------- -------
$62,392$76,396 $63,593
======= =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS - Continued
March 31,June 30, December 31,
1997 1996
-------- ----------------- -------
(dollars in thousands)
Liabilities and Stockholders' Equity
------------------------------------
Liabilities Notes and interest payable ....................... $ 36,275 $ 38,957................ $48,560 $38,957
Other liabilities (including $126$94 in 1997 to
affiliates) ..................................... 2,355........................................ 2,613 2,255
-------- --------
38,630------- -------
51,173 41,212
Commitments and contingencies
Stockholders' equity
Common Stock, $.01 par value;
authorized, 10,000,000 shares; issued and
outstanding, 1,519,888 shares in 1997 and
1996 ........................................................................................... 15 15
Paid-in capital ......................................................................... 64,804 64,804
Accumulated distributions in excess of accumulated
earnings ........................................ (41,057)........................................... (39,596) (42,438)
-------- --------
23,762------- -------
25,223 22,381
-------- --------
$ 62,392 $ 63,593
======== ========------- -------
$76,396 $63,593
======= =======
The accompanying notes are an integral part of these Consolidated
Financial Statements.
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Six Months
Ended March 31,June 30, Ended June 30,
------------------------------------------------------
1997 1996 1997 1996
---------- ----------- ----------- -----------
(dollars in thousands, except per share)
INCOME
Rents ......................................................... $ 2,6922,893 $ 2,0332,026 $ 5,585 $ 4,059
Interest .............................. 69 77..................... 73 88 142 165
---------- ----------- ----------- 2,761 2,110-----------
2,966 2,114 5,727 4,224
EXPENSES
Property operations ................... 1,340 1,042.......... 1,225 1,104 2,565 2,146
Interest .............................. 877 496..................... 901 655 1,778 1,151
Depreciation .......................... 365 263................. 340 264 705 527
Advisory fee to affiliate ................. 123 94103 246 197
Net income fee to affiliate ........... 124.. 94 -- 218 --
General and administrative ............ 265 360... 172 248 437 608
---------- ----------- ----------- 3,094 2,255-----------
2,855 2,374 5,949 4,629
---------- ----------- ----------- (Loss)-----------
Income (loss) from operations ................. (333) (145)... 111 (260) (222) (405)
Equity in income (loss) of
partnerships 17 (1)................. 29 31 46 30
Gain on sale of real estate ........... 1,849..... 1,473 -- 3,322 --
---------- ----------- ----------- -----------
Net income (loss) ..................................... $ 1,5331,613 $ (146)(229) $ 3,146 $ (375)
========== =========== =========== ===========
Earnings Per Share
Net income (loss) ................................. $ 1.011.06 $ (.09)(.15) $ 2.07 $ (.24)
========== =========== =========== ===========
Weighted average Common shares
used in computing earnings
per share ........................... 1,519,888 1,560,5921,519,888 1,519,888 1,540,240
========== =========== =========== ===========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the ThreeSix Months Ended March 31,June 30, 1997
Accumulated
Distributions
Common Stock in Excess of
-----------------------Common Stock Paid-In Accumulated Stockholders'
Shares Amount Capital Earnings Equity
------ ------ ------- ------------ ---------------------- --------- --------- --------- ---------
(dollars in thousands)
Balance, January 1, 1997 ............ 1,519,888 $ 15 $ 64,804 $ (42,438) $ 22,381
Dividends ($.10.20 per share) .. -- -- -- (152) (152)(304) (304)
Net income ....................................... -- -- -- 1,533 1,5333,146 3,146
--------- --------- --------- --------- ---------
Balance, March 31,June 30, 1997 .............. 1,519,888 $ 15 $ 64,804 $ (41,057)(39,596) $ 23,76225,223
========= ========= ========= ========= =========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the ThreeSix Months
Ended March 31,
---------------------June 30,
--------------------------
1997 1996
--------- ------------------ ----------
(dollars in thousands)
Cash Flows from Operating Activities
Rents collected .................................................................... $ 2,6455,330 $ 2,0404,066
Interest collected ............................. 66 73................................. 136 159
Interest paid .................................. (825) (433)...................................... (1,582) (1,007)
Payments for property operations ............... (1,185) (1,048)................... (2,287) (2,034)
Advisory and net income fee paid to affiliate ................. (127) (88)...... (374) (202)
General and administrative expenses paid ....... (427) (218)........... (589) (617)
Distribution from equity partnerships' operating
cash flow .......................................................................... -- 56
Other .......................................... 60 (449)
------- -------.............................................. (193) (822)
---------- ----------
Net cash provided by (used in) operating
activities ..... 207 (118)................................... 441 (451)
Cash Flows from Investing Activities
Acquisition of real estate ..................... (1,988)......................... (8,126) --
Proceeds from sale of real estate .............. 1,609.................. 6,773 --
Real estate improvements ........................... (321) (119)
Funding of equity partnerships ................. (3) (66)
Real estate improvements ....................... (149) (26)
------- -------..................... (221) (70)
---------- ----------
Net cash provided by (used in) investing activities ............................... (531) (92)......... (1,895) (189)
Cash Flows from Financing Activities
Payments on notes payable ...................... (155) (89).......................... (344) (198)
Proceeds from notes payable ............................................ -- 7,300
Deferred borrowing costs ....................... (3)........................... (15) (297)
Repurchase of Common Stock .............................................. -- (621)
Dividends to stockholders ...................... (152) (158).......................... (304) (325)
Payments (to)/from advisor ..................... 19 (243)
------- -------......................... 31 (373)
---------- ----------
Net cash provided by (used in) financing
activities ..................................... (291) 5,892................................... (632) 5,486
Net increase (decrease) in cash and cash
equivalents .................................... (615) 5,682........................................ (2,086) 4,846
Cash and cash equivalents, beginning of period .......... 3,186 2,988
------- ----------------- ----------
Cash and cash equivalents, end of period ...................... $ 2,5711,100 $ 8,670
======= =======7,834
========== ==========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the ThreeSix Months
Ended March 31,
----------------------June 30,
------------------------
1997 1996
--------- -----------------
(dollars in thousands)
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities
Net income (loss) ...................................................................... $ 1,5333,146 $ (146)(375)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
(Gain) on sale of real estate ................... (1,849)....................... (3,322) --
Depreciation and amortization ................... 396 281....................... 765 570
Equity in loss (income) of partnerships ......... (17) 1.................. (46) (30)
Distributions from equity partnerships' operating
cash flow ............................................................................ -- 56
(Increase) in other assets ...................... (35) (486).......................... (481) (850)
Increase in interest payable .................... 18 41........................ 130 95
Increase (decrease) in other liabilities ........ 161 186
------- -------....................... 249 133
--------- ---------
Net cash provided by (used in) operating
activities ....................................................................... $ 207441 $ (118)
======= =======(451)
========= =========
Schedule of noncash investing and financing
activities
Notes payable from purchase of real estate ............. $ 3,470 $ --
The accompanying notes are an integral part of these Consolidated
Financial Statements.
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
Operating results for the threesix month period ended March 31,June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to the Consolidated Financial
Statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1996 (the "1996 Form 10-K").
Shares and per share data have been restated for the two for one forward Common
Stock split effected June 14, 1996.
NOTE 2. REAL ESTATE AND DEPRECIATION
In January 1997, the Company purchased the Chuck Yeager Building, a 60,060
square foot industrial/office building in Chantilly, Virginia, for $5.1
million. The Company paid $2.0 million in cash and obtained new mortgage
financing of $3.1 million. The mortgage bears interest at a variable rate,
currently 10.75% per annum, requires monthly payments of principal and interest
of $72,017, and matures in January 1999. The Company paid a real estate
acquisitionbrokerage commission of $171,000 to Carmel Realty, Inc. ("Carmel Realty"), an
affiliate of Basic Capital Management, Inc. ("BCM"), the Company's advisor, and
a real estate acquisition fee of $51,000 to BCM based on the $5.1 million
purchase price of the property.
In March 1997, the Company completed the sale of the Plumtree Apartments, a 116
unit apartment complex in Martinez, California, that was under contract for
sale at December 31, 1996. The apartment complex was sold for $7.8 million in
cash, the Company receiving net cash of $1.6 million after the payoff of $5.7
million in existing mortgage debt and the payment of various closing costs
associated with the sale. The Company paid a real estate salesbrokerage commission
of $226,000 to Carmel Realty based uponon the $7.8 million sales price of the
property. The Company recognized a gain of $1.8 million on the salesale.
In May 1997, the Company purchased the La Mesa Village Plaza Office Building, a
92,611 square foot office building in La Mesa, California, for $8.1 million.
The Company paid $2.1 million in cash and obtained new mortgage financing of
$1.8$6.0 million. The mortgage bears interest at 9.1875% per annum, requires
monthly payments of principal and interest of $51,124 and matures in June 2007.
The Company paid a real estate brokerage commission of $232,000 to Carmel
Realty and a real estate acquisition fee of $81,000 to BCM based on the $8.1
million purchase price of the property.
In June 1997, the Company sold the Porticos Apartments, a 256 unit apartment
complex in Milwaukee, Wisconsin, for $15.2 million in cash. The Company
received net cash of $5.2 million after the payoff of $9.6
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. REAL ESTATE AND DEPRECIATION (Continued)
in existing mortgage debt and the payment of various closing costs associated
with the sale. The Company paid a real estate brokerage commission of $348,000
to Carmel Realty based on the $15.2 million sales price of the property. The
Company recognized a gain of $1.5 million on the sale.
In June 1997, the Company purchased Renaissance Parc, a 294 unit apartment
complex in Dallas, Texas, for $15.7 million. The Company paid $3.2 million in
cash and obtained new mortgage financing of $12.5 million. The mortgage bears
interest at 8.375% per annum, requires monthly payments of principal and
interest of $95,161 and matures in July 2007. The Company paid a real estate
brokerage commission of $355,000 to Carmel Realty and a real estate acquisition
fee of $157,000 to BCM based on the $15.7 million purchase price of the
property.
Also in June 1997, the Company purchased LaMonte Park, a 128 unit apartment
complex in Houston, Texas, for $3.7 million. The Company paid $200,000 cash and
assumed the existing mortgage of $3.5 million. The mortgage bears interest at a
variable rate, currently 8.6% per annum, requires monthly payments of principal
and interest of $30,333 and matures in July 2001. The Company paid a real
estate brokerage commission of $132,000 to Carmel Realty and a real estate
acquisition fee of $37,000 to BCM based on the $3.7 million purchase price of
the property.
NOTE 3. COMMITMENTS AND CONTINGENCIES
The Company is involved in various lawsuits arising in the ordinary course of
business. The Company's 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
Income Opportunity Realty Investors, Inc. (the "Company") invests in equity
interests in real estate through acquisitions, leases and partnerships, and has
invested in mortgage loans on real estate, including first, wraparound, and
junior mortgage loans. The Company is the successor to a California business
trust organized on December 14, 1984 which commenced operations on April 10,
1985.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources
Cash and cash equivalents at March 31,June 30, 1997 aggregated $2.6$1.1 million, compared
with $3.2 million at December 31, 1996. The Company's principal sources of cash
have been and will continue to be property operations, proceeds from property
sales, financings and refinancings, collection of interest on its mortgage note
receivable and, to a lesser extent, distributions from partnerships. The
Company's business plan provides for the Company's use of approximately $4.0$2.0
million of its available cash for property acquisitions during the remainder of
1997. At March 31,June 30, 1997, the Company had a firm earnest money deposit to
purchase the LaMesa Village Plaza,Westlake Office Building, a 92,61145,500 square foot office/retail centeroffice building in
LaMesa,Westlake Village, California, for $8.1 million. The Company
expects to obtain$3.9 million approximately $1.4 million in
cash and the assumption of the existing mortgage financing of $6.0 million to complete the purchase.debt. The Company anticipates
that after closing such acquisition, it will have sufficient cash to meet its
various cash requirements including the payment of distributions, debt service
obligations and property maintenance and improvements.
In January 1997, the Company purchased the Chuck Yeager Building in Chantilly,
Virginia, for $5.1 million. The Company paid $2.0 million in cash and obtained
new mortgage financing of $3.1 million.
In March 1997, the Company sold the Plumtree Apartments in Martinez,
California.California, for $7.8 million. The Company received net cash of $1.6 million
after the payoff of $5.7 million in existing mortgage debt and the payment of
various closing costs associated with the sale.
In May 1997, the Company purchased the La Mesa Village Plaza Office Building in
La Mesa, California, for $8.1 million. The Company paid $2.1 million in cash
and obtained new mortgage financing of $6.0 million.
In June 1997, the Company sold the Porticos Apartments in Milwaukee, Wisconsin,
for $15.2 million. The Company received net cash of $5.2 million after the
payoff of $9.6 million in existing mortgage debt and the payment of various
closing costs associated with the sale.
Also in June 1997, the Company purchased (i) the Renaissance Parc Apartments in
Dallas, Texas, for $15.7 million, consisting of $3.2 million in cash and new
mortgage financing of $12.5 million and (ii) the LaMonte Park Apartments in
Houston, Texas, for $3.7 million, consisting of $200,000 in cash and an assumed
mortgage of $3.5 million.
In the first threesix months of 1997, the Company paid regular quarterly dividends
of $.10$.20 per share or a total of $152,000.$304,000.
The Company's management reviews the carrying values of the Company's
properties and mortgage note receivable at least annually and whenever events
or a change in circumstances indicate that impairment may exist. Impairment is
considered to exist if, in the case of a property, the future cash flow from
the property (undiscounted and without interest) is less than the carrying
amount of the property. For notes receivable
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
impairment is considered to exist if it is probable that all amounts due under
the terms of the note will not be collected. In those instances where
impairment is found to exist, a provision for loss is recorded by a charge
against earnings. The Company's mortgage note receivable review includes an
evaluation of the collateral property securing such note. The property review
generally includes selective property inspections, a review of the property's
current rents compared to market 9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
rents, a review of the property's expenses, a
review of maintenance requirements, a review of the property's cash flow,
discussions with the manager of the property and a review of properties in the
surrounding area.
Results of Operations
For the three and six months ended March 31,June 30, 1997, the Company had net income of
$1.5$1.6 million and $3.1 million, respectively, as compared with a net loss of
$146,000$229,000 and $375,000 in the corresponding periodperiods in 1996. Net income for the
first quarter ofthree and six months ended June 30, 1997 includes a gaingains on sale of real estate
of $1.8 million.$1.5 million and $3.3 million, respectively. Fluctuations in thosethis and other
components of the Company's revenues and expenses between the 1996 and 1997
periods are discussed below.
Rents in the three and six months ended March 31,June 30, 1997 were $2.7$2.9 million and
$5.6 million as compared to $2.0 million and $4.0 million in the corresponding
periodperiods in 1996. Of the increase $645,000increases, $1.2 million and $1.8 million for the three
and six months ended June 30, 1997 is due to threesix properties acquired subsequent
to March 31,June 30, 1996 and $33,000$45,000 and $106,000 for the three and six months ended
June 30, 1997 is due to an increase in rental rates at twothree of the Company's
apartment complexes.properties. These increases are partially offset by a decrease of $65,000$400,000 and
$453,000 for the three and six months ended June 30, 1997 due to the sale of
onetwo of the Company's apartment complexes in March1997. Rents for the remaining six
months of 1997 is expected to increase as the Company acquires additional
properties over the remainder of 1997.
Property operations expense in the three and six months ended March 31,June 30, 1997 was
$1.3$1.2 million and $2.6 million as compared to $1.0$1.1 million and $2.1 million in
the corresponding periodperiods in 1996. The increase is primarily due to the
acquisition of threesix properties subsequent to March 31, 1996.June 30, 1996, partially offset by
the sale of two apartment complexes in 1997.
Interest income decreased from $77,000$88,000 and $165,000 in the three and six months
ended March 31,June 30, 1996 to $69,000$73,000 and $142,000 in the three and six months ended
March 31,June 30, 1997. The decrease isdecreases are due to a decrease in interest earned on the
short term investment of the Company's excess cash. Interest income for the
remaining quarterssix months of 1997 is expected to be comparable to that of the first
quarterand second quarters of 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
Equity in income of partnerships improvedfor the three and six months ended June 30,
1997 was comparable to income of $17,000 in the three
months ended March 31, 1997 as compared to a loss of $1,000$29,000 and $46,000 in the corresponding
periodperiods in 1996. The increase is mainly due to an increase in
interest income earned by the Nakash Income Associates partnership in which the
Company has a 40% general partnership interest.
Interest expense increased from $496,000$655,000 and $1.2 million in the three and six
months ended March 31,June 30, 1996 to $877,000$901,000 and $1.8 million in the three and six
months ended March 31,June 30, 1997. Of this increase
$226,000these increases, $390,000 and $508,000 for the
three and six months ended June 30, 1997 is due to three property acquisitionsthe debt incurred on five of
the six properties acquired subsequent to March 31,June 30, 1996, and $195,000$28,000 and
$315,000 for the three and six months ended June 30, 1997 is due to financing
obtained on properties previously unencumbered. These increases are partially
offset by a decrease of $31,000$170,000 and $204,000 for the three and six months
ended June 30, 1997 due to the sale of antwo apartment complexcomplexes in March 1997.
Interest expense for the remaining quarterssix months of 1997 is expected to be
comparable to that of the first quarterand second quarters of 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Depreciation expense increased from $263,000$264,000 and $527,000 for the three and six
months ended March
31,June 30, 1996 to $365,000$340,000 and $705,000 in the three and six months
ended March 31,June 30, 1997. The increase isincreases are mainly due to threesix properties acquired
subsequent to March 31, 1996.June 30, 1996 partially offset by the sale of two apartment
complexes in 1997. Depreciation expense is expected to continue to increase as
the Company acquires additional properties over the remainder of 1997.
Advisory fee expense increased from $94,000$103,000 and $197,000 in the three and six
months ended March 31,June 30, 1996 to $123,000 and $246,000 for the three and six
months ended March 31,June 30, 1997. The increase isincreases are due to an increase in the
Company's gross assets, the basis for such fee. Advisory fee expense is
expected to continue to increase as the Company acquires additional properties
over the remainder of 1997.
Net income fee of $124,000$94,000 and $218,000 was incurred for the three and six
months ended March 31,June 30, 1997. Such fee is payable to the Company's advisor based
on 7.5% of the Company's net income. No such fee was incurred in 1996.
General and administrative expense decreased to $265,000$172,000 and $437,000 in the
three and six months ended March 31,June 30, 1997 from $360,000$248,000 and $608,000 in the
corresponding periods in 1996. The decrease isdecreases are primarily due to the nonreoccurrence of fees in
1996 relating to the Company's incorporation partially offset by an increase in
legal fees relating to the Olive litigation. General and administrative expense
for the remaining six months of 1997 is expected to be comparable to that of
the first and second quarters of 1997.
Tax Matters
As more fully discussed in the Company's 1996 Form 10-K, the Company has
elected and, in management's opinion, qualified, to be taxed as a real
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Tax Matters (Continued)
estate investment trust ("REIT"), as defined under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended, (the "Code"). To continue to
qualify for federal taxation as a REIT under the Code, the Company is required
to hold at least 75% of the value of its total assets in real estate assets,
government securities, cash and cash equivalents at the close of each quarter
of each taxable year. The Code also requires a REIT to distribute at least 95%
of its REIT taxable income plus 95% of its net income from foreclosure
property, all as defined in Section 857 of the Code, on an annual basis to
shareholders.
Inflation
The effects of inflation on the Company's operations are not quantifiable.
Revenues from property operations generally fluctuate proportionately with
inflationary increases and decreases in housing of properties and,
correspondingly, the ultimate realizable value of the Company's real estate and
notes receivable portfolios. Inflation also has an effect on the Company's
earnings from short-term investments.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, the Company may be potentially liable for removal or remediation
costs, as well as certain other potential costs, relating to hazardous or toxic
substances (including governmental fines and injuries 11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Environmental Matters (Continued)
to persons and property)
where property-level managers have arranged for the removal, disposal or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the
air, and third parties may seek recovery from the Company for personal injury
associated with such materials.
The Company's management is not aware of any environmental liability relating
to the above matters that would have a material adverse effect on the Company's
business, assets or results of operations.
----------------------------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Olive Litigation. In February 1990, the Company, together with
Continental Mortgage and Equity Trust ("CMET"), National Income Realty
Trust and Transcontinental Realty Investors, Inc. ("TCI"), three real
estate entities with, at the time, the same officers, directors or
trustees and advisor as the Company, entered into a settlement of a
class and derivative action entitled Olive et al. v. National Income
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ITEM 1. LEGAL PROCEEDINGS (Continued)
Realty Trust et al. pending before the United States District Court for the
Northern District of California and relating to the operation and management of
each of the entities (the "Olive Litigation"). On April 23, 1990, the court
granted final approval of the terms of a Stipulation of Settlement.
On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Olive Modification") that settled
subsequent claims of breaches of the settlement that were asserted by the
plaintiffs and that modified certain provisions of the April 1990 settlement.
The Olive Modification was preliminarily approved by the court on July 1, 1994,
and final court approval was entered on December 12, 1994. The effective date
of the Olive Modification was January 11, 1995.
The Court retained jurisdiction to enforce the Modification, and during August
and September 1996, the Court held evidentiary hearings to assess compliance
with the terms of the Modification by various parties. The Court issued no
ruling or order with respect to the matters addressed at the hearings.
Separately, in 1996, legal counsel for the plaintiffs notified the Company's
Board of Directors that he intendsintended to assert that certain actions taken by the
Board of Directors breached the terms of the Modification. On January 27, 1997,
the parties entered into an Amendment to the Modification effective January 9,
1997 (the
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ITEM 1. LEGAL PROCEEDINGS (Continued) "Amendment"), which was submitted to the Court for approval on
January 29, 1997. The Amendment provides for the settlement of all matters
raised at the evidentiary hearings and by plaintiffs' counsel in his notices to
the Company's Board of Directors. On May 2, 1997, a hearing was held for the
Court to consider approval of the amendment.Amendment. As a result of May 7, 1997, the hearing, the
parties entered into a revised Amendment. The Court had not issued an order either approving
or disapproving the amendment.Amendment on July 3, 1997.
The Amendment provides for the addition of three new unaffiliated members to
the Company's Board of Directors and sets forth new requirements for the
approval of any transactions with certain affiliates until April 28, 1999. In
addition, the Company, CMET, TCI and their shareholders released the defendants
from any claims relating to the plaintiffs' allegations and matters which were
the subject of the evidentiary hearings. The plaintiffs' allegations of any
breaches of the Modification shall be settled by mutual agreement of the
parties or, lacking such agreement, by an arbitration proceeding.
Under the Amendment, all shares of the Company owned by Gene E. Phillips or any
of his affiliates shall be voted at all stockholders' meetings held until April
28, 1999 in favor of all new Board members added under the Amendment. The
Amendment also requires that, until April 28, 1999, all shares of the Company
owned by Gene E. Phillips or his affiliates in excess of forty percent (40%) of
the Company's outstanding shares shall be voted in proportion to the votes cast
by all non-affiliated shareholders of the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on May 8, 1997, at which
meeting the Company's stockholders were asked to consider and vote upon (i) the
election of Directors of the Company and (ii) the renewal of the Company's
advisory agreement with BCM.
At such meeting the Company's stockholders elected the following individuals as
Directors of the Company:
Shares Voting
------------------------
Withheld
Trustee For Authority
------- ------- ---------
Ted P. Stokely 984,856 18,684
Edward L. Tixier 986,097 17,443
Martin L. White 986,362 17,178
Edward G. Zampa 986,362 17,178
Also at such meeting the Company's stockholders approved the renewal of the
Company's advisory agreement with BCM until the next annual meeting of the
Company's stockholders with 969,996 votes for the proposal, 19,224 votes
against the proposal and 11,717 votes abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
- - ------- ---------------------------------------------------------
27.0 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K as follows:
A Current Report on Form 8-K, dated November 13, 1996,May 14, 1997, was filed with
respect to Item 2. "Acquisition or Disposition of Assets," and Item 7.
"Financial Statements and Exhibits," which was amended on Form 8-K/A,
filed Januaryreports the acquisition of
the Chuck Yeager Office Building, the LaMesa Village Plaza Office
Building, the Renaissance Parc Apartments and the LaMonte Park
Apartments as well as the sale of the Plumtree and Porticos
Apartments.
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1997.
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SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INCOME OPPORTUNITY REALTY INVESTORS,
INC.
Date: May 7,August 4, 1997 By: /s/ Randall M. Paulson
------------------------ --------------------------------------------------------- -------------------------------
Randall M. Paulson
President
Date: May 7,August 4, 1997 By: /s/ Thomas A. Holland
------------------------ ---------------------------------------------------------- -------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the ThreeSix Months Ended March 31,June 30, 1997
Exhibit Page
Number Description Number
- - ------- ------------------------------------------------ ------
27.0 Financial Data Schedule. 16
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Exhibit Page
Number Description Number
- - ------- ----------------------------------------------- ------
27.0 Financial Data Schedule. 18
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