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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 SEPTEMBER 30, 1998MARCH 31, 1999
--------------
Commission File Number 1-95251-14784
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
----------------------------------------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
NEVADA 75-2615944
- - ------------------------------- --------------------------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas, 75231
- - -----------------------------------------------------------------------------------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(214) 692-4700
-------------------------------------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
---___.
---
Common Stock, $.01 par value 1,524,467
-1,526,819
- ---------------------------- ---------------------------------
(Class) (Outstanding at OctoberApril 30, 1998)1999)
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
The accompanying Consolidated Financial Statements have not been audited by
independent certified public accountants, but in the opinion of the management
of Income Opportunity Realty Investors, Inc. (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
September 30,March 31, December 31,
1999 1998
1997
---------- --------------------------- ----------------
(dollars in thousands)thousands,
except per share)
Assets
-------
Assets
Notes and interest receivable
Performing .............................................. $ -- $ 2,010
Real estate held for investment, net of
accumulated depreciation ($6,7848,021 in 19981999 and
$5,211$7,379 in 1997) ......................................... 83,483 81,914............................................................ $ 83,914 $ 83,691
Investment in partnerships ................................. 1,619 1,762partnerships......................................................... 1,442 1,483
Cash and cash equivalents .................................. 481 1,145equivalents.......................................................... 205 103
Other assets (including $128$126 in 1999 and $475 in
1998 and $302 in
1997 from affiliates) ................................... 2,920 3,478
---------- ----------...................................................... 2,525 3,418
------------- -----------
$ 88,50388,086 $ 90,309
========== ==========88,695
============= ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable .................................payable......................................................... $ 60,99260,536 $ 61,32360,786
Other liabilities (including $511$1,669 in 1999 and
$1,194 in 1998 and
$468 in 1997 to affiliates) ............................. 3,583 3,855
---------- ----------
64,575 65,178.............................................. 4,436 4,349
------------- -----------
64,972 65,135
Commitments and contingencies
Stockholders' equity
Common Stock, $.01 par value;
authorized, 10,000,000 shares; issued and
outstanding, 1,522,5311,526,043 shares in 19981999 and
1,519,888 in 1997 .......................................1998....................................................................... 15 15
Paid-in capital ............................................ 64,833 64,804capital.................................................................... 64,857 64,857
Accumulated distributions in excess of accumulated
earnings ................................................ (40,920) (39,688)
---------- ----------
23,928 25,131
---------- ----------earnings................................................................... (41,758) (41,312)
------------- -----------
23,114 23,560
------------- -----------
$ 88,50388,086 $ 90,309
========== ==========88,695
============= ===========
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 Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------March 31,
-------------------------
1999 1998
1997 1998 1997
----------- ----------- ----------- --------------------- ------------
(dollars in thousands,
except per share)
INCOME
Rents ................................Rents............................................ $ 3,3213,728 $ 3,174 $ 10,511 $ 8,759
Interest ............................. 33 61 158 203
----------- ----------- ----------- -----------
3,354 3,235 10,669 8,9623,590
Interest......................................... 7 63
---------- ------------
3,735 3,653
EXPENSES
Property operations .................. 1,592 1,518 4,547 4,083
Interest ............................. 1,388 1,081 4,217 2,859
Depreciation ......................... 551 426 1,573 1,131operations.............................. 1,672 1,461
Interest......................................... 1,371 1,406
Depreciation..................................... 643 504
Advisory fee to affiliate ............ 165 133 500 379
Net income fee to affiliate .......... (4) -- -- 218affiliate........................ 166 168
General and administrative ........... 206 318 594 755
----------- ----------- ----------- -----------
3,898 3,476 11,431 9,425
----------- ----------- ----------- -----------administrative....................... 156 216
---------- ------------
4,008 3,755
---------- ------------
(Loss) from operations .................. (544) (241) (762) (463)operations.............................. (273) (102)
Equity in income (loss) of partnerships ......................... (12) (25) 249 21
Gain on sale of real estate ............. -- -- -- 3,322
----------- ----------- ----------- -----------partnerships.................... 52 13
---------- ------------
Net income (loss) ................................................................. $ (556)(221) $ (266) $ (513) $ 2,880
=========== =========== =========== ===========(89)
========== ============
Earnings Per Share
Net income (loss) ............................................................ $ (.37)(.14) $ (.18) $ (.34) $ 1.89
=========== =========== =========== ===========(.06)
========== ============
Weighted average Common shares used in computing
earnings per share ................... 1,522,491share................................ 1,526,043 1,519,888
1,520,976 1,519,888
=========== =========== =========== ===================== ============
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 NineThree Months Ended September 30, 1998March 31, 1999
Accumulated
Distributions
Common Stock in Excess of
-------------------------Common Stock Paid-In Accumulated Stockholders'
----------------------
Shares Amount Capital Earnings Equity
------------ -------- --------- ----------- ----------- ----------- ----------- ------------------------
(dollars in thousands)thousands, except per share)
Balance, January 1, 1998 ........... 1,519,8881999........... 1,526,043 $ 15 $ 64,80464,857 $ (39,688)(41,312) $ 25,131
Sale of Common Stock under
dividend reinvestment
plan ............................ 2,643 -- 29 -- 2923,560
Dividends ($.45.15 per share)......... -- -- -- (719) (719)- - - (225) (225)
Net (loss)......................... -- -- -- (513) (513)
----------- ----------- ----------- ----------- ------------ - - (221) (221)
------------ -------- ---------- ------------- ------------
Balance, September 30,
1998 ............................ 1,522,531March 31, 1999............ 1,526,043 $ 15 $ 64,83364,857 $ (40,920)(41,758) $ 23,928
=========== =========== =========== =========== ===========23,114
============ ======== ========== ============ ============
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 NineThree Months
Ended September 30,
------------------------------March 31,
--------------------------
1999 1998
1997
---------- ---------------------- ------------
(dollars in thousands)
Cash Flows from Operating Activities
Rents collected ...........................................collected........................................................... $ 10,8063,862 $ 8,4443,706
Interest collected ........................................ 168 194collected........................................................ 7 60
Interest paid ............................................. (4,072) (2,491)paid............................................................. (1,330) (1,322)
Payments for property operations .......................... (4,615) (3,301)operations.......................................... (2,079) (1,762)
Advisory and net income fee paid to affiliate ............. (570) (617)refunded by affiliate........................................ 167 24
General and administrative expenses paid .................. (895) (875)paid.................................. (170) (498)
Distributions from equity partnerships'partnership's operating
cash flow .............................................. -- 218
Other ..................................................... (24) 240
---------- ----------flow............................................................... 93 -
Other..................................................................... 431 (108)
------------ ------------
Net cash provided by operating activities .............. 798 1,812activities.............................. 981 100
Cash Flows from Investing Activities
Acquisition of real estate ................................ -- (31,258)
Proceeds from sale of real estate ......................... -- 21,989
Real estate improvements .................................. (3,143) (512)improvements.................................................. (866) (957)
Funding of equity partnerships ............................ (7) (222)
Distributions from equity partnerships'
investing cash flow .................................... 399 --
---------- ----------partnerships............................................ (1) (1)
------------ ------------
Net cash (used in) investing activities ................ (2,751) (10,003)activities................................ (867) (958)
Cash Flows from Financing Activities
Payments on notes payable ................................. (1,180) (15,735)
Proceeds from notes payable ............................... 800 21,640
Collection on notes receivable ............................ 2,000 --payable................................................. (236) (235)
Deferred borrowing costs .................................. (24) (15)
Distributions from equity partnerships' financing cash flow .............................................. -- 627
Sale of Common Stock under dividend reinvestment
plan ................................................... 29 --costs.................................................. (37) -
Dividends to stockholders ................................. (719) (456)stockholders................................................. (225) (222)
Advances from advisor ..................................... 383 21
---------- ----------advisor..................................................... 486 328
------------ ------------
Net cash provided by(used in) financing activities .............. 1,289 6,082activities................................ (12) (129)
Net increase (decrease) in cash and cash
equivalents .................. (664) (2,109)equivalents............................................................... 102 (987)
Cash and cash equivalents, beginning of period ...............period............................... 103 1,145
3,186
---------- ---------------------- ------------
Cash and cash equivalents, end of period .....................period..................................... $ 481205 $ 1,077
========== ==========158
============ ============
Reconciliation of net (loss) to net cash
provided by operating activities
Net (loss)................................................................... $ (221) $ (89)
Adjustments to reconcile net (loss) to net
cash provided by operating activities
Depreciation and amortization............................................. 698 534
Equity in (income) of partnerships........................................ (52) (13)
Distributions from equity partnership's operating
cash flow.............................................................. 93 -
Decrease in other assets.................................................. 875 303
Increase (decrease) in interest payable................................... (14) 51
(Decrease) in other liabilities........................................... (398) (686)
------------ ------------
Net cash provided by operating activities.............................. $ 981 $ 100
============ ============
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 - Continued
For the Nine Months
Ended September 30,
----------------------------
1998 1997
--------- ---------
(dollars in thousands)
Reconciliation of net income to net cash
provided by operating activities
Net income (loss) ............................................ $ (513) $ 2,880
Adjustments to reconcile net income to net cash
provided by operating activities
(Gain) on sale of real estate ............................. -- (3,322)
Depreciation and amortization ............................. 1,666 1,208
Equity in (income) of partnerships ........................ (249) (21)
Distributions from equity partnerships' operating
cash flow .............................................. -- 218
Decrease in interest receivable ........................... 17 --
(Increase) decrease in other assets ....................... 483 (547)
Increase in interest payable .............................. 45 282
Increase (decrease) in other liabilities .................. (651) 1,114
--------- ---------
Net cash provided by operating activities .............. $ 798 $ 1,812
========= =========
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 ninethree month period ended September 30, 1998March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.1999. 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, 19971998 (the "1997"1998 Form 10-K").
Certain balances for 19971998 have been reclassified to conform to the 19981999
presentation.
NOTE 2. NOTES AND INTEREST RECEIVABLE
In August 1998, the Company's remaining mortgage note receivable with a
principal balance of $2,000,000 was collected in full. Net cash of $1.5 million
was received, after the pay off of $500,000 in underlying debt.
NOTE 3. INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES
- --------------------------------------------------------
The Company owns a 36.3% general partner interest in Tri-City Limited
Partnership ("Tri-City"), which owned fiveowns three commercial properties in Texas.
In May 1998,
Tri-City sold two of its apartment complexes for a total of $3.3 million in
cash. Tri-City received net cash of $1.4 million after the payoff of $1.9
million in existing mortgage debt and the payment of various closing costs
associated with the sale. The Company received a distribution of $399,000 of
such net cash. Tri-City paid a real estate brokerage commission of $119,000 to
Carmel Realty, Inc., an affiliate of Basic Capital Management, Inc. ("BCM"), the
Company's advisor, based on the $3.3 million sales price of the properties.
Tri-City recognized a gain of $496,000 on the sale of which, the Company's
equity share was $180,000.
NOTE 4.3. NOTES AND INTEREST PAYABLE
- ----------------------------------
In August 1998,January 1999, the Company obtained mortgage financingdebt in the amount of $816,000$2.5 million secured by the
previously unencumbered Valley View CenterAkard Plaza Office Building in Farmers
Branch, Texas. Net cash of $778,000 was received, afterDallas, Texas, matured. In February 1999, the
payment of various
closing costs associated withlender agreed to extend the financing. The mortgage bears interest at 9.1%
per annum, requires monthly payments of interest only and matures in August
2000. A mortgage brokerage and equity refinancing fee of $8,000 was paidmaturity date to BCM
based on the $816,000 refinancing.
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSJune 1999. All other terms remained
unchanged.
NOTE 5.4. COMMITMENTS AND CONTINGENCIES
- -------------------------------------
The Company is involved in various lawsuits arising in the ordinary course of
business. Management is of the opinion that the outcome of these lawsuits will
have no material impact on the Company's financial condition, results of
operations or liquidity.
----------------------------NOTE 5. OPERATING SEGMENTS
- --------------------------
Significant differences among the accounting policies of the Company's operating
segments as compared to the Company's consolidated financial statements
principally involve the calculation and allocation of administrative expenses.
Management evaluates the performance of its operating segments and allocates
resources to each of them based on their net operating income and cash flow. The
Company based reconciliation of expenses that are not reflected in the segments
is $156,000 of administrative expenses in the three months ended March 31, 1999
and $216,000 in 1998. There are no intersegment revenues and expenses and the
Company conducts all of its business in the United States.
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. OPERATING SEGMENTS (Continued)
- --------------------------
Presented below are the Company's reportable operating segments, their operating
income for the three months ended March 31, and segments assets at March 31.
Commercial
1999 Properties Apartments Total
- ---------- ------------------ ------------------ ---------
Rents......................................... $ 2,422 $ 1,306 $ 3,728
Property operating expenses................... 1,064 608 1,672
------------------ ------------------ ---------
Net operating income.......................... $ 1,358 $ 698 $ 2,056
================== ================== =========
Depreciation.................................. $ 490 $ 153 $ 643
Interest...................................... 928 443 1,371
Real estate improvements...................... 866 - 866
Segment assets................................ 59,169 24,745 83,914
1998
- ----------
Rents......................................... $ 2,301 $ 1,289 $ 3,590
Property operating expenses................... 852 609 1,461
------------------ ------------------ ---------
Net operating income.......................... $ 1,449 $ 680 $ 2,129
================== ================== =========
Depreciation.................................. $ 356 $ 148 $ 504
Interest...................................... 943 463 1,406
Real estate improvements...................... 929 28 957
Segment assets................................ 57,033 25,334 82,367
_________________________________
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Introduction
Income Opportunity Realty Investors, Inc. (the "Company")- ------------
The Company invests in equity interests in real estate through acquisitions, leasesdirect equity
ownership and partnerships and has invested in mortgage loans on real estate.
The Company is the successor to a California business trust organized on
December 14, 1984 which commenced operations on April 10, 1985.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents at September 30, 1998,March 31, 1999, were $481,000,$205,000, compared with
$1.1 million$103,000 at December 31, 1997.1998. The Company's principal sources of cash have
been, and will continue to be property operations, proceeds from property sales,
financings and refinancings, partnership distributions and, to a lesserthe extent
distributionsnecessary, advances from partnerships.its advisor.
The Company's cash flow from property operations (rents collected less payments
for expenses applicable to rental income) increased from $4.7 million in the
first nine months of 1997decreased to $6.0 million in the first nine months of 1998. Of
this increase $1.8
million is due to the purchase of eight income producing
properties during 1997 and $153,000 is due to increased rental and occupancy
rates at the Company's commercial properties. These increases were partially
offset by a decrease of $700,000 due to the sale of three apartment complexes
during 1997.
In August 1998, the Company received net cash of $1.5 million from the payoff of
its one remaining mortgage note receivable.
Also in August 1998, the Company obtained mortgage financing in the amount of
$816,000 secured by the unencumbered Valley View Center Office Building. Net
cash of $778,000 was received, after the payment of various closing costs
associated with the financing. $1.7 million was expended in 1998 to complete
construction of the building.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
million in the first three months of 1999 from $1.9 million in 1998. This
decrease was mainly due to an increase in property tax payments and repair and
maintenance expenses at the Company's commercial properties.
Interest collected decreased to $7,000 for the three months ended March 31, 1999
from $60,000 in 1998. The decrease is due to the collection of the Company's
last remaining mortgage note receivable in August 1998.
General and administrative expenses paid decreased to $170,000 for the three
months ended March 31, 1999 from $498,000 in 1998. This decrease is due to a
decrease in legal fees relating to the Olive litigation and a decrease in fees
paid related to potential property purchases.
Distributions from a equity partnership were $93,000 for the three months ended
March 31, 1999. No such distributions were received in 1998.
Other cash from operating activities increased to $431,000 for the three months
ended March 31, 1999 from a negative $108,000 in 1998. The increase is due to a
decrease in prepaid expenses and property fundings.
Under its advisory agreement, all or a portion of the annual advisory fee must
be refunded by the advisor if the operating expenses of the Company exceed
certain limits specified in the advisory agreement. The Company received a
refund of $337,000 of its 1998 advisory fee in March 1999 as compared to
$202,000 of its 1997 advisory fee in March 1998.
In the first nine monthsquarter of 1998, quarterly1999, the Company paid dividends of $.45$.15 per share or a
total of $719,000 were paid, and 2,643$225,000. No shares of Common Stock were sold through the dividend
reinvestment program for a total of $29,000.program.
Management reviews the carrying values of the Company's properties at least
annually and whenever events or a change in circumstances indicate that
impairment may exist. Impairment is considered to exist if, in the case of a
property, the future cash flow from the property (undiscounted and without
interest) is less than the carrying amount of the property. In those instances
whereIf impairment is
found to exist, a provision for loss is recorded by a charge against earnings.
The property review generally includes selective property inspections,
which includes discussions with the manager of the property and visits to selected properties
in the surrounding area and a review of the following: (i)(1) the property's current rents
compared to market rents; (ii)(2) the property's expenses; (iii)(3) the property's
maintenance requirements; and (iv)(4) the property's cash flow.flows.
Results of Operations
- ---------------------
For the three and nine months ended September 30, 1998,March 31, 1999, the Company had a net lossesloss of
$556,000 and $513,000$221,000 as compared with a net loss of $266,000 and net
income of $2.9 million in the corresponding periods in 1997. Net income$89,000 for the ninethree months ended September 30, 1997, included gains on sale of real estate of
$3.3 million.March
31, 1998. Fluctuations in this and other components of revenuesrevenue and expensesexpense between the 19971998 and
19981999 periods are discussed below.
Rents in the three and nine months ended September 30, 1998, were $3.3 million
and $10.5 million as compared to $3.2 million and $8.8 million in the
corresponding periods in 1997. Of the increases, $427,000 and $3.7 million for
the three and nine months ended September 30, 1998, is due to eight properties
being acquired during 1997. These increases were partially offset by a decrease
of $244,000 and $2.0 million for the three and nine months ended September 30,
1998, due to the sale of three apartment complexes in 1997. Rents for the
remainder of 1998 are expected to increase as the Company continues to benefit
from the operations of the properties acquired in the second half of 1997.
Property operations expense in the three and nine months ended September 30,
1998, was $1.6 million and $4.5 million as compared to $1.5 million and $4.1
million in the corresponding periods in 1997. Of the increases, $327,000 and
$1.9 million for the three and nine months ended September 30, 1998, is due to
the acquisition of eight properties during 1997. These increases were partially
offset by a decrease of $208,000 and $1.3 million for the three and nine months
ended September 30, 1998 due to the sale of three apartment complexes in 1997.
98
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Results of Operations (Continued)
- ---------------------
Rents in the three months ended March 31, 1999, increased to $3.7 million from
$3.6 million in 1998. The increase in rents was mainly due to an increase in
rental rates and a decrease in bad debts at the Company's commercial properties
and the initial leasing of an office building construction of which was
completed in September 1998. Rents for the remainder of 1999 are expected to
increase as the occupancy rate at the Company's commercial properties is
expected to increase.
Property operations expense in the three months ended March 31, 1999, increased
to $1.7 million from $1.5 million in 1998. The increase was due to an increase
in property tax and repair and maintenance expenses at the Company's commercial
properties.
Interest income decreased to $33,000 and $158,000$7,000 in the three and nine months ended September 30, 1998 comparedMarch 31, 1999
from $63,000 in 1998. The decrease was due to the $61,000 and $203,000 incollection of the corresponding periods in 1997. In August 1998, the Company collected itsCompany's
last remaining mortgage note receivable.receivable in August 1998. Interest income for the
fourth quarterremainder of 19981999 is expected to be minimal due to the payoff of such mortgage note
receivable.insignificant.
Interest expense increased towas constant at $1.4 million and $4.2 million in the three and
nine months ended September 30, 1998,March
31, 1999 and as compared to the $1.1 million and $2.9
million in the corresponding periods in 1997. Of these increases, $207,000 and
$1.5 million for the three and nine months ended September 30, 1998, was due to
the debt incurred or assumed on the eight properties acquired during 1997, and
an additional $118,000 and $352,000 for the three and nine months was due to the
refinancing of a property. These increases were partially offset by a decrease
of $1,000 and $444,000 for the nine months ended September 30, 1998 due to the
sale of three apartment complexes during 1997.1998. Interest expense for the fourth
quarterremaining quarters of
19981999 is expected to be comparable toapproximate that of the thirdfirst quarter, of
1998.unless the Company
should acquire additional properties.
Depreciation expense increased to $551,000 and $1.6 million for$643,000 in the three and
nine months ended September 30, 1998, compared to $426,000 and $1.1 millionMarch 31, 1999 from
$504,000 in the corresponding periods in 1997. These increases were1998. The increase was due to eight properties
being acquired during 1997 partially offset byincreased depreciation of capital and
tenant improvements at the sale of three apartment
complexes during 1997.Company's commercial properties. Depreciation expense is
expected to remain constant, forunless the fourth quarter of 1998 as noCompany should acquire additional
properties are expected to be
acquired during 1998.properties.
Advisory fee expense increased to $165,000 and $500,000of $166,000 in the three and nine
months ended September 30, 1998 comparedMarch 31, 1999 was comparable
to $133,000 and $379,000 for the corresponding periods$168,000 in 1997. These increases were due to an increase in the1998. The Company's gross assets are the basis for such fee.
Advisory fee expense is expected to decline inremain constant, unless the fourth quarter of 1998, as a result of a decline in the
Company's gross assets due to the August 1998 collection of its remaining note
receivable.
Net income fee in the nine months ended September 30, 1997, was $218,000. No
such fee was incurred for the nine months ended September 30, 1998. The fee is
payable to the Company's advisor based on 7.5% of the Company's net income.Company should
acquire additional properties.
General and administrative expense decreased to $206,000 and $594,000$156,000 in the three and nine months
ended September 30, 1998, compared to the $318,000 and
$755,000March 31, 1999 from $216,000 in the corresponding periods in 1997.1998. The decrease iswas mainly due to a
decrease in legal fees related to the Olive litigation.litigation and professional fees
relating to potential property purchases. General and administrative expense for
the fourth quarterremaining quarters of 19981999 is expected to be
comparable toapproximate that of the thirdfirst
quarter of 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)1999.
Tax Matters
- -----------
As more fully discussed in the Company's 19971998 Form 10-K, the Company has elected
and, in management's opinion, qualified, to be taxed as a real estate investment
trust ("REIT"), as defined under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended, (the "Code"). To continue to qualify for
federal taxation as a REIT under the Code, the
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Tax Matters (Continued)
- -----------
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 propertyapartment operations generallytend to fluctuate proportionately with
inflationary increases and decreases in housing costs. Fluctuations in the rate
of inflation also affect the sales value of properties and correspondingly, the ultimate gain to
be realized from property sales. To the effectextent that inflation affects interest
rates, earnings from short-term investments and the cost of the new financings as
well as the cost of variable interest rate debt will be affected.
Inflation also has an effect on 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 to persons and property)
where property-level managers have arranged for the removal, disposal or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the air,
and third parties may seek recovery for personal injury associated with such
materials.
Management is not aware of any environmental liability relating to the above
matters that would have a material adverse effect on the Company's business,
assets or results of operations.
Year 2000
- ---------
Basic Capital Management, Inc. ("BCM"), the Company's advisor, has informed
the Companymanagement that its computer hardware operating system and computer software
have been certified as year 2000 compliant.
Further, Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of BCM,
that performs property management services for the Company's properties, has
informed management that effective January 1, 1999 it began using year 2000
compliant computer hardware and property management software for the CompanyCompany's
commercial properties. With regard to the Company's apartments, Carmel, Ltd. has
informed management that it is currently testingits subcontractors are also using year 112000 compliant
computer hardware and property management software.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Year 2000 (Continued)
2000 compliant property management computer software for the Company's
commercial properties. Carmel, Ltd. expects to begin utilizing such software
January 1, 1999. With regards to the Company's apartment complexes, Carmel, Ltd.
has informed the Company that its subcontractors either have in place or will
have in place in the first quarter of 1999, year 2000 compliant property
management computer software.- ---------
The Company has not incurred, nor does it expect to incur, any costs related to
its computer hardware and accounting and property management computer software being
modified, upgraded or replaced in order to make itthem year 2000 compliant. Such costs have
been or will be borne by either BCM, Carmel, Ltd. or the property management
subcontractors of Carmel, Ltd.
Management has not completed its evaluation of the Company's computer controlled
building systems, such as security, elevators, heating and cooling, etc., to
determine what systems mayare not be year 2000 compliant. Management does not
believebelieves that any
necessary modifications to such systems willare insignificant and do not require
significant expenditures or cause interruptions in operations,to make the affected systems year 2000 compliant, as such
enhanced operating systems are readily available.
The Company has or will have in place the year 2000 compliant systems that will
allow it to operate. The risks the Company faces are that certain of its vendors
will not be able to supply goods or services and that financial institutions and
taxing authorities will not be able to accurately apply payments made to them.
Management believes that other vendors are readily available and that financial
institutions and taxing authorities will, if necessary, apply monies received
manually. The likelihood of the above having a significant impact on the
Company's operations is negligible.
-----------------------------------______________________________________
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 (the "Settlement") of a class and derivative
action entitled Olive et al. v. National Income 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 ofthe
Settlement.
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ITEM 1. LEGAL PROCEEDINGS (Continued)
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 Olive Modification, and during
August and September 1996, the Court held evidentiary hearings to assess
compliance with the terms of the Olive 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 intended to assert that certain actions taken by the
Board of Directors breached the terms of the Olive Modification.
On January 27, 1997, the parties entered into an Amendment to the Olive ModificationSettlement
effective January 9, 1997 (the "Olive Amendment"), which was submitted to the
Court for approval on January 29, 1997. The Olive Amendment providesprovided for the
settlement of alladditional 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 Olive Amendment. As a result of the
hearing, the parties entered into a revised Olive Amendment.1996. The
Court issued an order approving the Olive Amendment on July 3, 1997.
11
ITEM 1. LEGAL PROCEEDINGS (Continued)
- --------------------------
The Olive Amendment provided for the addition of four new unaffiliated members
to the Company's Board of Directors and set forth new requirements for the
approval of any transactions with certain affiliates until April 28, 1999. In
addition, the Company, CMET, TCI and their shareholdersstockholders 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 Olive Modification shall be settled by mutual agreement of the
parties or, lacking such agreement, by an arbitration proceeding.allegations.
Under the Olive Amendment, all shares of the Company owned by Gene E. Phillips
or any of his affiliates
shallwere required to be voted at all stockholder meetings of the Company held until
April 28, 1999 in favor of all new Board members added under the Olive
Amendment. The Olive Amendment also requiresrequired that, until April 28, 1999, all
shares of the Company owned by Gene E. Phillips or hisany affiliates in excess of forty percent (40%)
of the Company's outstanding shares shallwere to be voted in proportion to the votes
cast by all non-affiliated shareholdersstockholders of the Company.
In accordance withThe provisions of the Settlement and the Olive Amendment Richard W. Douglas, Larry E. Harley and
R. Douglas Leonhard were added to the Company's Board of Directors in January
1998 and Murray Shaw was added to the Company's Board of Directors in February
1998.
13
14terminated on April 28,
1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
Exhibit
Number Description
- - ------ -----------
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 December 30, 1997, was filed
January 9, 1998, with respect to Item 2. "Acquisition or Disposition of
Assets," and Item 7. "Financial Statements and Exhibits," which reports
the acquisition of Akard Plaza and Fireside Thrift Building, as amended
by Form 8-K/A, filed August 5, 1998.
14None.
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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: November 9, 1998May 13, 1999 By: /s/ Randall M. Paulson
------------------------ ----------------------------------------------------------
Randall M. Paulson
President
Date: November 9, 1998May 13, 1999 By: /s/ Thomas A. Holland
------------------------ ------------------------------------------------ -----------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
1513
16
INCOME OPPORTUNITY REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Three Months Ended September 30, 1998
Exhibit Page
Number Description Number
- - ------ ----------- ------
27.0 Financial Data Schedule. 17
March 31, 1999
Exhibit Page
Number Description Number
- ------ ------------------------------------------------------- ------
27.0 Financial Data Schedule. 15
14