SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2000
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Commission File Number 1-14784
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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
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas, 75231
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(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 1,518,200
- ---------------------------- --------------------------------
(Class) (Outstanding at July 31, 2000)
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
The accompanying Consolidated Financial Statements have not been audited by
independent certified public accountants, but in the opinion of the management
of Income Opportunity Realty Investors, Inc. ("IORI"), all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the IORI's consolidated financial position, consolidated results of operations
and consolidated cash flows at the dates and for the periods indicated have been
included.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2000 1999
--------- ------------
(dollars in thousands,
except per share)
Assets
------
Real estate held for investment, net of
accumulated depreciation ($5,978 in 2000 and
$9,509 in 1999).................................... $ 67,950 $ 86,542
Investment in partnerships.......................... 82 907
Cash and cash equivalents........................... 18,297 722
Other assets (including $1,400 in 2000 and $107
in 1999 from affiliates)........................... 3,252 3,014
--------- ---------
$ 89,581 $ 91,185
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable.......................... $ 48,559 $ 62,852
Other liabilities (including $13 in 2000 and
$721 in 1999 to affiliates)........................ 2,481 4,342
--------- ---------
51,040 67,194
Commitments and contingencies
Stockholders' equity
Common Stock, $.01 par value;
authorized, 10,000,000 shares; issued and
outstanding, 1,530,500 shares in 2000 and
1,528,908 in 1999.................................. 15 15
Paid-in capital..................................... 64,882 64,874
Accumulated distributions in excess of accumulated
earnings........................................... (26,321) (40,898)
Treasury stock at cost, 6,000 shares in 2000........ (35) --
--------- ---------
38,541 23,991
--------- ---------
$ 89,581 $ 91,185
========= =========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
2
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(dollars in thousands, except per share)
Property revenue
Rents........................................... $ 3,623 $ 4,089 $ 7,738 $ 7,817
Property expense
Property operations............................ 1,771 1,621 3,619 3,293
--------- --------- --------- ---------
Operating income.............................. 1,852 2,468 4,119 4,524
Other income
Interest........................................ 91 6 98 13
Equity in income/(loss) of
partnerships.................................. (23) 253 (69) 305
Gain on sale of real estate.................... 16,119 -- 17,022 --
--------- --------- --------- ---------
16,187 259 17,051 318
Other expense
Interest........................................ 1,356 1,464 2,771 2,835
Depreciation.................................... 613 675 1,324 1,318
Advisory fee to affiliate....................... 168 166 335 332
Net income fee to affiliate..................... 1,171 2 1,219 2
General and administrative...................... 289 173 487 329
--------- --------- --------- ---------
3,597 2,480 6,136 4,816
--------- --------- --------- ---------
Net income...................................... $ 14,442 $ 247 $ 15,034 $ 26
========= ========= ========= =========
Earnings Per Share
Net income.................................... $ 9.43 $ .16 $ 9.82 $ .02
========= ========= ========= =========
Weighted average Common shares
used in computing earnings
per share..................................... 1,530,345 1,526,785 1,530,379 1,526,416
========= ========= ========= =========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
3
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2000
Accumulated
Distributions
Common Stock in Excess of
------------------- Treasury Paid-In Accumulated Stockholders'
Shares Amount Stock Capital Earnings Equity
--------- ------ -------- --------- ------------- ------------
(dollars in thousands, except per share)
Balance, January 1, 2000............... 1,528,908 $ 15 $ -- $ 64,874 $ (40,898) $ 23,991
Sale of Common Stock under
dividend reinvestment
plan.................................. 1,592 -- -- 8 -- 8
Repurchase 6,000 shares of
Common Stock.......................... -- -- (35) -- -- (35)
Dividends ($.30 per share)............. -- -- -- -- (457) (457)
Net income............................. -- -- -- -- 15,034 15,034
--------- ------ -------- --------- ------------- ------------
Balance, June 30, 2000................. 1,530,500 $ 15 $ (35) $ 64,882 $ (26,321) $ 38,541
========= ====== ======== ========= ============= ============
The accompanying notes are an integral part of these
Consolidated Financial Statements.
4
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
---------------------
2000 1999
-------- --------
(dollars in thousands)
Cash Flows from Operating Activities
Rents collected...................................... $ 7,793 $ 7,818
Payments for property operations..................... (3,493) (3,175)
Interest collected................................... 98 13
Interest paid........................................ (2,651) (2,734)
Advisory and net income fee (paid to)/refunded
by affiliate...................................... (1,301) 6
General and administrative expenses paid............. (485) (342)
Distributions from equity partnerships' operating
cash flow......................................... 25 155
Other................................................ (522) 626
-------- --------
Net cash provided by (used in) operating
activities....................................... (536) 2,367
Cash Flows from Investing Activities
Funding of equity partnerships....................... (8) (2)
Distributions from equity partnerships'
investing cash flow............................... -- 1,155
Real estate improvements............................. (766) (1,622)
Proceeds from sale of real estate.................... 25,931 --
Acquisition of real estate........................... (4,892) --
-------- --------
Net cash provided by (used in) investing
activities....................................... 20,265 (469)
Cash Flows from Financing Activities
Payments on notes payable............................ (426) (452)
Deferred financing costs............................. -- (37)
Distributions from equity partnerships' financing
cash flow......................................... 739 --
Sale of common stock under dividend reinvestment
plan.............................................. 8 5
Purchase of treasury stock........................... (35) --
Dividends to stockholders............................ (453) (452)
Net (payments) to affiliate.......................... (1,987) (579)
-------- --------
Net cash (used in) financing activities............. (2,154) (1,515)
Net increase in cash and cash equivalents............. 17,575 383
Cash and cash equivalents, beginning of period........ 722 103
-------- --------
Cash and cash equivalents, end of period.............. $ 18,297 $ 486
======== ========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
5
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Six Months
Ended June 30,
--------------------
2000 1999
-------- --------
(dollars in thousands)
Reconciliation of net income to net cash
provided by (used in) operating activities
Net income........................................... $ 15,034 $ 26
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization...................... 1,393 1,428
Gain on sale of real estate........................ (17,022) --
Equity in (income)/loss of partnerships............ 69 (305)
Distributions from equity partnerships' operating
cash flow......................................... 25 155
(Increase) decrease in other assets................. (160) 902
Increase (decrease) in interest payable............. 51 (8)
Increase in other liabilities....................... 74 169
-------- --------
Net cash provided by (used in) operating
activities....................................... $ (536) $ 2,367
======== ========
Schedule of noncash investing and financing
activities
Notes payable from acquisition of real estate...... $ 2,814 $ --
Notes payable assumed by buyer on sale of
real estate...................................... (16,094) --
The accompanying notes are an integral part of these
Consolidated Financial Statements.
6
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
- -----------------------------
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
Dollar amounts in tables are in thousands, except per share amounts. Operating
results for the six month period ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000. For further information, refer to the Consolidated Financial Statements
and notes thereto included in IORI's Annual Report on Form 10-K for the year
ended December 31, 1999 (the "1999 Form 10-K").
Certain balances for 1999 have been reclassified to conform to the 2000
presentation.
NOTE 2. INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES
- --------------------------------------------------------
IORI owns a 36.3% general partner interest in Tri-City Limited Partnership
("Tri-City"), which owns the 70,275 sq. ft. Chelsea Square Shopping Center in
Houston, Texas. In February 2000, Tri-City obtained mortgage financing of $2.1
million secured by the previously unencumbered shopping center. Tri-City
received net cash of $2.0 million after the funding of required escrows and the
payment of various closing costs. The mortgage bears interest at a fixed rate
of 10.24% per annum until February 2001 and thereafter at a variable rate,
requires monthly payments of principal and interest of $20,601 and matures in
February 2005. IORI received a distribution of $739,000 of the net cash.
NOTE 3. REAL ESTATE
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In 2000, IORI sold the following properties:
Net
Sales Cash Debt Gain on
Property Location Units/Sq.Ft. Price Received Discharged Sale
- ------------- --------------- ------------- -------- ---------- ---------- ---------
First Quarter
Apartments
La Monte Park Houston, TX 128 Units $ 5,000 $ 1,066 $ 3,829 * $ 903
Second Quarter
Apartments
Renaissance Parc Dallas, TX 294 Units 17,198 4,536 12,265 * 1,213
Office Buildings
Olympic Los Angeles, CA 46,685 Sq.Ft. 8,500 3,811 4,443 1,850
Saratoga Saratoga, CA 89,825 Sq.Ft. 25,000 17,709 6,968 13,056
- ------------
* Debt assumed by purchaser.
7
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. REAL ESTATE (Continued)
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In 2000, IORI purchased the following properties:
Net
Units/ Purchase Cash Debt Interest Maturity
Property Location Sq.Ft./Acres Price Paid Incurred Rate Date
- -------------- ------------------ ------------ -------- ------- --------- --------- --------
Second Quarter
Apartments
Frankel
Portfolio * Midland, TX 391 Units * $ 14,034 $ 2,905 $ 10,875 9.13% 07/03
Land
Etheredge Collin County, TX 74.98 Acres 1,875 344 1,406 ** 10.0% 04/01
Fambrough Collin County, TX 75.07 Acres 1,877 345 1,408 ** 10.0% 04/01
Frankel Midland County, TX 1.01 Acres 41 43 -- -- --
- ------------
* Frankel portfolio consists of five apartments: 60 unit Brighton Court, 92
unit Del Mar Villas, 68 unit The Enclave, 57 unit Signature Place and 114
unit Sinclair Place.
** Seller financing.
NOTE 4. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
- -----------------------------------------------------
Fees and cost reimbursements to Basic Capital Management, Inc. ("BCM"), a
contractual advisor under the supervision of the Board of Directors, and its
affiliates for the six months ended:
June 30,
2000
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Fees
Advisory................................... $ 335
Net income................................. 1,219
Property acquisition....................... 565
Real estate brokerage...................... 1,192
Mortgage brokerage and equity refinancing.. 7
Property and construction management and
leasing commissions*..................... 330
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$ 3,648
=======
Cost reimbursements........................ $ 164
=======
- -------------------
* Net of property management fees paid to subcontractors other than Regis
Realty, Inc., which is owned by an affiliate of BCM.
NOTE 5. OPERATING SEGMENTS
- --------------------------
Significant differences among the accounting policies of IORI's operating
segments as compared to the Consolidated Financial Statements principally
involve the calculation and allocation of general and administrative expenses.
Management evaluates the performance of each
8
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. OPERATING SEGMENTS (Continued)
- --------------------------
of the operating segments and allocates resources to each of them based on their
net operating income and cash flow. Expenses that are not reflected in the
segments are $487,000 and $329,000 of general and administrative expenses for
the six months ended June 30, 2000 and 1999, respectively. Excluded from
operating segment assets are assets of $21.7 million at June 30, 2000, and $3.4
million at June 30, 1999, which are not identifiable with an operating segment.
There are no intersegment revenues and expenses and all business is conducted in
the United States.
Presented below is the operating income of each operating segment for the six
months ended June 30 and each segment's assets at June 30.
Commercial
2000 Properties Apartments Land Total
---------- ---------- ------ ---------
Rents..................... $ 4,866 $ 2,872 $ -- $ 7,738
Property operations....... 1,984 1,635 -- 3,619
---------- ---------- ------ ---------
Segment operating income.. $ 2,882 $ 1,237 $ -- $ 4,119
========== ========== ====== =========
Depreciation.............. $ 1,001 $ 323 $ -- $ 1,324
Interest.................. 1,767 934 70 2,771
Real estate improvements.. 483 283 -- 766
Assets.................... 38,660 25,249 4,041 67,950
Commercial
Property sales: Properties Apartments Total
---------- ---------- ---------
Sales price............... $ 33,500 $ 22,198 $ 55,698
Cost of sale.............. 18,594 20,082 38,676
---------- ---------- ---------
Gain on sale.............. $ 14,906 $ 2,116 $ 17,022
========== ========== =========
Commercial
1999 Properties Apartments Total
---------- ---------- ---------
Rents..................... $ 5,168 $ 2,649 $ 7,817
Property operations....... 2,141 1,152 3,293
---------- ---------- ---------
Segment operating income.. $ 3,027 $ 1,497 $ 4,524
========== ========== =========
Depreciation.............. $ 1,015 $ 303 $ 1,318
Interest.................. 1,925 910 2,835
Real estate improvements.. 1,622 -- 1,622
Assets.................... 59,400 24,595 83,995
NOTE 6. COMMITMENTS AND CONTINGENCIES
- -------------------------------------
IORI is involved in various lawsuits arising in the ordinary course of business.
Management is of the opinion that the outcome of these lawsuits will have no
material impact on IORI's financial condition, results of operations or
liquidity.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Introduction
- ------------
IORI invests in equity interests in real estate through direct equity ownership
and partnerships and has invested in mortgage loans on real estate. IORI is the
successor to a California business trust organized on December 14, 1984, which
commenced operations on April 10, 1985.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents at June 30, 2000, were $18.3 million, compared with
$722,000 at December 31, 1999. IORI's principal sources of cash have been, and
will continue to be property operations, proceeds from property sales,
financings and refinancings, partnership distributions and, to the extent
necessary, advances from its advisor.
IORI's cash from property operations (rents collected less payments for expenses
applicable to rental income) decreased to $4.3 million for the six months ended
June 30, 2000, from $4.6 million in 1999. The decrease was primarily due to the
sale of La Monte Park Apartments, Renaissance Parc Apartments, Saratoga Office
Building and Olympic Office Building in 2000, partially offset by the Meridian
Apartments acquisition in 1999.
General and administrative expenses paid increased to $485,000 in the six months
ended June 30, 2000, from $342,000 in 1999. The increase was primarily due to
an increase in legal fees, shareholder relations expenses, professional fees and
advisor cost reimbursements.
Distributions from equity partnerships' operating cash flow were $25,000 for the
six months ended June 30, 2000, compared to $155,000 in 1999.
No distributions from equity partnerships' investing cash flow were received in
the six months ended June 30, 2000, compared to $1.2 million in 1999. The 1999
distribution was due to Tri-City's sale of Summit at Bridgewood Shopping Center
in 1999.
Distributions from equity partnerships' financing cash flow of $739,000 were
received in the six months ended June 30, 2000. See NOTE 2. "INVESTMENT IN
EQUITY METHOD REAL ESTATE ENTITIES."
Advisory and net income fee paid increased to $1.3 million in the six months
ended June 30, 2000 from a refund of $6,000 in the six months ended June 30,
1999. The increase is primarily due to the net income fee of $1.3 million. No
such fee was incurred in 1999. Under its advisory agreement, all or a portion of
the annual advisory fee must be refunded by the advisor if the operating
expenses of IORI exceed certain limits specified in the advisory agreement. IORI
received a refund of $289,000 of its 1999 advisory fee in April 2000, compared
to $167,000 of its 1998 advisory fee in March 1999.
Other cash used in operating activities was $522,000 for the six months ended
June 30, 2000, compared to cash provided of $626,000 in 1999. The change is
primarily due to the funding of escrows and payments of prepaid expenses.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
In 2000, IORI paid dividends of $.30 per share or a total of $453,000, and 1,592
shares of Common Stock were sold through the dividend reinvestment program for a
total of $8,000.
In 2000, 6,000 shares of Common Stock were repurchased for a total of $35,000.
There were no shares repurchased in 1999.
In March 2000, IORI sold the 128 unit La Monte Park Apartments in Houston,
Texas, for $5.0 million, receiving net cash of $1.1 million after the payment of
various closing costs. The purchaser assumed the $3.8 million mortgage secured
by the property.
In April 2000, IORI purchased, in separate transactions, Etheredge and Fambrough
land, 75.0 acre and 75.1 acre parcels of unimproved land in Collin County,
Texas, for $1.9 million each. IORI paid a total of $689,000 in cash and
obtained seller financing of the remaining $1.4 million of each of the purchase
prices.
In May 2000, IORI sold the 89,825 sq.ft. Saratoga Office Building in Saratoga,
California, for $25.0 million, receiving net cash of $17.7 million after the
payment of various closing costs.
Also in May 2000, IORI sold the 46,685 sq.ft. Olympic Office Building in Los
Angeles, California, for $8.5 million, receiving net cash of $3.8 million after
the payment of various closing costs.
In June 2000, IORI sold the 294 unit Renaissance Parc Apartments in Dallas,
Texas, for $17.2 million, receiving net cash of $4.5 million after the payment
of various closing costs. The purchaser assumed the $12.3 million mortgage
secured by the property.
Also in June 2000, IORI purchased, the Frankel portfolio, consisting of the 60
unit Brighton Court Apartments, the 92 unit Del Mar Villas Apartments, the 68
unit Enclave Apartments, the 57 unit Signature Place Apartments and the 114 unit
Sinclair Place Apartments in Midland, Texas, for $14.0 million. IORI paid $2.9
million in cash and obtained mortgage financing of $10.9 million.
Further in June 2000, IORI purchased Frankel land, a 1.0 acre parcel of
unimproved land in Midland County, Texas, for $41,000. IORI paid $43,000 in
cash after the payment of various closing costs.
Management reviews the carrying values of IORI's properties at least annually
and whenever events or a change in circumstances indicate that impairment may
exist. Impairment is considered to exist if, in the case of a property, the
future cash flow from the property (undiscounted and without interest) is less
than the carrying amount of the property. If impairment is found to exist, a
provision for loss is recorded by a charge against earnings. The property review
generally includes selective property inspections, discussions with the manager
of the
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
property visits to selected properties in the area and a review of the
following: (1) the property's current rents compared to market rents, (2) the
property's expenses, (3) the property's maintenance requirements, and (4) the
property's cash flows.
Results of Operations
- ---------------------
For the three and six months ended June 30, 2000, IORI had net income of $14.4
million and $15.0 million as compared with net income of $247,000 and $26,000
for the corresponding periods in 1999. Fluctuations in components of revenue
and expense between the 1999 and 2000 periods are discussed below.
Rents in the three and six months ended June 30, 2000 of $3.6 million and $7.7
million approximated the $4.1 million and $7.8 million in the corresponding
periods in 1999. Rents for the remainder of 2000 are expected to increase with
the purchase of the Frankel portfolio.
Property operations expense in the three and six months ended June 30, 2000 of
$1.8 million and $3.6 million approximated the $1.6 million and $3.3 million in
the corresponding periods in 1999.
Interest income in the three and six months ended June 30, 2000 was $91,000 and
$98,000 as compared to $6,000 and $13,000 in the corresponding periods in 1999.
The increase was due to the investment of cash received from the sale of two
apartment and two commercial properties. Interest income for the remainder of
2000 is expected to decline as IORI selectively purchases properties.
Equity in partnerships in the three and six months ended June 30, 2000 were
losses of $23,000 and $69,000, as compared to income of $253,000 and $305,000.
The decrease is mainly due to IORI's equity share of the 1999 gain recognized by
Tri-City on the sale of one commercial property.
For the three and six months ended June 30, 2000, gains on sale of real estate
totaling $16.1 million and $17.0 million were recognized, $903,000 on the sale
of La Monte Park Apartments, $1.2 million on the sale of Renaissance Parc
Apartments, $1.9 million on the sale of Olympic Office Building and $13.1
million on the sale of Saratoga Office Building. No such gains were recognized
in 1999.
Interest expense of $1.4 million in the three months ended June 30, 2000 was
comparable to the $1.5 million in 1999 and was $2.8 million for the six months
ended June 30, 2000 and 1999. Interest expense for the remainder of 2000 is
expected to approximate that of the first and second quarter, unless IORI should
selectively acquire or sell properties.
Depreciation expense decreased to $613,000 in the three months ended June 30,
2000 compared to $675,000 in 1999 and remained constant at $1.3 million in the
six months ended June 30, 2000 and 1999. The decrease in
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Results of Operations (Continued)
- ---------------------
the second quarter is due to sale of one apartment and two commercial
properties. Depreciation is expected to increase from the second quarter with
the purchase of the Frankel portfolio.
Advisory fee expense of $168,000 and $335,000 in the three and six months ended
June 30, 2000 was comparable to the $166,000 and $332,000 in 1999. IORI's gross
assets are the basis for such fee. Advisory fee expense is expected to remain
constant, unless IORI should selectively acquire or sell properties.
Net income fee was $1.2 million and $2,000 in the three and six months ended
June 30, 2000 and 1999. The net income fee is payable to IORI's advisor based
on 7.5% of IORI's net income.
General and administrative expense was $289,000 and $487,000 for the three and
six months ended June 30, 2000 as compared to $173,000 and $329,000 in the
corresponding periods in 1999. The three and six month increase was primarily
due to an increase in legal fees, professional fees, shareholder relations
expenses and advisor cost reimbursements. General and administrative expense for
the remaining quarters of 2000 is expected to approximate that of the first and
second quarter of 2000.
Tax Matters
- -----------
As more fully discussed in IORI's 1999 Form 10-K, IORI has elected and, in
management's opinion, qualified, to be taxed as a real estate investment trust
("REIT"), as defined under Sections 856 through 860 of the Internal Revenue Code
of 1986, as amended, (the "Code"). To continue to qualify for federal taxation
as a REIT under the Code, IORI is required to hold at least 75% of the value of
its total assets in real estate assets, government securities, cash and cash
equivalents at the close of each quarter of each taxable year. The Code also
requires a REIT to distribute at least 95% of its REIT taxable income plus 95%
of its net income from foreclosure property, all as defined in Section 857 of
the Code, on an annual basis to shareholders.
Inflation
- ---------
The effects of inflation on IORI's operations are not quantifiable. Revenues
from apartment operations tend to fluctuate proportionately with inflationary
increases and decreases in housing costs. Fluctuations in the rate of inflation
also affect the sales value of properties and the ultimate gain to be realized
from property sales. To the extent that inflation affects interest rates,
earnings from short-term investments and the cost of new financings, as well as
the cost of variable interest rate debt, will be affected.
Environmental Matters
- ---------------------
Under various federal, state and local environmental laws, ordinances and
regulations, IORI may be potentially liable for removal or
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Environmental Matters (Continued)
- ---------------------
remediation costs, as well as certain other potential costs, relating to
hazardous or toxic substances (including governmental fines and injuries to
persons and property) where property-level managers have arranged for the
removal, disposal or treatment of hazardous or toxic substances. In addition,
certain environmental laws impose liability for release of asbestos-containing
materials into the air and third parties may seek recovery for personal injury
associated with such materials.
Management is not aware of any environmental liability relating to the above
matters that would have a material adverse effect on IORI's business, assets or
results of operations.
Year 2000
- ---------
Even though January 1, 2000, has passed and no adverse impact from the
transition to the year 2000 was experienced, no assurance can be provided that
IORI's suppliers and tenants have not been affected in a manner that is not yet
apparent. As a result, management will continue to monitor IORI's year 2000
compliance and the year 2000 compliance of IORI's suppliers and tenants.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
- -----------------------------------------------------------------------
At June 30, 2000, IORI's exposure to a change in interest rates on its debt is
as follows:
Weighted Effect of 1%
Average Increase In
Balance Interest Rate Base Rates
---------- ------------- ------------
(Amounts in thousands, except per share)
Wholly-owned debt:
Variable rate.................. $ 29,711 10.96% $ 296
Fixed rate..................... 18,848 8.45% --
-------- ------
$ 48,559 $ 296
======== ======
Total decrease in IORI's annual
net income..................... $ 296
======
-----------------------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
Olive Litigation. In February 1990, IORI, together with Continental Mortgage
and Equity Trust ("CMET"), National Income Realty Trust and Transcontinental
Realty Investors, Inc. ("TCI"), three real estate
14
ITEM 1. LEGAL PROCEEDINGS (Continued)
- --------------------------
entities with, at the time, the same officers, directors or trustees and advisor
as IORI, entered into a settlement (the "Settlement") of a class and derivative
action entitled Olive et al. v. National Income Realty Trust et al. relating to
the operation and management of each of the entities (the "Olive Litigation").
On April 23, 1990, the Court granted final approval of the terms of the
Settlement. The Settlement was modified in 1994 (the "Modification").
On January 27, 1997, the parties entered into an Amendment to the Modification
effective January 9, 1997 (the "Olive Amendment"). The Olive Amendment provided
for the settlement of additional matters raised by plaintiffs' counsel in 1996.
The Court issued an order approving the Olive Amendment on July 3, 1997.
The Olive Amendment provided that IORI's Board of Directors retain a
management/compensation consultant or consultants to evaluate the fairness of
IORI's advisory contract with Basic Capital Management, Inc. and any contract of
its affiliates with TCI, CMET and IORI, including, but not limited to, the
fairness to TCI, CMET and IORI of such contracts relative to other means of
administration. In 1998, the Board engaged a management/compensation consultant
to perform the evaluation which was completed in September 1998.
In 1999, plaintiffs' counsel asserted that the Board did not comply with the
provision requiring such engagement and requested that the Court exercise its
retained jurisdiction to determine whether there was a breach of this provision
of the Olive Amendment. Although several status conferences have been held on
this matter, there has been no Court order resolving whether there was any
breach of the Olive Amendment.
In January 2000, the Board engaged another management/compensation consultant to
perform the required evaluation again. This evaluation was completed in April
2000 and was provided to plaintiffs' counsel. The Board believes that any
alleged breach of the Olive Amendment has been fully remedied by the Board's
engagement of the second consultant.
The Board believes that the provisions of the Settlement, the Modification and
Olive Amendment terminated on April 28, 1999. However, plaintiffs' counsel has
asserted that certain provisions continue to be effective after the termination
date. This matter is pending before the Court.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits:
Exhibit
Number Description
- ------- ---------------------------------------------------------
27.0 Financial Data Schedule, filed herewith.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
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(b) Reports on Form 8-K as follows:
A Current Report on Form 8-K, dated June 15, 2000, was filed June 22, 2000,
with respect to ITEM 5. "OTHER EVENTS," which reports the resignation of
two directors.
A Current Report on Form 8-K, dated May 25, 2000, was filed August 2, 2000,
with respect to ITEM 2. "ACQUISITIONS AND DISPOSITION OF ASSETS," and ITEM
7. "FINANCIAL STATEMENTS AND EXHIBITS," which reports the acquisition of
the Frankel Portfolio and Etheredge, Fambrough and Frankel land as well as
the disposition of La Monte Park Apartments, Renaissance Parc Apartments,
Olympic Office Building and Saratoga Office Building.
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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: August 14, 2000 By: /s/ Karl L. Blaha
------------------------ -------------------------------------
Karl L. Blaha
President
Date: August 14, 2000 By: /s/ Mark W. Branigan
------------------------ -------------------------------------
Mark W. Branigan
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 2000
Exhibit Page
Number Description Number
- ------- ------------------------------------------------ ------
27.0 Financial Data Schedule. 19
18