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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 JUNE 30, 1996
Commission File Number 1-9525
INCOME OPPORTUNITY REALTY INVESTORS, INC.
--------------------------------------------------------
(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 Office) (Zip Code)
(214) 692-4700
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(Registrant's Telephone Number,
Including Area Code)
INCOME OPPORTUNITY REALTY TRUST
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(Former Name of Registrant)
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 .
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Common Stock, $.01 par value 1,519,888
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(Class) (Outstanding at August 2, 1996)
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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
June 30, December 31,
1996 1995
-------------- --------------
Assets (dollars in thousands)
------
Notes and interest receivable
Performing....................................... $ 1,992 $ 1,986
Foreclosed real estate held for sale, net of
accumulated depreciation ($20 in 1996 and 1995).. 914 966
Less - allowance for estimated losses.............. - (121)
-------------- --------------
2,906 2,831
Real estate held for investment, net of
accumulated depreciation ($6,614 in 1996 and
$6,087 in 1995).................................. 39,002 39,480
Investment in partnerships......................... 2,566 2,472
Cash and cash equivalents.......................... 7,834 2,988
Other assets (including $228 in 1996 and $90 in
1995 from affiliates)............................ 2,625 1,398
-------------- --------------
$ 54,933 $ 49,169
============== ==============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable......................... $ 29,880 $ 22,682
Other liabilities (including $243 in 1995 to
affiliates)...................................... 2,183 2,296
-------------- --------------
32,063 24,978
Commitments and contingencies
Stockholders' equity
Common Stock, $.01 par value;
authorized, 10,000,000 shares; issued and
outstanding, 1,519,888 shares in 1996 and
1,582,888 shares in 1995......................... 15 3,347
Paid-in capital.................................... 64,804 62,093
Accumulated distributions in excess of accumulated
earnings......................................... (41,949) (41,249)
-------------- --------------
22,870 24,191
-------------- --------------
$ 54,933 $ 49,169
============== ==============
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 June 30, Ended June 30,
---------------------------------- ---------------------------------
1996 1995 1996 1995
-------------- -------------- --------------- -------------
(dollars in thousands, except per share)
INCOME
Rents....................... $ 2,026 $ 1,950 $ 4,059 $ 3,700
Interest.................... 88 51 165 113
-------------- -------------- --------------- -------------
2,114 2,001 4,224 3,813
EXPENSES
Property operations......... 1,104 1,068 2,146 2,003
Equity in (income) loss of
partnerships .............. (31) 729 (30) 644
Interest.................... 655 466 1,151 936
Depreciation................ 264 264 527 521
Advisory fee to affiliate... 103 91 197 183
General and administrative.. 248 263 608 398
-------------- -------------- --------------- -------------
2,343 2,881 4,599 4,685
-------------- -------------- --------------- -------------
Net (loss).................... $ (229) $ (880) $ (375) $ (872)
============== ============== =============== =============
Earnings Per Share
Net (loss).................. $ (.15) $ (.56) $ (.24) $ (.55)
============== ============== =============== =============
Weighted average shares of
Common Stock used in
computing earnings per share 1,519,888 1,582,888 1,540,240 1,582,888
============== ============== =============== =============
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 Six Months Ended June 30, 1996
Accumulated
Distributions
Common Stock in Excess of
-------------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Earnings Equity
-------- -------- ------------ -------------- --------------
(dollars in thousands)
Balance, January 1,
1996.................... 1,582,888 $ 3,347 $ 62,093 $ (41,249) $ 24,191
Change in par value....... - (3,332) 3,332 - -
Repurchase of Common
Stock................... (63,000) - (621) - (621)
Dividends ($.40 per
share).................. - - - (325) (325)
Net (loss)................ - - - (375) (375)
------------- ----------- ------------ --------------- --------------
Balance, June 30, 1996.... 1,519,888 $ 15 $ 64,804 $ (41,949) $ 22,870
============= =========== ============ =============== ==============
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 Six Months
Ended June 30,
-----------------------------------
1996 1995
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(dollars in thousands)
Cash Flows from Operating Activities
Rents collected.................................. $ 4,066 $ 3,687
Interest collected............................... 159 107
Interest paid.................................... (1,007) (896)
Payments for property operations................. (2,034) (1,743)
Advisory fee paid to affiliate................... (202) (183)
General and administrative expenses paid......... (617) (551)
Distribution from equity partnerships' operating
cash flow...................................... 6 39
Other............................................ (822) (323)
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Net cash provided by (used in) operating
activities.................................. (451) 137
Cash Flows from Investing Activities
Real estate improvements......................... (119) (120)
Contributions to partnerships.................... (70) (5)
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Net cash (used in) investing activities....... (189) (125)
Cash Flows from Financing Activities
Payments on notes payable........................ (198) (302)
Proceeds from notes payable...................... 7,300 -
Debt issue costs................................. (297) -
Distributions to stockholders.................... (325) (238)
Advances from (repayments to) advisor............ (373) 743
Repurchase of Common Stock....................... (621) -
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Net cash provided by financing activities..... 5,486 203
Net increase (decrease) in cash and cash
equivalents...................................... 4,846 215
Cash and cash equivalents, beginning of period.... 2,988 232
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Cash and cash equivalents, end of period.......... $ 7,834 $ 447
============== ==============
Reconciliation of net (loss) to net cash provided
by (used in) operating activities
Net (loss)........................................ $ (375) $ (872)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization.................... 570 558
Funding of equity partnerships................... - (5)
Equity in (income) losses of partnerships........ (30) 644
Distributions from partnerships in excess of
current period earnings........................ 6 39
(Increase) in other assets....................... (850) (194)
Increase (decrease) in interest payable.......... 95 (2)
Increase (decrease) in other liabilities......... 133 (31)
-------------- --------------
Net cash provided by operating activities..... $ (451) $ 137
============== ==============
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 six month period ended June 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. 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, 1995 (the "1995 Form 10-K").
At a special meeting of shareholders held on March 15, 1996, shareholders
approved a proposal to convert the Company, then a California business trust
with a finite life into a Nevada corporation with a perpetual life. The
conversion was effective March 15, 1996.
Certain balances for 1995 have been reclassified to conform to the 1996
presentation. Shares and per share data have been restated for the two for one
forward Common Stock split effected June 14, 1996.
NOTE 2. NOTES AND INTEREST PAYABLE
In March 1996, the Company obtained mortgage financing of $7.3 million secured
by the previously unencumbered Saratoga Office Building in Saratoga,
California. The Company received net cash of $6.6 million after funding
required tax and insurance escrows and the payment of various closing costs
associated with the financing. The mortgage bears interest at 9.0% per annum,
requires monthly payments of principal and interest of $61,261 and matures
April 1, 2006. The Company paid a mortgage brokerage and equity refinancing
fee of $73,000 to Basic Capital Management, Inc., the Company's advisor, based
on the $7.3 million financing.
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
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Introduction (Continued)
partnerships, and 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.
Liquidity and Capital Resources
Cash and cash equivalents at June 30, 1996 aggregated $7.8 million, compared
with $3.0 million at December 31, 1995. 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 $7.5 million of its available cash for acquisitions during the
remainder of 1996. The Company anticipates that after closing such
acquisitions, it will have sufficient cash to meet its various cash
requirements during the remainder of 1996, including the payment of
distributions, debt service obligations and property maintenance and
improvements.
In March 1996, the Company received net cash of $6.6 million from the financing
of its previously unencumbered Saratoga Office Building in Saratoga,
California.
In the first six months of 1996, the Company paid quarterly dividends
aggregating $.40 per share or a total of $325,000.
Through July 31, 1996, the Company had repurchased 198,904 shares of its Common
Stock at a total cost of $1.8 million pursuant to a repurchase program
commenced in December 1989. 63,000 of such shares were repurchased in 1996 at
a total cost of $625,000. The Company's Board of Directors has authorized the
Company's repurchase of a total of 200,000 shares under such repurchase
program, of which 1,096 shares remain to be repurchased.
On a quarterly basis, the Company's management reviews the carrying value of
the Company's mortgage note receivable and properties held for sale and
periodically, but no less than annually, its properties held for investment.
Generally accepted accounting principles require that the carrying value of
such assets cannot exceed the lower of their respective carrying amounts or
estimated net realizable value. In the initial instance when the estimated net
realizable value of a mortgage note receivable or a property held for sale is
less than the carrying amount at the time of evaluation, a reserve is
established and a corresponding provision for loss is recorded by a charge
against earnings. A subsequent revision to estimated net realizable value
either increases or decreases such reserve with a corresponding charge against
or credit to earnings. In the case of properties held for investment the
carrying value of the property is written down and a provision for loss is
recorded. The estimate of net realizable value of the Company's mortgage note
receivable is based on management's review
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
and evaluation of the collateral property securing the mortgage note. The
property review generally includes selective property inspections, a review of
the property's current rents compared to market rents, a review of the
property's expenses, a review of maintenance requirements, discussions with the
manager of the property and a review of the surrounding area. See "Recent
Accounting Pronouncement," below.
Results of Operations
For the six months ended June 30, 1996, the Company had a net loss of $375,000,
as compared with a net loss of $872,000 in the corresponding period in 1995.
For the three months ended June 30, 1996, the Company had a net loss of
$229,000 as compared with a net loss of $880,000 in the corresponding period in
1995. The primary factors contributing to the Company's net loss are discussed
in the following paragraphs.
Rents in the three and six months ended June 30, 1996 were $2.0 million and
$4.0 million, as compared to $2.0 million and $3.7 million in the corresponding
periods in 1995. Of this increase $169,000 is due to the Company's obtaining,
through foreclosure, the Spanish Trace Apartments in Irving, Texas.
Property operations expense in the three and six months ended June 30, 1996
were $1.1 million and $2.1 million, as compared to $1.1 million and $2.0
million in 1995. Of this increase $106,000 is due to the Company's obtaining
in March 1996, through deed in lieu of foreclosure, the Spanish Trace
Apartments in Irving, Texas.
Interest income increased from $51,000 and $113,000 in the three and six months
ended June 30, 1995 to $88,000 and $165,000 in the three and six months ended
June 30, 1996. This increase is due to increased short term investment of the
Company's available cash.
Equity in income of partnerships improved to income of $31,000 and $30,000 in
the three and six months ended June 30, 1996 as compared to a loss of $729,000
and $644,000 in the corresponding periods in 1995. The 1995 equity in loss of
partnerships is primarily due to the write down of a wraparound mortgage note
receivable to the balance of the underlying mortgage payable by the Nakash
Income Associates, a partnership in which the Trust has a 40% general partner
interest.
Interest expense increased from $466,000 and $936,000 in the three and six
months ended June 30, 1995 to $655,000 and $1.1 million in the three and six
months ended June 30, 1996. This increase is due to the Company having
financed for $7.3 million the previously unencumbered Saratoga Office Building
in March 1996. See NOTE 2. "NOTES AND INTEREST PAYABLE."
Depreciation expense and advisory fee expense for the three and six months
ended June 30, 1996 approximated that of the corresponding period
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
in 1995. Depreciation and advisory fees are expected to increase as the
Company acquires additional properties over the remainder of 1996.
General and administrative expense increased to $248,000 and $608,000 in the
three and six months ended June 30, 1996 from $263,000 and $398,000 in the
corresponding periods in 1995. This increase is due to an increase in legal
fees and other professional fees related to the Company's conversion from a
business trust to a corporation. See NOTE 1. "BASIS OF PRESENTATION." Such
expenses are expected to return to more normal levels over the remainder of
1996.
Tax Matters
As more fully discussed in the Company's 1995 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 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 costs. Fluctuations in the rate
of inflation also affect the sales value of properties and, correspondingly,
the ultimate realizable value of the Company's real estate and notes receivable
portfolios.
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 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Recent Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of."
The statement requires that long-lived assets be considered impaired "...if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset." If impairment exists,
an impairment loss shall be recognized, by a charge against earnings, equal to
"...the amount by which the carrying amount of the asset exceeds the fair value
of the asset." If impairment of a long-lived asset is recognized, the carrying
amount of the asset shall be reduced by the amount of the impairment, shall be
accounted for as the asset's "new cost" and such new cost shall be depreciated
over the asset's remaining useful life.
SFAS No. 121 further requires that long-lived assets held for sale "...be
reported at the lower of carrying amount or fair value less cost to sell." If
a reduction in a held for sale asset's carrying amount to fair value less cost
to sell is required, a provision for loss shall be recognized by a charge
against earnings. Subsequent revisions, either upward or downward, to a held
for sale asset's estimated fair value less cost to sell shall be recorded as an
adjustment to the asset's carrying amount, but not in excess of the asset's
carrying amount when originally classified as held for sale. A corresponding
charge against or credit to earnings is to be recognized. Long-lived assets
held for sale are not to be depreciated. The Company adopted SFAS No. 121
effective January 1, 1996.
The effect of adopting SFAS No. 121 was the discontinuance of depreciation on
the Company's one property held for sale which would have amounted to $5,000
and $10,000 in the three and six months ended June 30, 1996, and a
corresponding reduction in the Company's reported net loss.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On March 15, 1996, shareholders approved the conversion of the Company from a
California business trust into a Nevada corporation. Upon conversion, each
shareholder received one share of the Company's Common Stock with $.01 par
value in exchange for each share of beneficial interest held in the business
trust. On June 14, 1996, the Company effected a two for one forward split of
its Common Stock.
See the exhibit to the Company's Form 8-K dated as of March 15, 1996 for
additional terms of the Company's Common Stock.
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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 31, 1996, 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 Basic Capital Management, Inc. ("BCM").
At such meeting the Company's stockholders elected the following individuals as
Directors of the Company:
Shares Voting
------------------------------
Withheld
Director For Authority
-------- --------- -----------
John P. Parsons 567,561 12,031
Bennett B. Sims 567,584 12,008
Ted P. Stokely 567,686 11,906
Martin L. White 567,932 12,200
Edward G. Zampa 567,886 11,906
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 555,417 votes for the proposal, 11,353 votes
against the proposal and 12,823 votes abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
- - ------- -----------
27.0 Financial Data Schedule
(b) Reports on Form 8-K as follows:
None.
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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 12, 1996 By: /s/ Randall M. Paulson
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Randall M. Paulson
President
Date: August 12, 1996 By: /s/ Thomas A. Holland
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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 Three Months Ended June 30, 1996
Exhibit Page
Number Description Number
- - ------- ----------- ------
27.0 Financial Data Schedule. 14
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